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Judgments about what strategy to pursue should ideally be grounded in a probing assessment of a company's external environment and internal situation. Unless a company's strategy is well-matched to the full range of external and internal situational considerations, its suitability is suspect. This section examines the techniques of industry and competitive analysis, the terms used to refer to external situation analysis of a single-business company. Industry and competitive analysis looks broadly at a company's macro environment. The Methods of Industry and Competitive Analysis Industries differ widely in their economic characteristics, competitive situations, and future outlooks. The pace of technological change can range from fast to slow.
Capital requirements can be big or small. The market can be worldwide or local. Sellers' products can be standardized or highly differentiated. Competitive forces can be strong or weak and can center on price, quality, service, or other variables. Buyer demand can be rising briskly or declining.
Industry conditions differ so much that leading companies in unattractive industries can find it hard to earn respectable profits, while even weak companies in attractive industries can turn in good performances. Industry and competitive analysis utilizes a toolkit of concepts and techniques to get a clear fix on changing industry conditions and on the nature and strength of competitive forces. It is a way of thinking strategically about an industry's overall situation and drawing conclusions about whether the industry is an attractive investment for company funds. The framework for industry and competitive analysis hangs on seven probing questions: 1. What are the chief economic characteristics of the industry? 2. What factors drive change in the industry, and what impact will they have? 3.
What competitive forces influence the industry, and how strong are they? 4. Which companies are in the strongest / weakest competitive positions? 5. Who will likely make what competitive moves next? 6. What key factors will determine competitive success or failure? 7. How attractive is the industry in terms of its prospects for profitability? The collective answers to these questions build understanding of a firm's surrounding environment and form the basis for matching strategy to changing industry conditions and to competitive forces.
Let's see what each question involves and consider some concepts and techniques that help managers answer them. Identifying the Industry's Dominant Economic Characteristics Because industries differ significantly in their basic character and structure, industry and competitive analysis begins with an overview of the industry's dominant economic traits. As a working definition, we use the word industry to mean a group of firms whose products have so many of the same attributes that they compete for the same buyers. The factors to consider in profiling an industry's economic features are fairly standard: Market size.
Scope of competitive rivalry (local, regional, national, or global). Market growth rate and where the industry is in the growth cycle (early development, rapid growth and takeoff, early maturity, late maturity and saturation, stagnant and aging, decline and decay). Number of rivals and their relative sizes -- is the industry fragmented with many small companies or concentrated and dominated by a few large companies? The number of buyers and their relative sizes. The prevalence of backward and forward integration. Ease of entry and exit.
The pace of technological change in both production processes and new product introduction s. Whether the product (s) /service (s) of rival firms are highly differentiated, weakly differentiated, or essentially identical. Whether there are economies of scale in manufacturing, transportation, or mass marketing. Whether high rates of capacity utilization are crucial to achieving low-cost production efficiency.
Whether the industry has a strong learning and experience curve such that average unit cost declines as cumulative output (and thus the experience of "learning by doing") builds up. Capital requirements. Whether industry profitability is above / below par. An industry's economic characteristics are important because of the implications they have for strategy. For example, in capital-intensive industries, where investment in a single plant can run several hundred million dollars, a firm can ease the resulting burden of high fixed costs by pursuing a strategy that promotes high utilization of fixed assets and generates more revenue per dollar of fixed-asset investment. Or, in industries like semiconductors, the presence of a learning / experience curve effect in manufacturing causes unit costs to decline about 20 percent each time cumulative production volume doubles.
The bigger the experience curve effect, the bigger the cost advantage of the company with the largest cumulative production volume. The Concept of Driving Forces: Why Industries Change An industry's economic features say a lot about the basic nature of the industry environment but very little about the ways in which the environment may be changing. All industries are characterized by trends and new developments that, either gradually or speedily, produce changes important enough to require a strategic response from participating firms. The popular hypothesis about industries going through evolutionary growth phases of lifecycle stages helps explain why industry conditions change but is still incomplete. The lifecycle stages are strongly keyed to the overall industry growth rate (which is why stages are described with such terms as rapid growth, early maturity, saturation, and decline), yet there are more causes of industry and competitive change than moving to a new position on the growth curve.
While it is important to judge what growth stage an industry is in, there's more analytical value in identifying the specific factors causing industry change. Industry conditions change because forces are in motion that create incentives or pressures for change. The most dominant forces are called driving forces because they have the biggest influences on what kinds of changes will take place in the industry's structure and environment. Driving forces analysis has two steps: (1) identifying what the driving forces are and (2) assessing the impact they will have on the industry.
The Most Common Driving Forces. Many events affect an industry powerfully enough to qualify as driving forces. Some are one-of-a-kind, but most fall into one of several basic categories. The most common driving forces are shown here. Changes in the Long-Term Industry Growth Rate. Shifts in industry growth up or down are a force for industry change because they affect the balance between industry supply and buyer demand, entry and exit, and how hard it will be for a firm to capture additional sales.
Changes in Who Buys the Product and How They Use It. Shifts in buyer demographics and the emergence of new ways to use the produce can force adjustments in customer service offerings, open the way to market the industry's product through a different mix of dealers and retail outlets, prompt producers to broaden / narrow their product lines, increase / decrease capital requirements, and change sales and promotion approaches. Product Innovation. Product innovation can broaden an industry's customer base, rejuvenate industry growth, and widen the degree of product differentiation among rival sellers.
Technological Change. Advances in technology can dramatically alter an industry's landscape, making it possible to produce new and / or better products at a lower cost and opening up whole new industry frontiers. Technological change can also change in capital requirements, minimum efficient plant sizes, and desirability of vertical integration, and learning or experience curve effects. Marketing Innovation.
When firms are successful in introducing new ways to market their products, they can spark a burst of buyer interest, widen industry demand, increase product differentiation, and / or lower unit costs -- any or all of which can alter the competitive positions of rival firms and force strategy revisions. Entry or Exit of Major Firms. When an established firm in another industry attempts entry either by acquisition or by launching its own startup venture, it usually intends to apply its skills and resources in some innovative fashion. Entry by a major firm often produces a "new ballgame" not only with new key players but also with new rules for competing.
Similarly, exit of a major firm changes industry structure by reducing the number of market leaders. Diffusion of Technical Know-How. As knowledge about how to perform a particular activity or to execute a particular manufacturing technology spreads, any technically-based competitive advantage held by firms possessing this know-how erodes. Increasing Globalization of the Industry. Global competition usually changes patterns of competitive advantage among key players.
For example, the growing ability of multinational companies to transfer their production, marketing, and management know-how from country to country at significantly lower cost than companies with a one-country production base may give global firms a significant competitive advantage over domestic-only competitors. Changes in Cost and Efficiency. Any time important changes in cost or efficiency take place, firms' positions can change radically concerning who has how big a cost advantage. Emerging Buyer Preferences for a Differentiated Instead of a Commodity Product (or for a more standardized product instead of strongly differentiated products). These swings in buyer demand can drive industry change by shifting patronage to sellers of cheaper commodity products and creating a price-competitive market environment. When sellers are able to win a bigger and more loyal buyer following by introducing new features, making style changes, offering options and accessories, and creating image differences via advertising and packaging, then the driver of change is the struggle among rivals to out-differentiate one another.
Regulatory Influences and Government Policy Changes. Regulatory and governmental actions can often force significant changes in industry practices and strategic approaches. Changing Societal Concerns, Attitudes, and Lifestyles. Emerging social issues and changing attitudes and lifestyles can be powerful instigators of industry change. Reductions in Uncertainty and Business Risk. A young, emerging industry is typically characterized by an unproven cost structure and much uncertainty over potential market size, R& D costs, and distribution channels.
Emerging industries tend to attract only the most entrepreneurial companies. Over time, however, if pioneering firms succeed and uncertainty about th...
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Research essay sample on Judging Industry Analysis And Competitive Strategies
