Streamline Training & Documentation: Industry Analysis as a Basis for Strategic Planning

Saturday, January 12, 2008

Industry Analysis as a Basis for Strategic Planning

As an update to work on strategy first presented in 1979, Michael Porter has published "The Five Competitive Forces that Shape Strategy" in the January 2008 issue of the Harvard Business Review.

The five forces determine the profit structure of an industry because they determine how the economic value the industry creates is apportioned among the groups with a stake in the industry, namely, existing and potential competitors, producers of substitute products and services, customers, and suppliers. The forces in question are:

Rivalry among existing competitors

Threat of new entrants

Threat of substitute products or services

Bargaining power of customers

Bargaining power of suppliers

In order to understand how these five forces are currently and prospectively affecting your industry, you need to undertake an industry analysis, for which Porter lays out these six typical steps:

Define the relevant industry.

Identify the participants and, if appropriate, segment them into groups.

Assess the underlying drivers of each competitive force to determine which forces are strong and which are weak, and why.

Determine overall industry structure, and test the analysis for consistency.

Analyze recent and likely future changes in each force, both positive and negative.

Identify aspects of industry structure that might be influenced by competitors, by new entrants, or by your company.

All of the Porter article is well worth reading. I'd call particular attention to his warning of common mistakes people make in carrying out an industry analysis:

Defining the industry too broadly or too narrowly.

Making lists instead of doing real analysis.

Paying equal attention to all five of the forces, rather than looking in particular depth at the most important ones.

Confusing effect (price sensitivity) with cause (buyer economics).

Using static analysis rather than taking industry trends explicitly into account.

Confusing cyclical or transient changes with true structural changes.

Using the industry analysis framework to declare an industry attractive or unattractive rather than using it to understand the underpinnings of competition and the root causes of profitability. The latter two items are what you need to guide your strategic choices.

Ideally, the outcome of a well-crafted industry analysis is a decision on how to defend against competitive forces, or to find a position in the industry where the competitive forces are relatively weak. There is also generally scope for influencing the key forces in your industry in order to create a more favorable structure for your company, or to increase the overall level of value created in the industry.

When the strengths of the five forces change significantly, you must do a fresh analysis and adjust your strategy in light of what you learn from the analysis.

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Labels: Business acumen, Strategy

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