sm chapter 4 industry & competitive analysis

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Industry and Competitive Analysis

“You do not have to do this; survival is not compulsory.” – W. Edwards Deming

A business firm’s strategy is affected by the structural characteristics of the industry. It is thus considered essential for a firm to make an elaborate analysis of the industry in which the firm operates its business. Based on Michael Porter’s research results, an industry structure consists of suppliers, buyers, direct competitors, new entrants and substitutes. The strategy-makers of a firm need to be concerned with the impact of the industry structure on the firm’s strategy. Once the external environmental analysis has been completed, they should embark upon industry analysis. Industry analysis helps them have clear information about what is happening in the industry in which their companies are operating their businesses. Since industry contains competition, its analysis brings to light the complexities of the competition and the consequent challenges facing the industry. This chapter discusses the elements of industry environment, how competition in the industry can be analyzed, and also how the ‘industry analysis’ as a whole (overall industry analysis) can be undertaken. Specifically, this chapter deals with the following:

Concept of industry and industry environment Importance and elements of industry environment Significance of industry and competitive analysis How to analyze competition in an industry How to conduct overall industry and competitive

analysis

The strategy-makers of a firm need to be concerned with the impact of the industry structure on the firm’s strategy.

Strategic Management / Dr. M A Mannan

Preparing an industry analysis plan4.1 Concept of Industry

In general, we can define industry as a group of firms offering products or services that are close substitutes for each other. The products satisfy the same basic consumer needs. According to Thompson and Strickland, an industry is a group of firms whose products have so many of the same attributes that they compete for the same buyers. Byars, Rue and Zahra defined industry as a group of companies that offer products, goods or services that satisfy similar customer needs.1 For example, laundry bar soap and detergent powder are close substitutes for each other. The soap manufacturers are in the same basic industry as the companies that manufacture detergent powder. Both of these products serve the same consumer need – the need of washing clothes.

4.2 The Industry Environment

Also known as ‘immediate operating environment,’ the industry environment is really the competitive environment of a business organization. Industry environment substantially affects a firm’s business operations, because it is the ‘immediate’ external environment of the firm. Every firm operates its business in an industry and therefore its activities are directly affected by any change in the industry environment.

Changes in the general environment can have direct impact on any of the factors in the industry environment. An organization has greater control over the industry environmental factors than the general environmental factors. One point is to be noted that although the industry environment affects all the firms in the industry, in reality, all firms are not affected equally.

4.3 Elements of Industry Environment

As already said, several factors constitute industry environment such as suppliers, customers, competitors (existing and potential), new entrants and substitute products. You will have detailed ideas about these factors from the following discussions.

Suppliers: Suppliers are sources of resources such as raw materials, components, equipment, financial support, services, and office supplies. In order to ensure long-term survival and growth of a company, it is essential to develop a dependable relationship between a business-firm and its suppliers. In relation to its competitive position with suppliers, a company should address the following questions.2

1 It is not that easy to provide a clear definition of industry. “The boundaries of an industry are indistinct, fuzzy, and often permeable. Where is the boundary between communication, entertainment, publishing, computing? Is Sony in competition with News Corporation?” See Fitzroy and Hulbert, op. cit., p. 77.

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We can define industry as a group of firms offering products or services that are close substitutes for each other.

An organization has greater control over the industry environmental factors than the general environmental factors.

Several factors constitute industry environment such as suppliers, customers, competitors (existing and potential), new entrants and substitute products.

C H A P T E R 4 Analysis of Industry and Competition

Are suppliers’ prices competitive? Do suppliers offer attractive quantity discounts? How costly are their shipping charges?

Are vendors competitive in terms of production standards? Are suppliers’ abilities, reputation, and services competitive? Are suppliers reciprocally dependent on the firm?

Customers: Strategy managers must understand the composition of the company’s customers. With this end in view, they need to develop an exhaustive customer profile of both the present and potential customers. Managers will be in a better position to pragmatically plan the firm’s strategic operations, anticipate changes in the size of the markets and anticipate demand patterns. While constructing a customer profile, managers need to use information regarding geographic location of customers, demographic characteristics of buyers, psychographic issues and buyer behavior.

Competitors: A firm needs to analyze the competitive intensity in the industry. It needs to understand the competitive position in the industry in order to improve its chance of designing winning strategies. Many companies develop a ‘competitor profile’ to more accurately forecast its short-and-long-term growth and profit potentials. A competitor profile may include such variables as market share, product line, effectiveness of sales distribution, price competitiveness, advertising and promotion effectiveness, location and age of facility, production capacity, raw material costs, financial position, etc.

New Entrants: The new entrants are the potential competitors of the firm. They are potential competitors because if they enter into the industry with the similar types of products, the competitive intensity will increase.

Substitute Products: The producers of substitute products are indirect competitors. The substitute products serve the same categories of customers. They can meet the similar needs of customers, and therefore, emerge as threats. For example, when detergent powder is capable of meeting customer needs in a much better way or even in the same way as the laundry soap does, detergent powder becomes strong indirect competitor of laundry soap.

4.4 Industry and Competitive Analysis: Why Is It Important?

Industry is the ‘container’ of competition. The strategy-makers must understand the competitive intensity in the industry. The competitive intensity influences a company’s business operations tremendously. Thus, it is absolutely essential for a company to

2 John A. Pearce and Richard B. Robinson, Strategic Management (Homewood, Illinois: Richard D. Irwin, 1985), p. 112.

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A competitor profile may include such variables as market share, product line, effectiveness of sales distribution, price competitiveness, advertising and promotion effectiveness, location and age of facility, production capacity, raw material costs, financial position, etc.


review the competitive intensity and fit its strategy to its industry environment.

No organizations can expect good strategy-making without a detailed analysis of industry environment. That is why, it is widely recognized that good strategy-making should be preceded by good industry and competitive analysis. Industry analysis provides necessary information about the industry’s situations. From this analysis, managers can obtain information regarding many industry-related issues such as the following:

Economic features of the industry like market size, number of customers and sellers, technology, nature of standardization of product, market growth potential, prospect of making profit etc.

Strength of competition and competitive pressures. Major driving forces in the industry that cause pressures for

change. Financial and competitive positions of the competitors in the

marketplace. Strategies undertaken by the competitors. Industry’s key success factors such as design in garments

industry. Attractiveness of the industry in terms of growth prospect, degree

of uncertainty in the future.

With these data, managers can achieve several purposes:3

1. Identifying and selecting the company’s arena by defining its industry and served markets.

2. Identifying business opportunities and uncovering niche markets.3. Providing a benchmark for evaluating the company relative to the

competitors and, based on it, developing skills and capabilities necessary for success.

4. Shortening the company’s response-time to competitors’ moves.5. Restricting or preempting competitors’ moves.6. Encouraging organizational development through frequent

interactions among the executives during the analysis.7. Helping the company to gain a competitive advantage through

identifying any area where the company holds a significant advantage over its rivals.

8. Enhancing organizational learning by exposing managers to the ideas and actions of their competitors.

9. Providing invaluable insights into the industry and competition, which help managers identify appropriate strategy and implement strategy successfully.

4.5 How to Analyze Competition in an Industry?

3 J. E. Bain, Barriers to New Competition, (Cambridge, Mss: Harvard University Press, 1956. Quoted in C. W. L. Hill and G. R. Jones, Strategic Management (Boston: Houghton Mifflin Company, 2000).

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Good strategy-making should be preceded by good industry and competitive analysis. Industry analysis provides necessary information about the industry’s situations.

The most widely used model for an industry’s competition analysis is Michael Porter’s Five Forces Model. Managers can use this model to analyze the competitive environment in the industry in which their company is operating its business.


Managers in a firm/company can use various models for analyzing the industry environment. However, the most widely used model for an industry’s competition analysis is Michael Porter’s Five Forces Model. Managers can use this model to analyze the competitive environment in the industry in which their company is operating its business. The Five Forces Model provides a framework to identify industry-related opportunities and threats. We discuss this model here in details.

Michael Porter’s Five Forces Model of Competition

Porter has developed a framework that managers can use to analyze competitive forces in the industry’s environment. It helps them identify the industry-related opportunities and threats confronting their company. A look at the Five Forces Model that appears in Figure 4.14 would enable you to have a broad view of the elements of the model. You will find that there are five factors or forces that shape competition in an industry. These are: (i) threat of new entrants; (ii) bargaining power of suppliers; (iii) bargaining power of buyers; (iv) threat of substitute products; and (v) rivalry among the existing firms.

Figure 41: Michael E. Porter’s Five Forces Model

We provide here a discussion on the impact that the individual forces in the industry can have on a firm within the industry.

1. Threat of New Entrants

Threat of new entrants refers to the risk of new entry by potential competitors. In the marketplace some competitors are already operating their businesses. They are called existing competitors. 4 Michael Porter, “How Competitive Forces Shape Strategy,” Harvard Business Review (March-April, 1979).

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Threat of new entrants

Rivalry among the existing firms

Threat of substitute products

Bargaining power of buyers

Bargaining power of suppliers

Potential competitors create threats to existing companies (incumbent companies) because if they enter they can make competition tougher through taking away market share from the existing companies.


Some other upcoming competitors are not now operating business in the industry but they can enter into the industry if they have the capability and desire to enter. They are potential competitors. Bangladesh Telephone and Telegraph Board (BTTB) was once considered a potential competitor in the cellular phone industry. In fact, BTTB (subsequently renamed as BTCL) entered into the industry with its cheaper mobile phones in April 2005, although it could not initially manage the market-situation well.

Potential competitors create threats to existing companies (incumbent companies) because if they enter they can make competition tougher through taking away market share from the existing companies. Thus, existing companies discourage potential competitors from entering into the industry by creating barriers to entry. ‘Barriers to entry’ are created by undertaking some measures that are very costly for the competitors to adopt. Such barriers may be strong brand loyalty, absolute cost advantage, sizable economies of scale, high capital requirements, difficulties of building distribution network of distributors and retailers, restrictive tariffs, international trade restrictions, and government regulations.5

On the other hand, if the risk of entry by potential competitors is low, the existing companies can raise prices and earn higher profits. When entry barriers are low, it is easy for potential competitors to enter the industry. Despite entry barriers, many entrants enter the industry with appealing products. The strategy-makers need to identify the entrants, monitor their strategies and tactics, undertake counter-strategy, and deal with the emerging issues building on the firm’s existing resources and capabilities.

2. Bargaining Power of Suppliers

A company has to procure various types of ‘supplies’ from the suppliers such as raw materials, components, parts and other materials necessary for producing a product. When dependency of the customers (buyer-firms) is high, the bargaining power of suppliers is enhanced. Powerful suppliers can raise prices of materials. As a result, powerful suppliers are a threat to the companies who have to buy at that price. If suppliers are weak, company may be in an advantageous position and can demand high quality at a lower price from the suppliers. In the paper industry in Bangladesh, the number of suppliers is very few and they are very strong in bargaining prices. This has created a threat for the publishing industry. However, this threat has been to some extent diluted due to imported paper. Suppliers have very little or no bargaining power if the materials they sell are available from different parties. Their power increases if the supply of the materials is limited or if the materials are such that they are

5 See J. E. Bain, Barriers to New Competition (Cambridge, Mass: Harvard University Press, 1956); C.W.L. Hill and G.R. Jones, Strategic Management (Boston: Houghton Mifflin Company, 2000); and Thompson et al., Crafting and Executing Strategy (New Delhi: Tata McGraw-Hill, 2010).

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‘Barriers to entry’ are created by undertaking some measures that are very costly for the competitors to adopt. Such barriers may be brand loyalty, absolute cost advantage, economies of scale, and government regulations

Suppliers have very little or no bargaining power if the materials they sell are available from different parties. Their power increases if the supply of the materials is limited or if the materials are such that they are inevitable for the company.


inevitable for the company (buyer). For example, in the PC market Intel is the most powerful because of its unique position in producing microprocessor (Pentium).

According to Michael Porter, suppliers are most powerful:6

When the product that they sell has few substitutes and is important to the company.

When the company’s industry is not an important customer of theirs. In such instances, the supplier’s health does not depend on the company’s industry, and suppliers have little incentive to reduce prices or improve quality.

When their respective products are differentiated to such an extent that it is costly for a company to switch from one supplier to another. In such cases, the company depends on its suppliers and cannot play them off against each other.

When, to raise prices, they can use the threat of vertically integrating forward into the industry and competing directly with the company.

When buying companies cannot use the threat of vertically integrating backward and supplying their own needs as a means to reduce input prices.

The bargaining power of suppliers is weaker under the following circumstances in the industry:

When substitute products acceptable to the buyers are easily available.

When huge quantity of products are available in the market.

When buyers can buy from alternative suppliers at a low cost.

When buyer-firms have the capacity to integrate backward into the business of the supplier and thus can satisfy the customer’s own requirements.

When the customers have ample opportunities to develop strategic alliance with other suppliers, and thus can have win-win gain.

When continued large purchases on the part of the customers is important for the suppliers.

The customers can buy the same products from many suppliers at the same price.

3. Bargaining Power of Buyers

Buyers of products may be ultimate consumers or even the intermediaries such as dealers, wholesalers and retailers. Buyer’s bargaining power becomes high when suppliers have to depend on them for some reasons. On the other hand, their bargaining power is weak when suppliers/sellers are capable to raise prices. Whether

6 Adopted from Charles W. L. Hill and Gareth R. Jones, Strategic Management (Boston, MA: Houghton Mifflin Company, 2000, p. 82).

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Buyer’s bargaining power becomes high when suppliers have to depend on them for some reasons. On the other hand, their bargaining power is weak when suppliers/sellers are capable to raise prices.


buyer-seller relationships represent a weak or strong competitive force depends on whether buyers have sufficient bargaining power to influence the terms and conditions of sale in their favor, and the extent of seller-buyer strategic partnerships in the industry.7

According to Porter, buyer’s bargaining power is highest when: The supply industry is composed of many small companies and

the buyers are few in number as well as they are large. Buyers purchase in large quantities. The supply industry depends on the buyers for a large percentage

of its total orders. Buyers can switch orders between supply companies at a low

cost. It is economically feasible for the buyers to purchase the input

from several companies at once. Buyers can use the threat to supply their own needs through

vertical integration (backward linkage) as a device for forcing down prices.

Buyer’s bargaining power is generally weaker –

When buyer depends on the seller because of the fact that the brand reputation of the seller is very important to the buyer.

When there is high demand for the seller’s products in the market and as a result, a ‘sellers’ market’ prevails in the industry.

When cost of procuring products from alternative sources is very high.

When buyer purchases a particular product from the seller in small quantity or does not purchase frequently.

4. Threat of Substitute Products

A company needs to consider the competitive pressures from substitute products. The substitute products may come from either the same industry or from other industries. For example, cotton producers are in direct competition with the producers of polyester fabrics. Newspapers compete against television in providing latest news. E-mail is a substitute for the overnight delivery of documents by the courier service companies. Coffee is a substitute of tea. Bottled water is a substitute of juice and soft drinks. Plastic bottles are substitutes of aluminum cans for beverages. Traditional film cameras are fighting hard against their substitute-enemy – the digital cameras.

If the buyers view the substitute products as ‘good substitutes’, competitive pressure automatically emerges from the actions of the companies producing substitute products. For example, “Lasik operation (laser surgery) of eyes has created a strong competitive pressure on the produces of eye-glasses and contact lenses.

7 A. A. Thompson and A. J. Strickland, Strategic Management (Boston: McGraw-Hill Irwin, 2001).

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A company needs to consider the competitive pressures from substitute products. The substitute products may come from either the same industry or from other industries.


Similar is the situation between VCRs/video tapes and DVD players, and between landline telephones and mobile phones.

The major factors that determine the strength of the competition from substitutes are (a) attractiveness of the prices of substitutes; (b) buyers’ satisfaction with the substitutes in terms of quality and other features; and (c) the easiness to switch to substitutes. When the substitutes are available at cheaper prices, the producers of the normal product are in a high competitive pressure to reduce prices. When substitute products are available, customers begin to compare prices, quality etc. with the normal products. Similarly, when switching costs from the normal product to substitute products are low (and also not inconvenient), buyers become more prone to the substitutes.

Thompson et al. have indicated three signs that point to a strong competition from substitutes. These are: (a) sales of substitutes are growing faster than sales of the industry; (b) producers of substitutes are moving to add new capacity; and (c) profits of the producers of substitutes are on the rise.

Existence of substitute products in the industry poses a threat to a company. Thus, the company’s profit is likely to depress due to cutting down prices. If a company has few substitutes, it has the opportunity to raise prices and thereby increase profits.

5. Rivalry Among the Existing Firms

A very important force in the Porter’s Model is the extent of rivalry among the established firms in the industry. In an environment of weak rivalry (competition), a firm can raise prices and make higher profits. When competition is strong, the industry may face severe price-war in which firms compete against each other on the basis of price cuts. If there is a severe competition among the firms in the industry, profitability decreases substantially. Thompson and Strickland regard this force of rivalry as the ‘strongest of the five forces.’

Inter-company rivalry or competition stems from several factors, as identified by Porter in his famous book Competitive Strategy. These are as follows:8

Competition increases as the number of competitors increases. Competition is usually stronger when demand for the product is

growing slowly. Competition is more intense when industry conditions encourage

competitors to cut prices. Competition is stronger when customers’ costs to switch brands are

low. Competition is stronger when one or more competitors are

dissatisfied with their market position and undertake other measures to win the battle for market share.

8 Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980).

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When competition is strong, the industry may face severe price-war in which firms compete against each other on the basis of price cuts.


Competition tends to be more intense when it costs more to get out of a business than to stay in the industry.

Competition becomes more volatile when competitors are diverse in their objectives, strategies resources, etc.

Competition increases when powerful companies from outside the industry acquire the weak companies in the industry and launch aggressive campaigns to make the acquired companies profitable.

4.6 Why Do Managers Widely Use Porter’s Five Forces Model?

Managers can use this model to systematically diagnose the principal competitive pressures in a market. With this model they can assess the strength of each of the competitive forces. They can further understand how important each of these forces is. The major reason behind the wide use of this technique is that it is easy to understand and apply in practice when mangers analyze competition. Mangers find it comfortable to analyze the competitive pressures associated with each force in the model. They can clearly determine whether the pressures of the five competitive forces exert any strong or weak influence in the market place. Based on their understanding of the interplay of these forces, they can strategically think about the right type of strategy for their company.

Michael Porter’s model has several management implications:1. It reveals most important strategic clues in an industry’s

competitive environment. These are strengths of each of the five forces, nature of the competitive pressures of each force, and the overall structure of competition in the industry.

2. Profit margins for all competing firms become thin if the suppliers and buyers have considerable bargaining leverage, competition among sellers is strong, low entry barriers allow companies to enter easily into the industry, and competition from substitutes is strong. The opposite happens when the competitive forces are not collectively strong.

3. Porter argues that the stronger each of these forces is, the more limited is the ability of established companies to raise prices and earn greater profits. A strong competitive force can be regarded as a threat since it depresses profits. A weak competitive force can be viewed as an opportunity, for it allows a company to earn greater profits. The strength of the five forces may change through time as industry conditions change. The manager’s task is to study how changes in the five forces give rise to new opportunities and threats. His/her next task is to formulate appropriate strategic responses. Manager’s strategy-making task becomes easier when he/she can gauge the competitive insights from the analysis of the five forces. The information from the analysis of five forces helps managers formulate winning strategy that can ensure the company a sustainable competitive advantage.

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The major reason behind the wide use of his technique is that it is easy to understand and apply in practice when mangers analyze competition.

A strong competitive force can be regarded as a threat since it depresses profits. A weak competitive force can be viewed as an opportunity, for it allows a company to earn greater profits.


Porter’s Model has major drawbacks as a tool for competition analysis. It can be used for analyzing only the degree of competition in the industry. It cannot explore such factors as the influential economic factors in the industry that are relevant to managerial strategy-making. It also fails to identify the driving forces – major causes of changing industry conditions. This model is not very suitable to assess the competitive position of rivals and their likely strategic moves, and overall industry attractiveness. These drawbacks can be overcome by using Thompson and Strickland’s ‘Seven Factors Model of Industry Analysis.’

Industry and Competitive Analysis: Thompson and Strickland’s Seven Factors Model

4.7 The Focus of Thompson and Strickland’s Model

Michael Porter’s Five Forces Model focuses only on the competitive forces surrounding buyers, suppliers, established companies, potential competitors and substitute products. This model excludes many other industry-related factors that substantially provide inputs for identification of industry’s environmental opportunities and threats. To overcome this shortcoming of Porter’s Model, Thompson and Strickland have developed a model for the overall analysis of an industry, including competition within the industry. The model for industry and competitive analysis proposed by Thompson and Strickland has not only been able to overcome the drawbacks of Porter’s Model, it also seems to be comprehensive. It touches on all the relevant issues in an industry that need to be analyzed for assessing the overall industry situations, including the degree of competition in the industry.

This model is based on seven forces. It provides a comprehensive treatment for the analysis of the issues in an industry. It focuses on dominant economic characteristics of an industry, sources of competitive pressures, strengths of the competitive forces in the industry, driving forces, market position of the competitors, strategic moves (actions) undertaken by competitors, the key success factors in the industry, and the overall attractiveness of the industry.

4.8 The Essence of Thompson and Strickland’s Model

The seven factors of the Thompson and Strickland Model are as follows:9

9 This section draws on Thompson and Strickland, op.cit. pp. 74-113.

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Thompson and Strickland have developed a model for the overall analysis of an industry, including competition within the industry.


1. Industry’s dominant economic features.2. Main sources of competitive pressure and the strengths of

the competitive forces.3. Driving forces. 4. Market position of the rival companies.5. Competitor’s strategic moves.6. Industry’s key success factors.7. Industry’s overall attractiveness and profitability prospects.

An analysis of these factors reveals competitive structure of the industry. Let’s discuss the factors one by one. The information generated through the analysis of these factors would build understanding of a firm’s surrounding environment and form the basis for matching strategy to changing industry conditions and competitive forces.

Dominant Economic Features of the Industry

An industry’s economic features are important because their implications for strategy making are great. Economic features of an industry generally include: market size; scope of competitive rivalry (local, regional etc); market growth rate and position; stage in life cycle (early development, rapid growth and takeoff, decline and decay etc); number of companies in industry; number of customers; extent of backward linkage or forward linkage (i.e., degree of vertical integration in the industry); ease of entry into the industry; ease of exit from the industry; types of distribution channels; level of differentiation of competitors’ products; technology/ innovation; opportunities to realize economies of scale by the companies; capacity utilization; and industry profitability.

An industry’s economic features are relevant to managerial strategy making in various ways. Here are some examples. The strategic importance of ‘market size’ is that small markets do not usually attract big competitors but big markets do it. The strategic importance of ‘entry barriers’ is that high barriers protect market position and profits of existing firms, and low barriers invite more and more potential competitors to enter into the industry. Similarly, big capital requirements create barriers to entry of potential competitors.

Sources of Competitive Pressures and Strengths of Competitive Forces

An important component of industry analysis is sources of competitive pressures and the strengths of each competitive force. An understanding of the competitive character of the industry helps managers develop successful strategy. Thompson and his colleague suggested the use of Michael Porter’s Five Forces Model

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An industry’s economic features are important because their implications for strategy making are great.

New developments take place in the industry because important forces are always driving the competitors, customers and suppliers to alter their actions.


for the analysis of competitive pressures and the strength of each force of competition. They are of the view that the state of competition in an industry is a composite of five competitive forces identified by Porter. As already discussed, the five forces are threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products, and rivalry among the existing firms.

Driving Forces in the Industry

Economic characteristics say a very little about the ways in which the environment may be changing because of new developments in the industry. New developments take place in the industry because important forces are always driving the competitors, customers and suppliers to alter their actions. These forces in the industry are the major underlying causes of changing competitive conditions in the industry. These are called driving forces.

Depending on the nature of industry there may be various drivers of industry and competitive change. The driving forces create pressure on competitors, suppliers and customers to change their actions. They tend to change competitive conditions in the industry. Most of them originate in the industry environment, although driving forces are not uncommon in the general environment.

The most common driving forces are changes in the long-term industry growth rate, changes in buyer demographics, product innovation, technological change, marketing innovation, entry or exit of major firms, diffusion of technical know-how, increasing globalization of the industry, changes in cost and efficiency, emerging buyer preferences, government policy changes, changing attitudes and life-styles etc.

Early detection of driving forces is possible through systematically and regularly scanning the industry environment as well as other external factors, known as Environmental Scanning. This qualitative technique of investigating into external factors involves itself in monitoring and studying current events, constructing scenarios and identifying the driving forces. Many large companies such as Coca-Cola, Motorola, and Shell Oil employ environmental scanning on a continuous basis.

In any kind of industry in general, you can adopt the following steps for the analysis of the driving forces:

Scan the environment and identify the driving forces. You need to identify the powerful driving forces that have dramatic impacts and also less strong driving forces which are specific to your industry but have moderate impacts.

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Environmental scanning involves itself in monitoring and studying current events, constructing scenarios and identifies the driving forces.


Examine the driving forces thoroughly and determine whether and how they are influencing the industry landscape, i.e., how they are making the industry attractive or unattractive or less attractive. This step is about the assessment of the impacts of the driving forces.

Finally, develop strategy taking into account the impacts of the driving forces. At this step, you will determine the possible strategy adjustments that would be needed to deal with the impacts of the driving forces.

There may be many forces of change in an industry but in reality all of them do not qualify as ‘driving forces’. Managers need to carefully evaluate the forces so that they can intelligently separate the major changes from the minor changes. This would help mangers formulate sound strategy. Driving-forces analysis is in reality considered as having ‘practical value and is basic to the task of thinking strategically about where the industry is headed and how to prepare for the changes ahead’.10

Market Position of the Competitors

Market position of competitors in the industry has a bearing on the overall competition in the industry. Therefore, the strengths of competitive forces need to be analyzed. Such analysis is important to discover the main sources of competitive pressures and how strong they are. Attempt is made to study the market position of rival companies.

One technique for revealing the competitive (market) positions of industry participants is strategic group mapping. It is most useful when an industry has so many competitors that it is not practical to examine each one in depth. Strategic group mapping endeavors to determine the strategic group for a product of a company. So, naturally, the question arises: What is a strategic group?

Strategic Group: Companies in an industry often differ with respect to several factors: distribution channels, market segments, quality of products, technological leadership, customer service, pricing policy, advertisement policy and promotion policy, etc. These differences lead to different groups consisting of a limited number of companies in the same industry. The companies in the same group are found to follow the same basic strategy, and some follow a strategy different from the companies in other groups. These groups are called strategic groups. The competitors that pursue similar strategic approaches and have similar positions in the market constitute a strategic group. For instance, although Maruti car is in the automobile industry, it is not a competitor of

10 Thompson et al., Crafting and Executing Strategy, 16th Edition, op. cit., p. 84.

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The competitors that pursue similar strategic approaches and have similar positions in the market constitute a strategic group.


Civic Honda or Prado. Subaru is not competing with Mercedes-Benz or BMW.

Figure 4.2 shows two main strategic groups in the pharmaceutical industry - Proprietary Group and Generic Group. The companies in the proprietary group invest huge amount of money in research and development for producing a new product. They patent the new product and produce and sell it for several years (as per patent law in the country) at high prices. This brings them high profits for many years until the patent term is expired. These companies are high-risk/high return companies, and are included in the proprietary group. On the other hand, the companies in the generic group are low-risk/low return companies. They produce those products (drugs) that were first invented by the proprietary group companies. Therefore, their investment is low due to low R&D spending, and risk is also low. Their returns are low because they charge low prices for the generic drugs.

Figure 4.2: Two strategic groups in the pharmaceutical industry

You will find resemblance in the companies in the same strategic group in terms of:

comparable product line breadth using same kind of distribution channels offering buyers similar services and technical assistance using essentially the same product attributes depending on identical technological approaches or selling in the same price/quality range.

The implications of strategic groups are:a. A company’s closest competitors are those in its strategic groups,

not those in other strategic groups. A major threat to a company’s profitability can come from within its own strategic group.

b. Porter’s five forces can all vary in intensity among different strategic groups within the same industry.

Strategic Moves of the Competitors

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High

Prices Charged

Low

PROPRIETARY GROUPCompany- ACompany-BCompany-C

GENERIC GROUPCompany-XCompany- Y

Low R & D Spending High

A company’s closest competitors are those in its strategic groups, not those in other strategic groups. A major threat to a company’s profitability can come from within its own strategic group.


Strategic moves refer to strategic steps or actions undertaken by a company. Every company must be informed of the strategic moves of the competitors. Information about the competitors’ strategic moves can be obtained through an analysis of their moves in a systematic way. The analysis involves (i) identifying competitors’ strategies, (ii) analyzing the strategies, (iii) watching the actions of the competitors, (iv) understanding their strengths and weak-nesses, and (v) anticipating what moves they will make next. After scouting the competitors’ strategic moves, managers can decide about the appropriate counter-moves. They can plan their own actions to defeat the competitors. It is simply impossible to outcompete a competitor without monitoring their actions and predicting their future moves.

Managers of a company can gather information about the strategies of competitors by:

Examining what the competitors are doing in the marketplace; Monitoring what the management of the competing companies is

saying about their plans; Considering competitors’ geographical market arena, strategic

intent, market share objective and willingness to take risks; Trying to understand whether competitors’ recent moves are

offensive or defensive; Directly visiting the competitors’ offices to get information about

prices, wage and salary levels, introduction of new products, etc.; Pumping competitors’ representatives at trade shows/exhibitions/

trade fairs; and Searching through garbage dumpsters outside competitors’ offices

(may be considered unethical, although not illegal).

Industry’s Key Success Factors

There are certain factors in every industry that determine a product’s success in the market. These may include attributes of the product, resources of the company, competitive capabilities etc. These factors are called ‘key success factors’ (KSF). A sound strategy incorporates industry key success factors. They are prerequisites for industry success. That is why, all firms in the industry must pay close attention to the KSF. For example, KSF in the juice industry include: full utilization of juice-producing capacity (to lower down costs), strong network of middlemen (to have a wider distribution of products over a region or the country), unique flavor and taste, etc. Even packaging can be a success factor if the juice is targeted to young groups.

Key success factors usually vary from industry to industry. The variations occur mainly because of changes in the driving forces and competitive conditions in the industry. This warrants that the managers of companies need to give careful attention to identifying the major KSF and avoid the minor ones.

Industry Attractiveness

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KSFs include attributes of the product, resources of the company, competitive capabilities etc.

Strategists review the overall industry situation and develop reasoned conclusions about the relative attractiveness or unattractiveness of the industry.


Strategy-makers in a company must be able to give answer to the question: “Is the industry attractive, and what are its prospects for above-average profitability?” In order to answer to this question, strategists review the overall industry situation and develop reasoned conclusions about the relative attractiveness or unattractiveness of the industry. The factors that they usually analyze for assessing industry attractiveness include:

industry’s growth potential favorable or unfavorable impact by the prevailing driving forces competitive position of the company in the industry potential entry or exit of major firms stability and/ or dependability of demand possibility of competitive forces becoming stronger or weaker severity of problems/issues confronting the industry as a whole degrees of risk and uncertainty in the industry’s future.

4.9 Industry Analysis Plan

Industry analysis provides information about the industry situations that help strategy-makers concentrate on strategic thinking and predicting the future of the industry. An insight about the overall industry situations facilitates effective and pragmatic strategy-making. On the basis of the above analyses, managers can prepare a document containing all the information related to the competitive forces in the industry. We may call it ‘industry analysis plan.’ From the format presented in Figure 4.3, you can understand the types of information that are usually provided in the industry analysis plan.

The industry analysis plan broadly includes such information as economic features, sources of competition, driving forces, market position, strategic moves of the competitors, attractiveness of the industry in which the company is operating its businesses, and the key success factors in the industry. Against each of these forces, detailed information is provided that portray the entire picture of the industry. The information in this plan helps the managers develop appropriate strategies to deal with the competitive pressures prevailing in the industry. It also serves as a database of the industry-related information.

4.10 Concluding Remarks

After making an analysis of the industry environment, managers have no reason to suffer from complacency. They cannot really make winning strategy unless they gather information regarding the company’s internal situations and the general external environmental factors. In the industry analysis, managers look at the industry-specific external environmental factors only. This analysis provides only industry-related external opportunities and threats. But they cannot know about the general opportunities and threats that arise from the general economic environment, political

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An insight about the overall industry situations facilitates effective and pragmatic strategy-making.

The next chapter deals with SWOT analysis that helps in identifying internal strengths and weaknesses and external opportunities and threats of an organization.

Industry analysis plan is a document that contains information about the competitive forces in the industry.


and legal environment, social and cultural environment, natural environment and demographic environment. Against this backdrop, we devote the next chapter to making SWOT analysis that helps in identifying internal strengths and weaknesses and external opportunities and threats of an organization.

INFORMATION ABOUT ECONOMIC FEATURES

Market size, growth potential, technology, vertical integration, number and sizes of buyers and sellers, and so on

SOURCES OF COMPETITIONStatus of competition among competitors, power of buyers and suppliers, competition from substitutes, threat of potential entry and so on.

DRIVING FORCESChanges in long-term industry growth, globalization of competition in the industry, product innovation, changing buyer preferences, etc.

MARKET POSITION Market leaders, runner-ups, weak companies, strategic group members.

STRATEGIC MOVES OF RIVALS Competitors’ strategic moves and intents, whom to be watched and so on.

KEY SUCCESS FACTORSProduct attributes, competencies, capabilities and so on.

INDUSTRY’S OVERALL ATTRACTIVENESS

Factors making industry attractive. Factors making industry unattractive, special industry problems, favorable or unfavorable profit outlook.

Figure 4.3: A sample format for industry analysis plan

TERMS USED

IndustryIndustry analysisCompetitionFive Forces ModelEntry barriersPotential competitorsBargaining powerSubstitute productsCompetitive pressureDriving forcesStrategic moves

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Key success factorsStrategic groupStrategic group mapping

SAMPLE MULTIPLE CHOICE QUESTIONS

1. When a strategy-maker undertakes strategic analysis of his/her organization, s/he generally makes an analysis of the organization through classification of the analyses broadly into three. Which of the following category of analysis in not included in his/her classification?

a. Analysis of internal environmentb. Analysis of virtual environmentc. Analysis of industry environmentd. Analysis of external environment

2. What would happen to industry competition when the number of suppliers is much higher than an industry needs?

a. Suppliers would have much bargaining powerb. Suppliers’ bargaining power would diminishc. Suppliers would charge higher prices for their materialsd. None of the above

3. Buyer’s bargaining power becomes high when a. Suppliers have to depend on them for some reasonsb. The supply industry depends on the buyers for a large percentage

of its total ordersc. Buyers can switch orders between supply companies at a low

costd. All of the above

4. The strength of competition from substitutes emerges from a. Attractiveness of the prices of substitute productsb. Buyers’ satisfaction with the substitutesc. Easiness to switch to substitutesd. All of the above

5. The five forces model of Michael Porter includes five major forces in an industry. Which of the following is not a force in his model?a. threat of the terrorists in the locality of the industryb. threat of substitute productsc. threat of new entrantsd. bargaining power of buyerse. rivalry among the existing firms

6. Managers in a company can use the Porter's Model to-a. systematically diagnose the principal competitive pressure in a marketb. assess the strength of each of the competitive forcesc. further understand how important each of the five forces isd. all of the abovee. none of the above.

7. Porter's model has several drawbacks that make it unsuitable for perfect analysis of an industry. Which of the following is/are included in these drawbacks?a. it can be used only for analyzing the degree of competition in the

industryb. it cannot explore such factors as the influential economic factors in the

industry that are relevant to managerial strategy-makingc. it fails to identify the driving forcesd. all of the above are true

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e. none of the above are true8. There are certain factors in every industry that determine a product's

success in the market. These may include-a. attributes of the productb. resources of the companyc. competitive capabilitiesd. all of the abovee. none of the above

9. In the juice industry, some of the key success factors (KSF) are-a. full utilization of juice-producing capacityb. strong network of middlemenc. packaging with attractive featuresd. all of the abovee. none of the above.

SAMPLE TRUE/FALSE STATEMENTS

# T/F Statements1 Early detection of driving forces is possible through systematically

and regularly scanning the industry environment.2 The state of competition in an industry is a composite of five

competitive forces identified by Porter.3 A strategic group is a group of competitors who are in strategic

alliance. 4 The key success factors in the various industries do not vary because

the driving forces in all industries are same.5 Since an industry’s economic features do not affect a company in that

industry, it is a futile exercise to examine the economic features of the industry for the purpose of strategy making.

6 A company’s internal weaknesses may relate to valuable physical assets, fruitful alliances, strong competitive capabilities and robust growth in profitability.

7 The factors that constitute industry environment are political situations, technological factors, demographic situations, economic conditions, etc.

8 An organization has greater control over the industry-related environment than the general environmental factors.

9 Strategic mangers need to monitor developments in technology for their particular industry when formulating strategy that might help them avoid obsolescence and promote innovation.

10 There are competitors in an industry who are not now competing but they can enter into the industry if they have the capability and desire to compete. They are called existing competitors.

11 If the suppliers in an industry are powerful they can raise prices of materials and as a result, powerful suppliers are a threat to the companies who have to buy at that price.

12 In an industry, the key success factors usually remain static from industry to industry and the static conditions occur mainly because of changes in the driving forces.

SAMPLE SHORT-ANSWER QUESTIONS

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1. You know that software industry in Bangladesh is an emerging industry. Competition is gradually growing in this industry. What actions could your firm take to create barriers of entry to this industry?

2. If your company is facing severe competition from substitute products, what actions would you adopt to retaliate aggressively against new entrants in the industry?

3. Define industry from the standpoint of strategic management. Cite a few examples of industry existing in Bangladesh.

4. Why is industry analysis necessary? Managers of a company can obtain information regarding many industry-related issues through industry analysis. What are those issues?

5. What is the most widely used model for the analysis of an industry’s competition? Explain the various forces of this model.

6. Explain Michael Porter’s Five Forces Model of competition analysis.

7. Why is the Porter’s Five Forces Model a widely used technique for an industry’s competition analysis?

8. What are the strategic implications of the Porter’s Model of Competition Analysis?

9. Discuss the methods for the analysis of an industry.

10. What are the dominant economic characteristics of an industry?

11. State the main sources of competitive pressures.

12. Define driving force and discuss the major driving forces in the industries.

13. What is the importance of evaluating the market position of competitors?

14. Define strategic group and explain the procedure for constructing a strategic group map.

15. Why should a company assess the strategic moves of the competitors in the industry?

16. What are the key success factors in an industry? Explain your answer with examples from the jute industry in Bangladesh.

17. How can you evaluate the attractiveness of an industry?

18. Prepare a sample industry analysis plan for the industry in which company is operating its business.

1. Prepare the strategic group for your firm, which is doing business in the textile industry. What factors would you consider for strategic group mapping?

2. If your company is operating its business in the pharmaceutical industry, and if you want to know the key success factors in the industry, what would you do to identify the key success factors in the industry?

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PRACTICE QUESTIONS

Strategic Management / Dr. M A Mannan76

sm chapter 4 industry & competitive analysis

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