Porter's Analysis in Strategic Management

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Strategic management Industry and sector analysis

Maria Aluchna, Strategic management

• Industries and sectors
– – – – Industry characteristics Sources of competition – five forces analysis Life cycle model Dynamics of competition

• Competitors and markets
– Strategic groups – Market segmentation – Key success factors Maria Aluchna, Strategic management


Industry characteristics
• • Industry is a group of firms producing the same principal product Convergence is where previously separate industries begin to overlap in terms of activities, technologies, products and customers Two forces of convergence – Supply led – organizations start to behave as though there are linkages between the separate industries/ sectors (public sector, government) – Demand led (market forces) – customers start to behave as though the industries have converged (substitute products)

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• • • • •

Market shares of main competitors, the structure of the competition (fragmented, concentrated) Entry barriers The stage of the industry development (birth, growth, maturity) Growth rate The structure of suppliers, the aspects of distribution The most popular business models Segments of customers Significant limitations (licenses, regulations)

Maria Aluchna, Strategic management

Spectrum of industry structures
Perfect competition Concentration Entry and exit barriers Product differentiation Information availability Many firms No barriers Homogeneous product (commodity) No impediments to information flow Oligopoly A few firms Duopoly Monopoly Two firms One firm High barriers

Significant barriers

Potential for product differentiation

Imperfect availability of information

Maria Aluchna, Strategic management


The impact of growth on profitability
30 25 20 15 10 5 0 -5 return on sales return on investment cash flow/ investment less than -5% -5% to 0 0 to 5% more than 5% over 10%

Maria Aluchna, Strategic management

Determinants interfirm differences in profitability
Research Schmalensee (1985) Rumelt (1991) McGahan & Porter (1997) Hawawini et al. (2003) Percentage of variance in firms’ ROA on assets explained by: Unexplained Industry effects Firm specific effects variance 19.6% 0.6% 80.4% 4.0% 18.7% 8.1% 44.2% 31.7% 35.8% 44.8% 48.4% 52.0%

Maria Aluchna, Strategic management


The impact of unionization on profitability
Variable None ROI (%) ROS (%) 25 10.8 Percentage of employees unionized 1 to 35% 24 9.0 35 to 60% 23 9.0 60 to 75% Over 75% 18 7.9 19 7.9

Maria Aluchna, Strategic management

Challenges for sector analysis
• Turbulent environment
– Severe fluctuations in sales, revenues, profit, investment – Market consolidation, dropping margins, hipercompetition, global pressure – Significant changes in customer expectations, consumption patterns

• Changes in industry structures
– Sectors evolve – e.g. telecommunication and TPSA: fixed lines, mobile, internet provider, television, data transfer and many more – Changes in competitors strategies – sector withdrawal/ entry, marker withdrawal/ entry, targeting different segments, organizational changes, cooperation patterns

Maria Aluchna, Strategic management


Five forces analysis
• • Framework It must be used at the SBU level Understanding the connections between competitive forces and the key drivers in the macro environment is essential Five forces are not independent from each other – pressures from one direction can trigger off changes in another in dynamic process of shifting sources of competition Competitive behavior may be concerned with disrupting these forces and not simply accommodating them • • Key questions Are some industries more attractive than others? What are the underlying forces in the macro environment that are driving the competitive forces? Is it likely that these forces will change? How do particular competitors stand in relation to these competitive forces What can managers do...
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