STAGE 1d) ANALYSE TODAY - INDUSTRY
“The leader must aim high, see big, judge widely, thus setting himself apart from the ordinary people who debate in narrow confines.”
Charles de Gaulle
Customers and competitors do not exist in a vacuum - there is an entire industry around them.
We need to understand the dynamics of the industry - the full industry value chain and the broader context the industry exists in.
Companies rely increasingly on strategic partnerships with other companies - many of them exist in a wide ecosystem. There is indirect competition for profits up and down the value chain, with each part of the chain striving to create and capture the most value for themselves. We want to understand how value is shared and why - this will help us predict how it will change in future.
Traditional industry boundaries are breaking down in the face of digital technology - it is important to identify this - opportunity often exists at these edges.
Questions to answer
- What is the industry value chain/ecosystem?
- How did we make money in our industry in the past? How is this formula changing?
- What is the structure, conduct and performance of our industry?
- Who in the industry is making good profits? Why?
- How are industry boundaries changing?
- Is our industry attractive? What causes its performance? How are these forces changing - will the industry be more or less attractive in the future?
- How are channels/route-to-market changing?
- Which industry partners are critical for our future?
Porter's Five Forces is a great place for us to start understanding our industry. It considers each of the forces that drive the profitability of our industry:
- Barriers to Entry - for our industry to achieve returns above cost of capital, it must be hard for new entrants
- Supplier Power - suppliers can suck all the profitability out of an industry if they have pricing power
- Buyer Power - if buyers see our industry as a commodity, we cannot get a price premium
- Competitive Intensity - intense price-based competition can destroy industry profits
- Substitutes - economic substitutes for our competitions will cap our industry pricing and influence its size
In addition to the five traditional Porter forces, there are two more that we should consider:
- Regulation - how does the regulatory environment affect industry profitability? Will a new compliance requirement raise barriers to entry and be good for long term profitability?
- Complements - our customers combine our products and services with others to do a bigger “job” in their lives. If the complement added more value than us, we will be commoditised.
Once we have mapped out the forces for our industry, we can compare it with the industry profit pool - do superior returns on capital reflect our qualitative analysis? If not, what are we missing?
Make the industry picture more dynamic and valuable by asking about how each of the forces is changing in future - will it make the industry more or less attractive?