Group 5:
Jason Bullard
Grant Gerhardt
Patrick Kirkland
Laura Moore
Jeffri Vaughn
Chet Visser

Defining an Industry

Dimensions of Industry

Competitive Analysis and Porter’s Five Forces
Industries can be defined in multiple ways
◦ Is the competition between products, companies, or
networks of alliance partners?
◦ Should we analyze the rivalry at the business level
or the corporate level?
◦ Should we differentiate between regional
competition and global rivalry?

Misspecification of an industry can be costly
◦ To narrow can lead to strategic myopia causing
great opportunities or dangers to be overlooked.
 Ex. Railroads judged to be competing with just other
railroads.
◦ To broad can prevent a meaningful assessment of
the competition.
 Ex. Identifying a firm such as Microsoft as simple a
high technology firm
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An industry is best defined in terms of four
dimensions.
◦ Products
◦ Customers
◦ Geography
◦ Stages in the Product-distribution Pipeline

Products can be broken into two components:
◦ Function- What the product or service does.
 Ex. Some cooking machines bake and some fry.
 Ex. One ship is a freighter and one is designed to carry
passengers.
◦ Technology- How does it perform the function.
 Ex. Some cooking machines use gas and some use
electricity.
 Ex. One type of power plant uses coal and another type
uses nuclear fission.
Here we distinguish between what industry
the firm competes in from what market it
caters to.

◦
Industry- the general product type the company
produces.

◦
Ex Do they make aircraft, ships, computers, and
cars.
Market- which particular customer base in the
industry does the firm serve.


Ex. Do they make and sell cargo ships or
passenger ships.
Ex. Does our firm make industrial super computer
or do we make personal computers.

This asks where the company competes. Are
they a world wide company or do they just
serve the domestic market.
◦ Ex. Southwest’s geography is southern half of the
United States, where as Continental has many
international destinations

Here we ask where the company is in the
industry. Do they make components for a
final product in the industry, or do the
assemble the finished product?
◦ Ex. Boeing Jetliners- Different aerospace companies
make different components that eventually are
installed in Boeings jets.
 The engines can be made by GE, Rolls Royce, or Pratt
and Whitney.
 Instrumentation is made by other companies such as
Honeywell or Raytheon and then installed in the
aircraft at the Boeing factory



Porters five forces help describe the intensity
of the rivalry in the industry.
This intensity can drastically affect the
industry’s profit potential.
Usually the more intense the rivalry the lower
the profit potential.

Threat of new Entrants- the level of difficulty
in entering an industry
◦ Likelihood of new entrants depends on:
 What barriers exist.



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Economies of Scale
Product Differentiation
Capital Requirements
Cost Disadvantages
Access to Distribution Channels
Government Regulations
 How current competitors will react

Powerful suppliers and buyers- influence
competition by exerting pressure over
prices, quality, or the quantity demanded or
sold.
◦ Suppliers powerful when:




Few Dominant companies
Switching among suppliers difficult
Suppliers can integrate forward
Industry generates only a small portion of supplier’s
revenue
◦ Buyers powerful when:
 Few of them or a they buy a large volume
 Product relatively undifferentiated
 Buyer’s purchase is a significant amount of the seller’s
revenue
 Buyers can integrate backward

Substitute Products and Services- these
continually threaten the industry and put a
limit on prices and profitability.
◦ Substitute Products or Services that require the
most scrutiny are:
 Those that show a price performance improvements
 Products produce by companies with deep pockets

Rivalry Among Participants- the number, size,
and competitive prowess of its participants,
the industries growth rate, and related
characteristics.
◦ Intense Rivalry exists when:





Competitors numerous and equal in size
Industry growth is slow
Fix costs are high, and or products are perishable
Capacity increases are secured in large increments
Exit barriers are high

The Bargaining power of Customers- Are the
customers powerful (Bulk Orders) or are they
not (Low Volume Orders).
◦ High Power Customers- buy in large quantities and
have a greater say on the price or customization of
a good. This situation makes the rivalry more
intense.
◦ Low Power Customers- buy in smaller quantities
and have a very little say in the price or
customization of a good. This situation tends not to
produce intense rivalries.




Industry structures change over time
Models of industry evolution can help us
understand how and why industries change
over time.
The word evolution can be deceiving,
suggesting a process of slow, gradual change
Structural change can occur with remarkable
rapidity, as is the case when a major
technological breakthrough enhances the
prospects of some companies at the expense
of others

A recent study suggests that industries evolve according
to one of four distinct trajectories of change
◦
◦
◦
◦

Radical
Progressive
Creative
Intermediating.
Two types of obsolescence define these paths of change
◦ A threat to an industry’s core activities, which account for a
significant portion of an industry’s profits
 Example: The steady decrease in importance of a dealer’s traditional
sales activities as online shopping has increased
◦ A threat to the industry’s core assets, which are valued as
differentiators.
 Example: The eroding brand value of many prescription drugs in the
face of generic competition.



Radical change occurs when an industry is
threatened with obsolescence of both its core
activities and core assets at the same time.
Progressive change can be expected when
neither form of obsolescence is imminent.
Creative and intermediating change paths are
defined by the dominance of one of the two
forms of obsolescence.
◦ Core assets are threatened in creative change.
◦ Core activities are threatened in intermediating
change.
Threatened
Radical Change
Threatened
Examples: makers of landline
telephone handsets,
overnight letter-delivery
carriers, and travel agencies
Intermediating Change
Not
automobile
Threatened Examples:
dealerships, investment
brokerages, museums, and
auction houses
Not Threatened
Creative Change
Examples: the motion
picture industry, sports
team ownership, and
investment banking
Progressive Change
Examples: online
auctions, commercial
airlines, and long–haul
trucking


The convergence of telecommunications,
computers, and television
“Rule of Three and Four”


Product life cycle model—Based on the theory
of diffusion of innovations and its logical
counterpart, the pattern of acceptance of new
ideas—is perhaps the best known model of
industry evolution.
The different stages are defined by changes
in the rate of growth of industry sales,
generally thought to follow an S-shaped
curve, reflecting the cumulative result of first
and repeat adoptions of a product or service
over time.

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
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The product life cycle can be a useful analytical tool
for strategy development. Research has shown that
the evolution of an industry or product class depends
on the interaction of a number of factors, including
the competitive strategies of rival firms, changes in
customer behavior, and legal and social influences.
Growth environments are less uncertain and
competitively more intense.
Mature industries, although the most competitively
stable, are relatively stagnant in terms of sales
growth.
Declining industries are typically regarded as
unattractive, but clever strategies can produce
substantial profits.



Many new industries evolve through some
convergence in technological standards.
C.K. Prahalad has proposed a model that
describes industry evolution in three phases.
In the first phase, competition is mostly
focused on ideas, product concepts,
technology choices, and the building of a
competency base. The goal at this stage is to
learn more about the future potential of the
industry and about the key factors that will
determine future success or failure.


In the second phase, competition is more about
building a viable coalition of partners that will
support a standard against competing formats.
Companies cooperating at this stage my compete
vigorously in phase three of the process—the battle
for market share for end products and profits.
As industry boundaries become more permeable,
structural changes in adjacent industries (industries
serving the same customer base with different
products or services, or industries using similar
technologies and production processes) or related
industries (industries supplying components,
technologies, or complementary services) increasingly
influence an industry’s outlook for the future.

Finally, change sometimes is simply a
function of experience. Buyers generally
become more discriminating as they become
more familiar with a product and its
substitutes and, as a consequence, they are
likely to be more explicit in their demands for
improvements.

The method usually used for analyzing an
industry is Strategic Segmentation.
 This strategically looks at a subset of the entire customer
market, competitor analysis that concentrates on
individual corporations and/or their major units, or a
group analysis of all firms that face similar threats and
opportunities.


The process of dividing an industry or market
into relatively homogeneous, minimally
overlapping segments that benefit from
distinct competitive strategies.
This is put together by a six-step process.



Strategic Segmentation
Strategic Targeting
Positioning

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

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Customer
Characteristics
Product-related
Variables
Service-related
Variables

Strategically target a specific segment and
position the firm for competitive advantage.
◦ Must identify the segments that offer the best
chance for long-term, sustainable results.
◦ It also considers the long-term defensibility of
different segments by analyzing barriers to entry
such as capital investment intensity, proprietary
technologies and patents, geographical location,
tariffs, and other trade barriers.

Segmentation is very complex because there
are a lot of ways to divide an industry, and
these characteristics and variables are the
most widely used variables in segmentation.




Geography
Size of customer firm
Customer Type
Customer Lifestyle



Age
Income
Sex




User type
Level of use
Benefits sought
Competitive offerings



Purchase frequency
Loyalty
Price Sensitivity

Analyzing a business or industry to come up
with a competitive strategy is much harder
than it used to be because of the lack of
boundaries from one market to another.
◦ Because of our ever-changing business market, we
must pair competitive analysis and the drivers of
industry evolution.



Who are our firm’s
direct competitors
now and in the near
term?
What are their major
strengths and
weaknesses?
How have they
behaved in the past?


How might they
behave in the
future?
How will our
competitors’ actions
affect our industry
and company?




Leader
Challengers
Followers
Nichers

Focus on expanding total demand by
attracting new users, developing new uses for
their products or services, and by
encouraging more use of existing products
and services

Typically concentrate on a single target-the
leader.

Compete with more modest strategic
objectives.

Firms that aren’t currently in the industry but
could enter at a relatively low cost should be
considered as potential competitors.

Normally, there are too many competitors
that can be analyzed individually
◦ To make analyzing more manageable, strategic
groups were formed.
◦ A strategic group is a set of firms that face similar
threats and opportunities, which are different from
the threats and opportunities faced by other sets of
companies in the same industry.
◦ Rivalry is often more intense within strategic groups
than between them, because members of the same
strategic group focus on the same market segments
with similar strategies and resources.

Four techniques:
◦
◦
◦
◦
Market Analysis
Growth Vector Analysis
Gap Analysis
Profit Pool Analysis


Purpose: To quantify the attractiveness of a
particular industry or segment
Also useful for developing a better
understanding of the key success factors and
core competencies needed for achieving
strategic objectives

Includes an assessment of the following:
◦
◦
◦
◦
◦
◦
◦
Actual and potential size of the market
Market and segment growth
Market and segment profitability
Underlying cost structure and trends
Current and emerging distribution systems
Importance of regulatory issues
Technological changes

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


Growth within the current market is called
Concentration
Growth by moving into related or new customer
segments is called Market Development
Growth into related or new products is called
Product/Technology Development
Growth in both customer segments and
products/technologies is called Diversification
Also useful to analyze key competitors


Gaps: Industry sales are below their potential
Gap Analysis: process of comparing an
industry’s market potential to the combined
current market penetration by all competitors

Can be the result of:
◦ Unavailability of product versions for specific
applications or usage occasions (Product Line
Gaps)
◦ Overlooked customer segments that have
difficulty accessing the product (Distribution
Gaps)
◦ Underdeveloped applications for the product
(Usage Gaps)
◦ Opportunities to displace competitors that offer
weak product entries or questionable
performance (Competitive Gaps)


Profit Pool: The total amount of profit earned
at all points along the industry’s value chain
Example: Automotive industry
◦ Car manufacturing and distribution have highest
revenues
◦ Auto leasing, insurance, and auto loans have
highest profits


Mapping: Helps executives to understand
how the industry is evolving, why profit
pools form where they have, and how the
profit distribution is likely to change
Consists of four steps:
◦ Defining the pool’s boundaries
◦ Estimating its overall size
◦ Allocating profits to the different value chain
activities
◦ Verifying the results

INDUSTRY ANALYSIS
◦ Strategic Segmentation

MARKET ANALYSIS
◦ Product/Service Offering
◦ Core Competencies

COMPETITOR ANALYSIS
◦ Fill the Gaps

De Kluyver, Cornelis A., and John A. Pearce II.
Strategy: A View from the Top (An Executive
Perspective). 3rd ed. New Jersey: Pearson
Prentice Hall, 2009.