Mithil Gandhi

gandhi.mithil@gmail.com

+91 9819066954

Introduction to Industry Analysis

Porters Five forces framework

Hindalco Discussion

HBS (CC&S) case

Mission &

Vision

Macro

Environment

Industry

Analysis

Internal

Analysis

Strategy

Formulation

Environmental

Analysis

Macro Analysis

Risks &

Opportunities

Analysis

Competitiveness

Analysis

Country

Region

Micro Analysis Industry Analysis

A set of factors that directly influences a company and its competitive actions and responses.

Interaction among these factors determine an industrys profit potential.

A framework to Analyze must, Identify current and potential competitors and determine which firms

serve them.

Conduct competitive analysis.

Recognize that suppliers and buyers can impact profitability in the business

Recognize that producers of potential substitutes may become competitors.

The Five Forces model of Porter is an outsideoutsideoutsideoutside----ininininbusiness unit strategy tool that is used to makean analysis of thethethethe attractivenessattractivenessattractivenessattractiveness (value...) of anindustry structure.

It captures the key elements of industrycompetition.

Porters video

Industry

Rivalry

Suppliers

Power of

Bargaining

Buyers

power of

Bargaining

Threat of

new

Entrants

Threat of

substitute

Industry

Rivalry

Suppliers

Power of

Bargaining

Buyers

power of

Bargaining

Threat of

new

Entrants

Threat of

substitute

New Entrants bring new capacity, desire to gain market share & Substantial resources

Prices down; Incumbents cost inflation & reducing Profitability

Two Important Factors: Barriers to Entry

Expected Retaliation from Existing Competitors

Entry Barriers

Economies of scale

Product Differentiation

Capital requirements

Switching costs

Access to distribution channels

Absolute advantages

Expected retaliation

Economies of Scale: Decline in unit cost of a product as the absolute volume per period

increases

Deter entry by forcing the entrant to come in at large scale

Examples: Automobile (Maruti 800)

Entire Functional Area or Particular Operations

Diversification into the related area

Capital Requirements Large Financial Resources requirement

Capital in terms of Production Facilities, Customer credit, Inventories, or covering start-up losses

Examples: Oil & Gas industry

Differentiation: Brand Identification and Customer Loyalties

Basis of Past Advertising, Customer Service, Product Differences or being first into Industry

Entrants to spend heavily to overcome existing customer Loyalties

Example: Mineral Water market (Bisleri)

Switching cost: One time costs facing the buyer of switching from one suppliers product

to another

Example: Telecom industry in the US

Access to distribution channel: Example: FMCG products for bottom of pyramid

Absolute Advantages Proprietary product knowledge (Pharma)

Favorable Access to Raw Materials (Aluminium industry)

Favorable Locations (Shipbuilding)

Government Policies (BTG sector)

Reaction of Existing Competitors A history of vigorous retaliation

Established firms with substantial resources to fight back

Firms with great commitment to industry

Industry

Rivalry

Suppliers

Power of

Bargaining

Buyers

power of

Bargaining

Threat of

new

Entrants

Threat of

substitute

Intensity of Rivalry Among Existing Competitors Rivalry Occurs because one or more competitors either feels the pressure

or sees the opportunity to improve position

Price Competition are highly unstable & leave industry worse off from profitability standpoint

Advertising Battles well expand the demand or enhance levels of product differentiation for betterment

Numerous or Equally Balanced Competitors Numerous Firms

Relatively Few firms & Relatively balanced

Domination by one or very few firms

Slow Industry Growth High competition for Firms seeking expansion

More Volatile than rapid growth markets

High Fixed or Storage Costs Strong pressures for firms to fill capacity

Rapid Price Cutting

Product once produced is very difficult or costly to store

Lack of Differentiation or Switching Costs Commodity based implies buyer is largely based on price and service

Result is Intense Price & Service Competition

Diverse Competitors: Diversity in goals lead to different strategies for competing

No set of Rules of the Game

High Strategic Stakes: High Stakes in achieving success leads to greater Rivalry

MNCs Foray into new countries & markets

Corporate Strategy Fit

High Exit Barriers; Specialized Assets

Fixed Costs of Exit

Strategic Interrelationships

Emotional Barriers

Government & Social Restrictions

Industry

Rivalry

Suppliers

Power of

Bargaining

Buyers

power of

Bargaining

Threat of

new

Entrants

Threat of

substitute

Limit the Profit Potential

Products that can perform the same FUNCTION

Substitute Products: Are Subject to trends improving the Price Performance Trade Off with

Industrys Product

Are produced by Industries earning high Profits

Examples: Steel Aluminum Plastic,

Industry

Rivalry

Suppliers

Power of

Bargaining

Buyers

power of

Bargaining

Threat of

new

Entrants

Threat of

substitute

Purchases large volumes relative to seller sales

Product represents significant fraction of buyers cost

Product are standard or undifferentiated

Few switching costs

Earns Low Profits

Buyers pose threat of backward integration

Industrys product is unimportant to quality of buyers products or services

Buyer has full Information

Industry

Rivalry

Suppliers

Power of

Bargaining

Buyers

power of

Bargaining

Threat of

new

Entrants

Threat of

substitute

Dominated by few players

No substitute products available

Industry not important customer of supplier group

Suppliers product is an important input to buyers business

Suppliers groups products are differentiated or high switching costs

Credible threat of Forward Integration

Positioning: For the positioning your company within the industry

Helps answer questions like: why are prices low/high? Can we reduce input costs?

Helps you locate where industry forces are weaker, and build a compelling offering for that space

Today & tomorrow

Exploiting Industry Change: Taking advantage of / defending against shifting forces & factors

Eg. Barriers of entry may change in multi-brand large format retail because of government regulation

Shaping Industry Structure: Re-dividing industry profits by stealing from other forces

Growing the overall profit pool

Define the scope of the industry Start with the buyer; what products are in the industry ? What are not ?

What are the geographic scope ?

Analyze each force thoroughly Use checklist for drivers

Try to quantify eg. Buyer force is strong if the product price is a large fraction of the buyers cost

Asses each force as weak/medium/strong

For each force, also forecast any likely changes

Final Analysis Rate the overall attractiveness of the industry high/medium/low

Repeatedly ask yourself what-if seek out different hypothetical positions to see if they fit with your companys needs and capabilities

Make the final decision market entry / exit /investment / integration