CHP.

1
THE STRUCTURAL
ANALYSIS OF
INDUSTRIES
PRESENTED BY
RAHMI SYAFITRI
NUR ASNI
ELOK FITRIYA
Fig.1 Forces Driving Industry Competition
 5 Forces of Competition
• Competition drives the return down to that which would be
earned by the economist’s “perfectly competitive” industry.
• All five competitive forces jointly determine the intensity of
industry competition and profitability.
• Different from short-run factors that can affect competition and
profitability in a transient way.
 5 Forces and Strategy
• The goal is to find a position in the industry where the company
can best defend itself against these competitive forces or can
influence them in its favor.
• Since the collective strength of the forces may well be apparent
to all competitors, the key for developing strategy is to analyze
the sources of each.
• The focus of the analysis of industry structure, or "structural
analysis," is on identifying the basic, underlying characteristics
of an industry rooted in its economics and technology that
shape the arena in which competitive strategy must be set
 Force 1. THREAT OF ENTRY
• Depends on extant barriers to entry, coupled with the expected
reaction from existing competitors.
• Barriers of Entry
• Economies of Scale.
• Product Differentiation.
• Capital Requirements.
• Switching Costs.
• Access to Distribution Channels.
• Cost Disadvantages Independent of Scale.
• Government Policy
 Force 2. INTENSITY OF RIVALRY AMONG
EXISTING COMPETITORS
• Firms are mutually dependent.
• Some forms of competition, notably price competition, are highly
unstable and quite likely to leave the entire industry worse off from the
standpoint of profitability.
• Intense rivalry is the result of interacting structural factors.
• Numerous or Equally Balanced Competitors.
• Slow Industry Growth.
• High Fixed or Storage Costs.
• Lack of Differentiation or Switching Costs.
• Capacity Augmented in Large Increments.
• Diverse Competitors.
• High Strategic Stakes.
• High Exit Barriers.
 Notes on Exit Barriers
• Economic, strategic, and emotional factors that keep companies
competing in businesses despite low or even negative returns on
investment.
• Major sources of exit barriers
• Specialized assets
• Fixed costs of exit
• Strategic interrelationships
• Emotional barriers
• Government and social restrictions
 Force 3. PRESSURE FROM SUBSTITUTE
PRODUCTS
• Industry’s overall elasticity of demand.
• Limits profits in normal times and also reduce the bonanza an
industry can reap in boom times.
• Position vis-à-vis substitute products may well be a matter of
collective industry actions.
• Substitute products that deserve the most attention are those
that (1) are subject to trends improving their price-performance
tradeoff with the industry’s product, or (2) are produced by
industries earning high profits.
Force 4. BARGAINING POWER OF BUYERS... is
high if...
• The industry is concentrated or purchases large volumes relative
to seller sales.
• The products it purchases from the industry represent a
significant fraction of the buyer’s costs or purchases.
• The products it purchases from the industry are standard or
undifferentiated.
• It faces few switching costs.
• It earns low profits.
• Buyers pose a credible threat of backward integration.
• The industry’s product is unimportant to the quality of the
buyers’ products or services.
• The buyer has full information. Retailers can gain significant
bargaining power over manufacturers when they can influence
consumers’ purchasing decisions,
Force 5. BARGAINING POWER OF SUPPLIERS ...
is high if ...
• Industry is is dominated by a few companies and is more
concentrated than the industry it sells to.
• Suppliers are not obliged to contend with other substitute products
for sale to the industry.
• The industry is not an important customer of the supplier group.
• Suppliers’ product is an important input to the buyer’s business.
• Supplier group’s products are differentiated or it has built up
switching costs.
• Supplier group poses a credible threat of forward integration.
• BTW... labor must be recognized as a supplier as well,
• The principles re the potential power of labor are similar to those
of suppliers. The key additions are labor's degree of organization,
and whether the supply of scarce varieties of labor can expand.
 Summary of 5 Forces
1. If the Threat of New Entrants is High, prices can be bid down and/or
incumbents' costs inflated, reducing profitability.
2. If the Intensity of Rivalry Among Existing Competitors is High, tactics like
price competition, advertising battles, product introductions, and increased
customer service or warranties are common, having noticeable effects on all
competitors.
3. If the Pressure from Substitute Products is High, it limits the potential returns
by placing a ceiling on the prices firms in the industry can profitably charge.
The more attractive the alternative, the firmer the lid on industry profits.
4. If the Bargaining Power of Buyers is High, Buyers compete by forcing down
prices, bargaining for higher quality or more services, playing competitors
against each other, reducing profitability.
5. If the Bargaining Power of Suppliers is High, Suppliers can exert bargaining
power over participants in an industry by threatening to raise prices or reduce
the quality of purchased goods/services.
 Chp. 2
GENERIC COMPETITIVE
STRATEGIES
 Three Generic Strategies
• Overall Cost Leaderhip
• requires aggres- sive construction of efficient-scale facilities,
vigorous pursuit of cost reductions from experience, tight cost
and overhead control, avoid- ance of marginal customer
accounts, and cost minimization in areas like R&D, service, sales
force, advertising, and so on.
• Differentiation
• Differentiation, if achieved, is a viable strategy for earning above-
average returns in an industry because it creates a defensible
position for coping with the five competitive forces, albeit in a
different way than cost leadership
• Focus
• focusing on a particular buyer group, segment of the product
line, or geographic market; as with differentiation, focus may
take many forms.
OTHER REQUIREMENTS OF THE
GENERIC STRATEGIES
 Stuck in the Middle

• is in an extremely poor strategic situation, that is firm

lacks the market share, capital investment, and resolve to
play the low-cost game, the industrywide differentiation
necessary to obviate the need for a low- cost position, or
the focus to create differentiation or a low-cost po- sition
in a more limited sphere.
 Chp. 3
A Framework for
Competitor Analysis
 Chapter 4
Market Signals
 Market Signals

• A market signal is any action by a competitor that provides a

direct or indirect indication of its intentions, motives, goals, or
internal situation.
• Some signals are bluffs, some are warnings, and some are
earnest commitments to a course of action.
• Market signal are indirect competitors behavior can carry
information that can aid in competitor analysis and strategy
formulation.
 Types of Market Signals
• Prior Announcements Of Moves
• Annuncements of Results or Actions after the Fact
• Public Discussions of the Industry by Competitor
• Competitors Discussions and Explanations of Their own
moves
• Competitors Tactics Relative to what they could have done
• Manner in which Strategic Changes are Initially Implemented
• Divergence from past goals
• Divergence from industry precedent
• The Cross-Parry
• The Fighting Brand
• Private antitrust suits
 The Use of History in Identifying
Signals

• Studying the historical relationship between a firm's

announcements and its moves, or between other
varieties of potential signals and the subsequent
outcomes, can greatly improve one's ability to read
signals accurately.
• Searching for signs a competitor may have
inadvertently given before making changes in the past
can also help to uncover new types of unconscious
signals unique to that competitor.
Can Attention to Market Signals Be a
Distraction
• Given the subtlety of interpreting market signals, one can take the
view that too much attention to them can be a counterproductive
distraction.
• Rather than getting all tangled up second-guessing competitors'
words and actions, holds this view, companies should focus their
time and energy on competing.
• Although Strategy formulation inherently contains some explicit or
implicit assumptions about competitors and their motives.
• Market signals can add greatly to the firm's stock of knowledge
about competitors, and therefore improve the quality of these
assumptions. Ignoring them is like ignoring competitors altogether.
 Chapter 5
Competitive Moves
 Industry Instability: The Likelihood
of Competitive Warefare

• Multiple bargaining areas

• Interconnections
• Competitor analysis
 Competitive Moves

• Most industries are structured as an oligopoly where

competitive moves by one firm affect other firm in the
industry
 Commitment

• Perhaps the single most important concept in planning

and exe cuting offensive or defensive competitive
moves is the concept of commitment.
• Commitment can guarantee the likelihood, speed, and
vigor of retaliation to offensive moves and can be the
cornerstone of defensive strategy.
• Commitments influence the way competitors perceive
their positions and those of rivals.
• Establishing commitment is essentially a form of
communicating the firm's resources and intentions
unequivocally.
 Focal Points

• The power of focal points resides in the need and desire

of competitors to mutually achieve some stable
outcome to avoid difficult and unsettling moves and
countermoves.
 A Note on Information and Secrecy

• Selective disclosure of information about itself is a crucial

resource the firm has in making competitive moves.
• The disclosure of any information should only be made as
an integral part of competitive strategy.