Strategic Management - Grant - Chapter 2

Industry Analysis
©2015 Robert M. Grant & Judith Jordan 1

www.foundationsofstrategy.com
Learning Objectives
By the time you have completed this topic you will:
• be familiar with a number of frameworks used to analyse an organization’s
external environment and understand how the structural features of an
industry influence competition and profitability;
• be able to use evidence on structural trends within industries to forecast

changes in competition and profitability and to develop appropriate strategies
for the future;
• be able to define the boundaries of the industry within which a firm is located;
• be able to recognize the limits of Porter’s five forces of competition framework

and extend the framework to include the role of complements ;
• be able to segment an industry into its constituent markets and appraise the
relative attractiveness of different segments;
• be able to analyse competition and customer requirements in order to identify

opportunities for competitive advantage within an industry (key success
factors).
The profitability of US industries,
2000-2010
Industry Median ROE Leading companies
2000-10(%)
Tobacco 33.5 Philip Morris Int., Altria,
Reynolds American
Household and personal 27.8 Procter & Gamble,
products Kimberly-Clark, Colgate-
Palmolive
Motor vehicles and parts 4.4 GM, Ford, Johnson
Controls
Entertainment 3.9 Time Warner, Walt Disney,
News Corporation
Airlines -11.3 AMR, UAL, Delta Airlines
Source: Data from Fortune 1000 by industry.

See Grant & Jordan 2e Table 2.1 for a more detailed list of US industries.

How can we account for these differences
in industry profitability?
• It is all down to luck?
• Some industries are in decline, others are growing fast?
• The basic premise that underlies industry analysis is that

the level of industry profitability is neither random nor
entirely the result of industry-specific influences, it is
determined by the industry’s underlying economic
characteristics
INDUSTRY STRUCTURE

Analysing the business environment
• The business environment of the firm consists of the external
influences that affect its decisions and performance
• How can managers monitor the vast array of possible

influences?
– Need to distinguish the ‘vital’ from the ‘merely important
– Classification schemes like PEST can help

PEST Analysis
How macro-environmental factors might impact a business
organization:
Political Economic
Changes in government economic policy, e.g. Changes in the level of economic activity, e.g.
taxation, government spending, monetary policy growth rates, rates of unemployment, inflation
Changes in legal requirements e.g. employment Changes in wage rates and income distribution
law, health and safety legislation, licensing Changes in exchange rates
practices, environmental regulations, competition
policy
Changes in the government ownership
e.g. nationalization, privatization, de-regulation
Social Technological
Changes in demographics e.g. the size of the Development of new products and processes
population, the age distribution with the Automation
population Developments in information and communication
Changing attitudes e.g. work/life balance, concern technologies
for the environment, ethical standards Developments in the natural sciences
Changes in social structure e.g. socio-economic
groupings, social mobility

From environmental analysis to
industry analysis

Porter’s Five Forces of Competition Framework

Structural determinants
of the competitive forces

Applying industry analysis
Industry analysis can be used to:
• Explain differences in profitability between industries and

changes in the profitability of a given industry over time
• Assist managers in positioning the firm advantageously
• Predict possible changes in competition and profitability in the

near future
• Identify opportunities for changing industry structures and

alleviating competitive pressures.

The challenges of applying the five
forces framework
• Defining the industry
• Dealing with missing factors
• Choosing the appropriate level of analysis
• Dealing with uncertainty and rapid structural change

Defining the industry
• Industries versus markets.
• Substitutability on the supply side versus
substitutability on the demand side.
• Boundaries are seldom clear-cut.
• In practice the way boundaries are drawn
depends on the purpose and context of the
analysis.

Dealing with missing factors

Choosing the appropriate level of
analysis
The difficulty in drawing industry boundaries
and the need to define industries more
broadly or more narrowly depending on the
kinds of questions we are seeking to answer
means that it is sometimes helpful to
undertake more detailed, disaggregated
analysis.
Segmentation Analysis

Segmentation analysis
Identify possible
segmentation variables
Construct a
segmentation matrix
Analyze segment
attractiveness
Identify key success

factors in each segment
Select segment scope

Illustrative segmentation
variables
Demographic Gender
Age
Ethnicity
Socio-economic Income
Education
Occupation
Psychographic Personality
Lifestyle
Geographic Region
Urban/suburban/rural
Behavioural Purchase occasion
Loyalty
Use rate

Dealing with uncertainty and rapid
structural change
• At what rate is structural change occurring?
• Some argue that the pace of change is
accelerating
– Intensifying international competition
– Rapid technological change
– Industries becoming hypercompetitive
But
• Systematic evidence of this trend is elusive.

Identifying key success factors


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Industry Analysis

©2015 Robert M. Grant & Judith Jordan 1

• be able to use evidence on structural trends within industries to forecast

• be able to recognize the limits of Porter’s five forces of competition framework

• be able to analyse competition and customer requirements in order to identify

Source: Data from Fortune 1000 by industry.

©2015 Robert M. Grant & Judith Jordan 3

• It is all down to luck?

• Some industries are in decline, others are growing fast?

• The basic premise that underlies industry analysis is that

©2015 Robert M. Grant & Judith Jordan 4

• How can managers monitor the vast array of possible

©2015 Robert M. Grant & Judith Jordan 5

©2015 Robert M. Grant & Judith Jordan 6

©2015 Robert M. Grant & Judith Jordan 7

©2015 Robert M. Grant & Judith Jordan 8

©2015 Robert M. Grant & Judith Jordan 9

• Explain differences in profitability between industries and

• Assist managers in positioning the firm advantageously

• Predict possible changes in competition and profitability in the

• Identify opportunities for changing industry structures and

©2015 Robert M. Grant & Judith Jordan 10

• Defining the industry

• Dealing with missing factors

• Choosing the appropriate level of analysis

• Dealing with uncertainty and rapid structural change

©2015 Robert M. Grant & Judith Jordan 11

©2015 Robert M. Grant & Judith Jordan 12

©2015 Robert M. Grant & Judith Jordan 13

©2015 Robert M. Grant & Judith Jordan 14

Identify key success

Select segment scope

©2015 Robert M. Grant & Judith Jordan 15

©2015 Robert M. Grant & Judith Jordan 16

©2015 Robert M. Grant & Judith Jordan 17

©2015 Robert M. Grant & Judith Jordan 18

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