Industry is a group of firm producing a similar product or services, such as soft drinks or financial services.
Michael Porter- an authority on competitive strategy, contends that a corporation is most concerned with the intensity of competition within its industry. The level of this intensity is determined by basic competitive forces, which are depicted in the figure above. the collective strength of these forces determines the ultimate profit potential in the industry, where profit potential is measured in terms of long-run return on investment capital. The six forces driving industry competition:
1) Threat of New Entrants New entrants to an industry typically bring to it new capacity, a desire to gain market share, and substantial resources, they are therefore, threats to an established corporation. The threat of entry depends on the presence of entry barriers and the reaction that can be expected from existing competitors. Entry barrier is an obstruction that makes it difficult for a company to enter an industry. Some possible barriers to entry are: * Economic of Scale * Product Differentiation * Capital Requirements * Switching Costs * Access to Distribution Channels. * Cost Disadvantages Independent in Size * Government Policy 2) Rivalry Among Existing Firms A competitive move by one fir can be expected to have noticeable effect on its competitors and thus may cause retaliation or counter efforts. According to porter, intense rivalry is related to the presence of several factors, including: * Number of Competitors * Rate of Industry Growth * Product or Service Characteristics * Amount of Fixed Costs * Capacity * Height of Exit Barriers * Diversity of Rivals 3) Threat of Substitute Products or Services Substitute products are those products that appear to be different but can satisfy the same need as another product. Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge. To the extent that switching cost are low, substitute have strong effect on an industry. 4) Bargaining Power of Buyers Buyers affect an industry through their ability to force down prices, bargain for higher quality or more services and play competitors against each other. A buyer is powerful if some of the following factors hold true: * A buyer purchases a large proportion of the seller’s product or service * A buyer has the potential to integrate backward by producing the product itself * Alternative suppliers are plentiful because the product is standard or undifferentiated * Changing suppliers cost very little * The purchased product represent a high percentage of a buyer’s cost * A buyer earns low profit and is thus very sensitive in cost and service differences * The purchased product is unimportant to the final quality or price of a buyer’s product 5) Bargaining Power of Suppliers Suppliers can affect an industry through their ability to raise prices or reduce quality of purchased goods and services. A supplier is powerful if some of the following factors apply: * The supplier industry is dominated by a few companies but it sells to many * Its product or service is unique and/or it has built up switching costs * Substitutes are not readily available * Suppliers are able to integrate forward and compete directly with their present customers * A purchasing industry buys only a small portion of suppliers group’s goods and services and is thus unimportant to the supplier 6) Relative Power of Stakeholders A sixth should be added in porter’s list to include a variety of stakeholder groups from the tak environment. The importance of this stakeholder varies by industry. Industry Evolution Over time most industries evolve through a series of stages from growth through maturity to eventual decline. The industry life cycle is useful for explaining and predicting trends among the six forces driving industry competition. When an industry is new, people often by the product regardless of price because it fulfils a unique need, this is probably a fragmented industry- no firm has large market share and each firm serves only a small piece of the total market in competition with others. By the time the industry enters maturity product tends to become more like commodities. This is now a consolidated industry- dominated by a few large firms, each of which struggles to differentiate its products from the competition. Categorizing International Industries World industries vary on a continuum from multidomestic to global. Multidomestic industries- are specific to each country or group of countries. Global industries, in contrast, operate worldwide, with MNC’s making only small adjustments for country specific circumstances . Factors that tend to determine whether an industry will be primarily multidomestic or primarily global : 1) Pressure for coordination with in the multinational corporations operating in that industry. 2) Pressure for Local responsiveness on the part of individual country markets. International Risk Assesment Regardless of the source data, a firm must develop its own method of assessing risk. It must decide on its most important risk factors and then assign weights to each other. Strategic Groups Strategic group is a set of business units of firm that “pursue similar strategies with similar resources”. Strategic groups in a particular industry can be mapped by plotting the market position of industry competitors on a two-dimensional graph using two strategic variables as the vertical and horizontal axes. Strategic Types Strategic types is a category of firms based on a common strategic orientation and a combination of structure, culture, and processes consistent with that strategy. General types have the following characteristic. * Defenders are companies with a limited product line that focus on improving the efficiency of their existing operation. * Prospectors are companies with fairly board product lines that focus on product innovation and market opportunities. * Analyzers are corporation that operate in at least two different product-market areas, one stable and one variable. * Reactors are corporation that lack a consistent strategy-structure-culture relationship. Hypercompetition When environment turbulence reaches more industries, competition become hypercompetition. In hypercompetition industries such as computers, competitive advantages comes from an up-to-date knowledge of environmental trends and competitive activity coupled with a willingness to risk a current advantage for a possible new advantages. Cannibalize- replacing popular products before competitors do so. Using Key Success Factor To Create An Industry Matrix Key success factors are those variables that can affect significantly the overall competitive position of all companies within any particular industry. Key success factors are different from strategic factors. Key success factors deals with entire industry; whereas, strategic factors deals with particular company. An industry matrix summarizes the key success factor within a particular industry. Steps to generate an industry matrix using two industry competitors (A & B) * In column 1 ( key success factors) list the 8 to 10 fctors that appears to determine current and expected success in the industry. * In column 2 (weight) assign a weigh to each factor ( all weights must sum to 1.0 regardless of the number of factors) * In column 3 (company A rating), assign a rating to each factor from 5.0 (outstanding) to 1.0 (poor) based on management’s current response to that particular factors. * In column 4 (company A weighted score) multiply the weight in column 2 for each factor times its rating in column 3 to obtain each factor’s weighted score. * In column 5 (company B rating), assign a rating to each factor from 5.0 (outstanding) to 1.0 (poor) based on management’s current response to that particular factors. * In column 6 (company B weighted score) multiply the weight in column 2 for each factor times its rating in column 5 to obtain each factor’s weighted score. * And finally add the weighted scores for all the factors in column 4 and 6 to determine the total weighted scores for company A and B. COMPETITIVE INTELLIGENCE – Is a formal program of gathering information on a company’s competitors. Competitive intelligence is now one of the fastest growing fields within strategic managements. USEFULL FORECASTING TECHNIQUE Extrapolation- most widely form of forecasting, it is the extension of present trends ino the future. Brainstorming- is non quantitative approach requiring simply the presence of people with some knowledge of the situation to be predicted. Expert opinion- is a non quantitative technique in which expert in particular area attempt to forecast likely developments. Delphi technique- in which separated experts independently assess the likelihoods of specified events. Statistical modeling- is a quantitative technique that attempt to discover casual or least explanatory factors that link two or more time series together. Scenario writing- appears to be the most widely used forecasting technique after trend extrapolation. Industry scenario- is a forecasted description of a particular industry likely future. EFAS TABLE ( External Factors Analysis Summary)- is one way to organize the external factors into the generally accept categories of oppurtunities and threats as well as to analyze how well a particular a particular company’s management is responding to these specific factors in light of the perceived importance of these factors to the company. To generate a EFAS TABLE for the company being analuzed , complete the following steps. * In column 1 (external factors), list 8 to 10 most important opportunities and threats facing the company. * In column 2 ( weight), assign a weigh to each factor ( all weights must sum to 1.0 regardless of the number of factors) * In column 3 (rating), assign a rating to each factor from 5.0 (outstanding) to 1.0 (poor) based on management’s current response to that particular factors. * In column 4 (weighted score) multiply the weight in column 2 for each factor times its rating in column 3 to obtain each factor’s weighted score. * In column 5 (comments), note why a particular factor was selected and/or how its weight and rating were estimated. * And finaly add the individual score to obtain the total weighted score for the company in the column 4. This tell how well the company is responding to the strategic factors in external environment.