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Industry attractiveness

Industry means any systematic activity carried on by co-operation between an employer and his workmen for the production, supply or distribution of goods or services with a view to satisfy human wants or wishes. Industry structure The term industry structure refers to the number and size distribution of firms in an industry. The level of competition in an industry rises with the number of firms in the industry. The structure of an industry affects the conduct of industry members (sellers and buyers) which, in turn, affects industry performance (profitability). This is the STRUCTURE-CONDUCT-PERFORMANCE (S-C-P) Model from industrial organization economics. Industry/ Strategic analysisAs mentioned above industry structure determines the competitiveness that prevails in the industry and thus it makes it important for an organisation to critically analyse the strategic or competitive environment to judge the attractiveness of the industry as a whole. The environment basically refers to everything and everyone outside the organisation such as competitors, customers, suppliers and also local and national government. It is important to study the environment because of three main reasons: 1. To develop sustainable competitive advantage. 2. To explore opportunities and threats and 3. To create sustainable co-operations and networks. However, there are three difficulties in determining the connection between the organisation and its environment: 1. The prescriptive versus emergent debate. 2. Uncertainty of the environment. 3. Varied influences of a number of factors. Key success factors- key factors for success in an industry are those resources, skills and attributes of the organisations in an industry that are essential to deliver success. KSF are common to all major organisations in an industry and do not differentiate one company from another. Ohmaes gave three principal areas that need to be analysed in an industry. 1. Customers- what do customers really want, what are the segments in the market place

2. Competition- how can the organisation beat or at least survive against competition. What is the competitive advantage? 3. Corporation- what are the key resources of the organisation and those of the competitors. What do the competitors deliver to the customers? There are mainly nine stages to analyse the attractiveness of an industry but studied approaches are: 1. Industry life cycle deals with the analysis of stages of market growth. It helps in identifying growth stage, maturity over production and cyclic issues. It also considers implications for strategy. 2. Five force analysis highlight factors specific to the competitive balance of power in the industry with the help of static and descriptive analysis of competitive force. 3. Four links analysis which provides factors specific to co-operation in the industry by analysing current and future organisations with which cooperation is possible and analysing networks. Industry life cycle

Industry life cycle is a concept relating to the different stages an industry will go through, from the first product entry to its eventual decline. The nature of strategic management changes as industry moves along the life cycle. The basic hypothesis is that an industry- or a market segment within an industry- goes through 4 basic phases of development, each of which has implications for strategy. 1. In the introductory phase organisations attempt to develop interest in the product. 2. As the industry moves towards growth, competitors are attracted by its potential and enter the market: from a strategic perspective, competition increases. 3. As all the available customers are satisfied by the product, growth slows down and market becomes mature. Although the growth has slowed new

competitors may still be attracted into the market: each company then has to compete harder for its market share. 4. Market share becomes more fragmented and is broken down into smaller parts. Sales enter a period of decline.

Industry life cycle and its strategic implications1. Introductory stage Customer strategy- early customers experiment with product and try to understand the nature of innovation. Company strategy- They seek to dominate the market and importance is given to R&D and production to ensure product quality. Competitor strategy- Interest in new category and attempts to replicate new product. 2. Growth stage Customer strategy- growing group of customers and quality and reliability important for growth. Company strategy- reacts to competition with marketing expenditure and initiatives. Competitor strategy- market entry (if not before) and attempts to innovate and invest in category. 3. Maturity phase Customer strategy- mass market, little trial of product or service and brand switching. Company strategy- expensive and difficult to increase market share if not already market leader and seek cost reduction. Competitor strategy- competition largely on advertising and quality, low product differentiation and low product change. 4. Decline phase Customer strategy- knows the product well and thus selection on the basis of price rather than innovation. Company strategy- emphasis on cost control. Competitor strategy- Competition based on price. Some companies seek to exit the industry. For strategic purposes, it is better to examine different segments of an industry rather than market as a whole, as different segment may be at different stages of the industry life cycle and may require different strategies. For example in the global travel industry, in recent years some special interest holidays like wildlife and photography were still growing strongly whereas standard beaches and sun holidays were in the mature stage of the industry life cycle.

Criticism of the ILC 1. It is difficult to determine the duration of some lifecycles and to identify the precise stage an industry has reached 2. Some industries miss stages or cannot be clearly identified in their stages. 3. Companies themselves instigate change in their product which alters the shape of the curve. 4. At each stage of evolution the nature of competition may be different. This determines the strategy to be pursued. Porters five force analysisPorter's Five Forces is a framework for industry analysis and business strategy development formed by Michael E. Porter to derive five forces that determine the competitive intensity and therefore attractiveness of a market. The objective of such a study is to develop the competitive advantage of the organisation to enable it to defeat its rival companies and also to form its strategies in order to create opportunities in its environment and protect itself against threats thus making it an attractive industry.

1. The bargaining power of suppliers- virtually every organisation has suppliers of raw materials or services which are used to produce the final goods. Porter suggested suppliers are more powerful under the following conditions If there are only a few suppliers the supplier start to exert its power because it is difficult to switch from one to another supplier. If there are no substitutes for the supplies they offer. If suppliers prices form a large part of the total cost of the organisation. Any increase in price would hit value added unless the organisation is able to raise its own prices in compensation. If a supplier can potentially undertake the value added process of an organisation.

To make an industry attractive there should be many number of suppliers, substitutes for the supplies and high margins for compensation in terms of price. 2. Bargaining power of buyers- In this model, porter uses the term buyer to describe what might also be called the customers of the organisation. Buyers have more bargaining power under the following conditions: If buyers are concentrated and there are a few of them. If the product from the organisation is undifferentiated. If the selling price from the organisation is unimportant to the total cost of the buyer. If there is large number of buyers and the product offered by the organisation is differentiated or unique and the selling price from the organisation holds importance to the total cost of the buyer, then the organisation holds more power and thus becomes attractive. 3. The threat of potential new entrants- new entrants come into a market place when the profit margins are attractive and the barriers to entry are low. There are major 7 sources of barriers to entry: Economies of scale- unit cost of production may be reduced as the absolute volume per period is increased. This presents barrier because any new entrant can enter on a large scale and achieve low cost. Product differentiation- branding customer knowledge and special level of service create barriers by forcing new entrants to spend extra funds or simply take longer to become established. Capital requirements- large investments and risks associated with such investments stop some company to enter the market. Switching costs- when a buyer is satisfied with the existing product or service, it is naturally difficult to switch that buyer to a new entrant. This will represent a barrier to entry. Access to distribution channels- distribution channels are already control by existing companies, thus acting as a barrier to entry. Cost of gaining existing market share- new entrants face problems in terms of gaining a foothold in the Market as compared to an already established company. Government policy- policies like monopoly restrict entry in defined sectors like telecommunication, health authority, gas and electricity and so on. 4. The threat of substitutes- substitutes not entirely replace existing products but introduce new technology or reduce the costs of producing the same product. Effectively, substitutes may limit the profits in an industry by keeping prices down. From a strategy view point, the key issues to be analysed are:

The possible threat of Obsolescence. The ability of the customer to switch to the substitutes. The costs of providing extra aspect of the service that will prevent switching. The likely reduction in profit margin if prices come down.

5. The extent of competitive rivalry- some markets are more competitive than others. Higher competitive rivalry may occur in the following circumstances: When competitors are roughly of equal size and one competitor decides to gain share over the other If a market is growing slowly and a company wishes to gain dominance, then it takes sales from its competitors. When fixed costs or the costs of storing finished products in an industry are high. If extra production capacity in an industry comes in large increments then, the companies might tempt to fill that capacity by reducing prices temporarily. If it is difficult to differentiate products or services. When it is difficult or expensive to exit from an industry due to legislation on redundancy cost. If the entrants have expressed a determination to achieve a strategic stake in that market. Criticism The analytical framework is essentially static, whereas the competitive environment in practice is constantly changing. It assumes that the organisations own interest comes first which may be incorrect for charitable and government institutions. It assumes that buyers have no greater importance than any other aspect of micro-environment. Porters strategic analysis ignores the human resource aspect of strategy. It considers neither the country cultures, nor the management skills aspects of strategic management. Porters strategic analysis emphasises on prescriptive strategic formulation rather than emergent approach which may prove to be challenging.

EXAMPLE Porters Five Force Analysis of Fashion Industry in Europe Porters five force model has identified five competitive forces that contour every industry and every market. These forces determine the intensity of competition and

hence the profitability and attractiveness of an industry. (Matt, 2009)The five competitive forces are: Threat of New Entrants-Threat of new entrants to Fashion industry is low. It has lesser influence of other new luxury brands entering into the market as it is well known to its customers worldwide. The new entrants will find it difficult to compete with the existing brands like Louis Vuitton. Thus in order to compete with new entrants LV applies effective marketing tool to support its brands. Threat of substitutes-Threat of substitutes to LVMHs Fashion and leather goods is low as there are few substitutes available in the market. As existing brands in the fashion industry offers quality products to its customers and has a strong customer base the customers will continue to purchase the product and will not be affected by the substitutes. Bargaining Power of Buyers-low The buyers of fashion industry will continue to purchase its products without any concern of high price charged as it is a status symbol for the customers. Bargaining power of Suppliers-Bargaining power of suppliers of LVMHs fashion and leather segment is high as the suppliers set all the terms and conditions of the business. Due to this it is more difficult for the firms to make profit as they are bounded by the rules and regulations of the suppliers. Louis Vuittons bargaining power of suppliers is high as they are less numbers of suppliers and it is very difficult and expensive for them to switch to another supplier. (Hitt et al. 2010) Competitive Rivalry-Competitive rivalry of LVMHs fashion & leather sector is high. It faces intense competition from various competitors like Hermes, Richemont, Armani, Gucci, Versace and many more. To outpace the competition it uses differentiation strategy which enhances the brand image of LVMH. The four links modelMost organisations not only compete with rivals but also co-operate with them. For example through informal supply relationships or through formal or legally binding joint ventures. The objective is to establish the strength and nature of the cooperation that exists between the organisation and its environment and is conducted through the four links model.

Co-operation between the organisation and others in its environment is important because: It helps in the achievement of sustainable competitive advantage. It opens up new markets and increased business opportunities. It produces lowers costs. It delivers more sustainable relationships with those outside the organisations.

The basic co-operative linkages1. Informal co-operative links and networks- these are occasions when organisations link together for a mutual or common purpose without the legally binding contractual relationships. By their nature they may occur by accident as well as by design. They include many form of contact ranging from formal industry body such as European confederation of iron and steel industry- to informal contacts that take place when like minded individuals from a variety of industries meet a social function. For example local chamber of commerce meeting. 2. Formal co-operative linkages- these linkages are bound together by some form of legal contract. They have a degree of formality and permanence with the organisation. Examples alliances, joint ventures, joint shareholdings and so on. The strength and weaknesses of such linkages should be measured in terms of depth, longevity and degree of mutual trust. 3. Complementors- they are those companies whose products add more value to the product of the base organisations then they would derive from there own products by themselves. In strategic terms there may be real benefits from developing new complementor opportunities and enhance both parties and contribute further to the links that exist between them. The main interest may come from opportunities offered by complementors; threats may arise from complementor linkages developed by competitors. 4. Government links and networks- they concern the relationships that many organisations have with a countrys parliament, regional assemblies and the associated government administrations. Such contract may be formal through business negotiations on investment, legal issues and tax matters. It may also be informal through representation on government or industry organisations in connection with investment and trade.

Criticism Such a model may not have precision and clarity. Networks come and go, complementors may come to disagree, alliances may fall apart and democratic government fail to be re-elected. All linkage relationships lack the simplicity of the bargaining power and competitive threat analysis.

Linkages may allow an unusual move in strategy development that will deliver sustainable competitive advantage.