Industry Analysis

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Industry Analysis:

The Fundamentals

When a management with a reputation for brilliance

tackles a business with a reputation for poor fundamental

economics, it is the reputation of the business

that remains intact.

—Warren Buffett, Chairman,

Berkshire Hathaway

The reinsurance business has the defect of being too

attractive-looking to new entrants for its own good

and will therefore always tend to be the opposite of,

say, the old business of gathering and rendering

dead horses that always tended to contain few and

prosperous participants.

—Charles T. Munger, Chairman,

Wesco Financial Corp.

OUTLINE

n INTRODUCTION AND OBJECTIVES

n FROM ENVIRONMENTAL ANALYSIS TO INDUSTRY ANALYSIS

n THE DETERMINANTS OF INDUSTRY PROFIT: DEMAND AND

COMPETITION

n ANALYZING INDUSTRY ATTRACTIVENESS

Porter's Five Forces of Competition Framework

Competition from Substitutes

Threat of Entry

Rivalry Between Established Competitors

Bargaining Power of Buyers

Bargaining Power of Suppliers

n APPLYING INDUSTRY ANALYSIS

Describing Industry Structure

Forecasting Industry Profitability

Strategies to Alter Industry Structure

INTRODUCTION AND OBJECTIVES 67

n DEFINING INDUSTRIES: WHERE TO DRAW THE BOUNDARIES

Industries and Markets

Defining Markets: Substitution in Demand and Supply

n FROM INDUSTRY ATTRACTIVENESS TO COMPETITIVE ADVANTAGE:

IDENTIFYING KEY SUCCESS FACTORS

n SUMMARY

n NOTES

INTRODUCTION AND OBJECTIVES

In this chapter and the next we explore the external environment of the firm.

In Chapter 1 we observed that profound understanding of the competitive

environment is a critical ingredient of a successful strategy. We further noted

that business strategy is essentially a quest for profit. The primary task for this

chapter is to identify the sources of profit in the external environment. The

firm's proximate environment is its industry environment; hence the focus of

our environmental analysis will be industry analysis.

Industry analysis is relevant both to corporate-level and business-level strategy.

n Corporate strategy is concerned with deciding which industries the firm

should be engaged in and how it should allocate its resources among

them. Such decisions require assessment of the attractiveness of different

industries in terms of their profit potential. The main objective of

this chapter is to understand how the competitive structure of an industry

determines its profitability.

n Business strategy is concerned with establishing competitive advantage.

By analyzing customer needs and preferences and the ways in which firms

compete to serve customers we identify the general sources of competitive

advantage in an industry – what we call key success factors.

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