The Structural Analysis

of Industries

What is an INDUSTRY?

Industry as the group of firms producing products that are close substitutes
for each other.

The
The Determinants
Determinants of
of Industry
Industry
Profitability
Profitability
3 key influences:

The value of the product to customers

The intensity of competition

Relative bargaining power at different levels

within the value chain.

The
The Spectrum
Spectrum of
of Industry
Industry Structures
Structures
Perfect
Competition

Oligopoly

Duopoly

Monopoly

Concentration

Many firms

A few firms

Two firms

One firm

Entry and Exit

Barriers

No barriers

Product
Differentiation

Homogeneous
Product

Potential for product differentiation

Perfect
Information flow

Imperfect availability of information

Information

Significant barriers

High barriers

Threat of New Entry

The threat of entry into an industry depends on the barriers to entry that are
present coupled with the reaction from existing competitors that the entrant
can expect.

If barriers are high and/or newcomer can expect sharp retaliation from
entrenched competitors, the threat of entry is low.

Barriers to Entry

Economies of Scale

Product Differentiation

Capital Requirements

Switching Costs

Access to distribution Channels

Cost Disadvantages Independent of Scale

Government Policy

Economies of Scale

Refer to decline in unit costs of a product as the absolute volume pr period

increases.

Deter entry by forcing the entrant to come in at large scale and risk strong
reaction from existing firms or come in at a small scale and accept a cost
disadvantage, both undesirable options.

Multi-business firms maybe able to reap economies similar to those of scale if

they are able to share operations or functions subject to economies of scale
with other businesses in the company.

Joint Costs: E.g. air passenger and air cargo (can share intangible assets such
as brand names and know-how)

Product Differentiation

Means established firms have brand identification and customer loyalties,

which stem from past advertising, customer service, product differentiation
or simply being the first in the industry.

Most important entry barrier for baby care products, over-the counter-drugs,
cosmetics, investment banking and public accounting.

Capital Requirements

The need to invest large financial resources in order to compete creates a

barrier to entry, particularly if the capital is required for risky or
unrecoverable up-front advertising or R&D.

Switching Costs

One Time Costs facing the buyer of switching from one suppliers product to
anothers.

Include employee retraining costs, costs of new ancillary equipment, cost and
time in testing or qualifying a new source, need for technical help as a result
of reliance on seller engineering aid, product redesign , or even psychic costs
of severing a relationship

Access to distribution Channels

The new firm must persuade the channels to accept its product through price
breaks, cooperative advertising allowances, and the like, which reduce
profits.

Cost Disadvantages Independent of Scale

Proprietary product technology: patents or secrecy

Favorable access to raw materials

Favorable locations

Government subsidies

Learning or experience curve

Government Policy

Government can limit or even foreclose entry into industries with such control
as licensing requirements and limits on access to raw materials .

Regulated industries like trucking, railroads, liquor retailing and freight

forwarding

Expected Retaliation

If existing competitors are expected to respond forcefully to make new

entrants stay in the industry an unpleasant one, then the entry may well be
deterred.

The Entry Deterring Price

The prevailing structure of prices which just balances the potential rewards
from entry with the expected costs of overcoming structural entry barriers
and risking retaliation .

If the current price level is higher than the entry deterring price, entrants
will forecast above-average profits from entry, and entry will occur.

Intensity of Rivalry Among Existing

Competitors

Takes the familiar form of jockeying for position- using tactics like price
competition, advertising battles, product introductions, and increased
customer service or warranties.

Rivalry occurs because one or more competitors feels the pressure sees the
opportunity to improve position.

Price competitions, advertising battles

Warlike, bitter, cut-throat vs. polite, gentlemanly

Structural factors of Intense rivalry

Numerous or equally balanced competitors

Slow industry growth

High Fixed or storage costs

Lack of differentiation or switching costs

Capacity augmented in large increments

Diverse competitors

High Strategic Stakes

High Exit barriers economic, strategic and emotional factors that keep
companies competing in businesses even though they may be earning low or
even negative returns on investment.

Sources of Exit barriers

Specialized assets

Fixed costs of exits

Strategic interrelationships

Emotional barriers

Government and social restrictions

Shifting Rivalry

Change in industry growth brought about by industry maturity.

Acquisition introduces a very different personality to an industry

Exit barriers and Entry Barriers

Exit Barriers
Entry Barriers

Low

High

Low

Low, Stable
Returns

Low, Risky
Returns

High

High, Stable
returns

High, Risky
Returns

Bargaining Power of Buyers

Buyers are powerful if:

It

is concentrated or purchase large volumes relative to

seller sales

The

products it purchases from the industry represent a

significant fraction of the buyers costs or purchases .

The

product it purchases from the industry are standard

or undifferentiated.

It

faces few switching costs.

It

earns low profits.

 Buyers

pose a credible threat of backward

integration.

The

industrys product is unimportant to the

quality of the buyers products or services.

The

buyer has full information

Bargaining Power of Suppliers

Suppliers are powerful if:

It is dominated by a few companies and is more concentrated than the industry it

sells to.

It is not obliged to contend with other substitute products for sale in the industry.

The industry is not an important customer of the supplier group.

The suppliers product is an important input to the buyers business.

The supplier groups products are differentiated or it has built up switching costs.

The supplier group poses a credible threat of forward integration.

Pressure from Substitute Products

Substitutes other products that can perform the same function as the
product of the industry.

They deserve the most attention if:

Subject to trends improving their price-performance trade-off with the industrys

product

Produced by industries earning high profits.

Structural Analysis and Competitive

Strategy

Once the forces affecting competition in an industry and their underlying

causes have been diagnosed, the firm is in a position to identify its strengths
and weaknesses relative to the industry .

An effective competitive strategy takes offensive or defensive action in order

to create defendable position against the five competitive forces.

Approaches

Positioning

Influencing the balance

Exploiting change

Diversification