Chapter 4

Analyzing an Industry
Carli Slingerland
Charity Moore
Andrew Keeling
Kolt Pederson
Hayley Rush
Alex Beverly
Emily Dale
Everett Gibson
 Introduction
• What is an industry?
• Industry Structure and Porter’s Five
Forces
• Industry Evolution
• Methods for Analyzing an Industry
• Analyzing Product/Market Scope
Four Dimensions to an Industry

1. Products

2. Customers

3. Geography

4. Stages in the product distribution pipeline

 Products: Two Components
• Function: What the product or service does;
this can be actual or perceived
– Example of function: Some cooking appliances
back. Others bake and roast. Still others fry
and boil.
– Example of function perception: Some over the
counter nasal congestion remedies are
positioned as cold relievers, whereas others
with similar chemicals are promoted as allergy
medicines.
 Products: Two Components
Continued
• Technology: While some appliances are
gas, some are electric. While some
medication is in liquid form, other medicine
is in capsules.
 Industry vs. Market Served
• Examples
– Industry: Large kitchen appliance industry
– Market Served: Refrigerators
Porter’s Five Forces Model
 Six Barriers to Market Entry
1. Economies of Scale
2. Product Differentiation
3. Capital Requirements
4. Cost Disadvantages (independent of size)
5. Access to Distribution Channels
6. Government Regulation
– Example: Soda and Beer Industries
 Powerful Suppliers and Buyers
• Buyers and suppliers influence
competition in an industry by exerting
pressure over prices, quality, or the
quantity demanded or sold.
• Example: Soft drink bottlers in the late
1980s
 Powerful Suppliers
• Suppliers, in general, are more powerful
when:
– There are a few dominant companies, and they
are more connected than the industry they serve.
– The component supplied is differentiated, so
switching suppliers is difficult.
– There are few substitutes.
– Suppliers can integrate forward.
– The industry generates but a small portion of the
suppliers’ revenue base.
 Powerful Buyers
• Buyers have substantial power when:
– There are few of them and/or they buy in
large volume.
– The product is relatively undifferentiated,
making it easy to switch to other suppliers.
– The buyers’ purchases represent a sizeable
portion of the sellers’ total revenues.
– Buyers can integrate backwards.
 Substitute Products and
Services
• Substitute products:
– Continually threaten most industries
– Limit prices and profitability
– Can take substantial market share from
existing businesses
• Example: Pay-per-view vs. Cable
television
 Substitute Products and
Services
• From a strategic perspective, substitutes
that deserve the closest scrutiny are those
that:
– Show improvements in price performance
relative to the industry average
– Are produced by companies with deep
pockets
 Rivalry Among Participants
• Characteristics producing intense rivalry:
– Competitors are numerous and relatively
equal
– Industry growth is slow
– Fixed costs are high
– Capacity increases are secured in large
increments
– Exit barriers are high
 Rivalry Among Participants
• Complementary products, when aligned with
the industry it compliments, preserve the
status quo.
• New technologies or approaches upset the
status quo.
• Change in technological standards that
render previously compatible products and
services incompatible.
– Example: Increasing dependence on the internet
 Industry Evolution
• Industry structures change over time
– Example: Sony

• Models help us understand change

• Change can occur rapidly

 Four Trajectories of Change
• Two types of obsolescence define change
1. Threat to core activities
2. Threat to core Assets
• Radical Change
– Both core assets and activities are threatened
• Example: Airlines
• Progressive Change
– Neither core activities or assets are threatened
• Example: Trucking Industry
 Four Trajectories of Change
Continued
• Creative Change
– Core Assets are threatened, but not Core
Activities
• Example: Movie Studio
• Intermediating Change
– Core Activities are threatened but not Core
Assets
• Example: Museums
 Industry Structure,
Concentration, and Product
Differentiation
• Useful to analyze changes in structure
– Example: Vertical-Horizontal, Concentration,
Product Differentiation
• Telecommunications, Computers, Television
– Traditional boundaries have disappeared
– All have evolved into 5 horizontal
segments
• Content, packaging, network, Transmission, display
 Industry Structure,
Concentration, and Product
Differentiation Continued
• Vertical Integration important Again
• Concentration
– Economies of scale are important
– “Rule Three and Four”
• Market Maturity
• Differentiation
 Product Life Cycle Model
• Based on the theory of diffusion of
innovations and its logical counterpart and
the pattern of acceptance of new ideas.
• Model states the industry passes through
stages: introduction, growth, maturity, and
decline
• These stages are defined by changes in
the rate of growth of industry sales.
 Strategic Choices over Product
Life Cycle
• Emerging Stage: High level of uncertainty

• Growth Environment: Less uncertainty,

Competition intense
• Mature Industries: Competitively stable,
Stagnant in sales growth
• Declining Industries: Unattractive
Product Life Cycle Model Pitfalls
• Little predictive value
• Industry growth does not follow S-shape
pattern
• Does not acknowledge that companies
can affect the shape of growth curve
• Can become a self-fulfilling prophecy
 New Patterns
• Industry evolution in three phases
1. Competition based on ideas, product
concepts, technology choices, and building
of competency base.
2. Competition based on building a viable
coalition of partners that will support a
standard against competing formats.
3. Competition in the battle for market share for
end products and profits.
 Methods for Analyzing an
Industry
• Segmentation
• Competitor Analysis
• Strategic Groups
 Strategic Segmentation
• Segmentation
– Identify Segmentation
– Develop Segment Profiles
• Targeting
– Evaluate Segment Attractiveness
– Select Target Segment(s)
• Positioning
– Identify Possible Positionings
– Select Develop Positioning
 Competitor Analysis
• Five Key Questions:
1. Who are the firm’s direct competitors now
and in the near term?
2. What are their major strengths and
weaknesses?
3. How might they have behaved in the past?
4. How might they behave in the future?
5. How will our competitors’ actions affect our
industry and company?
 Competitor Analysis: Roles of
Competitors
• Leaders
– Focus to expand total demand
– Example: Coca-Cola
• Challengers
– Target the leader
– Example: Quizno’s Subs
• Followers
– Use strategy of “innovative imitation”
– Example: Gilletee
• Nichers
– Concentrate on small slice of market
– Example: Stepan Company
 Strategic Groups
• “A set of firms that face similar threats and
opportunities, which are different from the
threats and opportunities faced by other
sets of companies in the same industry.”
» Strategy page 92

• McDonald’s is not concerned with Spago

 Analyzing Product/Market
Scope
• Market Analysis
• Growth Vector Analysis
• Gap Analysis
• Profit Pool Analysis
 Market Analysis
• Used to quantify the attractiveness of a
particular industry or segment
• Helps develop better understanding of key
success factors companies need to develop in
order to achieve their strategic objectives
• Includes assessment of:
1. Actual and potential size of market
2. Market and segment growth
3. Market and segment profitability
4. Underlying cost structure and trends
5. Current and emerging distribution systems
6. Importance of regulatory issues
7. Technological changes
 Growth Vector Analysis
• A company can increase its strategic
scope within in industry by offering more
products/technologies/services to tap
more customer segments
Product Options

Present Future Products

Market Products
Options Present Markets Concentration Product
Development
Future Markets Market Diversification
Development
 Gap Analysis
• Process of comparing an industry’s market
potential to the combined current market
penetration by all competitors
– Leads to identification of new avenues of
growth
– Possible gaps include:
• Product-line gap
• Distribution gap
• Usage gap
• Competitive gap
 Profit Pool Analysis
• Profit pool- an industry’s total amount of profit
earned at all points along the value chain
• “Mapping” profit pools provides insight into
industry’s profit potential, its evolution, why they
form where they do, and how it might change
• Four steps:
1. Defining pool’s boundaries
2. Estimating its overall size
3. Allocating profits to the different value chain
activities
4. Verifying results
 Conclusion/Summary
• What is an Industry?

• Industry Evolution

• Methods for Analyzing and Industry

• Analyzing Product/Market Scope