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Strategic Management
Notes
Example: A multi-business corporation like ITC assigns priorities in its corporate strategy
to its various businesses like cigarettes, vegetable oils, hotels, agro-based products, financial
services etc. The business strategies of these units are formulated in accordance with those
priorities. Business-level decisions also help bridge decisions at the corporate level and functional
levels.
8.1 Industry Structure
An industry is a collection of firms offering goods or services that are close substitutes of each
other. Alternatively, an industry consists of firms that directly compete with each other. For the
purpose of industry analysis, an industry can be defined rather broadly (the beverage industry)
or more precisely (the carbonated soft drink industry). How one defines and circumscribes an
industry depends on the kinds of analysis to be performed. In “industry analysis”, it is generally
better to define an industry as precisely as possible.
Example: In discussing companies like Coca-Cola and Pepsi, one would want to define
the boundaries of the “carbonated soft drink industry” rather than that of the “beverage industry”.
The term “industry structure” refers to the number and size distribution of firms in an industry.
The number of firms in an industry may run into hundreds or thousands. The existence of a large
number of firms in an industry reduces opportunities for coordination among firms in the
industry. Hence, generally speaking, the level of competition in an industry rises with the
number of firms in the industry. The size distribution of firms in an industry is important from
the perspective of both business policy and public policy.
Industry structure consists of four elements:
(a) Concentration
(b) Economies of scale
(c) Product differentiation
(d) Barriers to entry.
(a) Concentration: It means the extent to which industry sales are dominated by only a few
firms. In a highly concentrated industry, i.e. an industry whose sales are dominated by a
handful of firms, the intensity of competition declines over time. High concentration
serves as a barrier to entry into an industry, because it enables the firms to hold large
market shares to achieve significant economies of scale.
(b) Economies of Scale: This is an important determinant of competition in an industry. Firms
that enjoy economies of scale can charge lower prices than their competitors, because of
their savings in per unit cost of production. They also can create barriers to entry by
reducing their prices temporarily or permanently to deter new firms from entering the
industry.
(c) Product differentiation: Real perceived differentiation often intensifies competition among
existing firms.
(d) Barriers to entry: Barriers to entry are the obstacles that a firm must overcome to enter an
industry, and the competition from new entrants depends mostly on entry barriers.
These features determine the strength of the competitive forces operating in the industry. Trends
affecting industry structure are important considerations in strategy formulation.
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