Industry & Competitor

Analysis

GET 2001 Strategy Notes Series

Industry Analysis

• The first set of notes

– Described the use of supply chains to map industry-market
connections and to identify and begin to analyze likely
industries and markets.
– Introduced the value chain as the more or less integrated
collection of activities firms do to transform inputs into
outputs -- and value.
– And outlined some techniques for describing and analyzing
markets.
• This set of notes focuses on industries and theories
and tools for describing and analyzing them.
The Supply Chain

Manufacturing Supply Chain

Raw Primary Product Marketer/

Material Manufacturer Fabricator Producer Distributor

Retailer
Extractor

Service Supply
Rainmaker Chain
Practitioner
Contractor
Value Chain

• The value chain is really a cross-linked network of distinct activities that affect
the cost or performance of the others.
• Optimizing the links as well as the functions or activities so that the entire chain
supports a strategy can yield a powerful, durable, hard-to-duplicate strategic
advantage.

Infrastructure

Human Resource Management

Technology Development
Margin
Procurement

Inbound Operations Outbound Marketing/ After Sales

Logistics Logistics Sales Service
Market Analysis: Perceptual Map

• Map the key products or services along the

dimensions that are most important to the buyers
and influencers.

Quality

Cost
 Market/Industry Analysis:
Competitors Table

• Chart the competitors, noting how they

compete.
Market Timeli-
Quality Cost Notes
Share ness
Competitor1 15% H H M
Competitor2 25% L L H v. aggressive
Competitor3 5% M M H
Competitor4 20% L L H quality slipping
Competitor5 15% M M H
Industry Analysis

• Industries are the circles in the supply chain diagram.

• Each industry is a set of firms that operate in the
same space in a supply chain, competing to control
some of the space and so capture value.
• Industries have structure, history/ trajectories and
competitive dynamics that set the context for new
entrants.
• Industries also operate within the macro environment
-- where most analysis starts.
Scan the Environment

• In business terminology, the environment

consists of all the external forces that
impinge on the industry, its markets and its
firms.
• Needless to say, there are a lot of
potentially relevant factors.
• The following picture summarizes common
forces; the following tables list some
indicators of these forces.
Environmental Forces
Macroenvironment

Sociocultural Economic
Forces Forces
Industry
Union/
Communiti
employees
es
Firm/
Government
Organization:
Trade
Structure Association
Culture
Stockholders
Competencies
Resources Competitors

Creditors
Suppliers
Political/Legal Customers Technological
Forces Forces
Environmental Forces Indicators
ECONOMIC TECHNOLOGICAL

GDP trends Total federal spending for R&D

Interest rates Total industry spending for R&D
Money supply Focus of technological efforts
Inflation rates Patent protection
Unemployment levels
New products
Wage/price controls
New technologies
Devaluation/revaluation
New developments in
Energy availability & cost technology
transfer from lab to marketplace
Disposable & discretionary
income Productivity improvements
 Environmental Forces Indicators
POLITICAL-LEGAL SOCIOCULTURAL

Antitrust regulations Lifestyle changes

Environmental protection laws Career expectations

Tax laws Consumer activism

Special incentives Rate of family formation

Foreign trade regulations Growth rate of population

Attitudes toward foreign Age distribution of population

companies
Regional shifts in population
Laws on hiring and promotion
Life expectancies
Stability of government
Birth rates
Scan the Environment

• The challenge is to sort through the noise to

find the key strategic factors for your
organization or industry or market.
• This requires a constant process of scanning,
which is both art and science.
• As you conduct various analyses of your industry
or markets, keep track of the outside forces
that affect them, and especially the trends and
discontinuities -- the opportunities and threats
-- driven by these forces.
 Environmental Analysis Informs All
Other Analyses
Environmental Analysis
Economic, Sociocultural, Technological, Political-Legal Factors

Market/Buyer Analysis
Competitor
Analysis
Resource
Analysis
Supplier
Interest Analysis
Group Select
Analysis STRATEGIC FACTORS
ie Governmental
Opportunities Analysis
Threats
 Tool: Matrix for Tracking
Environmental Forces
Env.
Economic Technological Political-Legal Sociocultural
Forces
Stake- 1. 1. 1. 1.
holders 2. 2. 2. 2.
Communities
Creditors Note how each force or set of forces affects each
Customers stakeholder group...
Employees
Stockholders
Suppliers
Etc.
Tool: Force Field Analysis

O
r
g
a
n
i Can be done for
z an organization
a or an industry.
t
i Each arrow is a
o force, with the
n lengths
indicating
Tool: External Strategic Factor
Analysis Summary
Weighted
Factors Weights Rating Score Comments
1 2 3 4 5

Opportunities:

Threats:

Total Weighed Score: 1.00

Notes:
1. List opportunities and threats (5-10 each) in column 1.
2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factor’s
probable impact on the company’s strategic position. The total weights must sum to 1.
3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the company’s response to
that factor.
4. Multiply each factor’s weight times its rating to obtain each factor’s weighted score in Column 4.
5. Use Column 5 (Comments) for rationale used for each factor. c

6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells
how well the company is responding to the strategic factors in its external environment.
Tool: Industry Scenarios

A tool for exploring the impact of major shifts in

the underlying context:
1. Examine possible shifts in environmental
forces.
2. Identify uncertainties in each of the forces.
3. Identify causal factors behind the
uncertainties.
4. Make range of assumptions about each causal
factor.
5. Combine assumption into internally consistent
scenarios.
6. Analyze the industry situation under each
scenario.
 Industry Structure

• Once you understand some of the forces affecting

your industry, it is useful to look at the structure
of the industry, and especially the power relations
that define the interactions within the industry.
• Actually, it often works best to start with this
industry analysis and then examine how larger
trends might shape or change the picture.
• The key tool for defining industry structure is
Porter’s Five Forces Model -- the one Hamilton
presented in detail (see notes in course materials).
Tool: Porter’s Five Forces Model
(adjusted)
Threat from
New
Entrants

Suppliers’ Rivalry Buyers’

Power of Power
Firms

Threat from Power of other

Substitutes Stakeholders
Tool: Porter’s Five Forces Model,
(adjusted)
• Applying microeconomic theory, Porter highlights the forces
that affect a firms ability to raise prices and earn profits.
• The stronger a force, the more it limits the industry firms’
ability to set prices.
• Thus, strong forces are threats because they are likely to
reduce profits; weak forces are opportunities because they
may allow firms a chance to earn greater profits.
• The pattern of forces shape an industry and constrain firms
within the industry -- but industry structure is subject to
change as the environment, each force, and each participant’s
strategy change.
Tool: Porter’s Five Forces Model,
Threat of Entry
• Industries that are hard to enter are cozy for insiders,
but also often attractive to outsiders longing for the value
being shared by so few.
• Barriers to entry make it harder for newcomers to play.
– Fierce reaction by incumbents.
– Size of payoff/relation of supply to demand.
– Economies of scale:
• minimum efficient scale of production
• distribution or sales networks
– Pioneering brand advantages.
– Experience curve.
– Licenses or patents.
– Cost of exit.
Tool: Porter’s Five Forces Model,
Threat of Substitution

• Industries with few substitute products

are more attractive than those with many
substitutes.
• Effective substitutes can often provide
ways in for upstarts.
• The threat of substitutes is often the
weakest of the forces -- except during
times of high demand or fast change, when
interlopers may see opportunities.
Tool: Porter’s Five Forces Model,
Buyer Power
• Attractive industries feature disorganized, small
customers, with little purchasing and negotiating
power.
• Buyers gain power when:
– They are large, relative to the seller (superstores).
– They are organized (eg., a coop).
– It is easy to switch to another supplier (eg., when
products are standard).
– They could integrate backwards and so take over a
supplier.
Tool: Porter’s Five Forces Model,
Supplier Power

• Attractive industries feature small and

disorganized suppliers.
• Suppliers gain power when:
– They are large, relative to the buyers. (Alcoa).
– It is difficult for buyers to switch to
competing suppliers. (Custom products,
proprietary information).
– They pose a credible threat of integrating
forward and taking over the buyers’ functions.
Tool: Porter’s Five Forces Model,
Industry Rivalry
• Attractive industries are controlled by monopolies
or gentlemanly oligopolies.
– On the other hand, the more the players, and the more
equally matched, the closer the industry approximates
“perfect competition” and minimum profits.
• Rivalry is reduced when:
– Power is concentrated (C4 Index )
– Competitors can truly differentiate.
– It is easy to exit.
– Demand is stable and predictable.
– Regulation takes the edge off.
Tool: Porter’s Five Forces Model,
Other Stakeholders’ Power

• Governments (if not in the environmental

scan), unions, creditors (if not a supplier),
advocacy groups (eg., environmentalists)
can all constrain industries.
– Regulated industries
– Teamsters
– Institutional investors
– Bottle bills
Industry Dynamics

• The weakness of Porter’s model is its static

nature. It provides a great snapshot of power
relations and is a great tool for focusing
research, but may not capture the direction of
change in an industry.
• Because most industries are dynamic, it is
critically important to stay alert to trends --
and more importantly sudden changes of
patterns or context (such as new technologies
or regulations) -- that might change everything.
Industry Dynamics

• At the simplest level, it is important to remember that

industries have life cycles.
– Newer industries are often fragmented, sellers’ domains with
many niches and relatively few constraints.
– More mature markets tend to be more consolidated, with
more homogenous products, fewer niches, and more intense
competition amongst the remaining firms.
– Declining industries can be fiercely competitive -- if exit
barriers are high -- or more relaxed, if attention is
elsewhere.
Industry Dynamics

• But increasing numbers of industries evolve and

change so quickly, that a life cycle analysis can be
misleading.
• Theorists like D’Aveni have labeled fast-moving
industries with unstable technological foundations
hypercompetitive.
– In hypercompetitive industries, everything speeds up,
companies compete on many fronts at once and leapfrog
each other in a breathless race towards an ever-receding
goal.
Industry Dynamics

• In hypercompetitive environments:
– Advantages erode constantly.
– Driving firms to risk huge new investments -- eg., betting the
firm on a new information technology or chip design.
– Or pushing firms to shift competition from competitive arena
to competitive arena -- first trying to improve quality, then
trying to build deep pockets, to buy experience, etc.
• In the end, as the such industries descend into the
world of perfect competition, only deep pockets
survive....
Tool: Four Arena Analysis

• One tool for studying trends and looking for

discontinuities is D’Aveni’s Four-Arena
Analysis.
• He argues that firms can compete in four
arenas -- cost/quality; timing/know-how;
barriers to entry; and deep pockets --
• And that competition in each arena escalates
up a ladder of intensity until competitors fall
out, or shift arenas.
Tool: Four Arena Analysis

• Thus the analysis consists of:

– identifying which arenas are hot;
– tracing the ladder of escalation;
– trying to predict when the competition might shift into
a new arena;
– trying to predict the next hot arena.
• An obvious strategy for a new entrant is to stake
out a new arena of competition before the
established players move.
Tool: Four Arena Analysis

• Cost & Quality • Barriers to Entry

– Cost leadership vs – Knowledge, capital barriers, etc
differentiation (often built with timing & know-
how)
• Timing & Know-how – Patents & other legal walls.
– First mover advantages – Distribution agreements or
vs fast-follower patterns.
advantages
– The competitive landscape.
– Experience Curve
• Deep Pockets
– Brawn often overcomes position
and brains and speed.
Case: Four-Arena Analysis of the
Uniform Services Industry
• Rental of uniforms, rags, mats.
• Blue collar origins.
– From auto repair shops to corporate logos.
• Dispersed but consolidating.
– Due to government regulation and technological
change.
• Players:
– Cintas, Aramark, Unitog, Unifirst, G&K, many
others.
Case: Four-Arena Analysis of the
Uniform Services Industry
Some high points:
❖ 1977 - Splash! Aramark Enters
And shakes up a sleepy industry.
❖ 1986 - Slosh! Uncle Sam Wades In
With the Clean Water Act, making Deep Pockets essential.
❖ 1992 - Gasp! Recession & the Clean Air Act
Accelerate consolidation.
❖ Whewie! 30 Years of High Margins
For the survivors.
Case: Four-Arena Analysis of the
Uniform Services Industry
25

20

15

10

0
Cintas Aramark Unifirst Unitog G&K

C/Q T/K SH DP

• Each color is a strategic move (purchases, new plants, new routing

systems...) in a given arena.
• Cintas’ 50 moves, mostly in Cost-Quality & Timing-Know-how, set the
pace; Aramark’s 25 moves provided the drama; G&K was surprisingly
aggressive.
Case: Four-Arena Analysis of the
Uniform Services Industry
Cintas

Aramark

Unitog

Unifirst

G&K

1970 1975 1980 1985 1990 1995 2000

• This tracks change in the Timing-Know-how arena.

• Each color is an type of innovation, in logistics or plant
design or service.
• Note the decreasing amount of time it takes for imitation
or replication. It’s time to shift arenas.
 Case: Four-Arena Analysis of the
Uniform Services Industry
100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000
- 50,000

Cintas
55
Aramark
7
Unitog
15
Unifirst
8
G&K
2

1991 1992 1993 1994 1995 1996

• This tracks change in the deep-pockets arena. For a variety of reasons, the industry was consolidating.
• Despite its lead in other arenas, and its 55 small purchases, Cintas was being outclassed by Aramark’s 7
huge purchases of market share and know-how. Who will be bought next?
Case: Four-Arena Analysis of the
Uniform Services Industry
• Conclusions:
– There were some geographical, market-segment and
service-based strongholds
– But all were eroding as the industry consolidated and
know-how was developed or bought.
– Still, the strongest three or four had built formidable
barriers to entry, mostly in the form of layers of
advantage in know-how and service and operations.
– Which meant very high stakes -- $70 million per year in
capital expenditures just to stay in the game.
– Forcing new entrants to partner with one of the big few,
or shift the rules of the game dramatically.
 Competitor Analysis

• The competitor table introduced in the last set of

notes is a good place to start a competitor analysis.
• The table simply summarizes the main players and
their central modes of competing (or their
strengths and weaknesses, or other important
dimensions).
Market Timeli-
Quality Cost Notes
Share ness
Competitor1 15% H H M
Competitor2 25% L L H v. aggressive
Competitor3 5% M M H
Competitor4 20% L L H quality slipping
Competitor5 15% M M H
Competitor Analysis: Strategic
Groups
• Sometimes it is useful to subdivide industries into
strategic groups -- ie., groups of firms that pursue
similar strategies with similar resources.
ChiChi’s, Olive Garden,
Red Lobster

Country Kitchen,
Price Denny’s, Diners,
Shoney’s

Arby’s, Burger King,

Domino’s, Hardees,
McDonalds, Taco Bell,
Wendy’s

Selection
Dynamic Competitor Analysis

• While useful, the competitor table and the

strategic groups are, like Porter’s Analysis,
essentially static.
• Just as the Four-Arena Analysis is useful for using
history to make guesses about the future --
especially about how trends might stop and the
ground might shift --
• Hamilton et al’s Core Competency Strategic Intent
matrix is useful for tracing -- and predicting --
shifts in competitors’ relative power.
Tool: CCSI Matrix

• The CCSI matrix works like a flip-book to bring inter-

firm dynamics alive.
• Matrices are made at regular intervals
– Yearly or quarterly depending on how fast things are changing
• The two dimensions of the matrix are:
– Core Competency: firms’ relative capacity -- as measured by
Tobin’s Q or market/book value or defect rates or as rated by
industry experts.
– Strategic Intent: firms’ relative aggressiveness -- as measured
by R&D expenditures or capital investments or analysis of press
releases.
Tool: CCSI Matrix

High
Capabilities
Averag
Core

e
Low

Passiv Averag Aggressiv

e Strategic
e Intent e
Tool: CCSI Matrix

• Each competitor is
mapped as a circle:
– the size of which
reflects sales or
capitalization or assets
– and the pie slice in
which reflects free
cash or other available
resources
Case: CCSI Analysis of the early
90s Automobile Industry
• Flip the through the following three slides
fast, noting:
– The decline of Honda & Toyota
– The ascendancy of Ford
– General Motors unsucessful run at leadership
– Chrysler’s repositioning as an up and coming
star.
 Automobile Industry 1990

High
Toyot
1.5 Hond a
a
1.
0
Capabilities

.5
Core

General Chrysl
Motors er
(.50 For
) d
(1.0)

(1.5)
Low

.88 .92 .96 1.04 1.08 1.12

Passiv Aggressiv
e Strategic Intent e
Figure 5
 Automobile Industry 1991
Toyot

High
a
1.5
Hond
a
1.
0
Capabilities

.5
Core

Chrysl
er
(.50
)
For General
(1.0)
d Motors

(1.5)
Low

.88 .92 .96 1.04 1.08 1.12

Passiv Aggressiv
e Strategic Intent e
Figure 6
 Automobile Industry 1992

High
Toyot
1.5 Hond a
a
1.
0
Capabilities

.5

For
Core

d
General
(.50 Motors Chrysl
) er
(1.0)

(1.5)
Low

.88 .92 .96 1.04 1.08 1.12

Passiv Aggressiv
e Strategic Intent e
Figure 7
From Analysis to Strategy

• Most of these analytic tools support

different approaches to strategy.
• The next set of notes will begin to discuss
strategy: The process of pursuing the
organization’s mission -- while managing the
relationship of the organization to its
environment.
The Strategy Process

Environmental Scanning

Evaluation & Strategy

Control Formulation
Mission

Strategy
Implementation
Bibliography

• Richard D’Aveni, Hypercompetition (Free Press: 1994).

• Pankaj Ghemawat, Strategy and the Business Landscape (Prentice Hall,
2001).
• Robert Hamilton lecture notes, 1998.
• Robert Hamilton, E. Eskin, M. Michael, "Assessing Competitors: The Gap
between Strategic Intent and Core Capability", International Journal of
Strategic Management-Long Range Planning, Vol. 31, No. 3, pp. 406-417,
1998
• TL Hill lecture notes, 1999, 2001.
• J. D. Hunger & T.L. Wheelan, Essentials of Strategic Management (Prentice
Hall, 2001).
• Sharon Oster, Modern Competitive Analysis, 2nd Edition (Oxford University
Press, 1994), for Porter and other economics-based strategy.
• Henry Mintzberg & James Brian Quinn, Readings in the Strategy Process,
3rd Edition (Prentice Hall, 1998).
• Michael Porter, Competitive Advantage (Free Press, 1985).