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MANAGEMENT-I
SESSION 5 & 6: EXTERNAL ANALYSIS/INDUSTRY
ANALYSIS
Rupanwita Dash
Assistant Professor, Strategic Management Area
Indian Institute of Management Lucknow
Fundamental question: Why firms differ in performance?
2
INDUSTRY ANALYSIS: TOOLS
1. SWOT Analysis
2. SCP Paradigm
3. PEST Analysis
4. FIVE FORCES Framework
SWOT Analysis
HELPFUL HARMFUL
Structure-
Conduct-
Performance Firm Conduct
Paradigm Price taking
Product differentiation
Tacit collusion
Performance
Competitive advantage, Competitive parity,
Competitive disadvantage
Firm and it’s Environment
Government
Existing
Rivals FIVE FORCES
Customers
Competitive Environment/
Suppliers
FIRM Market Environment
Non-Market Environment
Potential
Rivals PEST
Exhibit 2.2,
government
page 44
FIVE FORCES Framework
Why does average performance differ across industries?
Bargaining
power of
suppliers
Bargaining
Threat of
Rivalry power of
new entry
consumers
Threat of
substitutes
7
Threat of new entrants: Structural drivers
• Economies of scale
• Product differentiation
• Brand identity/loyalty
• Switching costs
• Capital requirements
• Access to distribution channels
• Expected retaliation
• Absolute cost advantages
• Experience and learning effects
• Access to necessary inputs
• Proprietary low-cost product design
Bargaining power of suppliers: Structural drivers
• Uniqueness of supplier’s products or services (differentiation)
• Number of suppliers
• Size of suppliers
• Supplier concentration
• Importance of volume to supplier
• Availability of substitutes for the supplier’s products
• Switching cost for supplier’s products
• Impact of inputs on cost or differentiation
• Supplier’s threat of forward integration
• Industry threat of backward integration
• Supplier’s contribution to quality or service of the industry products
• Total industry cost contributed by suppliers
• Importance of the industry to supplier’s profit
Bargaining power of buyers: Structural drivers
• Buyer volume (number of customers)
• Buyer concentration
• Buyer’s switching costs
• Buyer’s ability to substitute
• Price sensitivity
• Brand loyalty
• Information availability
• Buyer’s threat of backward integration
• Industry threat of forward integration
Threat of substitutes: Structural drivers
• Strategic groups
• Blue ocean strategy
Key Takeaways
• Don’t enter an industry just because it is growing
• Analyze all the drivers of average industry profitability
• Understand how each parameter within a force affects an average firm’s revenue,
cost, or both, ceteris paribus
• Use five forces analysis to guide managerial actions that can change the
industry structure
• Mergers & acquisitions to reduce intra-industry rivalry
• Backward (forward) integration to reduce supplier (buyer) power
• Invest in advertising or R&D to increase barriers to entry