Industry analysis to develop strategies - Marketing Strategy

An organization has to understand the nature of the relationships within its industry in order to allow the enterprise to develop strategies to gain advantage of the current relationships.

A useful framework that can be utilized when undertaking this analysis is Porter’s ‘five forces’ model of establishing industry attractiveness for a business (see Figure below). This analysis should be conducted at the level of the individual strategic business unit (SBU) rather than at the level of the organization as a whole, otherwise the range of relationships facing a company with several divisions causes the analysis to lose focus. Porter identified five factors that affect the level of competition and therefore profitability within an industry:

  • Suppliers :The power of suppliers is liable to be strong where:Control over supplies is concentrated into the hands of a few players.Costs of switching to a new source of supply are high.The supplier has a strong brand.The supplier is in an industry with a large number of smaller disparate customers.
  • Buyers :The power of buyers is liable to be strong where: A few buyers control a large percentage of a volume market. For example, grocery and electrical goods retailers in the UK dominate the market and are in a very strong position versus their suppliers as a result.There are a large number of small suppliers. In the meat industry in the UK there are a large number of small farmers supplying a retail sector dominated by a small number of large supermarkets.The costs of switching to a new supplier are low.The supplier’s product is relatively undifferentiated, effectively lowering barriers to alternative sources of supply.

The five forces model

The five forces model

  • Potential entrants :The threat of potential entrants will be determined by a number of barriers to entry that may exist in any given industry:The capital investment necessary to enter the industry can be very high in areas such as electrical power generation or chemical production. A well-entrenched competitor who moved into the industry early may have established cost advantages irrespective of the size of their operation. They have had time to establish crucial aspects of their operation such as effective sources of supply, the best locations, and customer franchises. Achieving economies of scale in production, distribution or marketing can be a necessity in certain industries.Gaining access to appropriate distribution channels can be difficult. Peugeot/Citr¨oen bought Chrysler’s entire UK operations in order to gain an effective dealership network in Britain.Government legislation and policies such as patent protection, trade relations with other states, and state-owned monopolies can all act to restrict the entry of competitors.The prospect of a well-established company’s hostile reactions to a new competitor’s entry to the market may be enough to act as a deterrent.
  • Substitutes :Substitution can arise in a number of ways:A new product or service may eradicate the need for a previous process. Insurance services delivered directly by producers over the phone or internet are substitutes for the services of the independent insurance broker.A new product replaces an existing product or service. Cassette tapes replaced vinyl records, only to be replaced in turn by compact discs.All products and services, to some extent, suffer from generic substitution. Consumers may choose to substitute purchasing an expensive holiday instead of buying a car.
  • Competitive rivalry :The intensity of competition in the industry will be determined by a range of factors: The stage of the industry life cycle will have an effect. Natural growth reaches a plateau once an industry reaches maturity, so the only way an organization can continue to grow in the industry is to take market share from its rivals.The relative size of competitors is an important factor. In an industry where rivals are of similar size, competition is likely to be intense as they each strive for a dominant position. Industries that already have a clear dominant player tend to be less competitive. In industries that suffer from high fixed costs, companies will try to gain as much volume throughput as possible. This may create competition based on price discounting.There may be barriers that prevent companies withdrawing from an industry. This may be plant and machinery that is specialist in nature and therefore cannot be transferred to other uses. The workforce may have non-transferable specialist skills. If the industry is in maturity, moving towards decline, and rivals cannot easily leave the industry then competition will inevitably increase.

The ‘five forces’ model allows an organization to identify the major forces that are present in the industry sector. This can be related to the critical factors that were identified by the PEST analysis. Several issue then need to be considered:

  • What is the likelihood that the nature of the relationships identified by the ‘five forces’ model will change given the trends in the external environment? Are there ways of benefiting from these potential changes?
  • What actions can the organization undertake that will improve its position against the current forces in the industry? Can the company increase its power, relative to suppliers or buyers? Can actions be taken to reduce competitive rivalry, or are there ways of building barriers to dissuade companies from considering entering the industry? Are there ways of making substitute products less attractive?
  • The organization will also need to consider its competitors. Given the forces in the industry, what is the relative position of the organization’s rivals? Do conditions favour one particular operator? Could conditions change in favour of one particulacompetitor? Consideration of the relative competitive position of rivals is an important aspect of an audit and needs now to be considered in more detail.

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