For understanding the environment of the industry it is very important to know in which industry are you in. Focussing on the broad industry can also lead to lack of understanding of the market and the existing competition in the market whereas o word industry in itself depicts a more broader meaning. Therefore the managers need to understand their customers, competitors and the suppliers before analysing the environment of the industry.
For understanding the structure of the market for gaining advantage for industry environment can be done by performing the segmentation of the market and through strategic group analysis.
Market segmentation analysis helps in identifying the similarities and differences among the group of customers who tend to use the products and services or buy them. For market segmentation analysis there are three main questions that need to be analysed which are :
- For which customer segment the strategy needs to be served?
- To what extent the needs of the customer are met?
- Which technological advances are to be used in order to fulfil the needs of the customers ?
Strategic group analysis is the grouping of those firms which share similar type of strategies or compete on a similar basis eg. Product or services. It also helps in understanding the competition and profitability within the sub groups of the industry and gives a better knowledge of where to make investments and what strategic actions can be expected from the competitors.
Porter’s five forces model
This model can be used to analyse the competitive position of a firm in a particular market. The five forces in this model are :
- Entry of new competition
- Bargaining power of the buyer
- Bargaining power of the supplier
- Threat from the substitute
- Industry rivalry
Barriers to entry into industry include
- Requirement of the capital
- Increased economies of scale
- Differentiation in the product
- Policies of the government
- Easy access to the distribution channels
The bargaining power of the buyer and supplier depends on :
- Concentration of buyer and supplier
- Switching cost of the buyer
- Differentiation of the product
- Total purchases made
- Information of the buyer
The threats from the substitutes depend on :
- The price offered by the substitute product
- Buyer’s switching cost
- Propensity of the buyer for the substitute product
The industry rivalry is influenced by :
- The numbers of exit barriers
- Capacity of the firm
- Costs incurred by the industry
- Differentiation of the product and cost of switching