Unit17.CompetitiveIndustryEnvironmentAnalysisCompetitiveIndustryEnvironmentAnalysisThereseemslittledoubtthatanindustry’sstructurechangesaffectnotonlythedegreeofcompetitiveintensitybutthebasesofcompetitionaswell.Industryevolutionbestbejudgedbyanalyzinganindustry’slong-termattractiveness,itscharacteristics,itsdrivingforces,itssuccessdeterminants,andespeciallythemajorcompetitiveforces:presentcompetitors,potentialcompetitors,thebargainingpowerofsuppliersandbuyers,andsubstituteproducts.Beforefocusingonthesesubjects,itisnecessarytobrieflydiscussindustrycompetitionandstrategicgroups.IndustryIdentificationandStrategicGroupsIndustryevolutioncanbestbejudgedbyanalyzingthoseconditionsthatareresponsibleforchange.Beforedongso,however,itisnecessarytodefinetherelevantindustryanditsstrategicgroups.Industriescomprisefirmsthatproducesimilarproducts.Thisdoesnotmeanthatallproductsinanindustryareclosesubstitutesforoneanother.Differentmarketsegmentsneeddifferentbenefitsbundles---and,thus,differentproducts.Industrymembershipalonedoesnotindicatewhichfirmscompetewitheachother,northeextentofrivalry.Muchdependsonhowtheindustryisdefinedandthelevelofaggregationused.Forexample,thecarbonatedsoftdrinkindustryproducescolas,rootbeers,gingerales,andfruitflavors.Theseproductscomeindietorregularform,andsomearecaffeinefree.Therearesome50sodaconcentrateproducingandmarketingfirmsintheUnitedStates,butCoca-ColaandPepsi-Coladominatetheindustrywiththeirfulllines.Adifferentalignmentofproductsandfirmsemergesifweaddnon-carbonatedproductstoourindustrydefinition.Thisdefinitionaddsfruitjuices,andbottledwater,whichareproducedbyseveralhundredfirms,includingCampbell’s,Kraft,GeneralFoods,DelMonte,andPerrier.Thislevelofaggregationissohugethatidentifyingcompetitorsandanalyzingcompetitivechangessimplyonindustrymembershipisalmostmeaningless.Theidentificationofstrategicgroupsmakesiteasiertolearnmoreaboutindustry’sdynamics.Astrategicgroupconsistsoffirmspursuingsimilarstrategies---thatis,employingasimilarmixofstrategyelements.Forexample,CokeandPepsifollowmuchthesamestrategywithrespecttomarketserved,productsandproductline,price,channelsadvertising,in-storepromotions,andpersonalselling,and,thus,constituteastrategicgroup.Astrategicgroupisanalyzedinthehopethatthefirmsitcomprisesareenoughaliketoreactessentiallythesametoenvironmentalchange.Themorecommonelementsused(oftenincombination)asthebasisforidentifyingstrategicgroupsaremarketserved,products/productline,anddistribution.IndustryanalysisAnumberofquestionsneedtobeansweredinmakinganindustryanalysis.Themostimportantonesare:1.Howprofitableistheindustrylikelytobeshort-term?Long-term?Anattractiveindustryplaysalargeroleindeterminingafirm’sstrategy---particularlyitsaggressiveness.Anunattractiveindustry,ontheotherhand,couldleadthefirmintowithdrawalstrategiesoranattempttoformanalliancewithacompetitors.2.Whatarethemoreimportantindustry’scharacteristics?Inansweringthisquestion,thefollowingfactorsshouldbeconsidered---marketsizeandgrowthrate,numberoffirms,geographicalscope,degreeofverticalintegration,easeofentryandexit,channelsofdistribution,customers,technology,andscale/learningeffects.3.Whataretheindustry’sdrivingforces?MichaelPorteridentifiesanumberofdrivingforcesthattoagreaterorlesserdegreearepresentintheevolutionofanyindustry.Theseinclude(1)changesinthemarketlong-termgrowthrate,whichdirectlyaffectinvestmentdecisionsandintensityofcompetition;(2)changesinbuyerssegments,whichaffectdemandandstrategicmarketingprograms;(3)diffusionofproprietaryknowledge,whichcontrolsboththerateatwhichproductsbecomemorealikeandentryofnewfirms;(4)changesincostandefficiency,derivedfromscaleandlearningeffects,whichhavethepotentialofmakingentrymoredifficult;and(5)changesingovernmentregulations,whichcanaffectentry,costs,basesofcompetition,andprofitability.4.Whataretheessentialdeterminantsofsuccess?Thesearecapabilitiesafirmmusthaveorbeabletoachieveinordertobecompetitiveandviablefinancially.Someofthemorecommondeterminantsareconcernedwiththemajorelementsinthemarketingmix---product(generatesuccessfulnewproducts),price(bealowcostproducer),channels,(obtainwidespreadproductavailability),andpersonalselling(servicelargecustomers).MajorForces

DeterminingIndustryCompetitionThissubjectisapartofindustryanalysis,butbecauseofitsimportanceitisdiscussedindetailhere.Therearefiveinteractivecompetitiveforcesthatcollectivelydetermineanindustry’slong-termattractiveness---presentcompetitors,potentialcompetitors,thebargainingpowerofsuppliersandbuyers,andsubstituteproducts(seeFigure1).Thismixofforcesexplainswhysomeindustriesareconsistentlymoreprofitablethanothersandprovidesfurtherinsightsintowhichresourcesarerequiredandwhichstrategiesshouldbeadoptedtobesuccessful.CurrentRivalryIndustryCompetitorsForcesInTheIndusryAnalysisSuppliersNewEntrantsBuyersSubstitutesThreatofNewEntrantsThreatofSubstitutesBargainingPowerorBuyersBargainingPowerorSuppliersThestrengthoftheindividualforcesvariesfromindustrytoindustryand,overtime,withinthesameindustry.Inthecellularphoneindustry,thekeyforcesarepresentcompetitorsandthreatofnewentrants.Whileinthefast-foodindustrythekeyforcesarethepresentcompetitors(forexample,Wendy’sversusBurgerKingversusMcDonald’s),substituteproducts(neighborhooddelis,saladbars,all-you-can-eatbuffetrestaurants,andfrozenmeals),andbuyerswhoareconcernedabouthealthandnutritionandwhoseefastfoodsasasymbolofathrow-awaysociety.PresentCompetitors：

Rivalryoccursamongfirmsthatproduceproductsthatareclosesubstituteforeachother—especiallywhenonecompetitoractstoimproveitsstandingorproductitsposition.Thus,firmsaremutuallydependent:Whatonefirmdoesaffectsothers,andviceversa.Ordinarily,profitabilitydecreasesasrivalryincreases.Competitionisgreaterunderthefollowingconditions:Thereishighinvestmentintensity;thatis,theamountoffixedandworkingcapitalrequiredtoproduceadollarofsalesislarge.Highintensityrequiredfirmstooperateatornearcapacityasmuchaspossible,therebyputtingstrongdownwardpressureonpriceswhendemandslackens.Thus,highinvestment-intensitybusinessesare,onaverage,muchlessprofitablethanthosewithlowerlevelofinvestment.BobCrandall,theCEOofAmericanAirlines,oncedescribedtheairlinesbusinessasbeing“intensively,vigorously,bitterly,savagelycompetitive.Therearemanysmallfirmsinanindustryornodominantfirmsexist.Inrecentyears,hundredsofpharmaceuticalcompanieshavestartedup,allhopingtoproducenewwonderdrugs.Insuchcrowdedsegmentsasneurosciences,inflammatorydiseases,anddrugdelivery,competitioniskeen,andsomecompaniesareconsideringpreemptivestepsinanefforttodominanttheirniches.Thereislittleproductdifferentiation---forexample,majorappliances,TVsets,andautomobiletires.Thereishighcosttochangingsuppliers(switchingcosts)aswouldbethecaseinchangingamajorcomputersoftwaresystem.Threatofnewentrants:Aseconddrivingforceaffectingcompetitionisthethreatofnewentrants.Newcompetitorsaddcapacitytotheindustryandbringwiththemtheneedtogainmarketshare,therebymakingcompetitionmoreintense.Thethreatofnewentrantsinthecellularphoneindustryisaveryrealconcerntopresentplayers.Entryismoredifficultunderthefollowingconditions:Whenstrongeconomyofscaleandlearningeffectsarepresentsinceittakestimetoobtainthevolumeandlearningtoyieldalowrelativecostperunit,iffirmsalreadypresentareverticallyintegrated,entrybecomesevenmoreexpensive.Also,iftheexistingfirmssharetheiroutputwiththeirrelatedbusinesses,theproblemofovercomingthecostdisadvantageismadeevenmoredifficult.Iftheindustryhasstrongcapitalrequirementsattheoutset.Whenstrongproductdifferentiationexists.Ifgainingdistributionisparticularlydifficult.Ifbuyersincursswitchingcostsinmovingfromonesuppliertoanother.BargainingStrengthsofSuppliers:

Thebargainingpowerofsuppliersoverfirmsinanindustryisthethirdmajordeterminantofindustrycompetition.Itisexercisedlargelythroughincreasedprices.Itsimpactcanbesignificant,particularlywhenalimitednumberofsuppliersserviceanumberofdifferentindustries.Theirpowerisincreasedifswitchingcostsandpricesofsubstitutesarehighandtheycanrealisticallythreatenforwardintegration.Suppliersareespeciallyimportantwhentheirproductislargepartofbuyers’valueadded---asinthecaseofmetalcans,wherethecostoftinplateisover60percentofvalueadded.Inrecentyears,thebargainingstrengthofsuppliersinmanyindustrieshaschangeddramaticallyasmorecompaniesseekapartnershiprelationshipwiththeirsuppliers.Whatwasonceanarm’s-lengthadversarialrelationshiphasturnedintoacooperativeoneresultinginlowertransactioncosts,improvedqualityderivedprimarilyfromusingasupplier’stechnicalskillstodesignandmanufactureparts,anddecreasedtransactiontimeintermsofinventoryreplenishments.BargainingStrengthsofBuyers:Anindustry’scustomersconstantlylookforreducedprices,improvedproductquality,andaddedservicesandthuscanaffectcompetitionwithinanindustry.Buyersplayindividualsuppliersagainstoneanotherintheirefforttoobtaintheseandotherconcessions.Thisiscertainlythecasewithsomelargeretailersintheirdealingswithmanyoftheirsuppliers.Theextenttowhichbuyerssucceedintheirbargainingeffortsdependson(1)theextentofbuyersconcentration,aswhenafewlargebuyersthataccountforalargeportionofindustrysalecangainconcessions;(2)switchingcoststhatreducethebuyersbargainingpower;(3)thethreatofbackwardintegration,therebyalleviatingtheneedforthesuppliers;(4)theproduct’simportancetotheperformanceofbuyersproduct---thegreatertheimportance,thelowertheirbargainingpower;and(5)buyerprofitability---ifbuyersearnlowprofitsandtheproductinvolvedisimportantpartoftheircosts,thenbargainingwillbemoreaggressive.ThreatofSubstituteProducts:Substitutesarealternativeproducttypes(notbrands)thatperformessentiallythesamefunctions,astinversusaluminumcansoleomargarineversusbutter,andfaxingofdocumentsversusovernightexpressdelivery.Substituteproductsputaceilingontheprofitabilityofanindustrybylimitingthepricethatcanbecharged,especiallywhensupplyexceedsdemand.Thus,inthemetalcontainerindustry,aluminumisasubstitutefortinplateandconstraintsthepriceschargedbytinplateproducers.ChangingCompetitionandIndustryEvolutionAllfivecompetitiveforcesjustdiscussedaboveareaffectedbythepassageoftime;therefore,theirstrengthvariesastheindustrypassesfromitsintroductorystagetoitsgrowthstageandontomaturity,followedbydecline.Competitiveforcesareapttobeweakestduringthefast-growthperiod,thus,therearesubstantialopportunitiesforgainingmarketshare.Duringtheshakeoutperiod,competitionforcesareattheirstrongest,andmanycompetitorsareforcedtoexittheindustry.Duringtheindustrymaturity,competitiontypicallyslackens,butonlyiftheindustryleaderholdsastrongrelativeposition.Anindustrywillexperiencemorepricecompetitionduringmaturityiftheleaderholdsaweakrelativeshareposition.KelloggandGeneralMillsholdtwo-thirdsoftheU.S.domesticcerealmarket,butsinceKelloggdoesnotholdadominantrelativeshare,theindustryexperiencesconsiderablepricecompetition.ThesameistruefortheTVindustryinChinainrecentyears.Adecliningindustryusuallywitnessesconsiderablerivalry,theextentofwhichdependsonthestrengthoftheexitbarriersandtherateofdecline.IndustryEvolutionandPotentialCompetitorsDuringtheearlystagesofindustryevolution,technologyisamajorentrybarrieralongwithscaleeconomiesandproductdifferentiation.Thus,anexistingcompanycantakeadvantageoftechnologybarriertobuildsalesandcustomerloyalty.ThisiswhatGillettedidwithitshigh-techSenorrazorandFederalExpressdidintheovernightexpressbusinessitcreatedmorethan30yearsago.Astheindustrypassesthroughitshigh-growthperiod.Technologyasabarriertoentrydeclines;witnessUnitedParcelService’s(UPS)entryintotheovernightexpressbusinessformerlydominatedbyFederalExpress.Asanindustrypassesthroughtheshakeoutstageandentersmaturity,entrybarrierincreasebecausefirmsfocusonreducingcostsanddevelopingafavorablebrandimage.profitsBothofwhichconstituteentrybarriers.Whenthedeclinestageisreached,entryisfurtherinhibitedbytheindustry’slowprofits.28ReviewofKeyTermsandConceptsstrategicgroup:Astrategicgroupconsistsoffirmspursuingsimilarstrategies---thatis,employingasimilarmixofstrategyelements.Forexample,CokeandPepsifollowmuchthesamestrategywithrespecttomarketserved,productsandproductline,price,channelsadvertising,in-storepromotions,andpersonalselling,and,thus,constituteastrategicgroup.戰略群組Threatofnewentrants：

Amajordrivingforceaffectingcompetitionisthethreatofnewentrants.Newcompetitorsaddcapacitytotheindustryandbringwiththemtheneedtogainmarketshare,therebymakingcompetitionmoreintense.新進入者的威脅29BargainingStrengthsofSuppliers：Thebargainingpowerofsuppliersoverfirmsinanindustryisthethirdmajordeterminantofindustrycompetition.Itisexercisedlargelythroughincreasedprices.Itsimpactcanbesignificant,particularlywhenalimitednumberofsuppliersserviceanumberofdifferentindustries。供應商的議價能力BargainingStrengthsofBuyers：

Buyersplayindividualsuppliersagainstoneanotherintheirefforttoobtaintheseandotherconcessions.Thisiscertainlythecasewithsomelargeretailersintheirdealingswithmanyoftheirsuppliers.購買者的議價能力ThreatofSubstituteProducts：Substitutesarealternativeproducttypes(notbrands)thatperformessentiallythesamefunctions,astinversusaluminumcansoleomargarineversusbutter,andfaxingofdocumentsversusovernightexpressdelivery.替代品的威脅DiscussionandReviewQuestions1.Whatconstitutesanindustryaccordingtothetext?Giveaconcreteexampletoillustratethisconcept..2.Whatarethemajorforcesthatdetermineindustrycompetition?Nameeachofthemaccordingtowhatyouhavelearned.3.Whatdoestheword“entrant”hereinthetextmean?Lookitupinadictionaryifnecessary.4.Whatisstrategicgroupbydefinitioninthiscontext?Giveanexampletoillustrateit.5.Whatisindustryanalysis,anyway?Andwhatkindsofquestionsmustbeansweredinmakinganindustryanalysis?6.Whataretheessentialdeterminantsofsuccessforafirminaparticularindustry?7.Takingintoaccountthemajorforcesdrivingindustrycompetition,whatdoyouthinkliesaheadfortheworldwideautomobileindustry?8.Whatarethemajorentrybarriersduringtheearlystageofindustryevolution?SelectedAnswers

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