Industry Analysis: skills and concepts for analyzing an industry

What is the definition of an industry?

An industry is a group of companies or organizations providing similar products and/or services to an identifiable set of customers or clients. An industry is a grouping of firms at a particular stage or level in a marketing channel. An industry is composed of firms on only one side of a market, buyer or seller. The firms in a specific industry are rivals and competitive relationships exist among them. An industry is the most detailed category available in the North American Industrial lassification !ystem "NAI !# to describe business activities. NAI ! provides hundreds of separate industry categories, uni$ue categories that reflect different methods used to produce goods and services. !tatistical agencies use industry categories to classify, collect, process, publish, and analyze business statistics. oncerns primarily engaged in the same kind of economic activity are classified in the same industry regardless of their types of o%nership "such as sole proprietorship, partnership or corporation#.

What is the influence of competitive forces on an industry?

A corporate strategist&s goal is to find a position in an industry %here his or her company can best defend itself against five basic forces driving industry competition or can influence the forces in its favor. The forces include' ( ( ( ( ( threat of ne% entrants bargaining po%er of suppliers bargaining po%er of buyers threat of substitute products rivalry among existing firms

from ).*. +orter, ,-o% ompetitive .orces !hape !trategy,, Harvard Business Review, )arch/April 0121, pp. 032/045.

Contending Forces
The strongest competitive force or forces determine the profitability of an industry. 6ifferent forces are prominent in shaping competition in each industry. *very industry

has a set of fundamental economic and technical characteristics that gives rise to industry competitive forces.

5 Forces Industry Analysis Model !"#$% THREAT OF ENTRY

- Create barriers to entry - Absolute cost advantages - Proprietary learning curve - Access to inputs - Government policy - Economies of scale - Capital requirements - Brand identity - Switching costs - Access to distribution - E pected retaliation - Proprietary products

SUPPLIER POWER
- Supplier concentration - !mportance of sales to supplier - "ifferentiation of inputs - Switching costs for firms in the industry - Presence of alternate inputs - #hreat of forward integration - Cost relative to total purchases by industry

DEGREE OF RIVALRY
- E it barriers - !ndustry concentration - $i ed costs%&alue added - !ndustry growth - 'vercapacity - Product differences - Switching costs - Brand identity - (ealth of rivals - Corporate interest

BUYER POWER
- Bargaining leverage - Buyer volume - Buyer )nowledge - Brand identity - Price sensitivity - #hreat of bac)ward integration - Product differentiation - Buyer concentration vs* industry - Substitutes available - Buyers+ incentives

THREAT OF SUBSTITUTES
- Switching costs - Buyer inclined to substitute - Price-performance trade-off of substitutes - !ndustry profits

&hreat of 'ntry
(even ma)or sources of *arriers to entry

7arriers to entry in an industry are tangible or intangible obstacles that a firm must overcome to enter an industry. 0. *conomies of !cale / decrease in cost per unit that occurs in some settings %hen production capacity "scale# increases 8. +roduct 6ifferentiation / providing customized and specialized products and services 3. apital 9e$uirements / cost of entry through ac$uisition or ne% facilities 4. ost 6isadvantages Independent of !ize / proprietary technology, access to best ra% materials, favorable location, government subsidy 5. Access to 6istribution hannels :. ;overnment +olicy 2. *xperience urve / unit cost in many industries declines %ith ,experience, or a particular company&s cumulative volume of production

(upplier +o,er -- .argaining +o,er of (uppliers

What can increase *argaining po,er of suppliers?
( ( ( ( ( .e% companies +roduct of supplier is uni$ue or at least differentiated No close substitutes redible threat of integrating for%ard .ocal industry is not an important customer of the supplier group

What can decrease *argaining po,er of suppliers?

( ( ( ( ( increase number of supplier companies product of suppliers is N<T uni$ue or differentiated find some close substitutes N< credible threat of integrating for%ard // increase barriers to entry )ake focal industry and/or your company an important customer of the supplier group

.uyer +o,er -- .argaining +o,er of .uyers

What can increase *argaining po,er of *uyers?
( 7uyers are concentrated or purchase in large volumes

( ( ( ( ( (

.ocal industry sells standard or undifferentiated products 7uyers purchase selectively 7uyers earning are lo% and they are price concious =uality is not as important as price +roduct has no added benefits, e.g., save money in other %ays 7uyers can integrate back%ards

What can decrease *argaining po,er of *uyers?

( !ell to many buyers in small volumes / don&t become dependent on one or a fe% ma>or customers ( 6evelop differentiated products ( *ncourage buyers to be brand loyal ( 9educe buyers price conciousness ( =uality is should be the focus and be perceived as more important than price ( +roduct has many added benefits, e.g., save money in other %ays ( 7uyers can N<T integrate back%ards // raise barriers to entry

&hreat of (u*stitutes
!ubstitute products that deserve the most attention strategically are those that' ( are sub>ect to trends improving their price/performance trade/off %ith the industry&s product <9 ( are produced by industries earning high profits. -o% cheap or easy it is to produce the substitute product is only important if those parameters change.

/egree of 0ivalry or 1ockeying for +osition

Tactics include' price competition, ne% product introduction, increased advertising expenditures. 9ivalry increases %hen' ( ompetitors are numerous ( !ales gro%th is slo%

( ( ( ( (

+roducts are not differentiated +roduct is perishable *xcess capacity *xit barriers are high Aggressive strategies

2o, does government policy affect industry competition and shape *usiness strategy?
( ( ( ( ( creates monopolies restrains competition subsidizes some industries restricts some $uestionable business practices prohibits collusion, restraint of trade

/efining an Industry
An industry is a group of companies or organizations providing similar products and/or services to an identifiable set of customers or clients. The definition of an industry sets boundaries and provides a frame of reference for other analyses.

Approaches
( ?se the !tandard Industrial lassification "!I # system or NAI !. .or example, the !I code for home refrigerators is 3:38, %hile the !I code for home laundry "%ashing# machines is 3:33. The North American Industry lassification !ystem "NAI !# has replaced the ?.!. !tandard Industrial lassification "!I # system "http'//%%%.census.gov/epcd/%%%/naics.html#. ( *numerating all of the companies that participate in that industry. .or example, in the fast food industry, firms that are burger/oriented "i.e., )c6onald&s, @endy&s, 7urger Aing, and some regional burger chains like 9oy 9ogers#. Any attempt to analyze a complex industry such as fast food, may re$uire segmentation into strategic groups. *numeration of the competitors in those groups %ill then be necessary. ( ?se specific criteria to aid in classifying companies as participants in an industry.

+ro*lems in /efining Industry .oundaries

( Industries change and evolve over time

( Ne% industries are sometimes created %ithin existing industries ( Industries are becoming global in scope

Identify Industry 'nvironments

0. *merging Industries o has proprietary technologies o has fe% entry barriers o has problems obtaining items from suppliers o has need for high risk capital 8. )aturing Industries, Transition to Industry )aturity o has more intense competition for market share o has experienced, repeat buyers o much harder to find ne% products and ne% applications o has cost/price pressures 3. )ature Industry o slo% gro%th in demand o beginning to see shifting needs or changing demographics 4. 6eclining Industry o decline in demand o permanent shift in needs or demographics 5. .ragmented Industries o no firm has a significant market share and no firm can strongly influence industry outcomes o high need for intense local coordination, high personal service, local autonomy o products hard to differentiate o intense competition and lo% margin o *xamples of fragmented industries' 0. 7ook publishing, 8. Bandscaping and plant nurseries, 3. Auto repair, 4. 9estaurant industry :. ;lobal Industries o country to country price and cost differences due to currency exchange fluctuations o may have differences in buyer needs across countries or homogeneous needs o may have differences in competitors and %ays of competing from country to country o differences in trade rules and governmental regulations across different countries o competition crosses national borders and occurs on a %orld/%ide basis

(tructural Attri*utes of Industries

( oncentration. oncentration in an industry refers to the extent to %hich industry sales are dominated by only a fe% firms. The market share of the four largest firms in an industry provides a measure of concentration. In general, highly concentrated industry are less competitive than industries that have lo% concentration. ( *conomies of !cale. *conomies of scale in an industry refers to the decrease in cost per unit that occurs in some production and service delivery settings %hen the production capacity increases. 7asically if unit cost is a function of the volume that a plant is capable of producing then scale economies exist in the industry. ( +roduct 6ifferentiation. +roviding customized and specialized products and services. ( 7arriers to *ntry. 7arriers to entry in an industry are tangible or intangible obstacles that a firm must overcome to enter an industry. ommon barriers include' capital re$uirements, economies of scale, product differentiation, cost disadvantages independent of size, access to distribution channels, and government policy "cf., +orter, 0121#.

(trategic 3roup Maps

/eveloping strategic group maps4
This techni$ue is useful for formalizing relationships among industry competitors. A strategic group map divides competitors in an industry into meaningful groups based on at least t%o strategic variables. The follo%ing steps can help you develop useful groupings' 0. Identify relevant dimensions of competitive strategy for your industryC that differentiate firms in an industry from one another 8. +ick t%o important, independent dimensions. 3. 6ra% a t%o/dimensional DmapE that places each firm in the appropriate position on the selected strategy variables 4. 6ra% circles/ovals around firms that cluster together to define a strategic group 5. )ake circles proportional to size of groupFs respective share of total industry sales/revenues/market :. ?se arro%s to indicate any previous or potential movement of firms from one group to another 2. *valuate and interpret the resulting strategic group map. G. 9epeat the above steps until you are satisfied that you have meaningful strategic group maps.
Guidelines 1) Variables selected as axes should NOT be highly correlated 2) Variables chosen as axes should expose MAJOR di erences in ho! ri"als co#pete $) Variables do NOT ha"e to be either %uantitati"e or continuous

&) ' #ore than t!o use ul strategic "ariables are identi ied( dra! #ultiple #aps )) *#phasi+e ,-.s and do#inant product ir#s /) Map direct co#petitors 0it alls 1) A"oid uni#portant1#inor di#ensions 2) A"oid correlated di#ensions 2you get a diagonal array o groups) $) 3o NOT split one ir# apart and #ap it in nu#erous positions &) 3o NOT li#it "ariables to only %uantitati"e di#ensions 2so#e categorical or %ualitati"e di#ensions are "ery use ul)

Figure 54! identifies a list of competitive strategy dimensions that seem relevant to many target industries. !trategic group maps can help you visualize relationships among industry participants. In the example sho%n in .ig. 8.8, the domestic airlines have been categorized by the type of market served "national or regional# and their cost position.

Figure 54! +ossi*le /imensions for (trategic 3roup Maps /imension !4 54 ;4 (pecialization +roduct 8uality &echnological leadership '6planation 7arro, or *road range of products 9evel of 8uality: consistency of 8uality &echnological leader or follo,er? '6tent of *ack,ard integration into sources of supply or for,ard integration in customer markets 2igh cost vs4 9o, cost such as credit: customer assistance: post-sales support 2igh price vs4 lo, price: aggressive pricing vs4 reactive pricing

<4 =ertical integration 54 Cost position

>4 (ervice Intangi*les ?4 +ricing policy

Adapted from )ichael *. +orter, ompetitive !trategy' Techni$ues for Analyzing Industries and ompetitors "Ne% Hork' The .ree +ress, 01GI#.
,o#e Additional 4ey Variables or 3e ining ,trategic Groups

-rand identi ication1recognition1loyalty ,er"ice le"el

,elling strategy( 0ush "s5 pull ,elling 6hannel participation1selection 3ebt17e"erage Relationship !ith parent co#pany Outsourcing

Mistakes in Identifying Competitors

( ( ( ( <veremphasize current and kno%n competitors Ignore small or start/up competitors <verlook international competitors Assume no change in competitor behavior

Notes on ,trategic Group Analysis and Maps ,trategic group analysis is part o an industry analysis that loo8s speci ically at the di erent groups o ri"al ir#s 2direct co#petitors) clustered around a si#ilar co#petiti"e approach or strategic position5 ,trategic group analysis plays an i#portant role in industry analysis5 't or#s the analytical lin8 bet!een industry structure and strategy5 ,trategic group analysis is used to deter#ine the9 1) di erent co#petiti"e positions that ri"al ir#s occupy 2descripti"e o"er"ie!) 2) intensity o co#petiti"e ri"alry !ithin and bet!een industry groups 2dra! ri"alry conclusions) $) pro it potential o the "arious strategic groups in an industry 2 orecast) &) i#plications or the co#petiti"e position o the ir# under analysis 2strategic change reco##endations) 3irect 6o#petitors are in the sa#e industry or strategic group( usually they are ri"als !ithin a strategic group5 The custo#ers and #ar8ets o direct co#petitors o"erlap5