Chapter 3 Looking First Customers And How They

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn. Wiley, 2016)

CHAPTER 3. INDUSTRY ANALYSIS: THE FUNDAMENTALS

Introduction

Understanding competition, its determinants, and its implications for profitability is a fundamental

component of any core strategy course. My preference is to introduce the tools of industry and

competitive analysis early in the course.

However, as with all areas of analytical frameworks, the value of the five forces framework is not as a

theoretical model (its theoretical foundations are shaky); its value is as a tool for getting to grips with the

fundamental features of an industry’s structure and understanding their implications for competition.

Hence, it is critical for students to get practice in applying the framework to different industry situations

so that they gain expertise in recognizing how industries differ in their basic structures and understanding

what these differences mean for the intensity of competition and the overall level of profitability.

For instructors who wish to use a more theoretically-rigorous game theoretic approach to the analysis of

industry and competition—in particular those who deploy cooperative game theory in the form of the

Brandenburger-Stuart “value capture model,” additional reading will be necessary, e.g.:

Class Outline

I begin with a case. I particularly like cases that deal with problem industries where competition is brutal

The principal topics I cover are:

[A] The analysis and prediction of industry profitability. I follow the case discussion with a more

systematic exposition of the Porter model, placing a lot of emphasis on industry rivalry and how an

industry’s structural factors—in particular, firm concentration, product differentiation, excess capacity,

exit barriers, and cost conditions—interact to determine the intensity of competition and overall level of

profitability.

[B] Drawing industry boundaries. As soon as we move from a preselected industry to a specific

company, the issue arises as to: What industry is it in? In the book chapter I discuss the case of Ferrari: is

its industry motor vehicles, automobiles, or performance cars? What about the geographical scope of the

industry: is it global, regional (Europe), or national (Italy)?

This question allows discussion of the role of substitutability in determining the boundaries of industries

and markets. However, the key practical issues that emerge from this discussion are:

[C] Implications for strategy. I draw two main implications for firm strategy:

• What strategies can firms adopt to change industry structure in order to lessen competitive

pressure in an industry and improve industry profitability?

• How can a firm position itself within an industry in order to shelter form the forces of

competition?

[D] Identifying Key Success Factors. I finish up by making the link with the analysis of competitive

advantage by discussing key success factors (KSFs). This is likely to require revisiting the industry case

Cases

Pot of Gold? The US Legal Marijuana Industry (R. M. Grant, Contemporary Strategy Analysis: Text

and Cases, 9th edn., Wiley, 2016)

At the beginning of 2015, 16 US states and the District of Columbia had legalized the sale of marijuana

for medical use and in four states—Colorado, Washington, Oregon, and Alaska—the sale of marijuana

The US Airline Industry in 2015 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th

edn., Wiley, 2016)

During 2015, the US airline industry, boosted by a growing US economy and falling oil prices,

experienced a continuation in the upswing in profitability that had begun in 2012. Did this mark a new era

of prosperity for the industry, or was it simply another of the temporary upturns in profitability that would

Looking ahead, the case asks whether the airlines’ recent success in avoiding over-investment and

limiting fare competition points to a restrained approach to rivalry based upon learning from the errors of

the past, or whether a return to intense competition and low profitability is the inevitable result of the

airline industry’s economics.

Ford and the World Automobile Industry in 2015 (R. M. Grant, Contemporary Strategy Analysis: Text

and Cases, 9th edn., Wiley, 2016).

Internationalization and maturity in the world auto industry has been associated with increasing

Although dated, this case provides a splendid introduction to the analysis of the industry and competition.

It is a particularly useful vehicle for applying Porter’s five forces of competition framework. The metal

container industry is low growth, with limited product differentiation; it faces strong supplier and

customer bargaining pressure, and increasing competition from other types of packaging. This case is also

valuable for:

(a) Analyzing industry segmentation – although the industry as a whole is unattractive, competitive

The case examines the structure of the offshore drilling industry and its competitive behavior with

particular emphasis on the cyclical pattern of prices and profitability.

This case addresses issues of industry and competitive analysis that are relevant to both Chapters 3 and 4

of Contemporary Strategy Analysis. In relation to the basic Porter Five Forces framework, the case offers