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Variables for
Building
Drivers of Change

Scenarios
Basic Trends Key Uncertainties

Rules of Interaction

Multiple Scenarios
 Industries, markets and sectors

An industry is a group of firms producing products and

services that are essentially the same. For example,
automobile industry and airline industry.
A sector is a broad industry group (or a group of markets)
especially in the public sector (e.g. the health sector)
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).
Layers of the Business Environment
Industry Analysis Goals
•An analysis of industry structure
reveals the roots of an industry’s
profitability
•Identify threads for your existing
business
•Identify opportunities that will
allow you to transform your
business

Industry Analysis Frameworks are

Data Reduction Techniques, but
we need to be careful to avoid
over reduction.
 Industry Analysis
• Managers tend to view competition too
narrowly, as manifested only in today’s
direct competitors. However,
competition goes well beyond the
established industry rivals.
• Customers, suppliers, potential
entrants, and substitute products are all
competitors in the fight for profits,
competitors whose influence may be
more or less important depending on
the industry.
 Industry Analysis

• The extended rivalry that results from

the interplay of these competitive
forces gives rise to industry
profitability.
• Understanding competitive forces,
and their causes, gives a strategist a
way to analyze and make decisions
about any industry, regardless of
whether it is a product or a service,
emerging or mature, high tech or low
tech.
 Industry Analysis and Strategy
• Understanding the forces that
shape competition in an industry is
the starting point for developing
strategy.
• It reveals the most salient aspects
of the direct competitive
environment and the crucial
constraints to overall profitability.
 Porter’s five (six) forces framework
Porter’s five forces framework helps to
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.
•Complementary Products
The five forces constitute an industry’s
‘structure’.
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 Rivalry between competitors or
Competitive rivals are organisations with Competitive Pressures
similar products and services aimed at Created by the Rivalry among
the same customer group and are Competing Sellers
direct competitors in the same
industry/market (they are distinct from
substitutes).
The degree of rivalry is increased when :
🡪 Competitors are of roughly equal size
🡪 Competitors are aggressive in seeking
leadership
🡪 The market is mature or declining
🡪 There are high fixed costs
🡪 The exit barriers are high
🡪 There is a low level of differentiation
 The Five Forces Framework
Rivalry between competitors (2)
• Price competition (dimension most destructive for
profitability) is most liable to occur if:
Products or services are not differentiated / few
switching costs
Fixed costs are high and marginal costs are low
Capacity must be expanded in large increments to be
efficient
The product is perishable (creates temptation to
decrease prices to sell the product while it is still
valuable)
 The intensity of rivalry is high when:
High Low
Number of competitors
Industry growth rate is
Fixed cost are
Storage cost are
Product differentiation
Switching costs are
Exit barriers
• The threat of entry is low when the
The Threat of Entry Barriers or
barriers to entry are high and vice New Entrants
versa.
• The main barriers to entry are:
🡪 Economies of scale/high fixed costs
🡪 Experience and learning
🡪 Access to supply and distribution
channels
🡪 Differentiation and market penetration
costs
🡪 Government restrictions (e.g. licensing)
• Entrants must also consider the
expected retaliation from
organisations already in the
market
 Competitive Pressures Associated with the
Threat of Potential Entry
The increase in competitive pressures faced by industry
members due to the threat of market entry of new firms
depends on:
• Whether the barriers to successfully entering the industry are
high or low
• The size of the pool of entry candidates and the resources at
their command to overcome the entry barriers
• The expected reaction of existing industry members to the
entry of newcomers
• How attractive the industry’s growth and profit prospects
are to potential entrants
 The threat of new entrants is high when:
High Low
Economies of scale are
Product differentiation is
Capital requirement are
Switching costs are
Current competitor´s control of distribution channels

Current competitor´s proprietary knowledge is

Current competitor´s access to government is

Current competitor´s access to raw material is

 Substitutes are products or
services that offer a similar benefit to Threat of Substitutes
an industry’s products or services, but
by a different process.
Customers will switch to
alternatives (and thus the threat
increases) if:
• The price/performance ratio of the
substitute is superior (e.g. aluminium
maybe is more expensive than steel
but it is more cost efficient for some
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)
 Competitive Pressures from the Sellers
of Substitute Products
• Companies in one industry come under
competitive pressure from the actions of
companies in a closely adjoining industry
whenever buyers view the products of the two
industries as good substitutes
• Examples of substitutes
• Attending movies at theaters versus subscribing to
Netflix
• Cell phone cameras versus traditional digital
cameras
• Beer versus wine versus hard liquors
• Contact lens versus prescription glasses
 When Are Substitute Products
a Strong Competitive Force?
• The strength of competitive pressures from
substitute products depends on:
• Whether substitutes are readily available and attractively
priced
• Whether buyers view substitutes as being comparable or
better in term of attributes
• How much it costs buyers to switch to substitutes

The lower the price of substitutes, the higher their quality

and performance, and the lower the user’s switching
Rule costs, the more intense the competitive pressures posed
by substitute products.
The threat of substitutes products is high when:

High Low
The differentiation of the substitute
product is
Rate of improvement in
price-performance relationship of
substitute product
 Buyers are the organisation’s The bargaining
immediate customers, not power of buyers
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)
 Competitive Pressures Stemming
from the Bargaining Power of Buyers
• Buyers exert strong competitive pressures on industry
members when:
• Buyers have bargaining leverage to obtain price concessions and
favorable terms and conditions of sale
• Many buyers are price sensitive and can act in unison to limit
prices that industry members can charge

Not all buyers of an industry’s product have equal degrees of

Important
bargaining power with sellers, and some are more or less sensitive
Point than others to price, quality, or service differences.
 The power of buyers is high when:
High Low
Concentration of buyers relative to suppliers is
Switching costs are
Product differentiation of suppliers is
Threat of backward integration by buyers is
Extent of buyer's profits is
Importance of the supplier´s input to quality of
buyer's final product is
 Suppliers are those who supply The bargaining power
what organisations need to produce
the product or service. Powerful
of suppliers
suppliers can eat into 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).
 Competitive Pressures Stemming from
the Bargaining Power of Suppliers

• Whether the suppliers of industry members represent a strong,

moderate, or weak competitive force depends on how much
bargaining power suppliers have to influence the terms and
conditions of supply in their favor.

Powerful or influential suppliers can be a source of strong

competitive pressure when they have the ability to
charge industry members higher prices and/or make it
difficult or more costly for industry members to switch to
other suppliers.
 The power of suppliers is high when:

High Low
Concentration relative to buyer industry is
Availability of substitute products is
Importance of customer to the supplier is
Differentiation of the supplier´s products and
services is
Extent of buyer's profits is
Switching costs of the buyer are
Threat of forward integration by the supplier is
 Complementary Products-Sixth Force
• Products or services that are
compatible with what a particular
industry sells.
• The effect of complementary goods
on an industry's profitability generally
depends on how reliant the product
or service is on the compatible
product.
 Complementary Products-Sixth Force
• If one cannot function without the other, the
impact is high. The impact of complementary
products can be good or bad for industry
profitability. If the complementary good is doing
well within its industry this can have a positive
effect on the profitability of a given company.
• Adversely, if performance is bad or prices rise
within the complementary product's market it
can negatively impact upon the level of profit
that the industry can obtain.
Porter’s Five Forces
• Industry structure determines industry’s
long-run profit potential
• Pitfall No. 1: to take certain visible
attributes for its underlying structure:
• Industry growth rate (growth NOT
EQUAL profitability)
• Technology & Innovation (innovative
industries NOT EQUAL to structurally
attractive)
• Government (how do government
policies affect each one of the five
forces)
• Complementary products https://hbr.org/video/3765767957001/the-explainer-port
ers-six-forces
 Implications
• Identifies the attractiveness of industries –
which industries/markets to enter or
leave.
• Reveals the why’s of an industry’s
profitability.
• Identifies strategies to influence the impact
of the forces, for example, building
barriers to entry by becoming more
vertically integrated.
• The forces may have a different impact on
different organisations e.g. large firms can
deal with barriers to entry more easily
than small firms.
 Implications for Strategy
• It highlights the industry changes that
pose the greatest threats and
opportunities.

• Industry structure also provides a

baseline for sizing up a company’s
strengths and weaknesses: where does
the company stand versus buyers,
suppliers, entrants, rivals, and
substitutes?
 Implications for Strategy
• Most importantly, an understanding of industry
structure guides managers toward possibilities
for strategic action, including:
• (1) positioning the company against the competitive
forces;
• (2) anticipating shifts in the forces and exploiting
them;
• (3) shaping the balance of forces to create a new
more favorable structure or one that favors the
company.