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1. MSCI-6103 – Strategic Finance
Topic 2: Strategic Analysis
Dr. Khalil Wahla
(khalil.rehman@kfueit.edu.pk)
Khwaja Fareed University of
Engineering and Information Technology
Department of Management Sciences
Dr. Khalil Wahla Strategic Finance

2. Learning
Outcome
• Apply industry analysis to explain current profitability
and predict future profitability
• Develop strategies to position an enterprise favourably
and influence industry structure
• Identify opportunities for competitive advantage within
an industry
• Recognise the limits of the Porter Five Forces
Framework
• Segment an industry into its constituent markets and
apply strategic group analysis

3. What makes a successful strategy?

4. From Environmental Analysis to Industry
Analysis

5. From Environmental Analysis to Industry
Analysis
• It consists of broad environmental factors that impact to a greater or
lesser extent many organisations, industries and sectors (the internet,
economic growth rates, climate change and aging populations).
The macro-environment Layer
• it consists of organisations producing the same sorts of products or
services, (the automobile industry or the healthcare sector).
The industry, or sector, layer
• specific competitors and markets immediately surrounding
organisations (Nissan, Ford, and Volkswagen).
competitors and markets layer

6. Analysing the macro-environment
PESTEL
Analysis
Political
Economic
Social
Technological
Ecological
Legal.

8. Example

9. Industry analysis

10. Risk of Entry by Potential Competitors
• Companies that are currently not competing in the
industry but have the potential to do so.
Potential competitors
• Reductions in unit costs attributed to a larger output.
Economies of scale
• Preference of consumers for the products of established
companies.
Brand loyalty

11. Risk of Entry by Potential Competitors
• Companies that are currently not competing in the industry but have
the potential to do so.
Absolute cost advantage
• Costs that consumers must bear to switch from the products offered by
one established company to the products offered by a new entrant.
Switching costs
• Falling entry barriers due to government regulation results in
significant new entry, increase in the intensity of industry competition,
and lower industry profit rates.
Government regulations

12. Risk of Entry by Potential Competitors
• Retaliation of an existing companies to prevent entry (Price
war)
Expected retaliation
• Current companies have had control over supply and/or
distribution channels (Vertical integration/ Loyalty)
Access to supply or distribution channels
• Current companies may have advantages not available to the
new entrant including access to technology, raw materials and
geographical locations.
Incumbency advantages

13. Rivalry Among Established Companies
• number and size distribution of companies in it.
• Intense rivalry among established companies constitutes a
strong threat to profitability.
Industry competitive structure
• Increasing demand moderates competition by providing
greater scope for companies to compete for customers.
Demand conditions
There are several factors that impact the intensity of rivalry among
established companies within an industry.

14. Rivalry Among Established Companies
• When fixed costs are high, profitability is highly leveraged to sales
volume.
Cost conditions
• Economic, strategic, and emotional factors that prevent companies
from leaving an industry.
Exit barriers
• Where product are poorly differentiated, Customers can easily switch
between competitors
Product differentiation
There are several factors that impact the intensity of rivalry among
established companies within an industry.

15. The Power of Buyers
• Where few large customers account for the majority of sales,
the buyer power is increased (many milk producers vs few
retailers).
Concentrated buyers
• Buyers who can easily switch among different suppliers, They
have a strong negotiation position (Standard and
undifferentiated products).
Low switching costs
• Threat of entering the industry and producing the product
(backward vertical integration).
Buyers competition threats

16. The Power of Suppliers
• Where just a few producers dominate supply, suppliers have
more power over buyers.
• The iron ore industry is now concentrated in the hands of three
main producers, leaving the fragmented steel companies, still
relatively fragmented, in a weak negotiating position for this
essential raw material.
Concentrated Suppliers
• If it is expensive or disruptive to move from one supplier to
another, then the buyer becomes relatively dependent and
correspondingly weak.
• Microsoft is a pow- erful supplier because of the high switching
costs of moving from one operating system to another.
high switching costs

17. The Power of Suppliers
• Suppliers have increased power where they are able to enter
the industry themselves or cut out intermediaries.
• Thus airlines have been able to negotiate tough contracts with
travel agencies (Forward vertical integration)
Buyers competition threats
• When the products or services are highly differentiated,
suppliers will be more powerful.
• Although Walmart are extremely powerful, suppliers with strong
brands, like P&G with Gilette, still have high negotiating power.
Differentiated products.

18. The threat of substitutes
• The price that customers are willing to pay for a product depends, in
part, on the availability of substitute products.
• Travel agencies, newspapers, and telecommunication providers have
all suffered severe competition from internet‐based substitutes.
Relative prices and performance of substitutes
• The more complex a product and the more differentiated are buyers'
preferences, the lower the extent of substitution by customers on
the basis of price differences.
The propensity of buyers to substitute

19. Applying industry analysis to forecast industry profitability
Identifying industry structure
• identifying who are the main players—the producers, the customers, the input
suppliers, and the producers of substitute goods
• examining some of the key structural characteristics of each of these groups
that will determine competition and bargaining power.
• the television industry: Production companies; Network broadcasters and cable;
Distributors (Local TV stations, Cable providers, Satellite TV providers, and
online video streaming companies); and customers (viewers and advertisers).

20. Applying industry analysis to forecast industry profitability
Definig Industry boundries
• An industry is a group of firms that supplies a market
• To define a market we need to look at the idea of substitutability
• Demand substitutability
• To what extent are customers willing to substitute
• Supply substitutability
• To what extent are producers able to switch production

21. Applying industry analysis to forecast industry profitability
Industry Structure

22. Applying industry analysis to forecast industry profitability
Forecasting Industry Profitability
• Examine how the industry’s current and recent levels of
competition and profitability are a consequence of its present
structure
• Identify the trends that are changing the industry’s structure
• Identify how these structural changes will affect the 5 forces
of competition and resulting profitability of the industry

23. Using Industry Analysis to Develop Strategy
Firm can reshape their industries to their own advantages. This
can happen through identifying “bottlenecks”: activities where
scarcity and the potential for control offer opportunities for
superior profit
• Create own bottleneck (e.g. Apple and Itunes)
• Relieve bottlenecks in other parts of the value chain (e.g.
Google and Android)
• Redefining roles and responsibilities (e.g. IKEA transferring
furniture assembly to the customer)

24. Identifying Critical Success Factors
What do our customers
want?
• Who are our customers?
• What do they want?
What does our firm need to do to
survive competition?
• What drives competition?
• What are the main dimensions of
competition?
• How intense is competition?
• How can we obtain a superior competitive
position?
From Industry attractiveness to competitive
advantages

25. Identifying Critical Success Factors
From Industry attractiveness to competitive advantages

26. Extending the Five Forces Framework
• The 5 forces model accounts for the presence of substitutes
which reduce the value of a product, It fails to account for
the presence of complements which increase the value of a
product
– Printers and ink cartridges
– Intel and Microsoft
• Profit will accrue to the supplier who builds the stronger
market position and reduces the value contributed by the
other

27. Five forces, or six?

28. Competitor Analysis
Predicting competitor behaviour is key to
competitor analysis. Porter proposes a 4 part
framework examining the:
•Competitor’s current strategy
•Competitor’s motivation & objectives
•Competitor’s assumptions about the
industry
•Competitor’s resources and capabilities

29. Porter’s 4 corner analysis

30. Segmentation and Strategic Groups
Segmentation into strategic groups can be
achieved by:
• Identifying key segmentation variables
• Constructing a segmentation matrix
• Analysing segment attractiveness
• Identifying the segment’s key success factors
• Selecting the segment scope

31. Strategic groups within the world petroleum industry

32. Summary
In this section we have :
• Examined the main structural features of an industry and its impact
on the level of competition and profitability within that industry
• Applied industry analysis to explain current profitability and predict
future profitability
• Developed strategies to position an enterprise favourably to influence
industry structure
• Identified opportunities for competitive advantage within an industry
• Recognised the limits of the Porter Five Forces Framework by
including compliments as well as substitutes
• Segmented an industry into its constituent markets and applied
strategic group analysis