Structural Analysis of Industries

Five Forces Model: Forces that drive the industry competition, and determine its intensity
• Potential Entrants
• Suppliers
• Buyers
• Substitutes
• Rivalry among existing firms

Potential Entrants
• Barriers to entry: These may change according to happening that is not in control
of the firm.
o Economies of scale: In case of R&D, manufacturing, marketing
o Product differentiation: brand identification, customer loyalties
o Capital requirements: If the initial capital is high
o Switching costs: Costs that an entrant incurs in switching the end user
from one product to his
o Access to distribution networks
o Cost disadvantages independent of scale:
Know-how
Favorable access to raw materials
Favorable location
Government subsidies
Learning or experience curve
o Government policy
• Entry deterring price: If the price is above the returns that the person forecasts
then he will enter
• Experience and scale as entry barriers: however this can be offset by the
flexibility that a new entrant brings in, in terms of newer technology

Intensity of rivalry among existing firms: This is determined by the following factors
• Number and equality of competitors
• Growth of the industry
• Capital investments
• Lack of differentiation or switching costs
• Capacity augmented in large increments
• Exit and entry barrier risks
• Stakes of individual competitors in the industry

Low High
Low Low, Stable Low, risky
returns returns
High stable High risky
High returns returns
Threat of Substitution
Identifying the product that can provide the same function to the end customer.

Bargaining power of buyers

A buyer group is powerful if the following conditions hold:
• It purchases a large volume of the seller sales
• If the product is a commodity in which case they can play one supplier against
another.
• It faces few switching costs to change from one supplier to another
• It earns low profits, which create additional incentives for it to switch suppliers
• Are capable of backward integration
• The quality of the component is not important, in which case the buyer can find a
substitute
• The buyer has full information, and possesses considerably higher bargaining
power

Bargaining power of suppliers

• If the supplier power is concentrated in the hands of a few suppliers
• If the supplies are not amenable to substitution
• The industry is not important to the supplier
• The suppliers input is important to the buyer
• The supplier has built in switching costs
• The supplier has forward integrated
Generic Competitive Strategies

The three generic strategies are

• Overall cost leadership
• Differentiation
• Focus

Overall cost leadership

• Experience curve effect
• Technologies
• Economies of scale
• Control

The high margins that are generated have to plough back so there can be sustainable
advantages. The risks faced here are
• Technological innovations nullify past investments
• Low cost focus leads to lack of focus on the customer
• Imitation

Differentiation
• Brand Image
• Technology
• Features
• Customer Service
The risks are
• The differentiating factor becomes outdated
• Imitation
Focus
• Particular buyer
• Segments of the product line
• Geographic market
Serve a particular customer segment well. The risks are:
• Competitors find subgroups within the market
• Cost differential becomes too large between the large companies and the focused
company

Uniqueness perceived Low cost position

by the customer

Industry wide Differentiation Overall Cost Leadership

Particular segment
Focus
Competitor analysis

Future Goals: Unless explicitly stated one can deduce it from the following questions:
• Financial goals
• Attitude towards risk
• Values or beliefs: is it a maverick industry statesman
• Organizational structure: where are the decisions coming from
• Control and incentive
• Accounting system
• What kind of managers comprise the leadership position, the board, and how
much unanimity among the members
• Are there any regulatory threats
• If controlled by a parent then the following questions can also be asked:
o What are the current results of the parent company
o What is the overall goal of the parent
o How important is the subsidiary to the parent
o Why did the parent get into this business
o What are the corporate wide strategies
o Is there a generic strategy that the parent has compiled
o What are the parent company’s diversification plans
o What clues can one gather from the organization structure of the parent
o What is their reward and punishment system
o Where does the organization recruit from
• Analyze the firm portfolio to determine which businesses are cash cows and
which are not

Assumptions: The competitor has about himself and about the industry and the firms in it.
These can help identify blind spots.
• What does the competitor believe about its relative position in cost, quality etc.
• What is the culture that the competitor comes from
• Does he have emotional attachments to the product
• What does he think about other competitors
• What is the current strategy, and are any assumptions thrown open by them
In all cases locating blind spots can be critical.
The history can also serve as an indicator
• What is the current vs. past performance
• What is the history in the marketplace
• What has he done well at and not done well at
• How has he reacted to particular strategic moves in the past? Reactive, proactive?

Current Strategies: What can this tell about the competitor

Capabilities: This s basically the five forces model. However strengths can be derived
from expertise in the following:
• Products
• Distribution
 • Marketing and selling
• Operations
• Research and Development
• Overall cost
• Financial strength
• Organization
• General managerial ability
• Corporate portfolio: what are the investments that it has made etc.

What are the firms?

• Core capabilities and
• What is its ability to grow
• Quick response ability
• Ability to adapt to change
• What is its staying power in the industry

Using the above analysis find out the following

Offensive ability
• Satisfaction with the current position
• Probable moves
• Strength and seriousness of moves

Defensive ability
• Vulnerability to events in the environment
• Provocation: What moves provoke a reaction
• Effectiveness of retaliation: What are the events that competitor cannot react
quickly to?

All this should lead to picking the best strategy to counter the competitor. Counter need
not mean head-on-head, it can also mean finding the optimal strategy where both benefit.
Structural Analysis within Industries

Profitability in an industry does not depend only on the industry but also on where you
want to enter within the industry. Also once you are in a strategic group, the ability to
shift to another is also determined by where you are and where you want to go.

Dimensions of Competitive Strategy

• Specialization
• Brand identification
• Push vs. pull
• Channel selection
• Product quality
• Technology leadership
• Vertical Integration
• Cost position: the extent to which it seeks low cost leadership
• Service
• Price policy
• Leverage
• Relationship with parent company: This can affect access to raw materials
• Relationship with home and host governments: regulatory assistance
In selecting any two make sure that they do not move together.

Strategic grouping is not similar to market segmentation but is at a more strategic level.
First divide the firms into strategic groups.
The other factor that affects profitability, apart from the strategic group, is the
implementation ability of the firm.

Now strategic groups provide the following:

• Mobility barriers
• Bargaining power: different groups have different bargaining powers
• Threat of substitutes: Different groups have different exposure to the threat of
substitutes
• Rivalry among existing firms
o The market interdependence among groups: degree to which they are
competing for the same customer
o The product differentiation achieved
o The number of strategic groups and their size: The more the number and
more equal the size, the more is the competition
o The distance among the various groups
•

Plot target customer segment along with the key strategic dimension to figure out how
various firms compete for which customer, and where the competition is likely.
Consolidating the entire thing
 1) Find out the industry characteristics like overall growth, demand, and aspects of
tech , the bargaining power of buyers and suppliers etc
2) Next find out the strategic groups and apply the five forces to each strategic group
3) Find out then the firms position within the strategic group: The degree of
competition within the strategic group, the difference in implementation ability,
and also the scale of the firm relative to others

At the end of the show what we are saying is that the firm is faced with the following
strategic opportunities:
1) Create a new strategic group
2) Shift to a more favorable strategic group
3) Strengthen the structural position of the existing group or firms position in the
group
4) Shift to a new group, and strengthen that groups structural position

The risks that the firms faces are:

1) Risks that reduce the mobility barriers within the group
2) Risk of companies entering its strategic group
3) Risks that accompany investments that raise mobility barriers
4) Risks that accompany moving into new strategic groups

Now a strategic group can be used to do the following:

1) Identifying mobility barriers
2) Identifying groups whose positions are tenuous
3) Chartering directions that each group is likely to take
4) Analyzing the trends for the industry
5) Predicting reactions of the industry to an event
Competitive Strategies in emerging industries

The structural environment: Most early industry firms face the following:
• Technology uncertainty
• Strategic uncertainty
• High initial cost, but steep cost reduction: steep learning curves, and high cost of
volumes
• Embryonic companies and spin-offs: These may cause a scenario where there is
perceived opportunity and profitability
• First time buyers: Emerging industries are faced with new buyers, who must be
informed about the product
• Short time horizon: problems are dealt with either in a hurry or from previous
experience, rather than a detailed analysis of the future scenario
• Subsidy: The government might subsidize much of the raw materials to encourage
formation of the infant industry
• Early mobility barriers:
o Proprietary technology
o Access to distribution channels
o Access to raw materials
o Cost advantages due to experience, made more significant by uncertainties
o Risks which affect the opportunity cost of capital

Problems constraining industry development

• Inability to gain access to raw materials
• Period of rapid escalation of raw material prices: The suppliers might see great
demand and constraining supplies, therefore the prices are bound to increase
• Absence of infrastructure: distribution, training facilities, service facilities
• Absence of product or technological standardization: like Microsoft
• Perceived likelihood of obsolescence: If buyers agree that the second generation
product is going to make obsolete the present product
• Customers confusion: The multiplicity of products often confuse the customer
• Erratic product quality:
• Image and credibility among the financial community
• Regulatory approval: Delays due to red tapism in the government
• High per unit initial costs: because of depreciation and all
• Response of threatened industries: by price cuts, policy reform appeals

Early and late markets: deciding which products will come early and which ones later
What is the nature of benefit we are offering the buyer? These can be performance or cost
• Performance advantage
o How large is the performance benefit to the buyer
o How obvious is the advantage
o How pressing is the need from the buyer to improve across the dimensions
offered by the new product
o Does the new product better the competitive advantage of the buyer
 o How strong is the competitive pressure to compel changeover
o How price sensitive is the buyer
• Cost advantage
o How large are the cost advantages for the buyer
o How obvious is the advantage
o Can lasting competition be got from lowering cost
o How cost oriented is the buyer in his current business

State of the art required yielding significant benefits

Cost of product failures
Introduction of switching costs
• Costs of retraining employees
• Cost of acquiring new ancillary equipment
• Write offs due to undepreciated investments
• Capital requirements for changeover
• Engineering and R&D cost for changeover
• Cost of modifying related stages of production
Support services
Cost of obsolescence
Asymmetric Government, Regulatory, or labor barriers
Resources to change: buyers will differ with respect to the resources they have available
Perception of technology change:
Personal risk to the decision maker

Strategic Choices: What are the strategies the firm can adopt?
• Shaping industry structure
• Externalities in Industry Development: induce cooperation and policy changes
• Changing role of supplier channels:
• Shifting mobility barriers
• What time should it enter the industry
• How should it cope with competitors
• What are the techniques for forecasting
• Which emerging industry to enter
o Profitable
o Long run profitability
o Can the firm defend itself in the long run
Competitive strategies in declining industries

Structural determinants of competition in decline: The structural features that take on

particular significance in determining the competition in the industry.
• Conditions of demand
o Uncertainty: If firms believe that demand might level off, and then they
might hold on, else they will move away. But firms may differ in
perception.
o Rate and pattern of decline: This is partly determined by the availability of
substitutes and also by the exit of already existing firms which might
cause panic
o Structure of remaining demand pockets: profit potential might be large in
remaining segments, like in the case of cigars. End game can be profitable
if the segment is price insensitive
o Causes of decline:
Technology substitution
Demographics: Shrinkage in the size of the segment that buys the
product
Shifts in needs
• Exit barriers: how does capacity leave the industry. Exit barriers stem from:
o Durable and specialized assets
o Fixed cost of exit:
cost of labor settlement, and other costs of exiting.
Loss of labor productivity due to knowledge of firm
Increase bargaining power of supplier, and loss of credits
o Strategic exit barriers: Business may be important from an overall
strategic point of view
Interrelatedness: It may be critical in some key distribution
channels.
Access to financial markets: May worsen the image of the firm in
the financial market.
Affect on the entire supply chain
Information barriers: Businesses not doing well may be hidden by
those doing well
Managerial or emotional barriers: caused by fears about their own
job. Most divestments do not occur until the top management is
changed
• Blow to identification with a brand that is long standing
• Blow to pride
• External sign of failure that reduces scope of further jobs
Government or social barriers: Government policy might not be
favorable to exit.
Mechanism for asset disposition: If you dispose the asset at low
price, it might affect the industry in general, because the new firm
might price the product lower.
 • Volatility of rivalry: will be characterized by strong price wars. These will be
intense if the following conditions prevail
o The product is perceived as a commodity
o Fixed costs are high
o Many firms are locked in an exit barrier situation
o Firms are uncertain about their relative competitive strengths
o The relative strengths are relatively balanced

Strategic alternatives to decline

• Leadership
o Through pricing
o Purchase market share by buying competitors
o Reduce exit barriers for competitors
o Demonstrate a willingness to stay in the industry through public
statements
o Raise the stakes for competitors to be in the business
• Niche
o Identify a segment and go after it hammer and tongs
• Harvest: Optimize cash flow from the business. Ultimately the business is sold
o Reduce the number of models
o Shrinking the number of channels
o Eliminating small customers
o Eroding service levels
• Divest quickly: The key here is to divest quickly

Choosing a strategy for decline: questions to be asked in a declining industry

• Is the structure of the industry hospitable
• What are the exit barriers facing each firm
• What will be structure of the industry that remains
• What are the strengths of the firm vis-à-vis other firms, and pockets of demand
that remain

Has strengths relative to Lacks strengths relative to

competition in remaining competitors in remaining
pockets pockets
Favorable industry Leadership or niche Divest or harvest
structure for decline1
Unfavorable industry Niche or harvest Divest quickly
structure for decline
Failures in choosing the right strategy
• Not recognizing the decline
• A war with competitors having high exit barriers
• Harvesting without clear strengths

1
These will be so when there are low exit barriers, low uncertainty and things like that