MODULE 1 INTRODUCTION TO INDUSTRY 3

Lectures
TOPICS
1 What is an Industry?
Primary, Secondary & Tertiary Industries 1
2 Current scenario of Major Industries - Growth & Scope.
Competition Analysis: Porter’s Five Forces. 2
Basic Competitive Strategies-
 Overall Cost Leadership
 Differentiation
 Focus

Industry refers to the production of goods and services by converting the inputs into
outputs and or creation of utilities to customers. Goods produced by an industry are used
either by consumers to satisfy their wants and needs or by other industries for further production.
An industry may refer to an extraction, generation, conversion or production of goods and
services or construction of building products for a certain price. According to the process of
production and the nature of the products, an industry can be divided into the following
categories.

1. Primary Industry

Primary industries refers to the creation of utilities by extracting materials form natural resources
or the growth and development of vegetation and animals by means of reproduction process,
Primary industries are further classified as extractive and genetic industries.

Extractive industry
It refers to the extraction or drawing out goods from the natural resources like land, water, air
etc. and creation of utilities in them. It supplies raw materials to other types of industries.
Mining, lumbering, hunting, fishing etc. are the examples of this sort of industry.

Genetic industry
It is related to the growth and development of flora and fauna by multiplying a certain species of
plants and breeding of animals. Plant nurseries, forestry, farming, animal husbandry, poultry etc.
are the examples of genetic industry.

2. Secondary Industry/ Manufacturing

The industries, which produce finished goods by the use of materials and supplies taken from the
primary industries are known as secondary industries. Such industries convert raw materials and
semi raw materials into finished products by way of processing the materials, assembling
components, constructing building products etc. It is concerned to the production of goods by
using raw materials or semi raw materials an input and also creates from utility in them.
Production of sugar from sugarcane, petroleum products from the crude oil manufacturing
vehicles by assembling various components etc. are some of the examples of this sort of
industry.

3. Tertiary industry/ service

The tertiary sector of the economy is a collection of industries that produce mostly intangible
value, meaning value that has no physical form. An industry which does not produce raw
materials or manufacture products but offers service. Developed countries usually have large
proportion of this sector hence high percentage of GDP and employment. Examples include
doctors, teachers, lawyers, estate agents, travel agents, accountants and policemen.

The boosting economic growth of the country is projecting India to be the world’s
fastest growing economy for the rest of the decade. The combined growth in the
population and the economy will soon make India the fifth largest economy in the
world, overall. Various sector and industries have put in their contribution
to drop India at a position where international market entry is considered
feasible for the industrial giants. The Indian economy is boomed by the long -
awaited recovery in consumption that has helped cut down slack in the economy
and underpinned sales in all the sectors.

 The Automobile sector- The Indian Automobile industry became the 4th largest
in the world with its sales increasing 9.5 percent year -on-year to 4.02 million
units in the year 2017. In the year 2017, India became the 7th largest
manufacturer of commercial vehicles. The country is known to have emerged as
an auto export hub for both small and heavy vehicles, along with establishing
itself as a prime destination for automotive manufacture. While the demand for
automobiles is broadly based across various market s, the major concentration of
the demand is from the rural part of the country. Indian rural areas deliver a
high demand for two-wheelers and tractors, which is strongly affecting the sales
of companies like Maruti Suzuki and Ashok Leyland in a positive
direction. Between FY13-18, the domestic automobile production in India
increased at 7.08 per cent CAGR. The domestic automobile sales increased at
7.01 per cent between FY13-18 with 24.97 million vehicles getting sold in
FY18. The Indian Automobile industry has attracted Foreign Direct Investment
worth US$19.29 Billion during April 2000 to June 2018.

 The Oil and Gas sector- India is experiencing a ferocious demand to power the
growing fleet of trucks, cars, and motorbikes. With the expanding middle -class
needs, the country’s appetite for energy is surging. The government is
continuously encouraging the use of cooking gas for cleaner air. This, as a
result, is driving refiners and attracting global major to enter the Indian market,
setting up their business in India. The Indian energy demand is known to be
growing at the fastest rate among all the major economies, making it the third
largest consumer of oil in the world in 2017, with consumption of 4.69 mbpd of
oil in 2017 as compared to 4.56 mbpd in 2016. India’s energy demand as a
percentage of global energy demand is expected to rise to 11 per cent in 2040
from 5.8 per cent in 2017. According to Department of Industrial Policy and
Promotion, the Indian petroleum and natural gas sector attracted FDI worth U S$
7 Billion between April 2000 and June 2018.

 The FMCG sector- Think-tank India Brand Equity Foundation has ranked India
as the fourth- largest in the economy for its rapid growth in the fast
moving consumer goods sector, with Household and Personal Care accounting
for 50 per cent of FMCG sales in the country. India is known as the world’s
largest producer of generic medicines accounting for 20% of the global volume.
The widespread availability of raw materials and the presence of highly skilled
workforce have both catapulted India to the top, establishing it as the research
and manufacturing hub for pharmaceuticals. The Indian Food Processing,
bringing together the country’s agriculture and industry is vital to the country’s
development. The Revenue of the FMCG sector reached 3.4 lakh crore (US$
52.75 Billion) in FY18 and is estimated to reach US$103.7 Billion in the year
 2020. The Indian FMCG sector witnessed FDI inflows of US$ 13.63 Billion
during April 2000 to June 2018.

 The Steel and Cement Sector - The Steel industry contributes to almost 2% of
the GDP is witnessing increasing local demand and higher prices. According to
the data from the Steel Ministry, Tata Steel Ltd.’s sales climbed
8 percent during April through June 2018, driven by automotive and special
products’ demand. On the parallel, JSW Steel Ltd. recorded a growth of
11 percent in the group sales. These figures were considered the highest in five
years in the year ended March, as per the data from the Steel Ministry. India’s
finished steel consumption grew at a CAGR of 5.69 per cent during FY08 -FY18
to reach 90.68 MT. According to DIPP, the Indian metallurgical industries
attracted Foreign Direct Investments (FDI) of US$ 10.84 Billion during April
2000 to June 2018.

 The Aviation sector- The Indian Aviation sector has continuously observed
double-digit traffic and capacity growth, as more people take to flying. The
country’s RPK (Revenue Pass enger Kilometre) rose to 16.6% in the month of
May 2018. The passenger demand has continued to gro w at a remarkable rate
over the years, further resulting in an increased number of airport
connections. The country’s Aviation sector is estimated to witness investments
of around $15 Billion in between the financial years of 2016 -17 to 2019-20. Out
of this figure, $10 Billion is expected to come only from the private sector.

The overall growth in the country’s economy enables global giants to look up
for mergers and acquisition firms in India and reap the benefits of the rapidly
growing Indian market.

Porter’s five forces model

It is an analysis tool that uses five industry forces to determine the intensity of competition in an
industry and its profitability level. It is created by M. Porter in 1979 to understand how five key
competitive forces are affecting an industry. The five forces identified are:
These forces determine an industry structure and the level of competition in that industry. The
stronger competitive forces in the industry are the less profitable it is. An industry with low
barriers to enter, having few buyers and suppliers but many substitute products and competitors
will be seen as very competitive and thus, not so attractive due to its low profitability.

Threat of new entrants. This force determines how easy (or not) it is to enter a particular
industry. If an industry is profitable and there are few barriers to enter, rivalry soon intensifies.
When more organizations compete for the same market share, profits start to fall. It is essential
for existing organizations to create high barriers to enter to deter new entrants. Threat of new
entrants is high when:

 Low amount of capital is required to enter a market;

 Existing companies can do little to retaliate;
 Existing firms do not possess patents, trademarks or do not have established brand
reputation;
 There is no government regulation;
 Customer switching costs are low (it doesn’t cost a lot of money for a firm to switch to
other industries);
 There is low customer loyalty;
 Products are nearly identical;
 Economies of scale can be easily achieved.

Bargaining power of suppliers. Strong bargaining power allows suppliers to sell higher priced
or low quality raw materials to their buyers. This directly affects the buying firms’ profits
because it has to pay more for materials. Suppliers have strong bargaining power when:
  There are few suppliers but many buyers;
 Suppliers are large and threaten to forward integrate;
 Few substitute raw materials exist;
 Suppliers hold scarce resources;
 Cost of switching raw materials is especially high.

Bargaining power of buyers. Buyers have the power to demand lower price or higher product
quality from industry producers when their bargaining power is strong. Lower price means lower
revenues for the producer, while higher quality products usually raise production costs. Both
scenarios result in lower profits for producers. Buyers exert strong bargaining power when:

 Buying in large quantities or control many access points to the final customer;
 Only few buyers exist;
 Switching costs to other supplier are low;
 They threaten to backward integrate;
 There are many substitutes;
 Buyers are price sensitive.

Threat of substitutes. This force is especially threatening when buyers can easily find substitute
products with attractive prices or better quality and when buyers can switch from one product or
service to another with little cost. For example, to switch from coffee to tea doesn’t cost
anything, unlike switching from car to bicycle.

Rivalry among existing competitors. This force is the major determinant on how competitive
and profitable an industry is. In competitive industry, firms have to compete aggressively for a
market share, which results in low profits. Rivalry among competitors is intense when:

 There are many competitors;

 Exit barriers are high;
 Industry of growth is slow or negative;
 Products are not differentiated and can be easily substituted;
 Competitors are of equal size;
 Low customer loyalty.

The following is a Five Forces analysis of The Coca-Cola Company in relationship to its Coca-
Cola brand.

Threat of New Entrants/Potential Competitors: Medium Pressure

 Entry barriers are relatively low for the beverage industry: there is no consumer switching
cost and zero capital requirement. There is an increasing amount of new brands appearing in
the market with similar prices than Coke products
 Coca-Cola is seen not only as a beverage but also as a brand. It has held a very significant
market share for a long time and loyal customers are not very likely to try a new brand.
Threat of Substitute Products: Medium to High pressure
 There are many kinds of energy drink s/soda/juice products in the market. Coca-
cola doesn’t really have an entirely unique flavor. In a blind taste test, people can’t tell the
difference between Coca-Cola and Pepsi.
The Bargaining Power of Buyers: Low pressure
 The individual buyer no pressure on Coca-Cola
 Large retailers, like Wal-Mart, have bargaining power because of the large order quantity,
but the bargaining power is lessened because of the end consumer brand loyalty.
The Bargaining Power of Suppliers: Low pressure
 The main ingredients for soft drink include carbonated water, phosphoric acid, sweetener,
and caffeine. The suppliers are not concentrated or differentiated.
  Coca-Cola is likely a large, or the largest customer of any of these suppliers.
Rivalry Among Existing Firms: High Pressure
 Currently, the main competitor is Pepsi which also has a wide range of beverage products
under its brand. Both Coca-Cola and Pepsi are the predominant carbonated beverages
and committed heavily to sponsoring outdoor events and activities.
 There are other soda brands in the market that become popular, like Dr. Pepper, because of
their unique flavors. These other brands have failed to reach the success that Pepsi or Coke
have enjoyed.

Competitive Strategy

Competitive Strategy is defined as the long term plan of a particular company in order to
gain competitive advantage over its competitors in the industry. It is aimed at creating
defensive position in an industry and generating a superior ROI (Return on Investment).

1. Competitive Landscape: It tends to identify and understand the competition deeply while
cognizing the vision, mission, objectives, strengths, weakness, opportunities and threats of the
enterprise. While analysing the competition, the firm also keeps an eye on the competitor’s
overall position in the market, to choose the right strategy for the enterprise.

2. Strategic Analysis: It implies the detailed examination of various components of the firm’s
business environment. It is important for strategy formulation, strategy implementation and
strategic decision making.
3. Industry and Competitive Analysis: The analysis in which a number of methods are used to
have a clear view of the basic industry practices, the intensity of competition, strategies of
competitors and their share in the market, change drivers, profit prospects and so forth, is called
as Industry and Competitive Analysis. It assists the company in strategically observing the
condition of the industry.
4. Core Competence: Core competencies of the company are those capabilities which help the
company in defeating its competitors by gaining a competitive advantage. It is a blend of
company’s technical and managerial know-how, skills, knowledge, experience, strategy,
resources, manpower, etc.
5. Competitive Advantage: Competitive Advantage assist the firm in defeating its rival
organization, through its core competencies which include a combination of distinguishing
characteristics of the firm and the product offered by it, which is considered as outstanding, that
has the edge over its competitors.Simply put, competitive advantage is when the profitability of
an organization is comparatively higher than the average profitability of the other companies
operating in the same industry.
6. Portfolio Analysis: It is a management tool which helps the company to analyze its product lines
and business units, from which good returns are expected. In other words, it identifies and
evaluates those products and strategic business units which help the company to survive and
grow in the market.
7. SWOT Analysis: SWOT Analysis is the analysis of the firm’s strengths, weakness,
opportunities and threats, to generate strategic alternatives. It aims at facilitating the management
in developing a business model, which accurately aligns the firm’s resources and capabilities,
according to the business environment.
8. Globalization: In basic terms, globalization refers to the process through which a business or
any other organization creates its presence across the world and begins its operations on an
international scale.

Michael Porter is considered a top authority on competitive strategy and the economic
development and competitiveness of regions, states, and nations. Porter’s classification
of generic competitive strategies includes differentiation, cost leadership, differentiation focus,
and cost focus

Cost Leadership Strategy

The intention behind a cost leadership strategy is to be a lower cost producer in comparison to
your competitors. There are two traditional options for businesses to increase profits – decreasing
costs or increasing sales. In a cost leadership strategy, the concentration is on acquiring quality
raw materials at the lowest price. Business owners additionally need to use the best labor to
convert these raw materials into valuable goods for the consumer. Thus, this strategy is
especially beneficial if the market is one where price is an important factor. Cost leadership is a
tough strategy for small businesses to implement, because it requires a long-term commitment to
selling your products and services at a cheap price. The challenge, however, is that you also have
to produce these products and services at a low cost, otherwise, you lose your profit margin.
Large businesses that can make their products cheaply and sell them at a discount while still
generating a profit, can drive competitors out of the market by consistently offering the lowest
prices.
Differentiation Strategy
This strategy aims at developing a competitive advantage by way of making available and
marketing a unique product or service – a product or service that is different in some way to what
a rival or competitor is offering. For this, you may have to spend a lot for research and
development, which you may not be able to afford if yours is a small business. A successful
differentiation strategy has the potential to lower price sensitivity and better brand loyalty from
customers.
Athletic gear provider Nike is considered the premier athlete supplier for serious athletes. Their
products include athletic footwear, workout and performance clothes as well as athletic
accessories such as gym bags, headbands, balls and more. Their business model is simple: offer
high quality sports materials and customers will be willing to pay higher prices.

Strategy used

Nike’s differentiation strategy is to establish the company as the standard in athletic wear. By
focusing on their product line, they are able to produce high quality products that meet customer
expectations. Nike’s product line is not wide: they offer athletic shoes, workout clothes and a
very limited number of additional products. Their focus is clear: give the athlete the equipment
they need to succeed. This single-minded focus has allowed them to develop efficient networks
of suppliers and manufacturers who can provide high quality materials.

Cost leadership Strategy

Cost leadership is a strategy that companies use to achieve competitive advantage by creating a
low-cost-position among its competitors. In other words, it’s a company’s ability to maintain
lower prices than its competitors by increasing productivity and efficiency, eliminating waste, or
controlling costs.
McDonald’s
This fast food chain has proven to be very successful using this strategy. They keep costs low by
maintaining a division of labor that allows them to employ and train inexperienced staff instead
of skilled cooks. This method allows them to hire a few managers who usually receive higher
wages.

Focus – Differentiation Focus and Cost Focus

Focus is essentially a strategy of segmenting markets. The segment may be dined by a particular
buyer group, geog. Market segment. The motive of this strategy is that a firm will limit its
attention to one or a few market segments and can serve those segments better to influence the
entire market.

If the business realizes that marketing to a homogenous customer niche would not be an effective
line of action for a particular product the business is selling, it can adopt the focus strategy. This
strategy involves the business tailoring its marketing endeavors and service to one or more select
customer segments and excluding the other segments.

There are two variants of the focus strategy. In cost focus, the aim of the business would be to
have an advantage over its competitors with respect to cost in its target segment. Thus, an
electronics store may have the aim of being the cheapest electronic store in a particular town but
not essentially the cheapest overall. A differentiation focus strategy takes advantage of the
special needs of consumers in specific segments and seeks differentiation by way of marketing
its product as unique in certain respects. For example, a company may bring out a product
specifically designed for left-handers.