The course is based on the ability of students to define their business, conduct an effective industry analysis, and identify the “key success factory” for firms competing in the industry. Such industry analysis is based on: A. DEFINE THE BUSINESS. The boundary for industry analysis is the markets and products that describe the domain of the industry. Once you understand the business segment that is to be analyzed, identify the capabilities required to participate in that industry, and those competitors that are able to effectively target the same business segments.
These four elements set the parameters for understanding and analyzing the industry. As industries like printers, copiers, scanners, and facsimile machines converge, business definitions become more difficult. In industries like computers, consumers are becoming more demanding for customized products and services. B. DESCRIBE THE INDUSTRY STRUCTURE. For each product-market segment, an industry analysis will describe the “five-forces” of competition. 1. A primary force comes customer segments that make up the markets.
The size and importance of customers provide the power to negotiate prices and deals that reduce the profitability of the industry. The size and growth of segments determine their potential influence on product development and level of competition. 2. A second force comes from the competitors and their strategies for gaining market share. Each competitor offers a set of products and services that attempts to provide higher value to the product-market segments they address.
Strategies can be to provide some combination of higher performance, more fashion and features, higher quality, or lower price. Increased rivalry often leads to price or service competition that can reduce the profitability of the business. 3. A third force comes from the industry suppliers. Industry suppliers often control critical inputs that can affect a firms ability to compete. Access to critical equipment, materials, or components can determine what firms will lead the industry. For this reason, increased outsourcing often leads to lower entry barriers for new competition.
4. The fourth force represents the barriers to change in industry structure, either from new competitors entering the industry or current competitors existing the industry. Barriers to entry often include heavy investment in capital, equipment, and market development. Barriers to exit often include outstanding warranty or service contracts that must be honored, and alternative use or potential sale of equipment and facilities. Once specialized facilities are established, they are seldom shut down, but are often sold to another industry participant. 5.
The fifth force represents the potential for change in product-market structure of the industry through the substitution of products or services with alternative approaches to satisfying the customer’s needs. This requires the identification of potential substitutes and the characteristics that would cause rapid substitution. Price often becomes a driver for substitutes, such as plastics for metals in cars and plumbing supplies. Today, the Internet is becoming a substitute for mail service and, eventually, telephone service. C. IDENTIFY KEY SUCCESS FACTORS.
The primary purpose of industry analysis is to identify the requirements and trends that determine the key success factors for the business. These factors encompass (1) customer requirements, (2) competitive factors that must be met, (3) regulations/industry standards in the business, (4) the resource requirements to implement competitive strategy, and other (5) technical requirements to build a competitive position. 1. Customers are looking for products that provide some level of value for the price they pay. Each buyer segment has different requirements that affect its key success factors.
Requirements can include high performance, durability, special features or fashion, ease of use, or rapid availability. 2. Competing firms often use similar product-market strategies. Competition is often based on price, quality, and delivery. Depending on their strategic focus, each firm must develop a set of skills (strategic weapons) that allow it to perform better than their competitors on each competitive dimension. 3. Industry regulations or standards are often minimum requirements for participation in a competitive arena. Goverment regulations often affect safety issues for the environment or end users.
Industry standards often determine technical compatibility, process performance, and interface issues for network or system products. Industry standards can be set by a special body, like the Industry Standards Organization (ISO), or become ad hoc standards set by leading competitiors, like Intel and Microsoft. 4. Resource requirements are be coming increasingly critical as markets become global and economies of scale become critical for research and development, manufacturing, and mar keting. Investments now excede $1 billion for facilities in semiconductors, paper making, and steel production.
In high technology areas, like information technology, shortages of qualified personnel are forcing firms to outsource much of their capabilities. 5. Technical requirements are also key to today’s competitive environment. Without access to, or internal technology, firms are not able to participate in many industries. This is especially important for suppliers, such as component suppliers for electronics or automobiles. As firms reduce their number of suppliers, suppliers must increasingly add research and development capabilities to stay in the game.