INDUSTRY ANALYSIS

INDUSTRY ANALYSIS				industry, and product differences are among the
Shanmukha Rao. Padala *Dr. N. V.S.				factors fostering brand identification.
Suryanarayana				3. Capital Requirements – The need to invest
INTRODUCTION:				large financial resources in order to compete
Industry and competition are				creates a barrier to entry, particularly if the capital
the main constituents of the task environment of				is required for unrecoverable expenditure.
a business firm. The environmental survey will not				4. Cost Disadvantages Independent of Size –
be complete without industry analysis and				Entrenched companies may have cost
competitor analysis. Analysis of macro				advantages not available to potential rivals, no
environment gives rise to common information				matter what their size and attainable economies
whereas Industry Aanalysis provides structural				of scale. These advantages can stem from the
realities, specific and unique information, which are				effects of the learning, proprietary technology,
required for strategy formulation. Industry analysis				access to the best raw materials, sources, assets
brings to light the industry attractiveness and the				purchased at pre-inflation prices or favourable
firm's competitive position within the industry. The				locations.
indusrty's attractiveness is mainly determined by				5. Access to Distribution Channels – The new
its growth potential and inherent profitability of of				entrants must of course secure distribution of his
the industry. Analysis of industry and competition				product or service. The more limited the
helps not only strategy formulation but also helps				wholesale or retail cannels are and the more that
in building competitive advantage.				existing competitors have these tied up, obviously
Michael E. Porter's book "				the tougher that entry into the industry will be.
Competitive Strategy" propelled the concept of				Sometimes this barrier is so high that, to
industry analysis into the foreground of strategic				surmount it, a new contestant must create its
thought and business planning. His well defined				own distribution channels.
analytical framework helps strategic managers to				6. Government Policy – The government can
understand industry dynamics and to correctly				limit or even foreclose entry to industries with
anticipate the impact of remote factors on a				such controls as license requirements and limits on
firm's operating environment.				access to raw materials. The government also
The nature and degree of				can play a major indirect role by affecting entry
competition in an industry hinge on five forces: the				barriers through controls such as air and water
threat of new entrants, the bargaining power of				pollution standards and safety regulations.
customers, the bargaining power of suppliers, the
threat of substitute products or services, and the				2. Powerful suppliers and buyers:
jockeying among current contestants.				Suppliers can exert bargaining
				power on participants in an industry by raising
FRAME WORK FOR INDUSRTY ANALYSIS:				prices or reducing the quality of purchased goods
The following framework,				and services. Powerful suppliers can thereby
which consists of seven aspects, is helpful to do				squeeze profitability out of an industry unable to
industry analysis.				recover cost increases in its own prices.
1. Basic Conditions: Under general/basic conditions,				Customers likewise can force
product categories, performance of the industry				down prices, demand higher quality or more
in recent years and size of the industry are				service, and play competitors off against each
considered. Before 1980 the Indian passenger car				other – all at the expense of industry profits.
industry was oligopolistic, industry size was small				The power of each important
and licensing system was used as an entry				supplier or buyer group depends on a number of
barrier. Customer service and quality of vehicles				characteristics of its market situation and on the
were lesser-known aspects. The industry				relative importance of its sales or purchases to
operated with limited players in a regulated				the industry compared with its overall business.
protected environment. In 1980 Maruti entered				A company's choice of
the Indian passenger car industry. The post				suppliers to buy from or buyer groups to sell
liberalization period witnessed the entry of several				should be viewed as a crucial strategic decision. A
new players including MNCs. The industry went				company can improve its strategic posture by
through growth phase and other players adopted				finding suppliers or buyers who possess the least
new strategies. The demand for passenger cart				power to influence it adversely.
was 15,714 in 1960. Within next two decades it				Most common is the situation
increased to 30,989. The Compound Annual				of a company being able to choose whom it will
Growth Rate rose from 3.50% to 18.60% in 1983.				sell to in other words, buyer selection, Rarely do
2. Industry Setting/ Environment: Michael Porter				all the buyer groups a company sells to enjoy
classified industries on the environment.				equal power.
- Fragmented industry
- Emerging industry				3. Substitute Products
- Transition to maruti				By placing a ceiling on prices it
- Declining industry				can charge, substitute products or services limit
- Global industry				the potential of an industry. Unless it can upgrade
Industry settings must project the industry type				the quality of the product or differentiate it
to which the firm belongs. With regard to Indian				somehow, the industry will suffer in earnings and
passenger car industry, it is a growing industry				possibly in growth.
and it is likely to have prolonged phase of growth.				Substitutes not only limit profits
It employs 4,50,000 people directly and 10 million				in normal times, they also reduce bonanza an
indirectly and it contributes 4% of GDP currently.				industry can reap in boom times.
1. Industry Structure: Till 1980, there were only				4. Jockeying for Position
two players in the passenger car industry namely				Rivalry among existing
Hindustan Motors and Premier Auto Ltd. In 1980,				competitors takes the familiar form of jockeying
Maruti entered the scene. With liberalization global				for position – using tactics like price
car giants such as Suzuki, General Motors, Ford,				competition, product introduction, and advertising.
Daewoo, Hyundai, Honda, Peugeot, Fiat, Mitsubishi,				Intense rivalry is related to the presence of a
Daimler Benz and BMW entered the Indian market				number of factors:
through joint venture route. Before 1980, licensing				- Competitors are numerous or roughly equal in
policy served as an entry barrier. After 1980,				size and power;
huge capital requirement, cost advantages and				- Industry growth is slow, precipitating fights for
experience curve effect of early players like				market share that involve expansion minded
Maruti proved to be an entry barrier for new				members;
players.				- Fixed costs are high or the product is perishable,
Industry structure is concerned with number of				creating strong temptation to cut prices;
players, total market size, market share of				- Exit barriers are high. Exit barriers keep
players, nature of competition, barriers,				companies competing even though they may be
differentiation, and cost structure of players.				earning low or even negative returns on
1. Industry Attraction: Industry attractiveness is				investment.
mainly determined by: industry potential, industry				- The rivals are diverse in strategies, origins and
growth, industry profitability and forces shaping				personalities. They have different ideas about how
competition. The demand for small car is				to compete and continually run head – on into
increasing in India. The l;uxury car is the segment				each other in the process.
where the demand is slowly on the rise in recent
times. The factors that determine profitability in				EXPERIENCE CURVE AS AN ENTRY BARRIER:
passenger car industry are technology and				In recent years, the
volume. All players have different models in all				experience curve has become widely discussed as
market segments. The existing players Premier				a key element of industry structure. According to
Auto Ltd., and Maruti put up defensive strategies.				this concept, unit costs in many manufacturing
Cost reduction, reduction of delivery time,				industries, as well as in some service industries
marketing network, auto financing by Citicorp,				decline with experience of a particular company's
export orientation, price cutting, aggressive pricing				cumulative volume of production.
policy, modernization, expansion and after sales				The cost decline creates
service are notified in Indian passenger car				barrier to entry because new competitors with no
industry.				experience face higher costs than established
2. Industry Performance: Performance of the				ones, particularly the producer with the largest
industry is studied in terms of sales, profitability,				market share, and have difficulty catching up with
production and technological advancement. The				the largest market share, and have difficulty
compact car segment has witnessed several				catching up with the entrenched competitors.
challenges Daewoo launched Matiz, and Hyundai				Adherents of the experience
launched Santro. Indica launched by Tata Motors				curve concept stress the importance of achieving
proved to be a world class low priced diesel car.				market leadership to maximise this barrier to
Maruti experienced tough competition from Indica				entry, and they recommend aggressive action to
and Indica reshaped Indian car market. A price				achieve it, such as price cutting in anticipation of
war was unleashed by leading players.				fallings costs in order to build volume.
Modernization of plants, export thrust, superior				The height of the barrier
after sales service have been observed among all				depends on how important costs are to
leading players. Now Tata Motors introduced				competition compared with other areas like
‘Nano' car at world least cost.				marketing selling, and innovation. The barrier can
3. Industry Practice: Industry practice refers to				be nullified by product of process innovations
what majority of players in the industry does				leading to a substantially new technology and
with distribution, pricing and R&D. joint				thereby creating an entirely new experience
venture with MNC is an accepted industry practice				curve. New entrants can leapfrog the industry
to ensure quality in passenger car industry. After				leaders and alight on the new experience curve,
sales service centers are established by all leading				to which those leaders may be poorly positioned
manufacturers. In recent times, Maruti has lost its				to jump.
dominant position mainly because of the				SWOT ANALYSIS:
aggressive attitude of new players. However it				SWOT or WOTS is an
enjoys the cost advantage as it was established				acronym for strengths, weakness, opportunities
in a regular environment.				and threats underlying strategic planning process.
4. Emerging Trends: The emerging trends are				The purpose of strategic planning is to discover
examined by studying product life cycle, stage of				future opportunities and threats so as to make
the industry, changes in buyer needs, and				plans to exploit or avoid them, as the case may
innovation in products, process, and growth rate				be, in the crucial step of strategy formulation.
and government policies. McKinsey consultants				Though SWOT analysis should be undertaken as
have predicted 256 per cent growth in industry				an integrated process in strategic management, it
production. The Ministry of Heavy Industries and				has been broken into two parts because of the
Public Enterprises plans to double the contribution				different nature of information requirement for
of auto industry by promoting exports.				each. The first part is the environmental analysis
				for identifying opportunities and threats, and the
How Competitive Forces Shape Strategy:				second part is corporate appraisal for identifying
The essence of strategy				strengths and weaknesses.
formulation is coping with competition. It is easy				SWOT analysis begins with the
to view competition too narrowly and too				appraisal of external environment so that the
pessimistically. Intense competition in an industry is				organisation can analyse the various opportunities
neither coincidence nor bad luck.				and threats offered by it and the organisation can
In the fight for market share,				relate itself in the light of its strengths and
competition is not manifested only in the other				weaknesses. From this point of view, managers
players. Rather, competition in an industry is				should appraise the various organisational factors
rooted in its underlying economics, and				through which it can cope up with its environment.
competitive forces exist that go well beyond the				Such a process is known as corporate appraisal.
established combatants in a particular industry.				Corporate appraisal is the process through which
Customers, suppliers, potential entrants and				managers analyse the various factors of their
substitute products are all competitors that may				organisation to evaluate their strengths and
be more or less prominent or active depending on				weaknesses so as to meet the opportunities and
the industry.				threats of environment.
The collective strength of
these forces determines the ultimate profit				USEFULNESS OF INDUSTRY ANALYSIS:
potential of an industry. It ranges from intense in				The basic purpose of industry
industries where no company earns spectacular				analysis is to assess the relative strengths and
returns on investment, to mild in industries, where				weakness of an organization relative to other
there is room for quick high returns.				players in the industry. It tries to highlight the
In the economist's perfectly				structural realities of a particular industry and the
competitive industry, jockeying for position in				extent of competition within that industry.
unbridled and entry to the industry very easy.				Through industry analysis, an organization can find
This kind of industry structure, of course, offers				whether the chosen field is attractive or not and
the worst prospect for long run profitability. The				assess its own position within the industry.
weaker the forces, the greater the opportunity				Industry analysis helps firms in the following ways.
for superior performance.				- Industy Attractiveness:
Whatever their collective				Industry analysis helps to find out:
strength, the corporate strategist's goal is to find				1. the growth potential of the industry,
a position in the industry where his or her				2. the profitability of the industry and
company can best defend itself against these				3. the relative ability of player in that industry.
forces or can influence them in its favour.				Where the growth prospects are good and profit
Knowledge of these underlying				potential is great, the firm can safely conclude
sources of competitive pressure provides the				that the field is attractive and offers enough
groundwork for a strategic agenda of action.				room for others to enter and explocit the field. At
They highlight the critical strengths and				this stage firm needs to answer certain questions
weaknesses of the company, animate the				like:
positioning of the company in its industry,.				1. is it a growing industry?
				2. if yes, at what pace the industry is growing?
MICHAEL PORTER'S ANALYSIS:				3. are there any limits to growth in the industry?
According to Michael Porter,				4. does it offer good returns consistently etc.
the nature and degree of competition in an
industry depends on four forces. The threat of				- Competitive Position:
new entrants, the bargaining power of suppliers,				Where does the firm stand in comparison to
the threat of substitute products or services, and				other in a particular industry. Finding answers to
the jockeying among current contestants. To				such a question is important for various reasons.
establish a strategic agenda for dealing with these				First, it helps the firm to find its own
competing currents and to grow despite them, a				advantageous/disadvantageous place. Second, it
company must understand how they operate in				enable the firm to know whether it is able to
an industry and how they affect the company in				deliver value for money when compared to
its particular situation.				others in the industry. Third, it can think of
The strongest competitive force or forces				effecting improvements in its product and service
determine the profitability of an industry and so				offerings in an attempt to defend and improve its
are of greatest importance in strategy				standing in the market place.
formulation. Even a company with a strong				SUMMARY:
position in an industry unthreatened by potential				Industry analysis brings to light
entrants will earn low returns if it faces a superior				the industry attractiveness and the firm's
or a lower cost substitute product. In such a				competitive position within the industry. The
situation, coping with the substitute product				nature and degree of competition in an industry
becomes the number one strategic priority. A				hinge on five forces: the threat of new entrants,
few characteristics are critical to the strength of				the bargaining power of customers, the bargaining
each competitive force.				power of suppliers, the threat of substitute
1. Threat of Entry:				products or services, and the jockeying among
New entrants to an industry				current contestants. The framework, which
bring new capacity, the desire to gain market				consist of seven aspects viz., basic conditions,
share, and often substantial resources. The				industry setting/environment, industry structure,
seriousness of the threat of entry depends on				industry attraction, industry performance, industry
the barriers present and on the reaction from				practice and emerging trends are helpful to do
existing competitors that the entrant can expect.				industry analysis. The basic purpose of industry
If barriers to entry are high and a new comer				analysis is to assess the relative strengths and
can expect sharp retaliation from the entrenched				weakness of an organization relative to other
competitors, obviously he will not pose a serious				players in the industry. It tries to highlight the
threat of entry. There are six major sources of				structural realities of a particular industry and the
barriers to entry.				extent of competition within that industry.
1. Economies of scale – These economies				According to Michael Porter, the nature and
deter entry by forcing the aspirant either to				degree of competition in an industry depends on
come in on a large scale or to accept a cost				four forces: the threat of new entrants, the
disadvantage. Scale economies in production,				bargaining power of suppliers, the threat of
research, marketing and service are probably the				substitute products or services, and the jockeying
key barriers to entry. Economies of scale can also				among current contestants.
act as hurdles in distribution, utilisation of the sales				The experience curve has become widely
force, financing and nearly any other part of a				discussed as a key element of industry structure
business.				in recent years. According to this curve, unit costs
2. Product Differentiation – Brand identification				in many manufacturing industries, as well as in
creates a barrier by forcing entrants to spend				some service industries decline with experience of
heavily to overcome customer loyalty.				a particular company's cumulative volume of
Advertising, customer service, being first in the				production.

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INDUSTRY ANALYSIS