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COMMERCE PAPER No.12 : Strategic Management MODULE No.11 : Industry Analysis

Subject COMMERCE

Paper No and Title 12. STRATEGIC MANAGEMENT Module No and Title 11. INDUSTRY ANALYSIS

Module Tag COM_P12_M11

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COMMERCE PAPER No.12 : Strategic Management MODULE No.11 : Industry Analysis

TABLE OF CONTENTS

1. Learning Outcomes 2. Introduction

3. Dominant Economic Features of an Industry 4. Driving Forces in an Industry

5. Industry’s Key Success Factors (KSFs) 6. Industry Attractiveness

7. Summary

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COMMERCE PAPER No.12 : Strategic Management MODULE No.11 : Industry Analysis

1. Learning Outcomes

After studying this module, you shall be able to

 Know about an industry’s leading economic features

 Learn the factors driving industry change and assess their impacts

 Understand the concept of Key Success Factors(KSFs)

 Assess the attractiveness of an industry in terms of profits and growth

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COMMERCE PAPER No.12 : Strategic Management MODULE No.11 : Industry Analysis

2. Introduction

Industry analysis is a tool that simplifies a company's understanding of its location relative to other companies that produce alike products or services. It provides essential information about the industry’s situations. Understanding the services at work in the complete industry is a significant component of operative strategic planning. Industry analysis allows business owners to categorize the threats and opportunities facing their businesses, and to emphasis their resources on developing sole capabilities that could lead to a competitive advantage.

Thus, it is absolutely important for a company to review the competitive power and fit its strategy to its industry environment. No organizations can believe good strategy-making without a thorough analysis of industry environment. That is why, it is broadly recognized that good strategy-making should be led by good industry analysis. From this study, managers can obtain evidence concerning many industry-related issues such as the following:

• Economic features of the industry like market size, number of customers and sellers, technology, degree of variation of products, market growth potential etc.

• Strength of competition and competitive pressures in the marketplace.

• Major driving services in the industry that cause pressures for change.

• Industry’s key success factors such as design in garments industry.

• Appeal of the industry in terms of growth panorama, degree of uncertainty in the future.

With these data, managers can achieve several purposes:

 Classifying and selecting the company’s showground by defining its industry and served markets.

 Identifying business opportunities and revealing niche markets.

 Providing a standard for evaluating the company comparative to the competitors and, based on it, developing skills and abilities necessary for success.

 Shortening the company’s response-time to participants’ moves.

 Restricting or pre-empting competitors’ moves.

 Encouraging organizational development through regular interactions among the executives during the analysis.

 Helping the company to gain a competitive lead through identifying any zone where the company holds a substantial advantage over its rivals.

 Enhancing organizational learning by divulging managers to the ideas and actions of their competitors.

 Providing vital insights into the industry and competition, which help managers recognize appropriate strategy and implement strategy successfully.

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COMMERCE PAPER No.12 : Strategic Management MODULE No.11 : Industry Analysis

3. Dominant Economic Features of an Industry

Because industries differ so knowingly, analyzing a company’s industry and economic environment begins with classifying an industry’s leading economic features and gaining an accurate and perceptive view of the industry. Table 1 provides a summary of what economic features to look at and the corresponding questions to consider in summarizing an industry’s landscape.

Table 1: Identifying an Industry’s Dominant Economic Features

Economic Feature Questions to Answer

Market size and growth rate

• How big is the industry and how fast is it growing?

• What does the industry’s position in the product life cycle (early development, rapid growth and takeoff, early maturity and decelerating growth, saturation and stagnation, decline) reveal about the industry’s growth prospects?

Number of rivals • Is the industry disjointed into many small companies or concentrated and dominated by a few large companies?

• Is the industry uniting to a smaller number of competitors?

Scope of competitive rivalry

Is the geographic area over which most companies compete local, regional, national, multinational, or global?

• Is having a presence in foreign markets becoming more significant to a company’s long-term competitive success?

Number of buyers • Is market demand disjointed among many buyers?

• Do some buyers have bargaining power because they purchase in large volume?

Degree of product differentiation

• Are the products of rivals becoming more differentiated or less differentiated?

• Are the products of rivals becoming progressively similar and causing sensitive price competition?

Product innovation • Is the industry characterized by rapid product innovation and short product life cycles?

• How important is R&D and product innovation?

• Are there opportunities to overtake key rivals by being first-to-market with next- generation products?

Demand–supply conditions

• Is a surplus of capacity pushing prices and profit margins down?

• Is the industry overcrowded with competitors?

Pace of technological change

• What role does advancing technology play in this industry?

• Are ongoing upgrades of facilities/equipment essential because of rapidly advancing production process technologies?

• Do most industry members have or need strong technological capabilities?

Why?

Vertical integration • Do most competitors operate in only one stage of the industry (parts and components production, manufacturing and assembly, distribution, retailing), or do some competitors operate in multiple stages?

• Is there any cost or competitive advantage or disadvantage associated with being fully or partially integrated?

Economies of scale • Is the industry characterized by economies of scale in purchasing, manufacturing, advertising, shipping, or other activities?

• Do companies with large-scale operations have an important cost advantage over small-scale firms?

Resource requirements and the ease of entry and exit

• Are the existing companies facing high exit barriers cause them to remain in the industry, even when the venture is not profitable?

• Does the industry require new applicants to make huge capital investments creating barriers to entry of potential competitors?

Learning/experience curve effects

• Are certain industry activities categorized by strong learning and experience effects (“learning by doing”) such that unit costs decline as a company’s experience in performing the activity builds?

• Do any companies have significant cost advantages because of their learning/experience in performing particular activities?

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COMMERCE PAPER No.12 : Strategic Management MODULE No.11 : Industry Analysis

An industry’s economic features are relevant to managerial strategy making in various ways.

Here are some examples. The strategic significance of ‘market size’ is that small markets do not typically attract big participants but large markets often draw the attention of companies looking to obtain competitors with established positions in attractive industries. The tactical importance of

‘entry barriers’ is that high barriers protect market position and profits of existing firms, and low barriers invite more and more probable competitors to enter into the industry. Similarly, in industries characterized by one product advance after another—such as the mobile phone, computer, and pharmaceuticals industries—companies must participate in research and development (R&D) and preserve strong product invention capabilities. Also, in an industry allied with important learning/experience curve effects (or by economies of scale) where strong economies of learning and experience result in failing unit costs as growing production volume builds, a strategy to become the largest-volume producer can yield the competitive profit of being the industry’s lowest-cost producer.

Identification of industry’s leading economic features is very important for evaluating a company’s industry’s and competitive situation. It also provides an summary of the overall landscape of industry. So basically it helps the company to know the different kind of strategic moves that industry members are likely to employ.

4. Driving Forces in an Industry

Economic characteristics say a very little about the ways in which the environment may be changing because of new developments in the industry. New developments take place in the industry because significant forces are always driving the industry members (competitors, customers and providers) to amend their actions.

The popular hypothesis that businesses go through a life cycle of take-off, rapid growth, early development and slowing growth, market saturation, and eventual stagnation or decline helps explain industry change—but there are more causes of industry change than an industry’s normal progression through the life cycle that need to be identified and their impact to be understood.

These forces in the industry are the major underlying causes of changing competitive conditions in the industry. These are called driving forces.

Depending on the nature of industry there may be various drivers of industry and competitive change. The driving forces create pressure on competitors, suppliers and customers to change their actions. They tend to change competitive conditions in the industry. Table 2 provides a summary of the most common driving forces.

Early detection of dynamic forces is possible through methodically and frequently scanning the industry environment as well as other peripheral factors, known as Environmental Scanning. This qualitative procedure of examining into external factors involves itself in checking and studying current events, constructing circumstances and identifying the driving forces. Many large companies such as Coca-Cola, Motorola, and Shell Oil employ environmental scanning on a continuous basis.

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COMMERCE PAPER No.12 : Strategic Management MODULE No.11 : Industry Analysis

Table 2: The Most Common Driving Forces

1. Changes in the long-term industry growth rate 2. Increasing globalization of the industry

3. Emerging new Internet capabilities and applications 4. Changes in who buys the product and how they use it 5. Product innovation

6. Technological change and manufacturing process innovation 7. Marketing innovation

8. Entry or exit of major firms

9. Diffusion of technical know-how across more companies and more countries

10 Changes in cost and efficiency

11. Growing buyer preferences for differentiated products instead of standardized commodity product (or for a more standardized product instead of strongly differentiated products)

12. Reductions in uncertainty and business risk

13. Regulatory influences and government policy changes 14. Changing societal concerns, attitudes, and lifestyles

In any kind of industry in general, you can assume the subsequent steps for the analysis of the driving forces:

 Scan the situation and identify the driving forces. You need to recognize the powerful driving forces that have intense impacts and also less strong driving forces which are precise to your industry but have modest impacts.

 Observe the driving forces carefully and determine whether and how they are prompting the industry landscape, i.e., how they are making the industry striking or unappealing or less attractive. This step is about the valuation of the influences of the driving forces.

 Finally, develop strategy taking into account the influences of the driving forces. At this step, you will govern the possible strategy alterations that would be needed to deal with the impacts of the driving forces.

The large number of different potential driving forces explains why it is too naive to view industry change only in terms of moving through the different stages in an industry’s life cycle and why a full understanding of all types of change drivers is a important part of industry investigation.

However, while many forces of change may be at work in a given industry, no more than three or four are likely to be true driving forces influential enough to qualify as the major causes of why and how the industry is changing.

Thus, company tacticians must resist the enticement to label every change they see as a driving force; the logical task is to assess the forces of industry and competitive alteration carefully enough to separate main factors from minor ones. This would help mangers frame sound strategy.

Driving-forces analysis is in realism considered as having practical value and is basic to the task of thinking strategically about where the industry is headed and how to prepare for the changes ahead.

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COMMERCE PAPER No.12 : Strategic Management MODULE No.11 : Industry Analysis

5. Industry’s Key Success factors (KSFs)

Key success factors vary from industry to industry and from time to time within the same industry. Table 3 provides a list of the most collective types of accomplishment factors. A sound strategy incorporates industry key success factors. They are basics for industry success. For example, KSF in the juice industry include: full consumption of juice-producing volume (to lower down costs), strong network of traders (to have a wider distribution of products over a region or the country), unique flavor and taste, etc. Even packaging can be a success factor if the juice is directed to young groups.

Determining the industry's accomplishment factors, given prevailing and anticipated industry and competitive conditions, is a top-priority reasoned concern. At the very least, managers need to comprehend the industry condition well enough to know what is more important to competitive achievement and what is less significant. They need to know what kinds of resources are competitively valued. Misdiagnosing the industry factors serious to long-term economic success greatly raises the risk of a misdirected strategy.

In distinction, a company with observant understanding of industry KSFs can gain maintainable competitive advantage by training its policy on industry KSFs and dedicating its energies to being specifically better than rivals on one or more of these factors.

Certainly, companies that stand out on a particular KSF enjoy a stronger market locus for their efforts - being specifically better than rivals on one or more key success factors presents a golden opportunity for gaining modest benefit. Hence, using the industry's KSFs as keystones for the

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COMMERCE PAPER No.12 : Strategic Management MODULE No.11 : Industry Analysis

benefit by excelling at one particular KSF is a fruitful competitive strategy approach.

Table 3: Common Types of Key Success Factors

Technology Related KSFs

Scientific research expertise (important in such fields as pharmaceuticals, medicine, space exploration, other “high-tech” industries.

Technical capability to make innovative improvements in production processes

Product innovation capability

Expertise in a given technology

Capability to use the Internet to disseminate information, take orders, deliver products or services Manufacturing

Related KSFs

Low-cost manufacture effectiveness (achieve scale economies, capture experience curve effects)

Quality of manufacturer (fewer defects, less need for repairs)

High utilization of fixed assets (important in capital intensive/high fixed-cost industries)

Low-cost plant locations

Access to adequate supplies of skilled labour

High labour productivity (important for items with high labour content)

Low-cost product design and engineering (reduces manufacturing costs)

Flexibility to manufacture a range of models and sizes/take care of custom orders Distribution

Related KSFs

A strong network of wholesale distributors/dealers (or electronic distribution capability via the Internet)

Gaining ample space on retailer shelves

Having company owned retail outlets

Low distribution costs

Fast delivery Marketing

Related KSFs

Fast, accurate technical assistance

Courteous customer service

Accurate filling of buyer orders (few back orders or mistakes)

Breadth of product line and product selection

Merchandising skills

Attractive styling/packaging

Customer guarantees and warranties (important in mail-order retailing, big-ticket purchases, new product intros)

Clever advertising Skills Related

KSFs

Superior workforce talent (important in professional services like accounting and investment banking)

Quality control know how

Design expertise (important in fashion and apparel industries and often of the keys to low-cost manufacture)

Expertise in a particular technology

An ability to develop innovative products and product improvements

An ability to get newly conceived products past the R&D phase and out into the market very quickly

Organizational Capability

Superior information systems (important in airline travel, car rental, credit card and lodging industries)

Ability to respond quickly to shifting market conditions (streamlined decision making, short lead times to bring new products to market)

Superior ability to employ the Internet and other aspects of electronic commerce to conduct business

More experience and managerial know how Other Types of

KSFs

Favorable image/reputation with buyers

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COMMERCE PAPER No.12 : Strategic Management MODULE No.11 : Industry Analysis

Overall low cost (not just in manufacturing)

Convenient locations (important in many retailing businesses)

Pleasant, courteous employees in all customer contact positions

Access to financial capital (important in newly emerging industries with high degrees of business risk and in capital-intensive industries)

Patent protection

6. Industry Attractiveness

Strategy-makers in a company must be able to give answer to the question: “Is the industry attractive, and what its prospects for above-average productivity are?” In order to answer to this question, strategists review the complete industry situation and develop logical conclusions about the relative attractiveness or unattractiveness of the industry. When evaluating whether an industry has both near term and long-term attractiveness, there are many important factors that must be assessed. Vital factors for company managers to consider include:

As a general proposition, if an industry’s overall profit prospects are above average, the industry can be reflected attractive.

However, it is a mistake to think of industries as being attractive or unattractive to all industry members and all possible candidates. Attractiveness is relative, not absolute, and conclusions one way or the other are in the eye of the beholder – industry appeal always has to be evaluated from the position of a specific company.

An valuation that the industry is primarily attractive suggests that current industry contributors employ strategies that reinforce their long-term competitive positions in the business, increasing sales efforts and investing in supplementary facilities and competences as needed.

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COMMERCE PAPER No.12 : Strategic Management MODULE No.11 : Industry Analysis

If the industry and competitive condition is comparatively

unattractive, more effective industry members may choose to invest carefully, look for ways to protect their long-term affordability and profitability, and possibly acquire smaller companies if the price is right; over the longer term, strong companies may consider divergence into more attractive businesses.

Weak companies in unpleasant industries may consider amalgamate with a rival to strengthen the market share and profitability or, look for divergence opportunities. On occasion, an industry that is unappealing overall is still very attractive to a constructively situated company with the skills and resources to take business away from weaker rivals.

7. Summary

 A comprehensive industry analysis requires companies to take an objective view of the underlying forces, attractiveness, and success issues that determine the arrangement of the industry.

 Industry study provides information about the industry circumstances that help strategy- makers concentrate on strategic thinking and forecasting the future of the industry. An insight about the overall industry circumstances facilitates the formulation of effective and pragmatic strategies, positioning the company for success, and making the most efficient use of the company’s limited resources.

 Once the forces distressing competition in an industry and their fundamental causes have been identified, the firm is in a position to classify its strengths and weaknesses comparative to the industry. An effective competitive policy takes offensive act in order to generate a defendable place against the competitive forces.

 Some of the likely strategies include arranging the firm to use its unique competences as protection, influencing the balance of outside forces in the firm's favor, or expecting shifts in the fundamental industry factors and adapting before competitors do in order to gain a competitive advantage.

References

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