Industry analysis is a helpful part of SWOT analysis. The focus is external to the enterprise.
This outside part of the SWOT analysis is the study of opportunities and threats. Sometimes called PEST analysis, it stands for Political, Economic, Social and Technological factors. We can add ‘I’ for Industry analysis to the PEST analysis and get PESTI analysis.
PEST analysis is a broad view of the context. Industry study fits between this macro level and the micro level of the individual firm.
Each industry has its own character and trends. For example comparing the performance of an airline with a retail chain is not comparing like with like. It may provide misleading ideas that are not helpful for strategic planning.
I am not saying that different industries do not learn from one another. Sometimes innovations come from people moving into different types of organization…sometimes!
Industry studies look at the pattern of relationships among the key parties involved such as rivals, buyers, and suppliers.
Michael E. Porter set out the approach Competitive Strategy: Techniques for Analyzing Industries and Competitors.
For other papers, see Harvard Institute for Strategy and Competitiveness.
This diagram of five competitive forces shows the patterns of influence in the industry.
This framework provides a way to guide discussion of a complex situation.
In recent years, there have been great changes in competitive forces, such as the execution of widespread ‘deregulation’.
An example is the reduced regulation of financial services. Some argue that this deregulation went too far. It may have contributed to the Global Financial Crisis (GFC) starting round 2007.
Changes in regulations, as well as in passenger demand and fuel prices affected the airline industry.
As an example of an industry study, I will sketch in the briefest of terms some of the issues in the airline industry. Obviously, a full industry review would require much research and fill many pages.
First, one needs to identify the industry in question and list rivals or competitors. In analysis of the industry, we are not talking about the broadest category of all airlines or all financial institutions. Rather you might focus on a small cargo-handling airline operating only in East European. You may only have a handful of competitors in the analysis. By contrast, we might be looking at the airlines competing on the long haul passenger routes across the Asia Pacific area.
In Australia for many years the passenger airline business was by government regulation covered by Australia's Two Airlines Policy.
Input suppliers include aircraft providers, whether manufacturers, aircraft leasing companies, or resellers of ‘pre-owned’ aircraft. In addition, we have fuel vendors and aircraft maintenance services.
Customers include individual travelers, travel agents, corporate users, and others. In addition, individual customers can buy tickets online.
Threat of substitutes includes that rapid development of high-speed rail in some regions. For long haul international flights, there is less of a threat, although in theory developments in telecommunications may obviate the need for some business travel.
The possibility of new entrants may have increased with the scope for low cost ‘no frills’ airline service. For these operators capital requirements are lower, and they can enter in a small way via short distance regional air services. There are still complexities in regulation, access to airport slots and other limits for many players seeking to enter the industry.
Competition amongst existing rivals in the industry is intense, with price wars especially among operators of low or no frills airlines. Some of the larger global players have subsidiaries that operate in this segment of the industry, and so they tend to fight the competitive industry wars on at least two fronts. At the high end, it is hard to differentiate on the basic of safety, reliability and so on, and so airlines compete on added-value services and comforts. The analysis would show the two-tiered nature of competition; we might call ‘high’ and ‘low’. However, they need to be looked at together because so many big players operate in both segments.
In addition, when the industry analysis is set against the backdrop of the PEST analysis it is seen that factors such as security threats from possible terrorist activity, as well as theft and smuggling raise costs in the industry as a whole.
We might depict this airline industry analysis as in this five forces diagram.
These various forces combine to keep profitability of the airline industry at low levels. A Centre for Aviation Airline profitability study by McKinsey & Company: Airlines can no longer afford to be the poor relations of aviation, shows that other parts of the value chain make higher returns than airlines, whose returns are consistently below the cost of capital.
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For specific cases of Industry Analysis check these.
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The classic work on this subject is still that of Michael E Porter.