VI. Your Market is Attractive: What About Your Industry?
A. Porter’s Five Competitive Forces
Five competitive forces collectively determine an industry’s long-term
attractiveness— rivalry among present competitors, threat of new entrants into the
industry, the bargaining power of suppliers, the bargaining power of buyers, and the
threat of substitute products.
Rivalry among Present Competitors
oRivalry occurs among firms that produce products that are close substitutes
for each other, especially when one competitor acts to improve its standing or
protect its position.
oRivalry is greater under the following conditions:
There is high investment intensity; that is, the amount of fixed and
working capital required to produce a dollar of sales is large.
There are many small firms in an industry or no dominant firms exist.
There is little product differentiation.
It is easy for customers to switch from one seller’s products to those of
others.
oThe greater the competitive rivalry in an industry, the less attractive it is to
current players or would-be entrants.
Threat of New Entrants
oNew competitors add capacity to the industry and bring with them the need to
gain market share, thereby making competition more intense.
oThe less the threat of new entrants, the greater will be an industry’s
attractiveness.
oEntry is more difficult under the following conditions:
When strong economies of scale and learning effects are present
If the industry has strong capital requirements at the outset
When strong product differentiation exists among current players
If gaining distribution is particularly difficult
oAt least one study suggests that a combination of effectively managing
innovation cycles while building entry barriers through cost advantages or
proprietary technologies can enhance incumbents’ ability to sustain
competitive advantage over time.
Bargaining Power of Suppliers
oThe bargaining power of suppliers over firms in an industry is exercised
largely through increased prices or more onerous terms and conditions of sale.
oTheir power is increased under the following conditions:
If the cost of switching to suppliers is high
If prices of substitutes are high
If suppliers can realistically threaten forward integration
When the supplier’s product is a large part of the buyer’s value added
oThe greater the bargaining power of the key suppliers to an industry, the less
will be the overall attractiveness of the industry.
Bargaining Power of Buyers
oThe extent to which buyers succeed in their bargaining efforts depends on
several factors, including these:
The extent of buyer concentration
Switching costs that reduce buyer’s bargaining power
The threat of backward integration
The product’s importance to the performance of the buyer’s product
Buyer profitability
oThe greater the power of the high-volume customers served by an industry,
the less attractive will be that industry.
Threat of Substitute Products
oSubstitutes are alternative product types (not brands) produced by other
industries that perform essentially the same functions.
oSubstitute products put a ceiling on the profitability of an industry by limiting
the price than can be charged, especially when supply exceeds demand.
B. A Five Force Analysis of the Cellular Phone Service Industry
Marketers who must decide whether to enter or continue to invest in the cellular
phone service industry must make a judgment as to whether the rapid growth of the
market—a favorable environmental context—is sufficient to offset the
deteriorating attractiveness of the industry—the not-so-favorable competitive
situation.
VII. Challenges in Macro-Level Market and Industry Analysis
In order to analyze the attractiveness of one’s market or industry, one must first identify
exactly which market or industry is to be analyzed.
On the market side and recalling that markets consist of customers—whether individual
consumers, trade customers like retailers, or business users in B2B markets—the challenge
often lies in sizing the relevant market.
oIt is informative to measure market size and growth rates in customer numbers as
well as in unit and value terms.
On the industry side, there is the question of how narrowly or broadly to define one’s
industry.
oA good way to identify the most suitable definition of the industry you are in is to
consider whether the kinds of key suppliers, the processes by which value is added,
and the kinds of buyers are the same for your company and other companies whose
industry you may consider yourself a part of.
A. Information Sources for Macro-Level Analyses
In the developed economies, there is an endless supply of information about macro
trends and industry forces, including the popular and business press, the internet,
supplier and customer contacts, and so on.
oIn emerging economies, however, such information is more difficult to find
and can, in many cases, be misleading.
The key outputs of a competent macro trend analysis for any market should include
both quantitative and qualitative data.
VIII. Understanding Markets at the Micro Level
In assessing market opportunities at the micro level, one looks individually at customers—
whether trade customers or end consumers or business users—to understand the
attractiveness of the target segment itself.
Opportunities are attractive at the micro level on the market side when the market offering
meets most or all of the following tests:
oThere is a clearly identified source of customer pain, for some clearly identifiable set
of target customers, which the offering resolves.
oThe offering provides customer benefits that other solutions do not.
oThe target segment is likely to grow.
oThere are other segments for which the currently targeted segment may provide a
springboard for subsequent entry.
For most companies and most goods or services, meeting the first two of these tests is all
about delivering generic category benefits—the basics that customers expect a good
marketer to provide in a product category.
oOften, doing so involves effective implementation rather than a fancy strategy.
IX. Understanding Industries at the Micro Level
On the industry side, the key micro-level question to ask is whether whatever competitive
advantage there might be as a result of the benefits offered to the target market—the
market side, micro-level assessment—can be sustained over a significant period of time.
Opportunities are attractive at the micro level on the industry side when the company itself
meets most or all of the following tests:
oIt possesses something proprietary that other companies cannot easily duplicate or
imitate.
oThe business has or can develop superior organizational processes, capabilities, or
resources that others would find it difficult to imitate or duplicate.
oThe company’s business model is economically viable.
X. The Team Domains: The Key to the Pursuit of Attractive Opportunities
The following three questions address the remaining three of the seven domains in the
opportunity assessment framework:
oDoes the opportunity fit what we want to do?
oDo we have the people who can execute on whatever it takes to be successful in this
particular industry?
oDo we have the right connections?
XI. Mission, Aspirations, and Risk Propensity
Notwithstanding the merits of a particular opportunity in market and industry terms, it
must also measure up to the expectations of the people who will pursue it.
Most large companies will not pursue opportunities to serve very small niche markets.
oIt is not worth their time and attention to do so.
XII. Ability to Execute on the Industry’s Critical Success Factors
In most industries, in addition to hard-to-imitate elements that are firm specific, there are
also a small number of critical factors that tend to separate the winners from the also-rans.
oThese few factors are that industry’s critical success factors, or CSFs for short.
Two key questions are to be asked in order to identify one’s CSFs:
oWhich few decisions or activities are the ones that, if gotten wrong, will almost
always have severely negative effects on company performance?
oWhich decisions or activities, done right, will almost always deliver
disproportionately positive effects on performance?
To assess opportunities, one must identify the industry’s few CSFs.
oThen one must ask a simple question: Do we have on our team—or can we attract—
the competencies and capabilities necessary to deliver what’s called for by our
industry’s CSFs?
XIII. Connectedness: It’s Who You Know Not What You Know
Despite the insights to be gleaned from the seven domains, reality dictates there will
remain considerable uncertainty about how attractive a particular opportunity really is.
The people who are the best connected—up the value chain, to insightful suppliers with a
broad view of what’s happening in their customer markets; down the value chain, to
customers who can tell you about their changing needs; and across the value chain, among
fellow players in your own industry who face the same challenges you do—are the ones
who will first see the winds of change shifting direction.
XIV. Putting the Seven Domains to Work
The seven domains are not additive. An opportunity’s strength on some domains—
especially at the micro level—can outweigh weaknesses on others.
Opportunities do not just sit there; they change and may be further developed.
The seven domains provide a useful and integrative lens through which to examine the
fundamental health of a business and the opportunities it has chosen to pursue at any stage
in its products’ life cycles.
XV. Anticipating and Responding to Environmental Change
To the extent that a firm identifies and effectively deals with key trends before competitors
do, it is more likely to win and retain competitive advantage.
Management needs systems to help identify, evaluate, and respond to environmental events
that may affect the firm’s longer-term profitability and position.
A. Impact and Timing of Event
In any given period, many environmental events that could have an impact on the
firm—either positively or negatively—may be detected. Somehow, management
must determine the probability of their occurrence and the degree of their impact.
One relatively simple way to accomplish these tasks is to use a 2 × 2 dimensional
opportunity/threat matrix.
The opportunity/threat matrix enables the examination of a large number of events
in such a way that management can focus on the most important ones.
XVI. Swimming Upstream or Downstream: An Important Strategic Choice
The influence of macro trends like fitness, graying of world population, global warming,
and increased attention to sustainability can be pervasive and powerful.
In general, life is better swimming downstream, accompanied by favorable trends, than
upstream, running counter to them.
For some trends, managers can do little but react and adapt.
For other trends, favorable moves can be reinforced through effective marketing.
Sometimes, unfavorable ones can be mitigated.