INDUSTRY ANALYSIS

P art One of this text examines a firm’s relationships with its upstream and downstream trading partners. Part Two explores the economics of competition. Given the breadth of material that we have covered, it would be easy for students to lose track of the key insights that we have developed thus far. Industry analysis frameworks, such as Michael Porter’s five forces and Adam Brandenberger and Barry Nalebuff’s Value Net, provide a structure that enables us to systematically work through these wideranging and often complex economic issues.

An industry analysis based on such frameworks facilitates the following important tasks:

•Assessment of industry and firm performance.

•Identification of key factors affecting performance in vertical trading relationships and horizontal competitive relationships.

•Determination of how changes in the business environment may affect performance.

•Identification of opportunities and threats in the business landscape. In this regard, industry analysis is essential to performing “SWOT” analysis, a “bread- and-butter” tool in strategic planning. SWOT stands for strengths, weaknesses, opportunities, and threats. Industry analysis provides insights into “OT,” while Part Three of the text provides guidance for identifying “SW.” Industry analysis is also invaluable for assessing the generic business strategies that we introduce in Chapter 9.

The concepts that we develop throughout the text are grounded in microeconomics, particularly the economics of the firm and the economics of industrial organization. Although the roots of these fields can be traced back a century or more, they had little impact on business strategy until Michael Porter published a series of articles in the 1970s that culminated in his pathbreaking book Competitive Strategy. The book presents a convenient framework for exploring the economic factors that affect the profits of an industry. Porter’s main innovation is to classify these factors into five major forces that encompass the vertical chain and market competition.

In their book Coopetition, Brandenberger and Nalebuff make a significant addition to the five-forces framework. They describe the firm’s “Value Net,” which includes suppliers, distributors, and competitors. Whereas Porter describes how suppliers,

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