Lecture Contemporary strategy analysis: Concepts, techniques, applications (5th edition): Chapter 3 - Robert M. Grant

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Industry Analysis: The Fundamentals

• The objectives of industry analysis

• From environmental analysis to industry analysis

• Porter’s Five Forces Framework

• Applying industry analysis

• Industry & market boundaries

• Identifying Key Success Factors

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The Objectives of Industry

Analysis

The Objectives of Industry

Analysis

• To understand how industry structure drives competition,

which determines the level of industry profitability.

• To assess industry attractiveness

• To use evidence on changes in industry structure to

forecast future profitability

• To formulate strategies to change industry structure to

improve industry profitability

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THE INDUSTRY

ENVIRONMENT

• Suppliers

• Competitors

• Customers

Social structure

The national/

international

economy

Technology

Government

& Politics

The natural

environment

Demographic

structure

Social structure

From Environmental Analysis

to Industry Analysis

From Environmental Analysis

to Industry Analysis

• The Industry Environment lies at the core of the Macro Environment.

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Profitability of US Industries

Pharmaceuticals 26.8 Gas & Electric Utilities 10.5
Tobacco 22.0 Food and Drug Stores 10.3
Household & Personal Products 20.5 Motor Vehicles & Parts 9.8
Food Consumer Products 20.3 Home Equipment 9.5
Medical Products & Equipment 18.8 Railroads 9.0
Beverages 18.8 Hotels, Casinos, Resorts 8.0
Scientific & Photographic Equipt. 16.5 Insurance: Life and Health 7.6
Commercial Banks 16.0 Building Materials, Glass 7.0

Publishing, Printing 14.3 Metals 6.0
Petroleum Refining 14.3 Semiconductors &

Apparel 14. 3 Electronic Components 5.8

Computer Software 13.5 Insurance: Property & Casualty 5.3
Electronics, Electrical Equipment 13.3 Food Production 5.3
Furniture 13.3 Telecommunications 3.5
Chemicals 12.8 Forest and Paper Products 3.5
Computers, Office Equipment 11.8 Communications Equipment (4.0)
Health Care 11.5 Airlines (34.8)

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Long-term Profitability of US Industries: EVA and ROA, 1986-97

Industry EVA/CE ROA Industry EVA/CE ROA

Tobacco 9.4 14.4 Paper and products (1.5) 5.2
Computer software Broadcasting and

& services 5.9 10.4 publishing (1.5) 6.0
Personal care Cars & trucks (1.5) 2.2 
products 2.8 8.0 Healthcare services (1.7) 3.3 
Medical products 2.7 9.5 Machine tools, hand tools (1.7) 6.0 
Printing & Appliances and home

advertising (2.0) 2.3 furnishings (1.9) 3.4
Food processing 2.5 8.5 Telephone equipment &

Drugs & research 0.7 7.6 services (2.1) 7.0
Beverages 0.2 5.6 Plastics & products (2.6) 5.3
Textiles (0.1) 7.4 Computers & peripherals (3.1) 3.1
Fashion retailing (0.4) 9.3 Electrical products (3.3) 4.6
Building materials (0.6) 5.6 Aerospace & defense (3.3) 4.8
Metals (1.0) - Railroads (3.4) 3.8
Telecom services (1.2) 4.6 Airlines (4.1) 1.0

Discount retailing (1.2) 6.4 Steel (6.4) 2.3 
Semiconductors Cable television (7.2) (3.3)
& components (1.3) 6.0 Electronics (9.2) 3.5

Average (1.1) 5.6

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The Determinants of Industry

Profitability

The Determinants of Industry

Profitability

3 key influences

:

• The value of the product to customers

• The intensity of competition

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The Spectrum of Industry Structures

Concentration

Entry and Exit

Barriers

Product

Differentiation

Information

Perfect

Competition

Oligopoly

Duopoly

Monopoly

Many firms

A few firms

Two firms

One firm

No barriers

Significant barriers

High barriers

Homogeneous

Product

Potential for product differentiation

Perfect

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Porter’s Five Forces of

Competition Framework

Porter’s Five Forces of

Competition Framework

SUPPLIERS

POTENTIAL

ENTRANTS

SUBSTITUTES

BUYERS

INDUSTRY

COMPETITORS

Rivalry among

existing firms

Bargaining power of suppliers

Bargaining power of buyers

Threat of

new

entrants

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THREAT OF ENTRY

•Capital requirements

•Economies of scale

•Absolute cost advantage

•Product differentiation

•Access to distribution
 channels

•Legal/ regulatory barriers

•Retaliation

SUBSTITUTE

COMPETITION

• Buyers’ propensity
 to substitute

• Relative prices & 
 performance of
 substitutes

BUYER POWER

• Buyers’ price sensitivity 
• Relative bargaining

power

INDUSTRY RIVALRY

•Concentration

•Diversity of
 competitors

•Product differentiation

•Excess capacity &
 exit barriers

•Cost conditions
BUYER POWER

• Buyers’ price sensitivity 
• Relative bargaining

power

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Lecture Contemporary strategy analysis: Concepts, techniques, applications (5th edition): Chapter 3 - Robert M. Grant

<b>Industry Analysis: The Fundamentals</b>

<b>Industry Analysis: The Fundamentals</b>

•

<b>The objectives of industry analysis</b>

•

<b>From environmental analysis to industry analysis</b>

•

<b>Porter’s Five Forces Framework</b>

•

<b>Applying industry analysis</b>

•

<b>Industry & market boundaries</b>

•

<b><sub>Identifying Key Success Factors</sub></b>

<b>The Objectives of Industry </b>

<b>Analysis</b>

<b>The Objectives of Industry </b>

<b>Analysis</b>

•

<b>To understand how industry structure drives competition, </b>

<b>which determines the level of industry profitability.</b>

•

<b>To assess industry attractiveness</b>

•

<b>To use evidence on changes in industry structure to </b>

<b>forecast future profitability</b>

•

<b>To formulate strategies to change industry structure to </b>

<b>improve industry profitability</b>

<b>THE INDUSTRY</b>

<b>ENVIRONMENT</b>

•

<b> Suppliers</b>

•

<b> Competitors</b>

•

<b> Customers</b>

<b>Social structure</b>

<b>The national/ </b>

<b>The national/ </b>

<b>international </b>

<b>international </b>

<b>economy</b>

<b>economy</b>

<b>Technology</b>

<b>Technology</b>

<b>Government</b>

<b>Government</b>

<b>& Politics</b>

<b>& Politics</b>

<b>The natural </b>

<b>The natural </b>

<b>environment</b>

<b>environment</b>

<b>Demographic </b>

<b>Demographic </b>

<b>structure</b>

<b>structure</b>

<b>Social structure</b>

<b>Social structure</b>

<b>From Environmental Analysis </b>

<b>to Industry Analysis</b>

<b>From Environmental Analysis </b>

<b>to Industry Analysis</b>

•

<i><b>The Industry Environment lies at the core of the Macro Environment. </b></i>

<b>Profitability of US Industries</b>

<b>Profitability of US Industries</b>

<b>Long-term Profitability of US Industries: EVA and ROA, 1986-97</b>

<b>The Determinants of Industry </b>

<b>Profitability</b>

<b>The Determinants of Industry </b>

<b>Profitability</b>

<i><b>3 key influences</b></i>

<b>:</b>

•

<b>The value of the product to customers</b>

•

<b>The intensity of competition</b>