Industry Analysis & Competitive Advantage

New entrants to an industry bring new capacity and the desire to gain market share, and they often also bring substantial resources. As a result, prices can be low, cost can be high, and profits can be low.

There is a relationship between threat of new entrants, barriers to entry, and reaction from existing competitors.

For example:
– If barriers are high and reaction is high, then the threat of entry is low.
– If barriers are low and reaction is low, then the threat of entry is high.

There are seven major barriers to entry, including: (1) economies of scale, (2) product differentiation, (3) capital requirements, (4) switching costs, (5) access to distribution channels, (6) cost disadvantages independent of scale, and (7) government policy.

Rivalry tactics include price competition, advertising battles, new product introduction, and increased customer service or product/service warranties. Competitors are mutually dependent in terms of action and reaction, moves and countermoves, or offensive and defensive tactics.

Intense rivalry is the result of a number of interacting structural factors such as:
– numerous or equally balanced competitors
– slow industry growth
– high fixed costs or storage costs
– lack of differentiation or switching costs
– capacity increased in large increments
– diverse competitors
– high strategic stakes
– high exit barriers

In a broad sense, all firms in an industry are competitors with industries producing substitute products. Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms can profitably charge.

The more attractive the price-performance alternative offered by substitutes, the stronger or firmer the lid on industry profits. Substitute products that deserve the most attention are those that are subject to trends improving their price-performance trade-off with the industry’s product or produced by industries earning high profits.

Buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other—all at the expense of industry profits.

A buyer group is powerful under the following circumstances: 
– it 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.
– the buyer has full information about demand, prices and costs: informed customers become empowered customers.

Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods or services. The conditions making suppliers powerful tend to mirror those making buyers powerful.

A supplier group is powerful if the following apply: 
– it is dominated by a few companies and is more concentrated than the industry it sells to.
– it is not obligated to contend with other substitute products for sale to the industry.
– the industry is not an important customer of the supplier group.
– the supplier’s product is an important input to the buyer’s business.
– the supplier group’s products are differentiated or it has built up switching costs.

(1) Define the relevant industry:
• What products are in it?
• Which ones are part of another distinct industry?
• What is the geographic scope of competition?

(2) Identify the participants and segment them into groups, if appropriate:
Who are
• the buyers and buyer groups?
• the suppliers and supplier groups?
• the competitors?
• the substitutes?
• the potential entrants?

(3) Assess the underlying drivers of each competitive force to determine which forces are strong and which are weak and why. 

(6) Identify aspects of industry structure that might be influenced by competitors, by new entrants, or by your company. 

Porter’s three competitive strategies include: 
(1) Differentiation
(2) Low-Cost Leadership
(3) Focus

This strategy usually targets customers who are not particularly concerned with price, so it can be quite profitable – customers are loyal and will pay high prices for the product. Companies that pursue a differentiation strategy typically need strong marketing abilities, a creative flair, and a reputation for leadership.

A differentiation strategy can reduce rivalry with competitors and fight off the threat of substitute products because customers are loyal to the company’s brand. However, companies must remember that successful differentiation strategies require a number of costly activities, such as product research and design and advertising.

For example, the most efficient, low-cost company is in the best position to succeed in a price war while still making a profit. Likewise, the low-cost producer is protected from powerful customers and suppliers because customers cannot find lower prices elsewhere.

If substitute products or potential new entrants occur, the low-cost producer is better positioned than higher-cost rivals to prevent loss of market share. The low price acts as a barrier against new entrants and substitute products.

The low-cost leadership strategy tries to increase market share by emphasizing low cost compared to competitors. This strategy is concerned primarily with stability.

Managers must think carefully about which strategy will provide their company with its competitive advantage.

These three strategies require different styles of leadership and can translate into different corporate cultures. A firm that is “stuck in the middle” is the one that has failed to develop its strategy in at least one of the three directions. It has low profitability, lost high-volume customers, lost high-margin businesses and blurred corporate culture.

Risks in pursuing the three generic strategies include: 
– failing to attain or sustain the strategy.
– eroding the strategic advantage with industry evolution.