1. Industry Analysis ©2015 Robert M. Grant & Judith Jordan

2. Learning Objectives
By the time you have completed this topic you will:
be familiar with a number of frameworks used to analyse an organization’s external environment and understand how the structural features of an industry influence competition and profitability;
be able to use evidence on structural trends within industries to forecast changes in competition and profitability and to develop appropriate strategies for the future;
be able to define the boundaries of the industry within which a firm is located;
be able to recognize the limits of Porter’s five forces of competition framework and extend the framework to include the role of complements ;
be able to segment an industry into its constituent markets and appraise the relative attractiveness of different segments;
be able to analyse competition and customer requirements in order to identify opportunities for competitive advantage within an industry (key success factors).
©2015 Robert M. Grant & Judith Jordan

3. The profitability of US industries, 2000-2010
Industry
Median ROE
(%)
Leading companies
Tobacco
33.5
Philip Morris Int., Altria, Reynolds American
Household and personal products
27.8
Procter & Gamble, Kimberly-Clark, Colgate-Palmolive
Motor vehicles and parts
4.4
GM, Ford, Johnson Controls
Entertainment
3.9
Time Warner, Walt Disney, News Corporation
Airlines
-11.3
AMR, UAL, Delta Airlines
Source: Data from Fortune 1000 by industry.
See Grant & Jordan 2e Table 2.1 for a more detailed list of US industries.
©2015 Robert M. Grant & Judith Jordan

4. How can we account for these differences in industry profitability?
It is all down to luck?
Some industries are in decline, others are growing fast?
The basic premise that underlies industry analysis is that the level of industry profitability is neither random nor entirely the result of industry-specific influences, it is determined by the industry’s underlying economic characteristics
INDUSTRY STRUCTURE
©2015 Robert M. Grant & Judith Jordan

5. Analysing the business environment
The business environment of the firm consists of the external influences that affect its decisions and performance
How can managers monitor the vast array of possible influences?
Need to distinguish the ‘vital’ from the ‘merely important
Classification schemes like PEST can help
©2015 Robert M. Grant & Judith Jordan

6. PEST Analysis
How macro-environmental factors might impact a business organization:
Political
Changes in government economic policy, e.g. taxation, government spending, monetary policy
Changes in legal requirements e.g. employment
law, health and safety legislation, licensing practices, environmental regulations, competition policy
Changes in the government ownership
e.g. nationalization, privatization, de-regulation
Economic
Changes in the level of economic activity, e.g. growth rates, rates of unemployment, inflation
Changes in wage rates and income distribution
Changes in exchange rates
Social
Changes in demographics e.g. the size of the population, the age distribution with the population
Changing attitudes e.g. work/life balance, concern for the environment, ethical standards
Changes in social structure e.g. socio-economic groupings, social mobility
Technological
Development of new products and processes
Automation
Developments in information and communication technologies
Developments in the natural sciences
©2015 Robert M. Grant & Judith Jordan

7. From environmental analysis to industry analysis
©2015 Robert M. Grant & Judith Jordan

8. Porter’s Five Forces of Competition Framework
©2015 Robert M. Grant & Judith Jordan

9. Structural determinants of the competitive forces
©2015 Robert M. Grant & Judith Jordan

10. Applying industry analysis
Industry analysis can be used to:
Explain differences in profitability between industries and changes in the profitability of a given industry over time
Assist managers in positioning the firm advantageously
Predict possible changes in competition and profitability in the near future
Identify opportunities for changing industry structures and alleviating competitive pressures.
©2015 Robert M. Grant & Judith Jordan

11. The challenges of applying the five forces framework
Defining the industry
Dealing with missing factors
Choosing the appropriate level of analysis
Dealing with uncertainty and rapid structural change
©2015 Robert M. Grant & Judith Jordan

12. Defining the industry Industries versus markets.
Substitutability on the supply side versus substitutability on the demand side.
Boundaries are seldom clear-cut.
In practice the way boundaries are drawn depends on the purpose and context of the analysis.
©2015 Robert M. Grant & Judith Jordan

13. Dealing with missing factors
©2015 Robert M. Grant & Judith Jordan

14. Choosing the appropriate level of analysis
The difficulty in drawing industry boundaries and the need to define industries more broadly or more narrowly depending on the kinds of questions we are seeking to answer means that it is sometimes helpful to undertake more detailed, disaggregated analysis. Segmentation Analysis
©2015 Robert M. Grant & Judith Jordan

15. Segmentation analysis
Identify possible segmentation variables
Construct a segmentation matrix
Analyze segment attractiveness
Identify key success factors in each segment
Select segment scope
©2015 Robert M. Grant & Judith Jordan

16. Illustrative segmentation variables
Demographic
Gender
Age
Ethnicity
Socio-economic
Income
Education
Occupation
Psychographic
Personality
Lifestyle
Geographic
Region
Urban/suburban/rural
Behavioural
Purchase occasion
Loyalty
Use rate
©2015 Robert M. Grant & Judith Jordan

17. Dealing with uncertainty and rapid structural change
At what rate is structural change occurring?
Some argue that the pace of change is accelerating
Intensifying international competition
Rapid technological change
Industries becoming hypercompetitive
But
Systematic evidence of this trend is elusive.
©2015 Robert M. Grant & Judith Jordan

18. Identifying key success factors
©2015 Robert M. Grant & Judith Jordan