Structural Analysis Within Industries

Question 1

What is the Purpose of Structural Analysis within an Industry?

Answer 1

To understand the strategic implications of how different Structural Postures impact profitability.

Porter, Competitive Strategy — P. 171.

A ‘Structural Posture’ is a Firm’s strategic position and direction in an Industry.

Question 2

What is the Process of Structural Analysis within an Industry?

Answer 2

• Taxonomize Firms into Strategic Groups.
• Evaluate the nature and strength of the Mobility Barriers insulating each Group.
• Evaluate each Group’s relative bargaining power vis-à-vis Buyers and Suppliers.
• Evaluate each Group’s relative exposure to Substitution.
• Evaluate the degree of Industry rivalrousness based on inter-Group dynamics.

Porter, Competitive Strategy — P. 175.

Question 3

What are the Strategic Dimensions that establish a Structural Position?

Answer 3

• Service.
• Leverage.
• Price Policy.
• Cost Position.
• Specialisation.
• Product Quality.
• Channel Selection.
• Vertical Integration.
• Brand Identification.
• End-User Separation.
• Inter-Group Dynamics.
• Technological Leadership.
• Home-Host Government Dynamics.

Porter, Competitive Strategy — P. 172-173.

These Dimensions are related; those of a particular Firm usually form an internally consistent set, an Industry will usually sport of a variety of such sets.

Question 4

What is the Dimension of Service?

Answer 4

The degree to which the Firm provides ancillary services for its products.

Porter, Competitive Strategy — P. 173.

Examples include engineering assistance, technical training, an in-house service network, credit, etc.

Question 5

What is the Dimension of Leverage?

Answer 5

The amount of financial and operating leverage the Firm undertakes.

Porter, Competitive Strategy — P. 173.

Financial leverage is the amount of indebtedness the Firm undertakes, whereas operating leverage is the proportion of fixed costs in its cost structure.

Question 6

What is the Dimension of Price Policy?

Answer 6

The Firm’s relative price position in the Industry.

Porter, Competitive Strategy — P. 173.

Question 7

What is the Dimension of Cost Position?

Answer 7

The degree to which the Firm prioritises Cost Leadership in its strategy.

Porter, Competitive Strategy — P. 173.

Question 8

What is the Dimension of Specialisation?

Answer 8

The degree to which the Firm prioritises Focus in its strategy.

Porter, Competitive Strategy — P. 172.

This largely pertains to the synergy and customization of the Firm’s product suite vis-à-vis its target customer and geographic segments.

Question 9

What is the Dimension of Product Quality?

Answer 9

The degree to which the Firm prioritises competiting on quality in its strategy.

Porter, Competitive Strategy — P. 172.

Examples include high performance, using premium inputs raw, exacting specifications, cutting-edge features, etc.

Question 10

What is the Dimension of Channel Selection?

Answer 10

The Firm’s distribution strategy.

Porter, Competitive Strategy — P. 172.

Question 11

What is the Dimension of Vertical Integration?

Answer 11

The amount of value added to the Firm through forward and backward integration.

Porter, Competitive Strategy — P. 172.

Question 12

What is the Dimension of Brand Identification?

Answer 12

The degree to which the Firm prioritises Differentiation in its strategy.

Porter, Competitive Strategy — P. 172.

This is as opposed to competing largely on price or other variables.

Question 13

What is the Dimension of End-User Separation?

Answer 13

The degree to which the Firm is directly exposed to the End User, as opposed to being assisted by intermediating distributors.

Porter, Competitive Strategy — P. 172.

Question 14

What is the Dimension of Inter-Group Dynamics?

Answer 14

The nature of the Firm’s relationship to its Parent and Sibling companies.

Porter, Competitive Strategy — P. 173.

Question 15

What is the Dimension of Technological Leadership?

Answer 15

The degree to which the Firm prioritises technological innovation in its strategy, as opposed to imitation.

Porter, Competitive Strategy — P. 172.

Question 16

What is the Dimension of Home-Host Government Dynmaics?

Answer 16

The nature of the Firm’s relationship to its Home and Host governments.

Porter, Competitive Strategy — P. 173.

Question 17

What is a Strategic Group?

Answer 17

A group of Firms with an identical or similar Structural Posture, as informed by the Strategic Dimensions.

Porter, Competitive Strategy — P. 175.

This tool is particularly useful because Group Firms tend to respond similarly to external events or competitive moves.

Question 18

What is a Map of Strategic Groups?

Answer 18

A Radar Chart that illustrates Structural Groups by identifying each Firm’s Structural Posture through its affinity in each Strategic Dimension.

Another use is analysing how prevailing trends will impact the Industry.

Porter, Competitive Strategy — P. 175.

Other statistical techniques, like Heatmaps with Hierarchical Clustering, Parallel Coordinate Plots, or Multidimensional Scaling can be used to supplement Radar Charts.

The most useful Dimensions are those that best illustrates Mobility Barriers and strategic diversity, but a variety of combinations must be used for a thorough analysis.

Question 19

What are Mobility Barriers?

Answer 19

Entry and Exit Barriers between Strategic Groups.

Porter, Competitive Strategy — P. 178.

Just as with ordinary Entry and Exit Barriers, they change with time and can be influenced by Firms’ actions.

Question 20

What is the Significance of Mobility Barriers?

Answer 20

They increase the cost of shifting Structural Postures, sometimes prohibitively, thereby insulating certain Groups from competition and preserving profitability.

Porter, Competitive Strategy — P. 179.

Question 21

Why do Mobility Barriers arise?

Answer 21

• Firms differ in their strengths, risk profiles, and assumptions;
• Leading to different strategies that become hard to imitate as irreversible investments are made.

Porter, Competitive Strategy — P. 181.

Environmental, developmental, and technological changes also play a significant role, either heterogenizing or homogenizing Strategic Groups.

Question 22

How does the presence of multiple Strategic Groups impact Industry Rivalrousness?

Answer 22

It increases rivalrousness by increasing asymmetry between Firms, which makes it harder to understand and cooperate with one another.

Porter, Competitive Strategy — P. 184.

Question 23

Which Factors determine the degree to which multiple Strategic Groups will impact Industry Rivalrousness?

Answer 23

In order of importance:

• Market interdependence between Groups.
• Product differentiation between Groups.
• Number and size of Groups.
• Degree of strategic divergence bweteen Groups.

Porter, Competitive Strategy — P. 184.

Separate mapping should be done for rivalrousness, using similar techniques.

Question 24

How can one evaluate an Individual Firm’s Profitability?

Answer 24

• A Structural Analysis of its Industry and its Strategic Group; followed by
• A Strategic Analysis of its position within its Group.

Porter, Competitive Strategy — P. 188.

Question 25

Based on Structural Analysis, how should a Firm formulate a Competitive Strategy?

Answer 25

Identify the Strategic Group that best leverages:

• Its strengths;
• Its weaknesses;
• Its distinctive competencies; and
• Industry risks and opportunities.

Porter, Competitive Strategy — P. 192.

Question 26

For the purposes of Formulating a Competitive Strategy, what do a Firm’s Strengths and Weaknesses concern?

Answer 26

• Relative scale.
• Insulation from competition.
• Bargaining power vis-à-vis Buyers and Suppliers.
• Mobility Barriers and means of overcoming them.

Porter, Competitive Strategy — P. 195.