Chapter 4
Analyzing an Industry
Carli Slingerland
Charity Moore
Andrew Keeling
Kolt Pederson
Hayley Rush
Alex Beverly
Emily Dale
Everett Gibson
Introduction
• What is an industry?
• Industry Structure and Porter’s Five
Forces
• Industry Evolution
• Methods for Analyzing an Industry
• Analyzing Product/Market Scope
Four Dimensions to an Industry
1. Products
2. Customers
3. Geography
4. Stages in the product distribution pipeline
Products: Two Components
• Function: What the product or service
does; this can be actual or perceived
– Example of function: Some cooking
appliances back. Others bake and roast. Still
others fry and boil.
– Example of function perception: Some over
the counter nasal congestion remedies are
positioned as cold relievers, whereas others
with similar chemicals are promoted as allergy
medicines.
Products: Two Components
Continued
• Technology: While some appliances are
gas, some are electric. While some
medication is in liquid form, other medicine
is in capsules.
Industry vs. Market Served
• Examples
– Industry: Large kitchen appliance industry
– Market Served: Refrigerators
Porter’s Five Forces Model
Six Barriers to Market Entry
1.
2.
3.
4.
Economies of Scale
Product Differentiation
Capital Requirements
Cost Disadvantages (independent of
size)
5. Access to Distribution Channels
6. Government Regulation
– Example: Soda and Beer Industries
Powerful Suppliers and Buyers
• Buyers and suppliers influence
competition in an industry by exerting
pressure over prices, quality, or the
quantity demanded or sold.
• Example: Soft drink bottlers in the late
1980s
Powerful Suppliers
• Suppliers, in general, are more powerful
when:
– There are a few dominant companies, and
they are more connected than the industry
they serve.
– The component supplied is differentiated, so
switching suppliers is difficult.
– There are few substitutes.
– Suppliers can integrate forward.
– The industry generates but a small portion of
the suppliers’ revenue base.
Powerful Buyers
• Buyers have substantial power when:
– There are few of them and/or they buy in
large volume.
– The product is relatively undifferentiated,
making it easy to switch to other suppliers.
– The buyers’ purchases represent a sizeable
portion of the sellers’ total revenues.
– Buyers can integrate backwards.
Substitute Products and
Services
• Substitute products:
– Continually threaten most industries
– Limit prices and profitability
– Can take substantial market share from
existing businesses
• Example: Pay-per-view vs. Cable
television
Substitute Products and
Services
• From a strategic perspective, substitutes
that deserve the closest scrutiny are those
that:
– Show improvements in price performance
relative to the industry average
– Are produced by companies with deep
pockets
Rivalry Among Participants
• Characteristics producing intense rivalry:
– Competitors are numerous and relatively
equal
– Industry growth is slow
– Fixed costs are high
– Capacity increases are secured in large
increments
– Exit barriers are high
Rivalry Among Participants
• Complementary products, when aligned
with the industry it compliments, preserve
the status quo.
• New technologies or approaches upset the
status quo.
• Change in technological standards that
render previously compatible products and
services incompatible.
– Example: Increasing dependence on the
internet
Industry Evolution
• Industry structures change over time
– Example: Sony
• Models help us understand change
• Change can occur rapidly
Four Trajectories of Change
• Two types of obsolescence define change
1. Threat to core activities
2. Threat to core Assets
• Radical Change
– Both core assets and activities are threatened
• Example: Airlines
• Progressive Change
– Neither core activities or assets are
threatened
• Example: Trucking Industry
Four Trajectories of Change
Continued
• Creative Change
– Core Assets are threatened, but not Core
Activities
• Example: Movie Studio
• Intermediating Change
– Core Activities are threatened but not Core
Assets
• Example: Museums
Industry Structure,
Concentration, and Product
Differentiation
• Useful to analyze changes in structure
– Example: Vertical-Horizontal, Concentration,
Product Differentiation
• Telecommunications, Computers, Television
– Traditional boundaries have
disappeared
– All have evolved into 5 horizontal
segments
• Content, packaging, network, Transmission,
display
Industry Structure,
Concentration, and Product
Differentiation Continued
• Vertical Integration important Again
• Concentration
– Economies of scale are important
– “Rule Three and Four”
• Market Maturity
• Differentiation
Product Life Cycle Model
• Based on the theory of diffusion of
innovations and its logical counterpart and
the pattern of acceptance of new ideas.
• Model states the industry passes through
stages: introduction, growth, maturity, and
decline
• These stages are defined by changes in
the rate of growth of industry sales.
Strategic Choices over Product
Life Cycle
• Emerging Stage: High level of uncertainty
• Growth Environment: Less uncertainty,
Competition intense
• Mature Industries: Competitively stable,
Stagnant in sales growth
• Declining Industries: Unattractive
Product Life Cycle Model Pitfalls
• Little predictive value
• Industry growth does not follow S-shape
pattern
• Does not acknowledge that companies
can affect the shape of growth curve
• Can become a self-fulfilling prophecy
New Patterns
• Industry evolution in three phases
1. Competition based on ideas, product
concepts, technology choices, and building
of competency base.
2. Competition based on building a viable
coalition of partners that will support a
standard against competing formats.
3. Competition in the battle for market share for
end products and profits.
Methods for Analyzing an
Industry
• Segmentation
• Competitor Analysis
• Strategic Groups
Strategic Segmentation
• Segmentation
– Identify Segmentation
– Develop Segment Profiles
• Targeting
– Evaluate Segment Attractiveness
– Select Target Segment(s)
• Positioning
– Identify Possible Positionings
– Select Develop Positioning
Competitor Analysis
• Five Key Questions:
1. Who are the firm’s direct competitors now
and in the near term?
2. What are their major strengths and
weaknesses?
3. How might they have behaved in the past?
4. How might they behave in the future?
5. How will our competitors’ actions affect our
industry and company?
Competitor Analysis: Roles of
Competitors
• Leaders
– Focus to expand total demand
– Example: Coca-Cola
• Challengers
– Target the leader
– Example: Quizno’s Subs
• Followers
– Use strategy of “innovative imitation”
– Example: Gilletee
• Nichers
– Concentrate on small slice of market
– Example: Stepan Company
Strategic Groups
• “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.”
» Strategy page 92
• McDonald’s is not concerned with Spago
Analyzing Product/Market
Scope
•
•
•
•
Market Analysis
Growth Vector Analysis
Gap Analysis
Profit Pool Analysis
Market Analysis
•
•
•
Used to quantify the attractiveness of a
particular industry or segment
Helps develop better understanding of key
success factors companies need to develop in
order to achieve their strategic objectives
Includes assessment of:
1.
2.
3.
4.
5.
6.
7.
Actual and potential size of 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
Growth Vector Analysis
• A company can increase its strategic
scope within in industry by offering more
products/technologies/services to tap
more customer segments
Product Options
Present
Products
Future Products
Present Markets
Concentration
Product
Development
Future Markets
Market
Development
Diversification
Market
Options
Gap Analysis
• Process of comparing an industry’s market
potential to the combined current market
penetration by all competitors
– Leads to identification of new avenues of
growth
– Possible gaps include:
•
•
•
•
Product-line gap
Distribution gap
Usage gap
Competitive gap
Profit Pool Analysis
• Profit pool- an industry’s total amount of profit
earned at all points along the value chain
• “Mapping” profit pools provides insight into
industry’s profit potential, its evolution, why they
form where they do, and how it might change
• Four steps:
1. Defining pool’s boundaries
2. Estimating its overall size
3. Allocating profits to the different value chain
activities
4. Verifying results
Conclusion/Summary
• What is an Industry?
• Industry Evolution
• Methods for Analyzing and Industry
• Analyzing Product/Market Scope