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33 to 35 points

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26 to 28 points

0 to 25 points

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13 to 14 points

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11 to 12 points

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Contemporary Strategy Analysis
Eleventh Edition
Robert M. Grant

Chapter 3
Industry Analysis: The Fundamentals

Industry Analysis: the Fundamentals
Outline
• Introduction / Objectives
• From environmental analysis to industry analysis
• Analyzing industry attractiveness
• Applying industry analysis to forecast industry profitability
• Using industry analysis to develop strategy
• Defining industries: Where to draw the boundaries
• Identifying Key Success Factors
3-2

Introduction / Objectives
The Objectives of Industry Analysis
• To appreciate that the form’s industry forms the core of its external environment
• To identify the main structural features of an industry and understand how they
determine competition and profitability.
• To apply industry attractiveness to predict industry profitability
• To develop strategies that
a) Position the firm favorably in relation ot competitive forces
b) Influence industry structure to enhance industry attractive
• To identify opportunities for competitive advantage(Key Success Factors)
3-3

From Environmental Analysis to Industry Analysis
At the Core of the Macro Environment is the Industry Environment

The Macro Environment impacts the firm through its effect on the Industry Environment
3-4

Analyzing Industry Attractiveness (1 of 9)
Profitability of Selected US Industries
(median ROCE)
High Profitability
Tobacco

%
64.5

Low Profitability
Airlines

%
15.5

Computers & Peripherals

53.0

Hospitals, Healthcare Facilities

14.7

Aerospace, Defense

50.2

Oil & Gas (integrated)

14.3

Household Products

38.6

Publishing, Newspapers

13.6

Pharmaceuticals

36.2

Telecom Services

13.5

Beverages (soft drinks)

33.4

Food Retailing

11.1

Information Services

29.1

Steel

11.0

Semiconductors

26.6

Electrical Power

6.0

Software

26.6

Motor Vehicles

5.7

Food Processing

21.1

Airlines

15.5
3-5

Analyzing Industry Attractiveness (2 of 9)
The Determinants of Industry Profitability
3 key influences:
1. The value of the product to customers
2. The intensity of competition
3. Relative bargaining power at different stages of the value chain

3-6

Analyzing Industry Attractiveness (3 of 9)
The Spectrum of Industry Structures

3-7

Analyzing Industry Attractiveness (4 of 9)
Porter’s Five Forces of Competition Framework

3-8

Analyzing Industry Attractiveness (5 of 9)
The Structural Determinants of Competition

3-9

Analyzing Industry Attractiveness (6 of 9)
Threat of Substitutes
Extent of competitive pressure from producers of substitutes depends upon:
• Buyers’ propensity to substitute
• The price-performance characteristics of substitutes.

3-10

Analyzing Industry Attractiveness (7 of 9)
Threat of New Entry
Entrants’ threat to industry profitability depends upon the height of barriers to entry.
The principal sources of barriers to entry are:
• Capital requirements
• Economies of scale
• Absolute cost advantage
• Product differentiation
• Access to channels of distribution
• Legal and regulatory barriers
• Retaliation
3-11

Analyzing Industry Attractiveness (8 of 9)
Bargaining Power of Buyers

NOTE: analysis of supplier
power is symmetric
3-12

Analyzing Industry Attractiveness (9 of 9)
Rivalry Between Established Competitors
The extent to which industry profitability is depressed by aggressive price
competition depends upon:
• Concentration (number and size distribution of firms)
• Diversity of competitors (differences in goals, costs strategies, etc )
• Product differentiation
• Excess capacity and exit barriers
• Cost conditions
etera

o Ratio of fixed to variable costs
o Extent of scale economies
3-13

Applying Industry Analysis to Forecast Industry Profitability
Applying Five-Forces Analysis to Forecast Industry Profitability
• Perform a Five Forces Analysis to understand why the industry’s current level of
profitability is what it is
• Identify the changes in industry structure that are likely to occur over the next
few years. E.g.
o Is new entry likely?
o Will concentration increase as a result of mergers and acquisitions?
o Will additions to industry capacity outpace the growth in demand?
o Will innovation create new substitutes?

• Use the Five Forces Framework to predict the impact of these structural changes
on competition and profitability
3-14

Using Industry Analysis to Develop Strategy
Using Industry Analysis to Develop Strategy
Strategies to Improve Industry Profitability
• Which of the structural variables that are depressing profitability can we
change by individual or collective strategies?
Strategic Positioning
• Once we know which structural features of the industry support
profitability and which depress profitability, we can choose a favorable
positioning within the industry.
3-15

Defining Industries
Drawing Industry Boundaries
• What industry is Ferrari in?
o The Motor Vehicle industry (SIC 371)
o The Automobile industry (SIC 3712)
o The performance car industry
o Is its industry global, regional (Europe) or national (Italy)?

• Key criterion: SUBSTITUTABILITY
o On the demand side : are buyers willing to substitute between types of cars and across countries
o On the supply side : are manufacturers able to switch production between types of cars and across
countries

We may need to draw industry boundaries differently for different types of decision
3-16

Identifying Key Success Factors (1 of 4)
Identifying Key Success Factors

3-17

Identifying Key Success Factors (2 of 4)
KSFs in Steel, Fashion Clothing, and Supermarkets
Steel

Fashion clothing

WHAT DO CUSTOMERS WANT?

HOW FIRMS SURVIVE COMPETITION?

KEY SUCCESS FACTORS

Low price
∙
Product consistency
Reliability of supply
Specific technical specifications for special
steels
∙ Demand segmented by garment type, style, ∙
quality, color

Strong price competition and cyclical
demand require low costs and financial
strength

∙ Cost efficiency requires either large plants
in low-cost locations, or hi-tech, flexible,
mini-mills close to customers

∙
∙
∙
∙

∙ Quality and service differentiation
Intensely competitive due to low entry
barriers, low seller concentration, and
strong retail buying power

∙ Price premium for brand, style, exclusivity,
and quality
∙ Differentiation can yield substantial price
premium, but imitation rapid
∙ Mass market highly price sensitive

Super-markets

∙
∙
∙
∙

Low prices
∙ Markets localized
Convenient location
∙ Intensity of price competition depends on
Wide product range adapted to local tastes
number and proximity of competitors
Fresh produce, good service, pleasant
∙ Bargaining power essential to low input
ambience, easy parking
costs

∙ Combining differentiation with low-costs

∙ Key differentiation variables: design,
speedy to fashion trends, brand
reputation, quality
∙ Cost efficiency requires low labor costs
∙ Low-costs require operational efficiency,
efficient supply chain, buying power, low
wage costs.

∙ Differentiation requires wide product
range (hence, large stores), convenient
location, easy parking
3-18

Identifying Key Success Factors (3 of 4)
Identifying KSFs Through Modeling Profitability: The Airline Industry

NOTE: ASM = Available Seat Miles; RPM = Revenue Passenger Miles
3-19

Identifying Key Success Factors (4 of 4)
Identifying KSFs by Analyzing Profit Drivers: Retailing

3-20

Summary (1 of 2)
From Environmental Analysis to Industry Analysis:
• The industry is the core of a firm’s external environment. Political, economic, social, and
technological forces impact the firm through its industry
Forecasting Industry Profitability
• Past profitability a poor indicator of future profitability.
• If we can forecast changes in industry structure we can predict likely impact on
competition and profitability
Strategies to Improve Industry Profitability
• Influencing industry structure by individual or collective strategies
• Positioning the firm to shelter from the forces of competition
3-21

Summary (2 of 2)
Defining Industry Boundaries
• Key criterion: substitution
• Industry definition depends upon the strategic issues being considered
Key Success Factors
• Gateway to the analysis of competitive advantage

3-22

Contemporary Strategy Analysis
Eleventh Edition
Robert M. Grant

Chapter 4
Further Topics in Industry and Competitive Analysis

Further Topics in Industry and Competitive Analysis (1 of 2)
Outline
• Objectives
• The limits of industry analysis
o
o
o

Does Industry Matter?
Hypercompetition
Winner-Take-All Industries

• Beyond the five-forces
o
o
o

Complements
Ecosystems
Business Models

• Competitive interaction
o

o

Game Theory
Competitor Analysis

• Segmentation and strategic groups
4-2

Further Topics in Industry and Competitive Analysis (2 of 2)
Objectives
• To recognize the limits of the Porter five forces framework
• To extend industry analysis to include the role of complements, business
ecosystems, and business models
• To understand competitive interaction using game theory competitor
analysis
• To apply segmentation analysis and strategic group analysis to examine
industries at a more disaggregated level

4-3

The Limits of Industry Analysis (1 of 3)
Does Industry Matter? The Sources of Profitability Differentials between Firms

4-4

The Limits of Industry Analysis (2 of 3)
Competition as a Dynamic Process: Hypercompetition
Porter framework assumes:
(a) industry structure drives competitive behavior
(b) Industry structure is (fairly) stable.

But, competition also changes industry structure:
• Schumpeterian Competition: A “perennial gale of creative destruction” –market leaders overthrown by innovation
• Hypercompetition: “intense and rapid competitive moves…. continuously creating new competitive advantages
and destroying existing competitive advantages”
Implication: –Within 5-forces framework:
INDUSTRY STRUCTURE
COMPETITION
–Under dynamic competition:
COMPETITIVE STRATEGY
INDUSTRY STRUCTURE
4-5

The Limits of Industry Analysis (3 of 3)
Winner-Take-All Industries
• In some industries, the notion of “industry attractiveness” is meaningless
because one firm takes all the industry’s profits and other firms earn little
or no profit
• These “winner-take-all” industries tend to be those with extreme scale
economies (e.g. search engines) or network externalities (online auction
sites, social networks)

4-6

Beyond The 5-Forces (1 of 3)
Five Forces or Six?
Introducing Complements

4-7

Beyond The 5-Forces (2 of 3)
Business Ecosystems: Managing Value Migration
• A business ecosystem is the “community of organizations, institutions,
and individuals that impact the enterprise”
• Change within a business ecosystem causes value to migrate between
firms and groups of firms
• A firm can influence value migration within a business ecosystem in order
to increase its share of value within the system. E.g. by becoming a
“guardian of quality”, becoming irreplaceable, exploiting changing
customer needs, or reconfiguring the value chain.
4-8

Beyond The 5-Forces (3 of 3)
Using Business Models to Manage the Ecosystem
• A business model is a simplified description of a business that specifies the core logic for creating value
• Business models are useful for developing strategies that can exploit the opportunities available in
complex business ecosystems

• The Business Model Canvas is a graphical tool for designing business models:

4-9

Competitive Interaction (1 of 2)
The Contribution of Game Theory to Competitive Analysis
1. Frames strategic decisions as interactions between competitors
2. Predicts outcomes of competitive situations involving a few, evenly-matched players
3. Provides key insights into the nature and determinants of interactions among competitors. E.g.:
a) Competition and Cooperation—Game theory can show conditions where cooperation more advantageous than
competition
b) Deterrence—changing the payoffs in the game in order to deter a competitor from certain actions
c) Commitment—irrevocable deployments of resources that give creditability to threats
d) Signaling—communication to influence a competitor’s decision

Problems of game theory:
•

Able to explain past competitive behavior—weak in predicting future behavior.

•

Lack of an integrated general theory— Many different models; outcomes highly sensitive to small changes in assumptions
4-10

Competitive Interaction (2 of 2)
A Framework for Competitor Analysis

4-11

Segmentation and Strategic Groups (1 of 9)
Segmentation Analysis: The Principal Stages
1. Identify key variables and
categories

Identify segmentation variables
Reduce to 2 or 3 variables
Identify discrete categories for each variable

2. Construct a segmentation matrix
3. Analyze segment attractiveness
4. Identify KSFs in each segment
5. Analyze benefits of broad v s.
narrow scope
ersu

Potential for economies of scope across
segments
Similarity of KSFs
Differentiation benefits of segment focus
4-12

Segmentation and Strategic Groups (2 of 9)
Customer and Product Characteristics as Segmentation Variables

4-13

Segmentation and Strategic Groups (3 of 9)
Segmenting the Global Automobile Industry

4-14

Segmentation and Strategic Groups (4 of 9)
Vertical Segmentation & Industry Profit Pools: The US Auto Sector

4-15

Segmentation and Strategic Groups (5 of 9)
Vertical Segmentation: A Profit Pool Mapping of the Electric Vehicle Industry

4-16

Segmentation and Strategic Groups (6 of 9)
Segmentation and Key Success Factors: The U.S. Bicycle Market

4-17

Segmentation and Strategic Groups (7 of 9)
Strategic Group Analysis
A strategic group is a group of firms in an industry that follow the same or
similar strategies
Identifying strategic groups:
• Identify principal strategic variables which distinguish firms.
• Position each firm in relation to these variables.
• Identify clusters.

4-18

Segmentation and Strategic Groups (8 of 9)
Strategic Groups within the World Automobile Industry

4-19

Segmentation and Strategic Groups (9 of 9)
Strategic Groups within the World Petroleum Industry

4-20

Summary
• Conventional industry analysis is limited to the extent that:
a) Industry membership is a minor influence on firm profitability
b) It assumes industry structure is stable—the competitive process can transform industry structures
c) In “winner-take-all” industries, the notion of industry attractiveness is meaningless
• We can extend our analysis of industry and competition to take account of:
a) complementary products
b) platform-based competition
c) business ecosystems
• Competitive interactions between close rivals can be analyzed:
a) game theory
b) competitor analysis—which is less formal than game theory, but can help us to understand competitors and
predict their behavior
• Segmentation analysis and strategic group analysis allows us to understand industries at a more detailed level

4-21

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