Industry structure analysis

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The industry structure analysis after the Five Forces Model ( english five forces ) is the strategic management one of Michael Porter developed tools for policy analysis in the corporate planning. The results of this analysis are often incorporated into a SWOT analysis as an environmental analysis , describing the forces that affect the company from the external environment .

Basics

The origin of the model is the industrial economics approach. The basic idea is that the attractiveness of the market is primarily determined by the market structure. The market structure in turn influences the strategic behavior of the company, i. H. their competitive strategy, which in turn determines their market success. So the success of a company is at least indirectly dependent on the market structure.

The model is based on the idea that the attractiveness of an industry is determined by the characteristics of the five main competitive forces:

Five forces model according to Michael Porter
  1. Rivalry among existing competitors / industry-internal competition (central driving force) ( English intensity of competitive rivalry or industry rivalry )
  2. Threat from new providers ( English potential entrants ) (also access restriction, English barriers to entry or threat of entry ).
  3. Bargaining power of suppliers ( English bargaining power of suppliers )
  4. Bargaining power of buyers ( English bargaining power of buyers and bargaining power of customers )
  5. Threat of substitute products ( substitution ) ( english threat of substitutes )

The greater the threat posed by these five competitive forces, the less attractive the industry under consideration and the more difficult it is to achieve a sustainable competitive advantage.

Companies should therefore try to be active in an industry with an attractive industry structure and to build up a defensible position in their industry , i.e. a position in which the five competitive forces are as less threatening as possible.

Companies can also influence the five forces with the help of appropriate strategic alignment. This can increase the attractiveness of an industry. However, if companies influence the distribution of competitive forces to the advantage of their own competitive position without being aware of the long-term effects or consciously accepting them, this can also destroy the structure and profitability of an industry.

The five forces

Note: The five forces are always related to the entire industry. A typical mistake is the application of the following analysis criteria to a sole proprietorship. The results of such an analysis then show corresponding deficiencies.

This requires - at least operating - Definition of Industry ( english industry ) before the attempted analysis. Porter defines "industry" as ... a group of firms producing products that are close substitutes for each other. (… A group of companies that produce closely related substitutes.) This industry is then examined for the following characteristics per factor ( force ).

Rivalry among existing competitors ( english intensity of competitive rivalry )

The intensity of competition between companies on the market is high when several of the following factors apply:

  • There are many competitors of a similar nature;
    z. B. Bakers have almost identical means of production, recipes, ingredients, etc. Competition is (mostly) high.
  • Slow industry growth;
    z. B. Food in Germany because a shrinking population is also eating less.
  • Capacity can only be increased in large volumes;
    z. B. the automotive industry can only expand in entire plants with capacities of 100,000 cars and more;
  • There are many different competitors (diversified products); Product differentiation ;
    z. B. Sweets ( ignoring economies of scale here )
  • There are high strategic risks;
    z. B. Energy (oil, electricity, gas etc.)
  • There are high market exit barriers ( English Exit Barriers ) as the following:
    • specialized resources
    • Fixed costs of decommissioning
    • strategic connection points (gas and oil)
    • emotional barriers (my father founded ...)
    • state or social barriers (post, rail ...)

Threat from new providers ( English threat of entry )

The existence of entry barriers ( English Barriers to Entry ) limits the number of companies in the market and therefore influences the "rivalry among existing competitors." If new providers appear on the market, competitive advantages are directly influenced. The new provider is responding to the existing market demand with new capacities, in which he must participate. This additional supply with the same demand depresses the returns of the market participants. The threat from new providers is great when the barriers to entry are low. Porter names 6 main barriers to entry:

  • Returns to scale ( englisch economies of scale )
    economies of scale are disproportionate reductions of the total cost, while increasing the production volume per period (d. E. If not double at double production volumes, costs, but less increase). The existence of economies of scale forces new entrants to enter with high capital expenditure and risk and thus provokes, among other things. U. strong reactions from market participants.
  • Product differentiation ( english differentiation )
    means product differentiation that the established company brand identification ( brand identification ), customer loyalties ( english customer loyalties ) u. have already achieved marketing goals. In order to cope with such factors, the new entrant has to accept additional costs for advertising etc.
  • Capital requirements ( english capital requirements )
    means capital requirements, that access to the industry requires significant investments. Especially if these costs can no longer be recovered in the event of a failure ( sunk costs ), such capital requirements represent a major hurdle for new entrants.
  • Switching costs ( english switching cost )
    switching costs means that the customer to take another (one-time) costs into account when changing from the product of a supplier must: z. B. for machine conversions. Switching costs thus represent a method of increasing customer loyalty (see lock-in effect ).
  • Access to distribution channels ( English access to distribution channels )
    An access barrier can be represented by the difficult access to distribution channels , e.g. B. if the newcomer has to secure sales channels and has to accept additional costs for this. This is typical of supermarkets where vendors have to pay for shelf space.
  • Cost disadvantages independent of scale ( englisch cost disadvantages independent of scale ).
    Cost disadvantages independent of economies of scale are Porter's collective term for all further cost disadvantages; According to his presentation, these come from:
    • proprietary product technology - know-how , patents, utility models, etc.
    • Favored access to raw material - natural monopoly , Porter only mentions raw material, but we can interpret that as “access to resources”, e.g. B. the landing rights at airfields where one airline can gain advantages over others.
    • Location advantages - established companies have often already occupied the locations that allow the easiest access to raw materials, markets, distributors, etc.
    • Subsidies - Subsidies often provide ongoing benefits to established businesses.
    • Learning Curve ( english economies of learning ) - A learning curve is shown when on a rising production not directly the cost proportional to rise, but a learning effect (ie improved production technology, savings, etc.) reduces costs. Here companies that have already produced large quantities have an advantage over newcomers.

Bargaining power of suppliers ( English bargaining power of suppliers )

Suppliers can pose a threat to an industry if they threaten to raise the price of goods or services. Powerful suppliers can thereby reduce the profitability of an industry that cannot recoup the increased costs in its own markets. The conditions under which a supplier is “powerful” largely mirror those that make a customer “powerful”. A supplier industry is "powerful" when the following factors are present:

  • the branch is dominated by a few companies and is more concentrated than the buying branch
  • there is a low risk of substitution for the products or services procured by the declining industry
  • the decreasing branch is not an important customer for the supplying branch
  • the products / services supplied make a significant contribution to the customer industry
  • the products / services of the supplying branch are differentiated or have built up switching costs
  • the supplying branch can credibly threaten forward integration into the customer branch

Bargaining power of buyers ( English bargaining power of buyers )

Buyers (customers) are in competition with an industry insofar as they can depress prices, enforce better quality or force expanded services if they have high market power. This lowers profitability within the industry.

A buyer group is powerful when the following circumstances are true:

  • the customer group is highly concentrated or buying large volumes compared to total industry sales
  • the purchased products / services are standardized or undifferentiated (e.g. gasoline)
  • the customer branch only has to accept low conversion costs
  • the customer sector is in a less profitable business situation
  • The customer industry can credibly threaten backward integration into the supplier industry (e.g. VW and Ford have considerable capacities in supplier manufacturing that can be expanded)
  • the products / services obtained are irrelevant for the quality of the products / services in the customer sector.
  • the customer branch has complete information

Threat (of substitute products English threat of substitutes )

In the broadest sense, all competitors in an industry compete with industries that produce substitutes . Substitutes limit the possible profits of an industry by setting an absolute limit on the prices that the industry can charge for their products / services.

The identification of substitutes is a search for products / services that can fulfill the same function as the product of the branch under consideration. This can be a difficult task at times that takes the analyst into industries that appear to be far removed from the industry being studied (e.g., fast food restaurants compete with kitchen appliance manufacturers).

The following criteria are not listed in Competitive Strategy (Porter ).

The influence of substitutes is great, though

  • there is only a low level of product loyalty in the market
  • the conversion costs from the original to the substitute are low
  • Licenses and patents expire
  • the prices of the original are relatively high and performance reductions in the substitute are accepted as acceptable at significantly low prices

Governments as an influencing variable on the industry structure ( English Government as a Force in Industry Competition )

Governments are not listed as a separate force in the model. Nonetheless, in Strategic Analysis , Porter cites governments as major influencers of forces.

Governments have primarily been examined for their possible influence on the barriers to entry, but must be viewed as a possible influence on many - if not all - aspects of the industry structure, both directly and indirectly. For many industries, governments represent customers (e.g. defense industries) or suppliers (e.g. wood), and government actions influence both buyers and suppliers. Current legislation can change the position of an industry in relation to substitutes (e.g. asbestos, cadmium, leaded gasoline).

criticism

advantages

  • Ensuring a systematic and comprehensive consideration of the factors relevant in competition
  • Especially useful in the initial phase of a strategic analysis to understand the industry
  • Model allows opportunities and risks to be assessed
  • offers the possibility to examine and evaluate complex interactions of competitors in a branch in a structured way

disadvantage

  • The model creates snapshots. Markets with higher competitive dynamics ( Schumpeteric competition ) are difficult to grasp because they change so quickly that new models have to be created very frequently.
  • Only structural features are considered.
  • By assuming constant competition , the industry analysis is limited to competitive relationships, but in practice there are also collaborations.
  • The model only takes one industry into account at a time. Complementors , i.e. industries that complement your own product, are not taken into account; z. For example, computers without software are just as useless as vice versa. The interactions between such industries are only insufficiently covered by the industry structure analysis.
  • The identification of possible competitors in the case of complex configured products (e.g. software-hardware combinations) depends on whether customers or suppliers are included who are believed to have the ability to integrate the value chain forwards or backwards. This becomes even more difficult with high service or aftermarket shares.
  • The practical implementation of the findings from the analysis can have a welfare-reducing effect on the economy as a whole, for example by setting up very high barriers to market entry in order to deter new competitors.

Individual evidence

  1. Michael E. Porter: Competitive Strategy: Techniques for analyzing industries and competitors: with a new introduction . Free Press, New York 1980, ISBN 0-684-84148-7
  2. Porter speaks of government in the singular