Because organizations are often systems, a number of environmental factors influence them inevitably. It is up to managers to ensure that this influence is harnessed in a positive way, leading to organizational success. The chief problem here is that given the vast number and range of external influences how can managers hope to monitor, analyze and respond to environmental conditions? One useful way out is to focus on the most important ones, impacting the crucial constituencies of organizations – that is suppliers, competitors and buyers. The logic, according to Grant, is quite simple. For the firm to make profit it must create value for customers or buyers. Hence, the need to understand in customers. Second, while creating value, the firm has to obtain goods or service from supplies. So, it must value its suppliers and form enduring business relationships with them. Third, while creating value for its buyers the firm must closely look at the rivals who are there in the arena competing for the same space. Hence, the firm must understand competition. Thus buyers, suppliers and competitors form the substances of a firm’s industry environment.
A Framework for industrial analysis:
As shown every firm holds a position or role in the chain of activities necessary to convert physical, financial, and human resources into more valued goods or services and market them. Upstream from the incumbent firm are the suppliers, who contribute (components materials, services, other inputs) the inputs that industry players use. Downstream from the incumbent firms are buyers (other manufacturers, wholesale and retail distributors and consumer) who buy from the firms in the industry. The chain from raw materials to final consumers is called a value chain because each link in the chain adds some value to its inputs. When we talk about value here we mean the value of the product to its final consumers minus the opportunity cost of the resources required to produce it. The value created is ultimately distributed among the participating players in the chain.
Industry analysis, thus helps firms find answers to two questions basically: What characteristics of the industry are important and how can a manager enhance performance given to those characteristics? An answer to the first question traces industry characteristics that affect incumbent firms, and thus contribute to average profitability. When managers are able to pursue a strategy that exploits the opportunities that industry characteristics pose and reduce the negative impacts, the firm performs better than its rivals in the industry. In addition to these two factors (industry characteristics a firm’s specific strategy) the average returns enjoyed by a firm is also dependent on the laws the government enact in order to govern competition.
Industry Characteristics that could Impact a Firm’s Performance:
1) The number of firms in the industry
2) The level and pattern of promotional expenditures.
3) The rate and nature of technological competition.
4) The relative size of firms.
5) Consumer preferences for the product and for related products.
6) The rate of demand growth
7) The extent of product differentiation
8) The price behavior of the leading firms.
9) The minimum efficient scale of production
10) Buyer switching costs
11) Demand side economies of scale
12) Specificity of plant and equipment to industry etc.
Let us explain this through an example. Suppose managers at Maruti Udyog Ltd (MUL) notice that sales of Maruti 800 have started falling in recent times. To appreciate what is happening managers at MUL should think about what competitors might have done (have they reduced their prices? Have they come out with technically – superior models) examine the industry demand (has demand declined for all the firms in the industry, say for Indica, Matiz , Santro etc) the effect of firm entry (are new entrants getting away with a longer share of the marketer?) Answers to these questions would help MUL identify the external factors contributing to the fall in the demand for Maruti 800.
Source: Strategic Management