STRUCTURAL ANALYSIS OF INDUSTRIES

N. Venkiteswaran IIM, Ahmedabad

Discussion structure
Industry analysis using Porters 5 Forces framework Structural analysis of Petroleum R&M industry Industry mapping and strategic group analysis

04-Dec-06

N. VENKITESWARAN, IIMA

Understanding industry structure

Industry economics rooted in the structure Decision on specific competitive strategy Entry/expansion/diversification/exit decisions Industry structure not static, but shifting Insight into competitor strategies and identify competitive space

04-Dec-06

N. VENKITESWARAN, IIMA

The five forces

(Michael E. Porter)
Potential entrants
Threat of entrants

Suppliers
Bargainin g power

Competitive rivalry

Buyers
Bargaining power

Threat of substitutes

Substitutes

04-Dec-06

N. VENKITESWARAN, IIMA

Analysis of five forces

Barriers to entry
Easy entry by too many players

Bargaining power of buyers

Buyers capture industry profits

Bargaining power of suppliers

Suppliers take away industry profits

Threat of substitutes
Substitutes cut into industry prospects

Intensity of competition in the industry

Competitors cut each others throat

04-Dec-06

N. VENKITESWARAN, IIMA

The 5 forces at work- examples

High entry barrier
Oil refining

High supplier BP
Computer (Intel)

Low entry barriers

IT, NBFC

Low supplier BP
Banks

High buyer BP
Oil companies for drilling services Auto OE

Substitutes
Soft drinks

Intense competition
Soft drinks

Low buyer BP
Retail

04-Dec-06

N. VENKITESWARAN, IIMA

Worst and best industry structures

Worst Low entry barriers High buyer BP High supplier BP Threat of substitutes Intense competition Best High entry barriers Low buyer BP Low seller BP Few substitutes Low/no competition

04-Dec-06

N. VENKITESWARAN, IIMA

Barriers to entry
Economies of scale
Oil refinery, airline

Capital intensity
Automobile, power equipment TELCO-Car

Access to distribution channels

FMCG products (P&G-Ariel); Telecom: last mile Petroleum: retail outlets

Cost advantage independent of size

Low cost raw material source Experience curve (Bajaj)
8

04-Dec-06

N. VENKITESWARAN, IIMA

Barriers to entry
Expected competitor retaliation
Reliance in petrochemicals Coke, Pepsi in soft drinks

Government regulation
Licensing in India in the past; sectors like Telecom, Banking etc. today Pharma in the US

Differentiation
All forms of branded goods Airlines, Banks
9 04-Dec-06 N. VENKITESWARAN, IIMA

Buyer bargaining power high

Concentration of buyers
Auto OE Vs. Replacement market Electricity supplies to EB

Fragmented supplier base

Farm produce

Alternative sources of supplies, and the product undifferentiated

Banking industry

10

04-Dec-06

N. VENKITESWARAN, IIMA

Buyer bargaining power high

Industry product is a A category (high cost) item for buyer
Tyres for Auto OE Drilling rigs for oil/gas companies

Low switching cost

Corporate customers of Banks

Threat of backward integration by the buyer

Nirma in respect of soda ash

11

04-Dec-06

N. VENKITESWARAN, IIMA

Supplier bargaining power high

Supplier concentration
OPEC in crude oil

Fragmented customer base

Retail banking

High switching costs for buyers

Mainframes, software for computer users Air craft engines

12

04-Dec-06

N. VENKITESWARAN, IIMA

Supplier bargaining power

Suppliers product highly differentiated
Perception reg. differentiation important FMCG brands e.g. HLLs products

Credible threat of forward integration by supplier

FMCG companies backward integration not difficult Input suppliers forward integration not easy
Hence soda ash mfgrs have little BP (TCL)

13

04-Dec-06

N. VENKITESWARAN, IIMA

Threat of substitutes
Product-for-product
Fax Vs. e-mail Vs. courier Scooters Vs. Mobikes

Substitution of need
Teleconferencing Vs. air travel

Generic substitution
Competing for disposable income (white goods in general)

Doing without
Cigarettes

14

04-Dec-06

N. VENKITESWARAN, IIMA

Competitive rivalry
Competitive balance Market growth rates
High growth stage/rate: less rivalry

High fixed costs

Cement industry in India Petroleum and petrochemicals

Capacity addition in chunks

Petroleum refining, cement, soda ash

15

04-Dec-06

N. VENKITESWARAN, IIMA

Competitive rivalry
Extent of differentiation
Low differentiation (commodity)-intense competition Cement, Petroleum products

High exit barriers

Cost of exit, emotional involvement Impossibility of exit ( E.g. PSUs in general, PSUs in petroleum refining in particular (IOC, HP & BPCL unlikely to ever exit or even contemplate a temporary shutdown.

16

04-Dec-06

N. VENKITESWARAN, IIMA

Petroleum industry: evolving structure

Entry barriers
High Capital intensity
Cost, large volumes Fragmented Concentrated Substitutes expensive Potential threat from NG/LNG Exit barriers, High FC, commodities
N. VENKITESWARAN, IIMA

Buyer power
Bulk buyers-high Retail-low

Supplier power
High (OPEC/ONGC)

Substitutes
Low, but growing

Competition:
High, medium
17 04-Dec-06

Relevance of FF analysis
Understanding industry dynamics Understanding of key industry segments structural and strategic characteristics strategically distinct industry despite apparent
E.g. Paint industry-decorative and industrial paints segments Commercial vehicles and motor cars. Strategy formulation/revision

18

04-Dec-06

N. VENKITESWARAN, IIMA

Industry analysis-Key questions

What are the key forces at work? Are there underlying forces behind these forces? What is likely to be the extent and pace of change in these forces? How are competitors addressing these forces? What can be done to influence the forces at work? Are some industries more attractive than others?

19

04-Dec-06

N. VENKITESWARAN, IIMA

Strategic group analysis (SGA)

Given the industry structure, SGA helps:
Identifying industry boundaries, competition segments and sub-segments
E,g. Paint industry in India-decorative and industrial segments Pharma industry: therapeutic areas, type of products (Prescription, generic, OTC etc.)

Relative positioning and competitive strategies of industry players Identify competitive/strategic space
20 04-Dec-06

N. VENKITESWARAN, IIMA

SGA
SGA helps in Identify finely-defined groupings with similar strategic characteristics or competitive strategies Identifying mobility barriers between strategic groups Formulation of strategic positioning and competitive strategy
21 04-Dec-06

N. VENKITESWARAN, IIMA

Industry mapping
Analysis of industry players on a variety of dimensions: Extent of product diversity Extent of geographic coverage Number of market segments served Distribution channels used. Extent of branding Marketing effort
22 04-Dec-06 N. VENKITESWARAN, IIMA

Industry mapping-dimensions
Extent of vertical integration Technological leadership and collaboration R&D capability and spending Cost position Pricing policy Ownership structure Financial strength

23

04-Dec-06

N. VENKITESWARAN, IIMA

A strategic group map-

Indian Petroleum R&M industry

IBP

IOC

HPCL

BPCL

MRPL/ Essar ONGC

Low Refining capacity
N. VENKITESWARAN, IIMA

RIL
High

24

04-Dec-06

Strategic group-another perspective

Based on the extent of vertical integration in the hydrocarbon value chain E&P (Oil and gas), R&M, Petrochemicals (RIL) E&P, R (ONGC) R&M, Petrochemicals (IOC) R&M (BPCL, HPCL) E&P (Cairn, Videocon, GSPC) R (Essar)
25 04-Dec-06 N. VENKITESWARAN, IIMA