Industry Analysis: Evaluating Forces, Attractiveness & Success - Essay Sample

Introduction

An industry analysis report is an essential tool that enables a company to evaluate its position relative to other firms that produce similar commodities. An extensive industry analysis covers three key components that include industry forces at work, the overall attractiveness of the particular industry, and lastly, the key elements that influence an organization's success within the industry. It is important to understand the forces at work in a particular industry to enable effective strategic planning. Exploring the intricate interplay of the forces that shape an industry is key in predicting and anticipating future trends that may impact business development. An industry analysis report helps businesses to develop a competitive advantage by enabling the efficient allocation and utilization of their resources in building unique capabilities and capacities. This paper aims to explore the industry and environment analysis of the fast-food industry to determine the opportunities and threats within the sector.

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Industry Analysis

There exist various models that businesses can use to explore the structure of the industry in which they operate. Michael E. Porter developed the most efficient model that is widely utilized in his work Competitive Strategy: Techniques for Analyzing Industries and Competitors. (Porter, 1980). The book has provided a premier model to aid in analyzing industries in terms of their structure and attractiveness. Porter's model outlines five forces that influence the rivalry among firms operating in a particular industry. These five forces include ease of entry, power of supplies, power of buyers, availability of substitutes, and lastly, nature of competition.

The initial step in analyzing the structure of an industry is to assess the effect of Porter's five forces. According to Porter, the five forces impact on the profit potential within a particular industry. Porter stated that "The collective strength of these forces determines the ultimate profit potential in the industry, where profit potential is measured in terms of long term return on invested capital,"( Porter, 1980). Besides, understanding the forces at work in the fast-food industry is crucial in establishing the strengths and weaknesses that may influence a company's growth and development. Porter believed that the "The goal of competitive strategy for a business unit in an industry is to find a position in the industry where the company can best defend itself against these competitive forces or can influence them in its favor." (Porter, 1980). An industry analysis exercise is crucial as it highlights the areas where strategic changes may have the greatest influence on developing a competitive advantage. Performing industry analysis helps to illuminate key trends within the industry that may turn into threats or opportunities.

Ease of Entry

Ease of entry determines the potential of new firms to begin operating in a particular industry. In essence, this force measures the ease or difficulty of new entrants to set up operations in an industry. The ease of entry into a market is an important consideration because it determines the likelihood that a firm already in operation, will face new competitors. Industries that are perceived as being easy to enter increase the possibility of competition for existing firms. In these industries, sources of competitive advantage tend to decline quickly as new entrants enter the market (Economics Online). In contrast, sectors that are difficult to enter, the likelihood of competition for existing firms is low. In these industries, sources of competitive advantage tend to last longer, and therefore firms are assured of having to compete with a definite set of competitors.

The potential of new firms to enter the market is key in exploring the structure of an industry. The ease of entry into a particular industry is dependent on various factors, such as the reaction of existing firms to new entrants and the prevailing entry barriers in the industry (Economics Online). The response of existing firms to rival businesses can enhance or deter the chances of new entrants getting into an industry. A strong reaction inhibits the entry of competing firms. Such kind of response is likely to happen when the existing firms have invested substantial resources in the industry and when the market is characterized by declining or slow growth. Besides, strong barriers to market entry also act as deterrents to the entry of new firms into an industry. These barriers include economies of scale, limited channels of distribution, high level of product differentiation, exorbitant capital requirements, high switching costs for the consumers, and lastly, restrictive government policies (Economics Online).

Power of Suppliers

The power of suppliers within an industry affects the ability of a firm to compete effectively. The bargaining power of suppliers is an existential force that can reduce the competitive advantage of an organization. Suppliers can establish bargaining power in different situations, such as in instances when an industry relies heavily on a few suppliers (Burke et al., 2010). Besides, in cases where there are no substitute products and raw materials, suppliers tend to gain extra bargaining power. In industries where the costs associated with switching to different suppliers are high, firms are less likely to change suppliers and thus strengthening the supplier's power. In markets where individual purchasers only account for a small percentage of the supplier's business, then the suppliers gain a strong claim in the industry.

Suppliers with massive resources have influential bargaining power as they can alter the chain of distribution and take on the position and role of weaker firms operating within the industry. Supplier power has the potential of affecting the quality and price of the finished product and thus indirectly affecting the relationship between small firms and their clients. Companies require collaborative supplier relationships to help develop their competitive advantage within an industry. Business needs to keenly analyze the power of suppliers as it is a force that can affect the ability of the firm to compete effectively and efficiently.

Power of Buyers

The purchasing power of consumers is another force that can exert pressure on the operation of small businesses. Influential consumers have the potential to exert pressure on firms by demanding higher quality products, albeit at lower prices, huge discounts, and additional aftersales services (Luenendonk, 2014). Buyers with high bargaining power have the potential of playing competitors against one another and thus adversely impacting small businesses. The bargaining power of consumers tends to increase when a single buyer accounts for a large portion of the firm's business. In industries where substitutes are readily available in the market, the bargaining power of buyers tends to increase as they can easily switch to rival firms.

In markets where the costs associated with changing suppliers are low, there is an influx of large volumes of goods with little differentiation, which reduces the bargaining power of individual firms. In such instances, the customers benefit from an increase in a variety of goods. Thus the buyer's position is strengthened as they can easily choose among various products at cheaper prices. Lastly, buyers with enough resources have considerable bargaining power as they can move backward in the distribution chain, thus affecting small businesses (Dobbs, 2014). Firms need to understand the influence of the bargaining power of buyers as it is a critical force that can affect their ability to realize productivity.

Availability of Substitutes

The availability of substitute products can affect the ability of a firm to compete effectively and efficiently in an industry. Porter explained that "All firms in an industry are competing, in a broad sense, with industries producing substitute products. Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge." (Porter, 1980). The availability of a large number of substitutes adversely affects a firm as it dilutes their respective competitive advantage in the market place. As mentioned earlier, the availability of substitutes is one factor that enhances the bargaining powers of the buyers, thus disenfranchising small businesses. Product substitution occurs when buyers are persuaded that they can acquire similar products that provide the same functions but at a reasonably lower price to what other firms are offering (Roy, 2011). Small businesses need to keenly evaluate the impact of product substitution as it occurs in either subtle or sudden ways. Firms require to invest in high degree differentiation of their goods if they are to counter the force of product substitution. In addition, organizations need to form a deep understanding of their buyers to create demand specifically for their goods and services.

Competitive Rivalry

The intensity of competition is a critical force that can impact the profitability of a business. According to Cook, "The battle you wage against competitors is one of the strongest industry forces with which you contend." Competitive battles have the potential to curtail the growth and progression of small businesses in an industry. Competitive battles exist in various forms, such as price wars, new product introduction, expanded service delivery, and advertising campaigns (Wilkinson, 2013). The intensity of competition is influenced by several factors, such as the existence of a large number of well-balanced competitors who stay and fight even in instances where the industry is no longer profitable.

An industry experiencing slow growth is prone to having an increase in the intensity of competition as more firms join the market. It is common to have intense competition in industries where there is little or no differentiation between commodities. In addition, the intensity of competition is high in sectors that are characterized by high exist barriers (Lewis, 2017). Firms operating in such an industry find it difficult to exit the market due to several factors such as specialized assets, government or social restrictions, emotional ties, and strategic relationships with other buyers and other business units. Additional exit barriers include high fixed costs and labor agreements. These high exist barriers make it difficult for existing firms to stop or switch lines of operations, and thus they continue operating in the saturated industry, therefore, intensifying competition. Businesses must understand the nature of competition in an industry as it can be an opposing force that affects their profitability and progression.

Industry Attractiveness and Success Factors

An industry analysis report reveals the attractiveness of a particular market under consideration. According to Cook, "Industry attractiveness is the presence or absence of threats exhibited by each of the industry forces." (Cook, 1995). The analysis of Porter's five forces is crucial in establishing the threats posed by each factor. Cook further explained that "The greater the threat posed by an industry force, the less attractive the industry becomes."(Cook, 1995). Firms seeking to enter new markets should seek out industries in which attractiveness is high, and the threats are low. Small businesses must understand the industry forces aptly at work in specific markets to devise strategic plans to deal with them. Developing effective strategic plans ensures that the business finds unique and ingenious ways to satisfy the needs of its customers, thus nurturing a competitive advantage over its rivals.

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