SAP 3: Analyze the Firm’s Industry Environment
This section requires each group to analyze various issues underlying the profitability [or lack of it] of the chosen firm’s industry. The main objective of this analytical exercise is to identify sources of profitability in the firm’s External (Industry) Environment. The secondary objective is to identify the [industry] environmental threats to the firm’s future performance in the medium- to long-term. This analysis forces firms to explore their strategic options to either avert or tackle the looming threat.
Required Content for Grading
• Describe your choice of sector, sub-industry, industry group, and industry.
This question requires you to describe the industry structure using relevant industry data. Industry structure or Industrial Market Structure defines the nature, level, and extent of competition in an industry or market
Total Industry Sales by year [5-10 years] Main product Groups/ Markets/ Market-segments
Leading and lagging firms [Number and Size distribution] & Concentration ratios
Nature of the industry competition [Global/ National/ Regional/ Local] Industry maturity
Industry Cost Structure [What are the major cost drivers?] Nature of Technology
Is there a dominant technology? If so, what are the characteristics of the same?
Do all firms have access to similar technology? If not, are some firms dominant due to their preferential access to the dominant technology?
Do firms invest in R&D?
Basic Demand conditions
How elastic is the industry demand?
How do consumers gain product information? Explain Advertising Content and Intensity.
What are the buyer characteristics? Explain size and frequency of orders and the corresponding selling practices adopted by firms.
Regulatory Influence, if any
What is the extent of regulation? What are the costs of compliance, if any?
• Assess the [financial] performance of industry Y for the prior financial year.
This question requires you to analyze the financial performance of the entire industry using relevant industry data.
• Analyze the structural attractiveness of industry Y.
Explain the industry performance in terms of industry structure. To what extent can the industry’s high or low profitability be attributed to the structure of the industry? Which of Porter’s five forces/ structural variables has had the biggest impact in elevating/ depressing industry profitability?
Identify key success factors for each segment or the entire industry. You can identify KSFs for the entire industry if it is a homogeneous industry. However, if the industry is fragmented you will be required to identify KSFs for at least one major industry segment.
• Forecast the Future Profitability [or lack of it] of industry Y.
How is the structure of the industry Y likely to change over the next 5 years?
As a result of these changes, is the industry likely to be more or less profitable over the next 5 years as compared with the last 5?
Which companies are likely to be most successful over the next 5 years?
• Enumerate Strategies required to change the industry structure towards one that is more favorable.