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Industry Structure Analysis[Please note: if
you want information on over 10,000 industry analyses, Some industries are more profitable than others, and industry profitability can change over time. The purpose of this section is to understand the factors which drive industry profitability. This section is not always easy the first time out. But the logic of Michael Porter's industry structure analysis is too compelling to ignore. The bright side of this analysis is that it gets easier to use with practice. Once you feel comfortable with the methodology, it becomes a useful tool that facilitates a quick yet thorough analysis of any industry. The methodology also exposes the weakness of any industry analysis that omits a discussion of one or more of the five industry forces (competitors; barriers to entry; substitutes; buyers; and suppliers). Each of the five industry forces is presented with several bullet items which represent the most frequent factors which influence that industry force. In most cases, the bullet items begin with a partially completed sentence followed by a series of periods ( .... ) to be replaced with the appropriate industry characteristics. Not all of the key factors listed within each of the five forces may be important or relevant to your particular industry. Deleting that paragraph may be appropriate. In a large corporation, however, it is usually better to leave the framework in tact for three reasons. First, management reviews and cross business unit information sharing are greatly enhanced with a common format. Second, management changes are facilitated with the use of a common format. Third, just indicating that a particular industry factor has no influence in your industry is important information in itself. Intensity of Rivalry Among Existing Competitors Different industries experience different levels of competitive rivalry. The factors which cause this include: Industry growth; Product differences; Concentration and balance; Diversity of competition; Fixed costs; Exit barriers. Each of these terms is defined in the Appendix. The partially completed paragraph entries on the opposite page are designed to facilitate thinking and writing about competitor rivalry. For example: "Concentration and Balance" [in the microprocessor industry] - There are four major competitors in this industry. In 1993, Intel accounted for 74% of the worldwide market; Motorola 8%; Advanced Micro Devices 6%; Texas Instruments 2%; and numerous competitors, each with less than 2% of the market, accounted for the remaining 10% of the global market. [Source: Dataquest] The trend in the number of competitors has been relatively stable, but the relative market share of the industry leaders is changing. A listing of existing competitors along with their annual revenue and market share is also presented. The number of competitors to list should be based on the industry with the goal of listing all major competitors and potentially significant competitors. In practice, there are numerous criteria which could be used regarding the ordering of competitors, although ranking by market share is most common because of data availability. Ranking by profitability would also be useful if the information is available. For highly fragmented industries with a large number of competitors, it is sometimes convenient to list competitors alphabetically or to lump together competitors that share similar characteristics and similar competitive strengths and weaknesses. Threat of Entry / Barriers to Entry Different industries are easier than others to enter. The factors which cause this include: Economies of scale; Proprietary product differences; Brand identity; Switching costs; Access to suppliers; Capital requirements; Expected retaliation; Government policy. Each concept relating to barriers to entry should be discussed in terms of how easy or how difficult it would be for a start-up company or a company from another industry to enter this industry. In practice, it is often helpful to pretend that you or someone you know will be starting a new business in the industry tomorrow. Think of all major tasks that must be done to simply enter the industry as a real player. Reality quickly sets in and entry barriers become more obvious, more time consuming, and more costly than previously envisioned. When discussing each of the barriers to entry, it also helps to consider the advantages of starting a new business with a clean slate. For example, the technological changes that have taken place over the years make it fairly easy for a new competitor to redesign how the business should operate in order to outperform current competitors. One of the most common disadvantages facing existing firms is their dependence on `maintenance programmers' that earn annual salaries of $50,000 to $100,000 per person (in New York) to keep old systems running. Many of these systems were written (in COBOL) over twenty years ago on mainframe computers. In many cases a new company could hire college graduates (or Russian scientists) who can build better systems on PCs for less than half the cost of maintaining the old system. Current competitors (with real people who have real families to support) are less flexible than a new company. Following the analysis of entry barriers, a listing of potential industry competitors should be presented. Actual company names should be listed whenever possible because it brings to mind the real potential skills and resources that would be brought to bear. Foreign competitors, non-traditional competitors, and new start-up companies should also be listed because of their more likely use new technologies or different skills to outperform current competitors. Industry substitutes are products and services that can be used instead of using the industry's products and services. For example, eye-glass manufactures have to beware of contact lens manufacturers and both have to monitor the progress of new laser-beam technology that can correct eyesight for certain types of eye disorders. Structural factors which influence the relative attractiveness of substitutes include: Relative price performance of the substitutes; Switching costs; Customer propensity to substitute. Michael Porter identifies four special substitutes which are present in most every industry and are often overlooked. They include: not purchasing anything at all; lowering the usage rate of the product required; using used, recycled, or reconditioned products; and backward integration. For example, the more corporations that self-insure, the less insurance they purchase and the lower the industry demand for insurance services. A listing of current and potential substitute products and services completes the analysis on industry substitutes. Customers have a varying degree of bargaining power depending on the industry. Some of the underlying factors why this is so include the following: Customer Concentration and Volume; Customer Information; Impact on Quality and Performance; Ability to Backward Integrate; Price Sensitivity of Customers; Channel Ability to Influence Buyer Purchasing Decisions. In some industries a channel (the intermediate buyer) distributes the product to the end user. For example, the supermarket is a channel for the purchase of breakfast cereals and hundreds of other products. The bargaining power of channels should be analyzed by using the same basic framework as used for end-users. If the industry you're analyzing doesn't currently use channels, and it is not practical to entertain the possibility that a channel could be used in the future, then leave the template shown on the opposite page as is. Otherwise, the analysis should be expanded by repeating the "Bargaining Power of Customers" analysis - only substitute the word "channel" for "customer." The analysis of the bargaining power of customers is concluded with a listing of industry customer types. Each customer type should be listed with the approximate number of each and an identification of whether the customer type is an end-user, a channel, or both. Different types of suppliers have a varying amount of leverage vis-à-vis the firms in the industry. Within each supplier type different suppliers can also have a different amount of leverage. The bargaining power of suppliers is affected by one or more of the following: Impact of inputs on cost or differentiation; Differentiation of inputs; Supplier concentration; Importance of volume to the supplier. Supplier power is generally greater when one or more of the following conditions is true:
The opposite circumstances would generally give suppliers less bargaining power. For example, suppliers are likely to have very little bargaining power if the product they supply is not unique, is of little importance to buyers, and is supplied by hundreds of suppliers. A listing of suppliers along with a comment on each completes the analysis on industry suppliers. |
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