Unit17.CompetitiveIndustryEnvironment AnalysisTheFiveFotcesThatShapeindustryConpetitionThressofNwEeranseRivalryBargsiningAmoogBargaininPowroExistingPoworotSappliersBuyeraCoanpetiltorsThroatofSubtisutoPredacsorServices
Unit 17. Competitive Industry Environment Analysis
CompetitiveIndustryEnvironmentAnalysisThere seems littledoubt that an industry'sstructure changes affect not only the degree ofcompetitive intensity but the bases of competitionas well.Industry evolution best be judged byanalyzing an industry's long-term attractiveness,itscharacteristics,itsdriving forces,itssuccessdeterminants,and especiallythemajorcompetitive forces:present competitors,potentialcompetitors,the bargainingpowerof suppliersand buyers,and substitute products.Beforefocusing on these subjects,it is necessarytobriefly discussindustry competitionand strategicgroups
Competitive Industry Environment Analysis ◼ There seems little doubt that an industry’s structure changes affect not only the degree of competitive intensity but the bases of competition as well. Industry evolution best be judged by analyzing an industry’s long-term attractiveness, its characteristics, its driving forces, its success determinants, and especially the major competitive forces: present competitors, potential competitors, the bargaining power of suppliers and buyers, and substitute products. Before focusing on these subjects, it is necessary to briefly discuss industry competition and strategic groups
IndustryIdentification andStrategicGroups Industry evolution can best bejudged byanalyzing those conditions that areresponsible forchange.Before dong so, however, it is necessaryto define the relevant industry and its strategicgroups:Industries comprise firms that producesimilar products.This does not mean that allproducts in an industryare close substitutes forone another.Different market segments needdifferent benefits bundles---and,thus,differentproducts.Industry membership alone does notindicate which firms compete with each other,northe extent of rivalry.Much depends on how theindustry is defined andthe level of aggregationused
Industry Identification and Strategic Groups ◼ Industry evolution can best be judged by analyzing those conditions that are responsible for change. Before dong so, however, it is necessary to define the relevant industry and its strategic groups. Industries comprise firms that produce similar products. This does not mean that all products in an industry are close substitutes for one another. Different market segments need different benefits bundles-and, thus, different products. Industry membership alone does not indicate which firms compete with each other, nor the extent of rivalry. Much depends on how the industry is defined and the level of aggregation used
For example,the carbonated soft drink industryproduces colas,root beers, ginger ales,and fruitflavors.These products come in diet or regularform, and some are caffeine free.There aresome 5o soda concentrate producing andmarketing firms in the UnitedStates,but Coca-Cola and Pepsi-Cola dominate the industry withtheir full lines.A different alignment of productsand firms emerges if we add non-carbonatedproducts to our industry definition. This definitionadds fruit juices,and bottled water,whichareproduced by several hundred firms,includingCampbell's,Kraft,GeneralFoods,DelMonte,andPerrier
◼ For example, the carbonated soft drink industry produces colas, root beers, ginger ales, and fruit flavors. These products come in diet or regular form, and some are caffeine free. There are some 50 soda concentrate producing and marketing firms in the United States, but CocaCola and Pepsi-Cola dominate the industry with their full lines. A different alignment of products and firms emerges if we add non-carbonated products to our industry definition. This definition adds fruit juices, and bottled water, which are produced by several hundred firms, including Campbell’s, Kraft, General Foods, Del Monte, and Perrier
This level of aggregation is so huge thatidentifying competitors and analyzing competitivechangessimplyonindustrymembershipis almostmeaninglessThe identification of strategicgroups makes iteasier to learn more about industry's dynamics.Astrategic group consists of firms pursuing similarstrategies ---that is, employing a similar mix ofstrategy elements.For example,Coke and Pepsifollow much the same strategy with respecttomarket served,products and product line,price,channels advertising,in-storepromotions,andpersonal selling,and,thus,constitute a strategiogroup
◼ This level of aggregation is so huge that identifying competitors and analyzing competitive changes simply on industry membership is almost meaningless. ◼ The identification of strategic groups makes it easier to learn more about industry’s dynamics. A strategic group consists of firms pursuing similar strategies -that is, employing a similar mix of strategy elements. For example, Coke and Pepsi follow much the same strategy with respect to market served, products and product line, price, channels advertising, in-store promotions, and personal selling, and, thus, constitute a strategic group
A strategicgroup isanalyzed inthe hope that thefirms it comprises are enough alike to reactessentially the same to environmental change.Themorecommonelements used (often incombination)as the basisfor identifying strategicgroups are market served,products/product line,and distributionIndustryanalysisAnumber of questionsneed tobeansweredinmaking an industryanalysis.The most importantonesare:
◼ A strategic group is analyzed in the hope that the firms it comprises are enough alike to react essentially the same to environmental change. The more common elements used (often in combination) as the basis for identifying strategic groups are market served, products/product line, and distribution. ◼ Industry analysis ◼ A number of questions need to be answered in making an industry analysis. The most important ones are:
1.How profitable is the industry likely to be short-term? Long-term? An attractiveindustry plays alarge role in determining a firm's strategy---particularly its aggressiveness.An unattractiveindustry,on the other hand,could lead the firminto withdrawal strategies or an attempt to forman alliance witha competitors.2. What are the more important industry'scharacteristics?In answering this question,thefollowing factors should be considered---marketsize and growth rate, number of firms,geographicalscope,degree of verticalintegration,ease of entry and exit,channels ofdistribution,customers,technology,andscale/learningeffects
1. How profitable is the industry likely to be shortterm? Long-term? An attractive industry plays a large role in determining a firm’s strategy- particularly its aggressiveness. An unattractive industry, on the other hand, could lead the firm into withdrawal strategies or an attempt to form an alliance with a competitors. 2. What are the more important industry’s characteristics? In answering this question, the following factors should be considered- market size and growth rate, number of firms, geographical scope, degree of vertical integration, ease of entry and exit, channels of distribution, customers, technology, and scale/learning effects
3.What are the industry's driving forces?MichaelPorter identifies a number of driving forces thatto a greater or lesser degree are present in theevolution of any industry.These include (1)changes in the market long-term growth ratewhichdirectly affect investment decisionsandintensityof competition;(2)changesin buyerssegments,which affect demand and strategicmarketingprograms;(3)diffusionof proprietaryknowledge,which controls boththe rate at whichproducts becomemore alikeand entry of newfirms;
3. What are the industry’s driving forces? Michael Porter identifies a number of driving forces that to a greater or lesser degree are present in the evolution of any industry. These include (1) changes in the market long-term growth rate, which directly affect investment decisions and intensity of competition; (2) changes in buyers segments, which affect demand and strategic marketing programs; (3) diffusion of proprietary knowledge, which controls both the rate at which products become more alike and entry of new firms;
(4)changesin cost and efficiency,derived fromscale and learning effects, which have the potentialofmakingentrymoredifficult;and (5)changesingovernment regulations,which can affect entry,costs,bases of competition,and profitability4. What are the essential determinants of success?These are capabilities a firm must have orbe abletoachieve inorder to be competitive and viablefinancially
◼ (4) changes in cost and efficiency, derived from scale and learning effects, which have the potential of making entry more difficult; and (5) changes in government regulations, which can affect entry, costs, bases of competition, and profitability. 4. What are the essential determinants of success? These are capabilities a firm must have or be able to achieve in order to be competitive and viable financially
Some of the more common determinants areconcerned with the major elements in themarketing mix ---product (generate successfulnewproducts),price(bealowcostproducer)channels,(obtain widespreadproductavailability),and personalselling(servicelargecustomers)
◼ Some of the more common determinants are concerned with the major elements in the marketing mix -product (generate successful new products), price (be a low cost producer), channels, (obtain widespread product availability), and personal selling (service large customers)