Strategic Management: Analysing the Industry Environment

OXFORD UNIVERSITY PRESS - STRATEGIC MANAGEMENT

FIFTH EDITION

Towards sustainable strategies in southern Africa

Authors: Lynette Louw, Peet Venter, Amos Boikanyo, Davis Hamann, Jansen van Rensburg, Perks, Sethibe, Van Wyk, Venter
Published by: Oxford University Press South Africa (Pty) Ltd 2024

Chapter 6: Analysing the Industry Environment

Learning Outcomes

  • After studying this chapter, you should be able to:
      - Explain what the term ‘industry’ means.
      - Define the boundaries of an industry for analysis.
      - Identify industry key success factors in different industry settings.
      - Conduct an analysis of the competitive and complementary forces in an industry and identify their impact on competition and profitability.
      - Apply the industry life cycle to an industry and identify the impact on industry dynamics and strategy.
      - Explain how a competitor analysis can be conducted.
      - Explain how strategic group analysis can be used to analyse competition in an industry.
      - Explain how a customer analysis can be conducted and its impact on competition and strategy.

Introduction to Industry and Market

Definitions

  • Industry: A group of firms producing similar products.
      - The organization employs a competitive or business strategy to achieve a sustainable competitive advantage in this environment.

  • Market: A group of customers for products and services that satisfy the same need.

Industry Analysis

Purpose

  • The purpose of industry analysis is to identify opportunities and threats in the industry environment.

Process

  • Industry analysis consists of three broad steps:
      1. Define the industry.
      2. Identify the key success factors of the industry.
      3. Examine the relationships shaping the industry and their influence on profitability.

Defining the Industry

Challenges

  • Deciding whether to define an industry broadly or narrowly can be challenging. Industry convergence may change or blur its boundaries.

  • Industry Convergence: Occurs when two or more previously separate industries begin to behave as linked.

Dimensions of Scope

  • Consider three dimensions of scope when defining industry boundaries:
      1. Horizontal scope: The range of products or services.
      2. Vertical scope: The supply chain levels an industry spans.
      3. Geographic scope: The geographical area the industry covers.

Industry Key Success Factors

Definition

  • Key success factors are external environmental determinants of an organization’s ability to survive and thrive. These factors impact all organizations within an industry.

Dependencies (“Three Cs”)

  • Key success factors depend on:
      - Customers: Understanding customer needs.
      - Competition: Strategies for competitive advantage.
      - Corporation: Unique resources possessed by the organization.

  • Generally limited to three to five critical factors essential for organizational success.

Key Success Factors in Different Industry Settings

Mature and Declining Industries

  • Characteristics: Low growth in demand; potential decline.

  • Opportunities for competitive advantage include:
      - Cost Advantage
      - Profitable Market Segments
      - Differentiation
      - Strategic Innovation

Technology-Intensive Industries

  • Key conditions for appropriating innovation value include:
      - Protection of intellectual property.
      - Impact of complementary products and services.
      - Extent of technology codification.
      - Lead time establishment by innovators.

Not-for-Profit Settings

  • Organizations need to assess:
      - Customer readiness to pay for services tied to core activities.
      - Utilization of professional management talent.
      - Inclusion of business-minded trustees or board members.
      - Capital acquisition through partnerships with businesses.
      - Merging with similar organizations.
      - Forming strategic alliances.

Relationships that Shape the Industry

Types of Relationships

  • Relationships can either enhance or hinder profits:
      - Enhancing Profit Relationships: Improve cost structures or pricing strategies.
      - Reducing Profit Relationships: Negatively affect cost and/or price.

Framework Overview (Refer to figure 6.1)

  • Components include:
      - Suppliers, buyers, potential entrants, substitute products, competitive rivalry, and regulations.

  • Relationships affecting profitability include:
      - Bargaining power of buyers and suppliers.
      - Threat of entry and substitutes.

Industry Evolution: Competition Over Time

The Industry Life Cycle

  • Describes how competitive rivalry is related to industry growth, with varying levels of competition in different growth phases.

  • Important for organizations to recognize their position in the life cycle to adapt strategies effectively.

Phases of Industry Growth

  1. Development Phase:
       - Early adopters are few, potential for a temporary monopoly.

  2. Growth Phase:
       - Following market entry by early competitors; focus on market share rather than pricing.

  3. Shake-Out Phase:
       - Declining growth; increasing rivalry pushes weaker competitors out. Lower entry rates than exits characterize this phase.

  4. Maturity:
       - Peak in growth, may start to decline; repeat sales increasingly drive revenues.

Competitor Analysis

Key Questions

  • What drives the competitor? - Informed by:
      - Market intelligence.
      - Competitive intelligence.
      - Competitive signaling.

  • Key analysis points include:
      - Current strategy and position.
      - Likely future moves.
      - Vulnerabilities.
      - Driver for effective retaliation.

Framework Overview (Refer to figure 6.3)

  • Elements include current strategy, stakeholder expectations, and competitor response profile.

Strategic Groups

Identification Criteria

  • Identifying strategic groups involves examining:
      - Mobility barriers.
      - Competitive dynamics within groups.
      - Bargaining power dynamics with buyers and suppliers.
      - Substitution effects.

Uses of Strategic Group Analysis

  • Organizations may use this analysis to:
      - Identify most direct competitors.
      - Determine opportunities and threats in the market.
      - Consider where to compete strategically.

Customer Analysis

Market Segmentation

  • A market segment consists of customers with similar needs distinct from other segments.

  • Key elements of customer analysis include:
      - Segment Uniqueness: Characteristics that differentiate them.
      - Segment Attractiveness: A measure of the segment’s market potential.
      - Key Success Factors: Specific characteristics necessary for success in the segment.
      - Scope of Segmentation: Clearly defined parameters for segment selection.

Summary

  • The chapter discussed both industry analysis and intra-industry analysis, focusing on defining the industry as a unit of analysis.

  • Detailed examination of industry structure, including the role of complementors in increasing product/service value.

  • The concept of industry evolution emphasized the need for adaptive strategy changes as market dynamics shift, especially considering key factors varying by industry phase.

  • Ongoing industry analysis is crucial for developing sound business strategies, yet many organizations neglect its significance. It is emphasized as a multidimensional, continuous task rather than a sporadic event.