Industries differ in their economic features and competitive character. Trucking, for example, bears little resemblance to Cable TV or the fast food industry. When constructing a strategy you need to first define your industry’s distinguishing features. These include market size, growth rate, the market’s geographic boundaries, size and number of competitors, buyer needs, differentiation, economies of scale, and the learning/experience curve. This will provide you with a picture of your industry and help you forecast the possible strategic moves of rivals. Below are questions to consider when doing your industry analysis.
1. Market Size and Growth
Your industry’s market size and growth prospects will channel the behaviour of rivals. For example, markets which are not growing or whose prospects lack growth attract consolidators. A consolidator could be a rival who seeks growth by acquisition. Similarly, a private equity firm may see opportunity in consolidating the industry. This was the case in the yellow pages sector. By contrast, growth sectors attract new entrants who may use pricing or service innovation to gain market share. This was the case with the entry of MetroPCS Communications Inc. and Wind Mobile into the cellular industry. Consider asking:
- What are the industry’s revenues?
- How fast is the industry growing year over year?
- Is your industry emerging, in rapid growth, maturing, or in decline?
- What are the industry’s long-term prospects?
- What strategies might rivals deploy, given your industry’s prospects?
An industry’s capacity is its’ aggregate unit output of a specific product/service. The unit output may rise or fall as industry members choose to increase or decrease output. Industry capacity drives the strategies of industry leaders. Adding or removing capacity can be a strategy employed by a large firm to discipline smaller rivals. Thinking of your industry,
- Is there a capacity surplus?
- Who is adding or removing capacity?
- Are there consolidation opportunities?
- What is pushing prices/profit margins up or down?
- Is rivalry local, national, multi-national, or global?
- Is success dependent on competing beyond local markets?
- Is the sector dominated by a few large companies or is it fragmented with several firms active in the sector?
A value proposition is the offer to the customer that is the combination of price and service (the product/service features) that an organization can deliver. For example, some steel companies offer low prices, product consistency, reliable supply, and specific technical specifications. By contrast, many supermarkets offer low prices, convenient locations, a wide range of products, fresh quality produce, good parking, a high degree of customer service, and a pleasant environment. In your industry,
- What are the value propositions of the dominant firms?
- What service attributes prompt a purchaser to choose one service over another?
- Is price an overriding factor or product/service features?
- Are purchasers’ needs changing? What is driving this change?
4. Technological Change
Technological change is a powerful change driver. It brings about industry change, as do other drivers such as demographics, globalization, and economic, social, and regulatory change. Consider asking:
- What role does technology play in your industry?
- Does technology push for constant upgrade? For example in the cellular industry, companies constantly have to upgrade their networks to accommodate new service requirements.
- Does tech leadership make a difference and if so why? Who in your industry is the technology leader?
- What is the expected impact of other change drivers such as demographics and globalization on your industry?
5. Vertical Integration
Vertically integrated companies generally have a common owner. Each is a member of a supply chain, which produces a portion of a product. They combine their capabilities to satisfy a customer need. Integration may be backward or forward. Backward, the firm takes ownership and control of producing its own components. Forward, the firm owns/controls activities formerly undertaken by customers. In your business,
- Are industry rivals partially/fully vertically integrated?
- Is integration an important cost differentiator?
- Does partial/full integration represent a competitive advantage/disadvantage?
Serial product development is typical in industries such as pharmaceutical, consumer products, and software. Firms in these industries develop strong innovation capabilities and relentlessly invest in R&D. In you sector,
- Is there brisk product/service innovation and short product life cycles?
- How important is innovation?
- Can a firm displace rivals by being first to bring an innovative differentiated product to market?
7. Product Differentiation
Differentiation is about how a firm offers uniqueness to customers. Differentiation is concerned with the firm’s position within a market in relationship to the service it offers, and the service characteristics that influence customer choice.
- Are rival products/services differentiated, if so how?
- How important is differentiation? Is it necessary for an organization to be an industry leader?
- What role does cost containment play in being an industry leader?
- Is price competition resulting from increased look-alike rival products?
8. Economies of Scale
The automobile, bottling, and microelectronic industries have economies of scale. To be a leader in any of these industries scale counts.
- Does your industry have economies of scale?
- Do large-scale rivals have a cost advantage over smaller firms, if so how?
9. Learning/Experience Curve
A lower cost of operations than rivals can be a strategic advantage. The unit cost of performing repetitive tasks declines as a firm’s experience at performing the task builds. This may lead to lower costs, reduced prices, increased market share, higher profitability, and market dominance. An industry characterized by learning and experience curves drives rivals to pursue increased sales and capture cost savings. By contrast, low-volume firms are under pressure to grow sales thus gaining operational experience and becoming cost competitive. Alternatively, they exit the market. The larger the learning /experience curve the more vital it is for firms to pursue strategies designed to win dominant market share and sustainable competitive advantage. In your industry,
- Does the unit cost decline as a firm’s experience in performing an activity increases? If so, by how much does the unit cost decline?
- Do industry incumbents have an advantage because of their experience in performing a particular activity? Who are they? What is their cost advantage? Does it affect your firm and how?
To paint a picture of your industry, you do not need to gather exhaustive information. The data should cause the conclusions to leap off the page. It should not require a meticulous analysis. A focused approach to the above questions will permit you to forecast the anticipated strategic moves of your rivals.
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