Module-2

Business Analysis - Industry

Strategy and Competitive Analysis

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 Industry Strategy Analysis

Organization’s profit potential is determined by its own

strategic choices such as:

1. choice of an industry

2. manner in which it intends to compete with

other organizations

3. create and exploit synergies

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 Strategy Industry Analysis: Cont…

Strategy analysis, therefore, involves

 industry analysis [Five forces that
determine the intensity of competition
determines] ,

 competitive strategy analysis [cost

leadership and differentiation], and

 corporate strategy analysis

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 INDUSTRY ANALYSIS

Analyzing organization’s profit potential, an analyst

has to first assess the profit (Revenue & Cost)
potential of each of the industry in which the
organization is competing.

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Strategy literature suggests that the average
profitability of an industry is influenced by the “five
forces”.
According to this framework, the intensity of
competition determines the potential for creating
abnormal profits by the firms in an industry.

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 Industry competitiveness:
Sources of Competition
There are five potential sources of competition in an
industry:
(1) rivalry between existing firms,
(2) threat of entry of new firms, and
(3) threat of substitute product or services
(4) Bargaining Power of Buyers
(5) Bargaining Power of Suppliers

These five forces determines industry profitability

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 Competitive Force 1:
Rivalry Among Existing Firms

Rivalry Among Existing Firms – What it does?

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Rivalry Among Existing Firms -
Intensity of Competition

Factors determine Rivalry Among Existing Firms

- intensity of competition.

 Industry Growth Rate

 Concentration and Balance of Competitors –
Number and their relative size
Rivalry Among Existing Firms -
Intensity of Competition

 Degree of Differentiation and Switching Costs

 Economies of scale and cost structure.

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 Competitive Force 2:
Threat of New Entrants - barriers to entry

The potential for earning abnormal profits will attract

new entrants to an industry and threat of new firms
entering an industry potentially constrains the pricing
of existing firms within it.

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 Threat of New Entrants – (barriers to entry)

Factors determine the Threat of New Entrants –

(barriers to entry) :

A: Economies of Scale

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Threat of New Entrants – (barriers to entry)

Factors determine the height of barriers to entry in an

industry:

What are the sources of Economies of scale ?

Threat of New Entrants – (barriers to entry)

Factors determine the height of barriers to entry in

an industry:

B: First Mover Advantage:

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 Learning economies / Economies of scale

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Threat of New Entrants – (barriers to entry)

Factors determine the height of barriers to entry in

an industry:

 Switching costs
Threat of New Entrants – (barriers to entry)

Factors determine the height of barriers to entry in

an industry:

C: Access to Channels of Distribution and

Relationships

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Threat of New Entrants – (barriers to entry)

Factors determine the height of barriers to entry in an

industry:

 new consumer goods manufacturers

 Existing relationships between companies

and customers in an industry

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 Threat of New Entrants – (barriers to entry)

Factors determine the height of barriers to entry in

an industry:

D: Legal Barriers

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 Competitive Force 3:
Threat of Substitute Products

 Same Form and Same Function.

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Threat of Substitute Products – Conti…

The threat of substitutes depends on what?

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Threat of Substitute Products – Conti…

 tap water and bottled water

 designer label clothing

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 Competitive Force 4:
Bargaining Power of Buyers

Two factors determine the power of buyers:

price sensitivity and relative bargaining power.

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Bargaining Power of Buyers – Conti…

A: Price Sensitivity: When buyer can be more

price sensitive?
Bargaining Power of Buyers – Conti…

Attribute to Price Sensitivity

 Cost structure.

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Industry Analysis: Cont…

Competitive Force 4: Bargaining Power of Buyers – Conti…

B: Relative Bargaining Power

Even if buyers are price sensitive, they may not be able

to achieve low prices unless they have a strong
bargaining position.
Industry Analysis: Cont…

What determines buyers’ bargaining power ?

Industry Analysis: Cont…

Competitive Force 4: Bargaining Power of Buyers – Conti…

 Automobile industry

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 In contrast, in personal computer industry?

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Industry Analysis: Cont…

Competitive Force 5:
Bargaining Power of Suppliers

In an industry, suppliers are powerful when

there are only a few companies and few
substitutes available to their customers.

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Industry Analysis: Cont…

Competitive Force 5: Bargaining Power of Suppliers – Conti…

 soft-drink industry
Industry Analysis: Cont…

Competitive Force 5: Bargaining Power of Suppliers – Conti…

 criticality to buyers’ business.

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Industry Analysis: Cont…

Competitive Force 5: Bargaining Power of Suppliers – Conti…

 airline pilots

 IBM

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 COMPETITIVE STRATEGY
ANALYSIS

The profitability of an organization is influenced not

only by its industry structure but also by the strategic
choices it makes in positioning itself in the industry.

There are two generic competitive strategies: (1) cost

leadership and (2) differentiation.

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 Competitive Strategy Analysis: Conti…

Competitive-Strategy 1: Cost Leadership

When cost leadership could be the clearest

way to achieve competitive advantage?

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How can we achieve Cost Leadership?

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Competitive Strategy Analysis: Conti…

Benefits of being cost leader

 Earn above-average

 Reduce competitors’ margin / profit.

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Competitive Strategy Analysis: Conti…

Competitive-Strategy 1: Cost Leadership – Conti…

Organizations that achieve cost leadership

focus on tight cost reductions. How do they
achieve it?

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Competitive Strategy Analysis: Conti…

Competitive Strategy 2: Differentiation

 unique with high value

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Feature of Differentiation:

 Product attribute(S)

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 Positioning.
 Cost effective

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Competitive Strategy Analysis: Conti…

Competitive Strategy 2: Differentiation –Conti….

How Differentiation can be achieved ?

 providing superior intrinsic value

 investing in signals of value

 investments in research and development,

engineering skills, and marketing capabilities.

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Competitive Strategy Analysis: Conti…

Competitive Strategy 2: Differentiation –Conti….

 While successful firms choose between cost
leadership and differentiation, they cannot
completely ignore the dimension on which they are
not primarily competing.

 Firms that target differentiation still need to focus

on costs so that the differentiation can be achieved
at an acceptable cost.
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 Similarly, cost leaders cannot compete unless they
achieve at least a minimum level on key dimensions
on which competitors might differentiate, such as
quality and service.

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Competitive Strategy Analysis: Conti…

Competitive Strategy 2: Differentiation –Conti….

How to Achieve and Sustain Competitive Advantage ?

 An organization has to have the capabilities

needed

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Competitive Strategy Analysis: Conti…

Competitive Strategy 2: Differentiation –Conti….

What is Core competency and Value Chain ?

Core competencies are the economic assets
that the organizations possess.

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The uniqueness of a firm i.e. core competency and
its value chain and the extent to which it is difficult
for competitors to imitate them determines the
sustainability of a firm’s competitive advantage.

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Competitive Strategy Analysis: Conti…

Competitive Strategy 2: Differentiation –Conti….

To evaluate whether a firm is likely to achieve its

intended competitive advantage, the analyst should
ask the following questions:

What are the key success factors and risks associated

with the firm’s chosen competitive strategy?

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Does organization currently have the resources and
capabilities to deal with the key success factors and
risks?

Has organization made irreversible commitments to

bridge the gap between its current capabilities and
the requirements to achieve its competitive
advantage?

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Competitive Strategy Analysis: Conti…

Competitive Strategy 2: Differentiation –Conti….

Has organization structured its activities (such as

research and development, design. manufacturing.
marketing and distribution, and support activities) in
a way that is consistent with its competitive strategy?

Is the company’s competitive advantage sustainable?

Are there any barriers that make imitation of the
firm’s strategy difficult?
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Competitive Strategy Analysis: Conti…

Competitive Strategy 2: Differentiation –Conti….

Are there any potential changes in organization’s

industry structure that might dissipate the
organization’s competitive advantage? Is the company
flexible enough to address these changes?

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Thank You

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