structural analysis

BY: RONA DJOHANNA FONTANILLA ORTIZ

DM 214 Strategic Planning

MDM – 1st Semester 2013

Porter's Five Forces Model: Analyzing Industry Structure

Central to Michael E. Porter's landmark works on Competitive Strategy (1980) and Competitive Advantage (1985) are the framework of structural analysis and the definition of an industry. According to Porter, “industry structure has a strong influence in determining the competitive rules of the game as well as the strategies potentially available to the firm”.

By providing considerable freedom for firms to draw the boundaries, Porter ensures that firms which apparently view themselves as part of an industry are, in fact, more realistically parts of different industries. This paradox is visible in multi-product industries such as automobile industry wherein each product group, trucks, buses, cars, three-wheelers, two-wheelers and tractors could each be considered as an industry based on the fact that different customers use these different product groups.

Porter’s paradox

Porter’s paradox

Structural analysis is rooted in the industry whose definition itself is not rooted in any particular methodology. There would also be a possibility of defining the industry in terms of broad factor commonalities such as four-wheelers and two-wheelers. Strategy formulation is expected to be based on structural analysis based on multiple industry and market segments.

At another level, the distinction between a product and its service has blurred, and the symbiosis between a product and its applications has increased enormously. The application of structural analysis, therefore, seems imperfect whichever canvas is chosen to define the industry. There seems to be a case for redrawing the parameters of structural analysis and industry definition in the current era, which has been a resultant of over three decades of profound technological changes.

Porter’s paradox

Source: http://cbrao2008.blogspot.com/2011/07/structural-analysis-and-industry.html

P.E.S.T. Analysis

is a scan of the external macro-environment in which an organization exists. It is a useful tool for understanding the political, economic, socio-cultural and technological environment that an organization operates in.

Industry Structure A final dimension of industry that

is important to the performance of new firm is industry structure. The structure of the industry refers to the nature of barriers to entry and competitive dynamics in the industry.

Four characteristics of industry structure are particularly important to the performance of new firms in the industry

Industry Structure

Capital intensity

Advertising intensity

concentration Average size

firm

Capital Intensity

Capital intensity measures the importance of capital as opposed to labor in the production process.

Advertising Intensity

Advertising is a mechanism through which companies

develop the reputations that help them sell their

products and services.

Concentration Intensity

Concentration is a measure of the market share that is held by the largest companies in an industry.

Average Firm Size

New firms perform better in industries in which the average size of firms is small. New firms tend to begin small as a way to minimize the risk of entrepreneurial miscalculation. That is, if entrepreneurs begin small, they have a lower downside loss if they are incorrect. In industries in which most firms are small, starting a new firm at a small scale does not create much of a disadvantage relative to the established firms in the industry. In contrast, in industries where the average firm size is large, starting small creates a number of disadvantages, such as the inability to purchase in volume and higher average manufacturing and distribution costs due to the absence of economies of scale.

P.E.S.T. Analysis

POLITICAL FACTORS

These include government regulations such as employment laws, environmental regulations and tax policy. Other political factors are trade restrictions and political stability.

eg – tax policy, employment laws

P-Noy signs

law

strengthening

NEA

P.E.S.T. ANALYSIS ECONOMIC FACTORS

These affect the cost of capital and purchasing power of an organization. Economic factors include economic growth, interest rates, inflation and currency exchange rates. eg – economic growth, interest rates

World Competitiveness Rank

In a neighborhood of so-called "Asian

tigers," the Philippines has quietly emerged

as the region's newest economic darling. At

6.6 percent, the Filipino economy's current

GDP growth rate is the second highest in

Asia, behind only China's.

http://business.inquirer.net/105219/neda-ph-economy-grew-by-6-6-in-2012

http://business.inquirer.net/105219/neda-ph-economy-grew-by-6-6-in-2012

P.E.S.T. ANALYSIS

SOCIAL FACTORS

These impact on the consumer’s need and the potential market size for an organization's goods and services. Social factors include population growth, age demographics and attitudes towards health. eg – health consciousness, population growth rate

The country is being heralded as the new Asian success story, but only an elite few

reap the rewards (JILLIAN KEENAN MAY 7 2013, 8:06 AM ET).

P.E.S.T. ANALYSIS

TECHNOLOGICAL FACTORS

These influence barriers to entry, make or buy decisions and investment in innovation, such as automation, investment incentives and the rate of technological change.

eg – R & D activity, automation, technology incentives

Industry Structure (Porter’s 5 Forces)

Porter's five forces of competitive position analysis was developed in 1979 by Michael E. Porter of Harvard Business School as a simple framework for assessing and evaluating the competitive strength and position of a business organization. This theory is based on the concept that there are five forces which determine the competitive intensity and attractiveness of a market. Porter’s five forces helps to identify where power lies in a business situation. This is useful both in understanding the strength of an organization's current competitive position, and the strength of a position that an organization may look to.

the PORTER DIAGRAM

Porter’s Five Forces of

Competition Framework

SUPPLIERS

POTENTIAL ENTRANTS

SUBSTITUTES

BUYERS

INDUSTRY

RIVALRY Threat of new entrants

Threat of substitutes

NEUTRALIZING THE FIVE FORCES

FORCE

METHOD FOR NEUTRALIZING

Entry

Erecting barriers (isolating mechanisms)

Rivalry

Compete on non-price dimensions

Substitutes

Improve attractiveness compared to substitutes

Buyers Reduce buyer uniqueness

Suppliers

Reduce supplier uniqueness

Preparing for the Future :

The Role of Scenario Analysis in Adapting to Industry Change

Stages in undertaking multiple Scenario Analysis:

Identify major forces driving industry change

Predict possible impacts of each force on the industry environment

Identify interactions between different external forces

Among range of outcomes, identify 2-4 most likely/ most interesting scenarios: eg: configurations of changes and outcomes

Consider implications of each scenario for the company

Identify key signposts pointing toward the emergence of each scenario

Prepare contingency plan

Efficiency Relevance Effective

ness Impact

Sustaina bility

Replicability

The Analytical Categories

Efficiency Analysis of Electric Cooperatives in the Philippines. Philippine Management Review 2011, Vol. 19, 1‐10. University of the Philippines, College of Business Administration, Diliman, Quezon City 1101, Philippines


Efficiency With this is meant the amount of outputs created

and their equality in relation to the resources

(capital and human efforts) invested.

The efficiency of electricity distribution in remote areas of the Philippines

by 120 electric cooperatives (ECs) is examined using data envelopment analysis

(DEA). Using data from 2001to 2006, the study finds that most ECs can reduce all

their inputs proportionately by up to 18percent and still produce the same level

of output. The study shows that efficiency of ECs rises with size.

This result is robust with respect to how size is defined. Unsurprisingly, the

levels of inefficiency are inversely related to system losses. The study also shows

that structural and operational characteristics significantly affect EC efficiency.

EC are likewise found to be inefficient in the non-technical component of their

distribution costs vis‐à‐vis their line operations and maintenance costs

(Valderrama, et al: 2011)

Efficiency

This study has shown that a number of structural as well as

operational factors significantly affect the efficiency of grid-

connected ECs. These are sales ands customer density,

customer structure, size,( as measured by sales volume and

number of customers), systems loss and number of customers

per employee. These are not totally surprising results.

What they imply, however, is that ECs should in the Philippines

resist external pressure (usually from local resist external pressure

(usually from local politician) to expand in areas with low

density so as not to sacrifice their efficiency even more. The

study also identifies two initiatives ECs can undertake to improve

their technical efficiency, reduce systems loss and

personnel. The most efficient ECs had an average 303

customer per employee, while the least efficient ones had only

221 customers per employee.


Relevance The issue here is to what extent the program

or project has addressed or is addressing problems of high priority, mainly as viewed by actual and potential stakeholders, particularly the program’s beneficiaries and any other people who might have been its beneficiaries.


Effectiveness Effectiveness expresses to what extent the

planned outputs, expected changes, intended effects (immediate and effect objectives) and intended impact (development objective) are being or have been produced or achieved.


Impact Means the overall consequences of the program

or project for the intended beneficiaries and any other people.

The productivity of the EC as a whole seems to have stagnated

during the post –EPIRA period. A possible reason for this is that

demand in the last three years (2004-2006) have been flat (the

compound annual growth rate is 1.1 % with 37 ECs experiencing

negative growth) compared with the 21.7% sales growth rate the

cooperative experienced during the period 2001-2003. As a

reversal in demand growth trend is not foreseeable given the

present economic conditions, efficiency in the sector have become

more of an imperative than ever (Valderrama, et al: 2011).

Impact Since the passage of the Electric Power Industry

Reform Act (EPIRA) in 2001, the Philippines

embarked on a comprehensive restructuring of its

power industry. From a vertically integrated,

extensively publicly owned utility business, the industry

was envisioned to be broken down into its main

components with a deregulated and effectively

privatized generation and supply sectors.

Despite the reform efforts through the EPIRA

enactment however, power rates in the Philippines

continue to be among the highest in Asia and remain a

source of concern for industries in the country

struggling to remain competitive with their regional

counterparts (Valderrama, et al: 2011)


Sustainability This means the maintenance or

argumentation of positive achievements induced by the evaluated program or project (or any component of it) after the scheme (or any component of it) has been terminated.


Replicability Replicability means the feasibility of

repeating the particular program or project or parts of it in another context i.e. at a later time, in other areas, for other groups of people, by other organizations, etc.

TRIVIA: In putting up a business, the following factors

should be considered. Stop! Don't Do It! Don't start a business in a capital intensive

industry. Don't start a business in an advertising intensive

industry. Don't start a business in an industry in which the

average sized firms are large. Don't start a business in a concentrated market.

Questions to Ask Yourself Is the industry that I am planning to enter a

good one for starting a new company?

Are the knowledge conditions in the industry favorable to a start-up?

Are demand conditions in the industry favorable to a start-up?

Is the industry at the right stage of the life cycle for a start-up?

Is the industry structure favorable for a start-up?

Sources:

Helena Agnes S. Valderrama and Carlos C. Bautista (2011) Efficiency Analysis of Electric Cooperatives in the Philippines. Philippine Management Review 2011, Vol. 19, 1‐10. University of the Philippines, College of Business Administration, Diliman, Quezon City 1101, Philippines

Edwin B.R. Gbargaye (2010) Lecture of Strategic Planning Analytical Categories. Sual, Pangasinan

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