1. Rationale for Industry Analysis
First step in the process of strategy formulation for a firm is an
understanding of the industry in which it operates
The competitive environment in which firms offer products
or services in an effort to compete for resources, customers,
sales, and profits
Underlying economics of the industries in which a firm
competes plays an instrumental role in its performance
External positioning
Understanding threats and opportunities
Key drivers of the industry
Key success factors

2. Salient Issues Regarding Industry
All companies face uncertain industry environments.
Managers must position the organizations strategically in order to compete successfully.
This is what we call business definition.
Requires that managers understand the dynamics of their firms’ markets before formulating strategies.

3. Industry Life Cycles
Rapidly growing markets (emerging industries) tend to be less competitive and often attract new entrants.
Usually provide sufficient room in competitive space for making some mistakes.
Mature, concentrated markets provide firms with very little breathing room.
Mistakes by one firm can significantly impact entire industry.
One firm’s price reductions can set off industry-wide price war.

4. Firm Performance & Industry
performance of all firms in an industry will explain about 20% of the variation in the performance of any single firm in that industry.
How Much Does Industry Matter?
One cannot generalize that the “industry is all that matters.”

5. Average Return on Assets of Different Industries

6. Average Return on Assets in the Automobile Industry: 1993 - 1997

7. High- and Low-Performing Firms in the Steel Industry

8. High- and Low-Performing Firms in the Pharmaceuticals Industry

9. The Five Forces Model
Industry structure will impact the competitive behavior
Firms’ conduct will influence the average performance of firms in that industry
As intensity of forces increases, the industry environment becomes more hostile and overall industry profitability will decline.

10. Analyzing Industry Structure
Opportunities and threats are competitive challenges arising from changes in industry conditions.
Analytic tools such as the five forces model help managers formulate appropriate strategic responses.

11. Five Forces Model Barriers to Entry Number of Firms Economies of Scale
Experience effects
Brand Identification
Switching Costs
Technology
Capital
Number of Firms
Industry Growth Rate
Excess Capacity
Number of Important
Buyers
Importance to Buyers
Industry
Competitors
Intensity of
Rivalry
Number of Important
Suppliers
Importance of components
supplies
Availability of close
Substitutes
Value price ratio

12. Potential Competitors
New entrants into an industry threaten incumbent companies.
Barriers to entry:
Brand loyalty
Absolute cost advantages
Economies of scale
Switching costs
Government regulation
Entry barriers reduce the threat of new and additional competition.

13. Rivalry Among Established Companies
The intensity of competitive rivalry in an industry arises from:
Industry’s competitive structure.
Demand (growth or decline) conditions in industry.
Height of industry exit barriers.

14. Competitive Structure
Continuum of Industry Structures
Fragmented
Many firms,
no dominant
firm
Few firms,
shared dominance (oligopoly)
Consolidated
One firm or one
dominant firm
(monopoly)

15. The Bargaining Power of Buyers
Buyers are most powerful when:
There are many small sellers and few large buyers.
Buyers purchase in large quantities.
A single buyer is a large customer to a firm.
Buyers can switch suppliers at low cost.
Buyers purchase from multiple sellers at once.
Buyers can easily vertically integrate to compete with suppliers.

16. The Bargaining Power of Suppliers
Suppliers have bargaining power when:
Their products have few substitutes and are important to buyers.
The buyer’s industry is not an important customer to the supplier.
Differentiation makes it costly for buyers to switch suppliers.
Suppliers can vertically integrate forward to compete with buyers and buyers can’t integrate backward to supply their own needs.

17. Substitute Products
The competitive threat of substitute products increases as they come closer to serving similar customer needs.
Close
Far

18. A Sixth Force: Complementors
Companies whose products are sold in tandem with another company’s products.
Increased supply of a complementary product collaterally increases demand for the primary product.
Example:
Faster CPU chips fuel sales of personal computers.

19. Steel: A Five Force Conspiracy
Consistent low industry performance average.
All but one of the five forces are intense.
Remember that as the intensity of any of the forces becomes higher, the industry becomes less attractive and industry performance tends to decline.
Threat of Entry
Threat is very real. Initial investment required is very large, but several Minimills have entered industry in last 25 years.

20. Threat of Substitutes
Significant factor in this industry.
Aluminum
Plastics
Composite materials
Power of Steel Buyers
Also significant.
Small number of companies account for very large proportion of steel purchases. Normal threat is to take their business elsewhere.

21. Rivalry
Very intense.
Key reason is the significant overcapacity which still exists today despite the closing of many mills over the last 20 years.
Mills try to keep running at full capacity in order to spread their fixed costs over a large volume.
Price of steel today is about the same as 20 years ago

22. Pharmaceuticals: Best of all Possible Industry Worlds?
Marked contrast to steel industry.
Suppliers exercise little power because most of raw materials are commodities that can be obtained from a large number of suppliers.
Significant barriers to entry reduce the threat of new entrants.
R&D costs and personnel.
Operating finances for many years while new drugs are developed and approved by FDA.
Must build large professional sales force.

23. Few true substitutes exist.
Very small market (in relative terms) of natural medicines.
Healthy living styles have not been adopted by majority of U.S. population.
Buyers exercise very little control.
Sick patients typically do not argue with drug company over price of product.
Normally, insurance company pays the bill.

24. Rivalry. Summary Industry enjoys an almost “friendly” competition.
Patent protection for 17 years.
Summary
Low intensity of all five forces helps to explain the high performance of firms in this industry.
New HMO realities may change that situation. Many patents due to expire soon.

25. Two options if firms are in unattractive industries:
Diversify their firms away from or exit completely the industry.
Firms often lack sufficient resources to do this.
Diversification can be risky for firms with little diversification experience.
Attempt to minimize the impact of any of the forces that are acting to make the industry unattractive.
Shield or protect their companies from the power of the forces. Certain action may lead to allegations of collusion or other unfair practices (Microsoft vs. Justice Department).

26. Evolution of Computer Industry was inconsistent with Porter’s Five Force Model.
Barriers to new entrants non-existent
Entrenched incumbents experienced declines in profitability.
New frameworks and models needed.

27. Personal Computers Xerox Beetle Daimler-Chrysler
Dynamic Nature of Industry Environments
Personal Computers
Xerox
Beetle
Daimler-Chrysler

28. Competing In An Era of Dynamism
Managers must actively anticipate the future.
Innovation is more important than imitation.
The advantages of thinking like an outsider.
Beware of success -- might lead to complacency