INDUSTRY &

ECONOMIC ANALYSIS

Prof. Sana Tabassum

 WHAT IS INDUSTRY AND ECONOMIC ANALYSIS
 Industry and economic analysis combines two key tools: “ industry analysis” and “economic
analysis.”
What is industry analysis?
 Industry analysis is the process of evaluating the following:
 Market dynamics
 Competitive landscape
 Industry trends
 Regulatory environment

Why is industry analysis important?:

 It helps businesses/firms evaluate the current state, future growth potential, competition level,
and emerging trends in the industry.
 enables businesses/firms to understand their position within the industry.
 WHAT IS INDUSTRY AND ECONOMIC ANALYSIS
What is economic analysis?
 Evaluating the broader economic environment in which an industry operates,
including macroeconomic factors and global economic trends
 Combination of Industry and Economic Analysis does the following: Evaluating a
specific industry by examining factors like market dynamics, competitive landscape,
industry trends, and regulatory environment within the broader economic context to
understand the potential for a company/firm to succeed within a specific industry.
 For example, A company in the automotive industry needs to understand the state of the
automotive industry (industry analysis) and the broader economic environment (economic
analysis) to make informed decisions.
 KEY COMPONENTS OF INDUSTRY AND
ECONOMIC ANALYSIS
 Market Dynamics
 Market Size: Refers to the total value of goods or services sold in a specific market,
typically measured by sales.
 Market Growth Rate: Indicates the rate at which the market is expanding or
contracting, measured as the percentage change in market size over a period of time.
 Competitive Landscape: Identifying the competitors and evaluating their strengths
and weaknesses.
 Industry Trends: General patterns or shifts in the industry that are particular to
every industry. These trends are influenced by technological advancements, changes
in consumer behavior, changes in demand or supply, etc.
Regulatory environment: Assessing the impact of government regulations and
policies on the industry.
 KEY COMPONENTS OF INDUSTRY AND
ECONOMIC ANALYSIS
 Broader Economic Context
 Macroeconomic Indicators: Analyzing the overall health of the
economy, such as GDP growth, inflation, unemployment rates, and interest
rates
 Global economic trends: Assessing the impact of international events and
economic conditions on the industry.
 WHAT IS AN INDUSTRY STRUCTURE?

 Refers to the underlying characteristics of a particular industry.

Key features of industry structure:

1. Number of firms: how many firms operate within the industry.
2. Market concentration: how much market is controlled by a few large players.
3. Barriers to entry: Obstacles that make it difficult for new firms to enter the industry.
4. Competitive rivalry: intensity of competition among the existing firms in the industry

Analyzing industry structure allows to understand the “rules of the game” and how to create
value for the customers.
 MARKET CONCENTRATION
 Refers to how much of a market is controlled by a few large firms
 Indicates the extent of domination of firm(s) in the industry.

Measure to calculate the market concentration

 Herfindahl-Hirschman (HHI) index
 This index is calculated by adding the squares of the percentage market share
of each individual firm in the industry.
 HHI index is used to indicate which industry has a higher market concentration.
 MARKET CONCENTRATION

 HHI Threshold limits

 HHI Below 1500: Low concentration
 HHI between 1500-2500: Moderate concentration
 HHI above 2500: High concentration.

Source: Textbook “Economics” by Paul Samuelson and Willian Nordhaus.

 STRUCTURE CONDUCT AND
PERFORMANCE PARADIGM
 (SCP)
SCP is an analytical framework to explore the relationship between market structure,
firm conduct and firm performance.
 The framework suggests that market structure determines firm conduct, which in
turn affects the firm performance.
 Structure (Market structure): Characteristics of the market
 Conduct (Firms behaviour): Strategies and behaviour of the firms within the industry
 Performance: what results come out of firm behaviour
 STRUCTURE CONDUCT AND PERFORMANCE (SCP) PARADIGM

STRUCTURE: “ How the market is set up”

 Number of competitors: How many companies are in the market?
 Heterogeneity of product: Are all products similar, or do companies
make unique products?
 Cost of entry and exit: How difficult or easy it is for new firms to enter
the industry?
 STRUCTURE CONDUCT AND PERFORMANCE (SCP)
PARADIGM

CONDUCT: “How firms behave and compete in the industry”

 Pricing Strategies: How firms set prices
 Product Differentiation: Efforts to make products unique
 Exploitation of market power: Does the firm take advantage of its dominance in the
market
 Collusion– Whether firms cooperate or compete?
 Investment & Innovation – R&D spending, technological advancements, and product
development.
 Advertising & Branding – Marketing efforts to attract customers and differentiate
products.
 STRUCTURE CONDUCT AND PERFORMANCE
(SCP) PARADIGM
Performance: "What Happens as a result of firm behavior?”
 Productive Efficiency – Are companies using resources wisely to make goods at the
lowest possible cost?
Example: Toyota’s just-in-time production reduces waste>> lowers cost >> and
improves efficiency>> which leads to affordable prices.
 Consumer satisfaction: How well the firms meet the needs and expectations of
consumers.
 Profitability: Are businesses making enough profits to survive and grow
 MORE EXAMPLES ON SCP
Identify whether the following is categorized into Structure, Conduct, or Performance.
 A large corporation acquires its biggest competitor, reducing the number of firms in the
industry.
Answer: Structure (Merger affects the level of competition in the industry).
 A new mobile network provider struggles to enter the industry due to high infrastructure
costs.
Answer: Structure (High infrastructure costs are barriers to entry).
 A smartphone company invests in AI-powered voice assistants to differentiate its products.

Answer: Conduct (Product differentiation).

 A logistics company successfully reduces delivery times by 30% through advanced AI
technology.
Answer: Performance (improvement in efficiency).
 MORE EXAMPLES ON SCP
A car manufacturer introduces a zero-emission vehicle to attract environmentally conscious
buyers.
Answer: Conduct (Firm behaviour).
A global e-commerce platform starts offering free shipping and cashback rewards to
increase customer loyalty
Answer: Conduct (Firm behaviour).
 Due to strict environmental laws, only a handful of companies can operate in the mining
sector.
Answer: Structure (Barriers to entry)
 A major clothing brand opens a factory in a low-cost country to reduce production
expenses.
Answer: Conduct (Firm behaviour).
 STRATEGIC DECISION MAKING

What is Strategy?
A strategy is a long-term plan of action designed to achieve a specific
goal.
Determines how the ends (goals) will be met by the means (resources).
 From a business perspective, strategy is about how a company competes,
grows, and sustains its success

Source: Freedman, Lawrence (2013). Strategy. Oxford University Press. ISBN 978-0-19-932515-3.
 ORGANIZATIONAL STRATEGY
 Organizational strategy is a “comprehensive plan outlining how an organization will
achieve its objectives by defining its mission, vision, core values and initiatives to
gain a competitive advantage” in the industry.
 Types of Organizational Strategy
 TYPES OF ORGANIZATIONAL STRATEGY

 Corporate-level Strategy
 Focus: Determines the overall scope of the organization. It represents
the topmost level of decision-making.
Scope: Addresses broad questions like: What businesses should the
company be in? How should resources be allocated across different
departments? What are the long-term goals of the company
Examples: Deciding to diversify/expand into new markets, acquiring
another company, restructuring the organization, divesting(selling off) the
an existing business unit/operation.
 TYPES OF ORGANIZATIONAL STRATEGY

 Business-level strategy
 Focus: Determines how a company will compete in a particular
industry.
Scope: Addresses questions like: How will we compete in this
market? What is our competitive positioning? Who are the target
consumers?
Examples: Developing a cost leadership strategy (striving to become
the lowest-cost producer), a differentiation strategy (offering unique or
high-quality products/services), or a Focus strategy (narrowing the
scope to target a specific niche market).
 TYPES OF ORGANIZATIONAL STRATEGY
 Functional-level strategy
 Focus: Specific actions and decisions taken within individual business
functions (departments) to support the broader business and corporate
strategies.
Scope: Addresses questions like: what will be the marketing strategy?
How will operations ensure efficient production? How will HR attract
and retain talent?
Examples: Developing a marketing campaign, implementing a new
production process, or designing a new compensation plan.
 IDENTIFY THE STRATEGY: CORPORATE, BUSINESS OR FUNCTIONAL
 A company decides to expand into new industries by acquiring a healthcare firm while already operating
in the manufacturing sector.
Answer: Corporate-level strategy.
Justification: This decision involves the overall scope of the business and expansion into new industries,
which is a corporate-level decision.
 A multinational conglomerate sells off its unprofitable textile business to focus on its core industries, such
as finance and technology.
Answer: Corporate-level strategy
Justification: This decision affects the overall portfolio of businesses within the company, making it a
corporate-level strategy.
 A smartphone company focuses on targeting high-end customers by offering luxury designs.

Answer: Business-level strategy.

Justification: This decision defines how the company competes in its industry, a business-level strategy.
 IDENTIFY THE STRATEGY: CORPORATE, BUSINESS OR FUNCTIONAL
 The finance department of an automobile company optimizes cash flow management by
implementing new budgeting techniques.
Answer: Functional level strategy
Justification: It indicates the action plan taken by specific department (finance department) to
optimize cash flows.
A multinational corporation decides to spin off its non-core businesses to focus only on
technology and finance.
Answer: Corporate-level strategy
Justification: Divesting is a corporate-level decision that will affect the overall scope of the
business.
 A beverage company decides to enter the snacks market by launching a new product line

Answer: Corporate-level strategy

Justification: entering into a new product category is a corporate-level decision that will
affect the overall scope of the business.