ANALYSIS OF INDUSTRIAL

AND OPERATING
ENVIRONMENT

Dr. Sasmita Palo

TISS, Mumbai
 “Strategy is a
choice
on how to
- Michael Porter
 External analysis
• General Environment (macro factors)
• Industry and Competitive
Environment (micro factors)
 Industry Competition and the IO
Model
• Industry:
– A group of firms producing products
(goods and/or services) that are
similar to each other.
• Structure-Conduct-Performance
(SCP) model
– The primary contribution of the
Industrial Organization (IO) economics
model
• Structure: Structural attributes of an
industry
• Conduct: The firm’s actions
The Structure-Conduct-Performance Paradigm:
Basic Conditions: factors which shape the market of the
industry, e.g. demand, supply, political factors
Structure: attributes which give definition to the supply-
side of the market, e.g. economies of scale, barriers to
entry, industry concentration, product differentiation,
vertical integration.
Conduct: the behavior of firms in the market, e.g. pricing
behavior advertising, innovation.
Performance: a judgment about the results of market
behaviour, e.g. efficiency, profitability, fairness/income
distribution, economic growth.
How can the government improve the performance in an

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 Basic Conditions

Structure : no of firms
Governm
and concentration, entry conditions, level of vertical
integration
and diversification ent
Policy
Conduct: goals of the firm,, price and
outpu
t decision, , degree of co-operation and
interdependence, anti

Performance: output, growth,

profitability, employment and efficiency

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 Five Forces Framework

– “Translated” and extended from

the SCP model in 1980 by Michael
Porter.
– A key proposition:
• The focal firm’s performance critically
depends on the degree of
competitiveness of the five forces
within an industry.
• The stronger and more competitive
these forces are, the less likely the
focal firm is able to earn above-
average return, and vice versa.
 Defining Industry
Competition
• Business strategists have turned the SCP
model from IO economics upside down, by
drawing on its insights to help firms
perform better.
• This transformation is the heart of this.
What is a 5 Forces Analysis?
• Based on premise that:
competition in an industry is rooted in the underlying
economics, competitive forces or structures that
collectively determine the profit potentialof the industry.
 Two Key Questions

1. How structurally attractive is

the industry?
2. What is the company’s relative
position within the industry?
 Determinants of Industry Profitability
Entry Barriers Rivalry Determinants
Economies of scale Industry growth
Proprietary product differences Demand conditions
Brand identity (overcapacity)
Capital requirements Exit barriers (corporate stakes,
Access to distribution high fixed costs)
Government policy Product differences
Expected retaliation
Threat of Brand identity
New Entrants Concentration and balance

Bargaining Rivalry Among Bargaining

Power Existing Power
of Suppliers Competitors of Buyers
Determinants of Supplier Power Determinants of Buyer Power
Dominated by few companies Bargaining leverage
Differentiation of product (inputs) causes
high switching costs
Threat of Buyer concentration vs. industry
Buyer volume
Few substitute inputs Substitutes Buyer switching costs
Supplier concentration Price/total purchases
Importance of volume to supplier Product differences
Cost relative to total purchases in the Determinants of Brand identity
industry Substitution Threat
Threat of forward integration relative to Relative price performance
threat of backward integration by firms in the of substitutes
industry Switching costs
Buyer propensity to substitute

Source: Michael Porter, “How Competitive Forces Shape Strategy,” Harvard Business Review, March-April 1979, and
“Viewer’s Guide,” Michael Porter on Competitive Strategy, Nathan/Tyler, 1988.
 Risk of Entry by Potential Competitors

Potential Competitors are companies that

are not currently competing in an industry but
have the capability to do so if they choose.
Barriers to new entrants include:
 Barriers to
Entry

– Scale-based low cost advantages (economies of

scale)- as firms expand output unit costs fall via:
Cost reductions – through mass production
Discounts on bulk purchases – of raw material and
standard parts
Cost advantages – of spreading fixed and
marketing costs over large volume
Non-scale-based low cost advantages (proprietary
technology / know-how / access to raw materials and
channels / good locations).
– Product Differentiation
– Capital Requirements
– Switching Costs
– Access to Distribution Channels
– Government Policy
– Expected retaliation
 Rivalry Among Established Companies
Competitive Rivalry refers to the competitive
struggle between companies in the same industry
to gain market share from each other. Intensity of

Industry Competitive Structure

vNumber and size distribution of companies
vConsolidated versus fragmented industries

Demand Conditions
vGrowing demand – tends to moderate competition and reduce rivalry
vDeclining demand – encourages rivalry for market share and revenue

Cost Conditions
vHigh fixed costs – profitability leveraged by sales volume
Lack of Differentiation ot low switching cost
High strategic stakes
Height of Exit Barriers – prevents companies from leaving
industry
vHigh fixed costs of exit
Emotional attachment to
vWrite-off of investment in assets
industry
vLow scrap value
Govt. regulations –
 Five Forces Framework:
Intensity of Rivalry among Competitors
(cont’d)
• Conditions leading to a high degree of
rivalry:
– The more concentrated an industry is, the
fewer the competitors are, and the more
likely that competitors will recognize their
mutual interdependence and so restrain
their rivalry.
– Competitors of similar size, market
influence, and product offerings vigorously
compete with each other.
– In “big ticket” industries where products
are purchased infrequently, it is difficult to
 • Blue Ocean

• Red Ocean
 Bargaining Power of Buyers
Industry Buyers may be the consumers or end-users
who ultimately use the product or intermediaries
that distribute or retail the products. These buyers

1. Buyers concentration ratio is high

2. Buyers purchase in large quantities.
v Buyers have purchasing power as leverage for price
reductions.
3. The industry is dependant on the buyers.
v Buyers purchase a large percentage of a company’s total
orders.
4. Switching costs for buyers are low.
v Buyers can play off the supplying companies against each
other.
5. Buyers can purchase from several supplying
companies at once.
6. Buyers can threaten to enter the industry themselves.
 Bargaining Power of
Suppliers
Suppliers are organizations that provide inputs such
as material and labor into the industry. These
suppliers are most powerful when:

1. The product supplied is vital to the industry and

has few substitutes.
2. The industry is not an important customer to
suppliers.
v Suppliers are not significantly affected by the industry.
3. Switching costs for companies in the industry are
significant.
v Companies in the industry cannot play suppliers against each
other.
4. Suppliers poses a credible threat to integrate
forward into the buyers’ industry
 Substitute Products
Substitute Products are the products from
different businesses or industries that can
satisfy similar customer needs.
1. The existence of close substitutes is a
strong competitive threat.
v Substitutes limit the price that

companies can charge for their product.

Substitutes are a weak competitive force if
an industry’s products have few close
substitutes.
v Other things being equal, companies in

the industry have the opportunity to

raise prices and earn additional profits.
n Substitutes are particularly threatening:
¡ If substitutes are superior to existing
products in quality and function.
¡ If switching costs are low.
 Interpreting Industry
Analysis
– The collective strength of these forces
determines the ultimate profit
potential of an industry.
– The stronger each of these forces the
more limited industries are in their
ability to raise prices and increase
profits
 In general,
a firm is likely to be more profitable if:
• the less intense is the rivalry in its industry;
• the less danger of potential entrants & the
higher the barriers to entry;
• the less numerous and less aggressive the firms
that sell substitute products, and the more
numerous and more aggressive the firms that
sell complementary products;
• the weaker the bargaining power of
clients/customers; and
• the weaker the bargaining power of suppliers.
In industry and competitive analysis, firms
examine their positions along these lines
and seek ways to change conditions to be
more favorable to the firm.
 High entry barriers

Suppliers and buyers

have strong positions

Unattractive
Strong threats Industry
from substitute
products

Intense rivalry
Low profit
among
potential
competitors
Five Forces Framework: Lessons from
the Five Forces Framework
• Not all industries are equal in terms
of their potential profitability.
• The task for strategists is to assess
the opportunities (O) and threats (T)
underlying each competitive force
affecting an industry, and then
estimate the likely profit potential of
the industry.
 Summary
• Industry Analysis is a powerful tool
for analyzing industry structures
– Identify profit opportunity
– Identify suitable position strategy
• BUT
– less emphasis on choice & innovation
– Static model
 Concept of sixth force

Role of a complementor
STRATEGIC GROUP
Three Strategic Groups in the Global Automobile
Industry

Figure
2.2
 Critical Evaluation of Comp.
Forces and Strategic Group
• Innovation and industry structure
• Company differences
• Competitive changes during an
industry’s evolution
 Implications of Strategic Groups

1.Intensity of competition among the

companies within the group.
2.Each Strategic Group can have different
competitive forces and may face a
different set of opportunities and threats.
3.Competition between the groups

Mobility Barriers
Competitive Advantage
– Performing activities better than competitors
– Activities that create value in eyes of
consumers
 Competitive Analysis
• The process of identifying key
competitors; assessing their
objective, strategies, strengths and
weaknesses & reaction patterns; and
selecting which competitors to attack
or avoid.

(Source: Principles of Marketing by: Philip Kotler and Gary Armstrong

10th Edition )
 Steps in the Process:
• Identifying Firms face a wide range
of competition
Competitors Be careful to avoid
• Assessing “competitor myopia”

Competitors Methods of identifying

• Selecting competitors:
Industry point-of-view
Competitors Market point-of-view
to Attack or
Avoid
(Source: Principles of Marketing by: Philip Kotler and Gary Armstrong
10th Edition )
 Sources of Competitive
Advantage

COST
ADVANTAGE
i lar
Sim du cetr
p rtolow t
a os
COMPETITIV c
E
ADVANTAGE P
fropre rice
mm
pr uniium
od qu
uc e DIFFERENTIATI
t ON
ADVANTAGE
 Porter’s Generic Strategies

SOURCE OF COMPETITIVE ADVANTAGE

Low cost Differentiation

Industry-wide COST
DIFFERENTIATION
COMPETITIVE LEADERSHIP
SCOPE
Single Segment FOCUS
 Sou r ces of C ompet iti ve
Advanta ge
Competitive
Advantages
(Sources of Rates of Profit
in Excess of the Competitive
Level)

Avoid Be Better
Competito Than
rs Competition
Attractiv Attractiv Attractiv
e e e Cost Differentiati
Industry Strategic Niche Advantag on
Group
e Advantage
Entry Mobility Mechanism
Barriers Barriers s
 Competi tiv e Advant ages as
the Sour ce of Super ior
• Competitive advantages work in two basic ways
• avoiding competitors
• outperforming competitors (ie. productivity
and efficiency/distinctive competencies)
 Sour ces of Superior
Pr ofita bilit y
• A business can achieve a higher rate of profit
(or potential profit) over a rival in one of two
ways:
• supplying an identical product/service at
a lower cost (cost-based advantage)
• supplying a differentiated product/service
in such a way that the customer is willing
to pay a price premium that exceeds the
cost of the differentiation
(differentiation-based advantage)
• These two sources of competitive
superiority define fundamentally different
approaches to business strategy
 Ma r ket Share-P rofi tabili ty
Relatio nship :
High
Differentiatio Low Cost
n-based Leadershi
Strategies p
Profitabilit

Strategies
y

Stuck-in-the-Middle

Low

Low High

Market Share
(Quantity)
Porter’s Generic Strategies
ANALYSIS OF COMPETITOR
ENVIRONMENT
 Competitor Analysis
•FUTURE AGENDA
•CURRENT STRATEGY

•ASSUMPTIONS

•CAPABILITIES
Competitor Analysis Components
The Competitive Profile
Matrix
Thank you