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