Industry Structure Analysis:
Porters 5-Forces Model
A business needs to understand the industry in which it competes. The
question is how? The best answer is to use Michael Porter's industry model. This
analysis is a useful way of analyzing any industry.
The analysis views the industry along the following five dimensions:
1. Industry competitors. Existing competitors should be analyzed in
terms of competitive advantages and disadvantages, as well as likely shifts in
strategy.
2. Potential entrants. New entrants into the industry will increase
competition and potentially bring new strategies that alter the basis of
competitive advantage.
3. Buyers. Buyers are not all alike and should be analyzed based on
their needs.
4. Substitutes. Substitutes represent products and services that could
be used instead of the industry's products. For example, contact lenses and eye
surgery are substitutes for eyeglasses. Ignore substitutes at great peril.
5. Industry suppliers. Suppliers affect costs and the ability to
differentiate.
According to Porter,
"the collective strength of these five competitive forces determines the
ability of firms in an industry to earn, on average, rates of return on
investment in excess of the cost of capital." The relative strength of each
of these five forces is different for each industry, and changes over time.
Industry Structure Analysis:
Industry Segmentation
For a given industry, not all buyers are alike. Whether a firm's
customers are individuals, corporations, or government entities, a firm
cannot equally satisfy the different needs and purchase criteria of all types of
buyers. For example, corporate customers may differ by geographical
location, industry, company size, and a host of other variables, any of which
may be relevant for understanding how to best group customers based upon common
needs.
A firm needs to clearly articulate which set of customers it will serve,
and which customers it will not serve. It is also important to understand
how the needs of customers will likely change, and how to take advantage of
those changing needs.
The basic theme, however, is that strategy is deciding which segments to
focus on, and which segments to leave for other competitors.
Each industry segment (a given buyer type - for a given product variety) can
be discussed in terms of: current and future competitors; current and future
customers; current and future revenue and profitability; etc. In practice,
developing an industry matrix is an excellent team building task that greatly
facilitates a common understanding of the industry structure and industry
dynamics. (It's the next step, choosing which industry segments to target, that
sometimes leads to not-so-subtle differences of opinion.)
Industry Structure Analysis:
Target Marketing
It is important that each business within a corporation develop its own
industry matrix, including its own view of how to segment buyers. For
example, the top ten U.S. banks, each of which competes in 75 to 150 businesses,
should not expect each business to segment its customers the same way. Different
criteria are relevant for each business unit depending upon the particular
products or services provided and how customers purchase and use them.
For example, the retail credit card business may segment its customers based
upon income, or language spoken, or age, or credit history, or dining or travel
habits, or even on favorite sports team or charitable cause. The wholesale funds
transfer business, however, should segment its customers quite differently. It
may segment its customers based on if the customer is another bank or a
corporation; the volume of transactions per day; the method of sending transfer
instructions, whether by phone, fax, or PC; or any other relevant criteria.
After analyzing the total industry (playing field) a firm should pick
which industry segments to target, and in what order.
In practice, it is useful to think of 100 poker chips representing 100% of
the total budget (or 100% of the total number of employees). Objectively place
the 100 poker chips in the industry segments to reflect current resource
allocations. Next, strategically (subjectively) place your bets through future
allocations.
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