The structure of an industry is determined by the key features, upon which the success and failure of the companies engaged in competition, is based. So it is these features or structural aspects that determine the profitability of any firm competing for the market space in a given industry. Knowledge of ones company’s position with respect to other players in the industry comes from a thorough dissection of the key features that define and have the potential to alter the very structure of the industry. The first step in the process of analyzing the industry structure is defining the industry. Unless there is clarity on where the boundaries lie, there cannot be any judgment or assessment on the key competitive forces that are shaping the industry with out any ambiguity.
It is common to find people getting confused between industry definition and business definition. As a general rule the business definition is about creating focus. It is about focusing on the products, customers and markets that the firm competes in. Business definition brings components of present competition to the fore that a firm must unmistakably concentrate on. On the other hand industry definition must go beyond the limits of current competitive pressures. It encapsulates not only the process by which the products are made and delivered but also alternate processes that can be adopted for making similar products so that efficiencies and effectiveness of various processes is always monitored, not only products but also functional aspects of the products that the firm makes so that substitutes and firms producing them are always tracked, not only current players indulging in the competition but also suppliers and buyers, so that relationships and linkages along the value chain are continuously assessed.
Identification of the key characteristic features of the industry
Based on where the industry boundary is drawn, identify the critical factors / key features that determine the profitability of the firms falling with in the boundaries of the industry and find out how the performance / position of the firms with respect to these factors can be measured or assessed.
Taking the hypothetical case of iron ore mining industry of India, broadly the industry can be structured based on the size and purpose of mining of the firms, as shown below:
- Large miners
- Captive miners
- Small and medium miners
Here captive miners are differentiated from other categories as they use iron ore as input for their down stream core business of iron / steel making. And other categories of miners are thriving on the global demand for rich Indian iron ore. What could have been the key factors on the basis of which industry players are categorized as above? Basically to understand the structure at this level, it is important to note that Government exercises fair amount of control on the industry and has every reason to do so – availability of rich iron ore is a natural competitive advantage of the nation. Some of the key factors that are possibly shaping the industry structure could be huge global demand, revenue generation for Government, Operational efficiencies – technological and environmental, long term economical perspective of steel production versus iron ore exports etc. These are the factors on which the future policies of Government may depend. In other words these factors might influence the competitive rules for the players in the industry. So an objective analysis of such factors, enable the players in the industry to position themselves to take the maximum advantage of the opportunity available today and future stand that Government might most likely take.
Quantification – cornerstone of analysis
Objective analysis depends upon the quantification of performance of players in each segment with respect to the key factors identified and evolving relationships on current and future profitability. Quantifying the industry attributes at a macro levels aids in understanding the forces that are active in industry, which may help a firm in charting a direction for the future. The key to enhancing competitiveness in the current time frame can be discovered by evaluating the performance of the firm by carrying the analysis dep into the industry structure.
In-depth industry analysis
It is advisable to define the industry in the broadest sense and then gradually narrow down on to specific groups of firms based on the technological issues, customer segments served, product mix delivered, degree of vertical integration, logistics and so on and so forth. Continuing our example, having analysed the industry at a very macro level, narrowing down the industry definition to small and medium miners, the key structural components can be further classified as quality of ore, lease period, location with respect to the nearest ports etc. Such analysis can help dissecting the competitiveness with respect to similar competitors and draw an action plan for enhancing current competitiveness. As we take the structural analysis to greater depth along the industry structure at each stage, we arrive at a group of players whose basis for competition / strategy deployment is more and more identical in nature and dissection of key features at each stage opens up opportunity for improving competitiveness.
Michael Porters' work on competitive strategy provides a conceptual framework for dissecting the competitive forces in any industry.