Analysis of the External

Environment

Industry and Value Chain

Analysis

Strategic Management
Robert Antonides
 Learning outcomes

• Use Porter’s competitive five forces framework to analyse

industries or sectors: rivalry, threat of entrants, substitute threats,
customer’s power and supplier power.
• On the basis of the five competitive forces and complementors and
network effects define industry attractiveness and identify ways
of managing these.
• Understand different industry types and how industries develop and
change in industry life cycles and how to make five force analyses
dynamic through comparative industry structure analysis.
• Analyse strategic and competitor positions in terms of strategic
groups, market segments and the strategy canvas.
• Use these various concepts and techniques together with
those from Chapter 2 in order to recognise threats and
opportunities in the industry and marketplace.
 Industries, markets and sectors

An industry is a group of firms producing products and

services that are essentially the same. For example, the
automobile industry and the airline industry.
A market is a group of customers for specific products or
services that are essentially the same (e.g. the market for
luxury cars in Germany).
A sector is a broad industry group (or a group of markets)
especially in the public sector (e.g. the health sector).
Industry and sector environments:
the key topics
 Defining the industry

• The industry must not be defined too broadly (too wide

to be meaningful) or too narrowly (thus excluding
important competitors).

• The broader industry value chain needs to be

considered – different stages in the value chain should
be treated as separate industries.

• Industries can be analysed at different levels, for

example, different geographies, markets and even
different product or service segments within them
(e.g. airline markets).
 Competitive forces:
The five forces framework
Porter’s Five Forces Framework helps identify the
attractiveness of an industry in terms of five competitive
forces:
• The threat of entry.
• The threat of substitutes.
• The bargaining power of buyers.
• The bargaining power of suppliers and.
• The extent of rivalry between competitors.
The five forces constitute an industry’s ‘structure’.
 The five forces framework (1 of 6)

Source: Adapted from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E.Porter,
copyright © 1980, 1998 by The Free Press. All rights reserved.
 The five forces framework (2 of 6)

Rivalry between existing competitors

Competitive rivals are organisations in the same
industry/market with similar products or services aimed at
the same customer group (distinct from substitutes).

The degree of rivalry depends on:

• Competitor concentration and balance.
• Industry growth rate.
• High fixed costs.
• High exit barriers.
• Low differentiation.
 The five forces framework (3 of 6)

The threat of entry

Barriers to entry are the factors that need to be overcome
by new entrants if they are to compete. The threat of entry
is low when the barriers to entry are high and vice versa.
The main barriers to entry are:
• Economies of scale/Experience/Network effects.
• Access to supply and distribution channels.
• Differentiation and market penetration costs.
• Legislation or government restrictions
(e.g. licensing).
• Expected retaliation.
• Incumbency advantages.
 The five forces framework (4 of 6)

The threat of substitutes

Substitutes are products or services that offer a similar benefit to an
industry’s products or services, but have a different nature, that is, they
are from outside the industry.
Customers will switch to alternatives (and thus the threat increases) if:
• The price/performance ratio of the substitute is superior
(e.g. aluminium is more expensive than steel but it is more cost
efficient for car parts)
• The substitute benefits from an innovation that improves customer
satisfaction (e.g. high speed trains can be quicker than airlines
from city centre to city centre on short haul routes).
• Extra-industry effects. Substitutes come from outside the
incumbents’ industry which forces managers to look outside
their own industry to consider more distant threats and
constraints.
 The five forces framework (5 of 6)

The power of buyers

Buyers are the organisation’s immediate customers, not necessarily
the ultimate consumers.
If buyers are powerful, then they can demand cheap prices or
product/service improvements to reduce profits.
Buyer power is likely to be high when:
• Buyers are concentrated.
• Buyers have low switching costs.
• Buyers can supply their own inputs (backward vertical
integration).
• Low buyer profits (under pressure to improve profits) and
the purchased inputs have a low impact on quality
(can cut costs without loss of quality).
 Who are the strategic customers?

A strategic customer is the person(s) at whom the strategy

is primarily addressed because they have the most influence
over which goods or services are purchased.
Examples:
• For a food manufacturer it is the multiple retailers
(e.g. Tesco) that are the strategic customers, not the
ultimate consumer.
• For a pharmaceutical manufacturer it is the health
authorities and hospitals, not the final patient.
 The five forces framework (6 of 6)

The power of suppliers

Suppliers are those who supply what organisations need
to produce the product or service. Powerful suppliers can
reduce an organisation’s profits.

Supplier power is likely to be high when:

• The suppliers are concentrated (few of them).
• Suppliers provide a specialist or rare input.
• Switching costs are high (it is disruptive or
expensive to change suppliers).
• Suppliers can integrate forwards (e.g. low-cost
airlines have cut out the use of travel agents).
 Complementors

An organisation is your complementor if it enhances your

business attractiveness to customers or suppliers.
Demand side: There is complementarity with respect to
customers if they value a product or service more when
they also have the other organisation’s product (e.g. app
suppliers are complementors to smartphone producers).
Supply side: An organisation is a complemetor to a
supplier if it is more attractive for the supplier to deliver
when it also supplies the other organisation (e.g. a
competing airline can be a complementor for a
supplier like Boeing, as Boeing may invest more in
improvements if they are supplying both airlines).
 Network effects

There are network effects in an industry when

one customer of a product or service has a
positive effect on the value of that product for other
customers.
Network effects are very important for eBay and
Facebook (see Illustration 3.2).
 Implications of five forces analysis

• Which industries to enter (or leave)? Identifies the

relative attractiveness of industries, for example, those
where forces are weak.

• How can the five forces be managed? Managers

should identify strategic positions to defend itself and
exploit forces, for example, building barriers to entry by
becoming more vertically integrated.

• How are competitors affected differently? Large

firms with more resources can often deal with
barriers to entry more easily than small firms.
 Issues in five forces analysis

• Defining the ‘right’ industry. Applying the model at the

most appropriate level – not necessarily the whole industry.
For example, the European low-cost airline industry rather
than airlines globally.
• Converging industries – particularly in the high tech
arenas – where industries overlap (e.g. digital industries –
mobile phones/cameras/mp3 players).
• Complementary organisations – which enhance the
attractiveness of a business to customers or
suppliers. Microsoft Windows and McAfee
computer security systems are complementors.
This can almost be considered as a sixth force.
 Steps in an industry analysis

There are several important steps in an industry analysis

before and after analysing the five forces:
• Define the industry clearly.
• Identify the actors of each of the five forces and define
different groups within them and the basis for this.
• Determine the underlying factors of and total strength of
each force.
• Assess the overall industry structure and attractiveness.
• Assess recent and expected changes
for each force.
• Determine how to position your business
in relation to the five forces.
Industry types
 Industry types (1 of 2)

• Monopoly industries – an industry with one firm and

therefore no competitive rivalry. A firm has ‘monopoly
power’ if it has a dominant position in the market. For
example, Google in the US search engine market.

• Oligopoly industries – an industry dominated by a few

firms with limited rivalry and in which firms have power
over buyers and suppliers. For example, Boeing and
Airbus dominate the market for civil aircraft.
 Industry types (2 of 2)

• Perfectly competitive industries – where barriers to

entry are low, there are many equal rivals each with very
similar products, and information about competitors is
freely available. Few markets are ‘perfect’ but many may
have features of highly competitive markets, for
example, mini-cabs in London.

• Hypercompetitive industries – where the frequency,

boldness and aggression of competitor interactions
accelerate to create a condition of constant
disequilibrium and change (e.g. mobile phones).
Comparative industry
structure analysis
Generic Industry Strategies
Generic Industry Strategies
The industry life cycle
Industry Value Chain
 Strategic groups

Strategic groups are organisations within an industry or

sector with similar strategic characteristics, following similar
strategies or competing on similar bases.

• These characteristics are different from those in other

strategic groups in the same industry or sector.
• There are many different characteristics that distinguish
between strategic groups.
• Strategic groups can be mapped on to
two-dimensional charts (maps).
These can be useful tools of analysis.
Some characteristics for identifying
strategic groups
 Strategic groups in the Indian
pharmaceutical industry

Source: Developed from R. Chittoor and S. Ray, ‘Internationalisation paths of Indian pharmaceutical firms: a strategic group analysis’,
Journal of International Management, vol. 13 (2009), pp. 338–55.
 Uses of strategic group analysis

• Understanding competition – enables focus on direct

competitors within a strategic group, rather than the
whole industry. (For example, Tesco will focus on
Sainsburys and Asda.)
• Analysis of strategic opportunities – helps identify
attractive ‘strategic spaces’ within an industry.
• Analysis of ‘mobility barriers’ – that is, obstacles to
movement from one strategic group to another. These
barriers can be overcome to enter more attractive
groups. Barriers can be built to defend an
attractive position in a strategic group.
 How Much Does Industry Matter?

• There is a debate over whether strategy

making should be externally or internally
oriented
• Porter’s work suggests that industry
factors influence profitability more than
firm-specific factors
• But, this varies by industry
How Much Does Industry Matter?
How Much Does Industry Matter?

• Porter & McGahan’s study suggests

that some industries influence
member’s firms profitabilities more
than others.
• Why might some industries have a
larger influence on their members’
profitability than others?
Case: Airline Industry Pre and Post 9/11

• Complete a five forces analysis for

the industry.
• What were the main changes pre and
post 9/11?
• Is the airline industry an attractive
industry to compete in?
Case: Global Forces in the
Pharmaceutical Industry
Case: ECCO, Global Value Chain
Management
Relative strength of Nations and
Industries

• Factor conditions
• Demand conditions
• Related industries
• Corporate strategy, structure and
rivalry