Wednesday, November 30, 2011

Industry And Competition Analysis (A.K.A It's A Cut-Throat World)

Introduction
Managers in a firm have always known that they operate in a world that is ever-changing. There are factors that influence the opportunities, threats, revenues, profits, losses, advantages, and handicaps on a daily basis. In this world, only the firms that analyze their markets in depth and recognize the importance of competition and the lack thereof can succeed beyond expectations. In this blog post, I intend to briefly describe Michael Porter’s five forces, and the new model proposed by Slater and Olson. Further, we will look at competition from a new angle.


Industry and Market

Today, the ideal unit of analysis is the industry that the firm operates in. However, this is not an easily defined term. When we try to determine the industry, we need to look at the direct customers that the firm caters to, the competition that directly affects the profits and losses, the competition that indirectly results in gain or loss of market share, and the products that are complements, substitutes and influential. For eg: even for a non-profit organization such as Teach For America, the industry would include not only the other non-profit organizations that work in the same space, but also the for-profit organizations as well as part of their in-house non-profit drives.


Michael Porter And His Famous Five Forces

Michael Porter devised a new framework for business strategy analysis to explain how industry forces play a crucial role in how a firm performs its operations, its return on capital and its competitive strategy. As per his proposed framework, every firm is constantly under the influence of suppliers, customers, new entrants, substitute products and competition.

Even though there are many other models such as Delta Model, Six Forces Model, and Value Chain Model, Porter’s five forces system is used extensively, and I am a personal fan of this because it is simple enough for any manager to utilize and complex enough to be a good representation of the scenario. It provides an opportunity to analyze each of the five important forces that affect the firm independently as well as in tandem. In my opinion, it is not always pertinent to assume that some of the forces work together like suppliers and customers. Moreover, there is no real mention of some external factors such as government, nature, etc. However, Porter does refer to these as forces that affect the already stated forces, and hence, the system is relatively acceptable.
(Image Source : Wikipedia)


Proposed System

The new system proposed by Slater and Olson for market analysis considers both incumbent competitors and new entrants as one entity called rivals. Further, it utilizes the new concept of complementors which take network effects into consideration in the new age. In some cases, this can cause positive impacts while in others, there will be negative effects. The new system focuses extensively on double barriers caused due to imitation. In my opinion, the new entrants and new technologies that can completely alter your business can be negotiated by fully utilizing the potential of intellectual property rights. For eg. Google recently bought Motorola’s cellular phone development division. While this might look financial to most people, I agree with the opinion that this is solely for patent purposes since Google was getting sued for patent infringements in their Android platform.

The new system focuses on strategic positioning by creating more market-focuses organizations that establish creative relationships with customers and suppliers while searching and creating new market space.

Competition Analysis

Analysis of competition is essential for new companies as well as incumbents. A periodic search for firms that operate in your territory as well as adjacent territories is of significance not only for acquisitions and mergers, but also for alliances. Every firm should perform a SWOT analysis of their firm as well as competitive organizations to have a clearer idea of the industry and future.

Citations

1. Porter’s Five Forces – Wikipedia - http://en.wikipedia.org/wiki/Porter_five_forces_analysis

2. “A Fresh Look At Industry And Market Analysis” – Stanley F. Slater, Eric M. Olson

3. “Competitor Analysis : Understand Your Opponents” – Harvard Business School Press

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