Defining the industry of a company, which is basically defining the business of a company, is probably one of the toughest challenges management faces. It may seem that it is an easy straightforward task, but that is far from the case. It is not only difficult, it is critical for the success of the business. Let’s first start with the difference between an industry and a market. An industry is a group of companies and their suppliers that serve a particular market. A market is the collection of individual customers that purchase goods or services that fulfill specific needs. Sounds pretty straightforward, so where does the confusion lie?
Challenges in defining the Industry
One of the McDonalds` CEOs once said that McDonalds is in the business with real estates. No. Neither was he drunk, nor was he high. The guy claimed that the fast food chain actually owns many top location real estates in the city center in the major cities across the globe. If you think about it, to a great extent the success of the fast food chains is so tied to the spots they pick up, that they have developed a portfolio of super attractive properties. Well, putting McDonalds in the real estate industry is a bit extreme of course.
But let’s jump to another company, Tesla, and try to define its industry. That should be an easy one. Tesla is in the Automotive Industry. But do they compete with Hyundai and Tata Motors? No, they don’t. They manufacture high-end cars just like BMW, Audi and Mercedes. So, respectively, that places Tesla in the high-end automotive industry. But these companies manufacture vehicles with internal combustion engines, while Tesla has only purely electric motors. Drawing conclusions from this, Tesla seems to be in the high-end electric vehicles industry. But the majority of the electric vehicles on the market right now are super sport exotic cars in limited numbers of production. Tesla’s model S on the other hand is a full-size executive sedan, with electric drive and zero emissions. So maybe it is in the environmental friendly car industry?
It is getting quite confusing at certain points to definitively nail the industry one competes in. Therefore we have to take the perspective of the market to check our assumptions. Did we get it right on Tesla? Well, 11% and 10% of the Tesla owners have, or have had, a Mercedes or a BMW. So, yes, Tesla is in the high-end automotive industry. Further 25% of Tesla owners have owned a Toyota manufactured hybrid vehicle. So, yes, we were right to look it up in the environmental friendly segment. Another relatively big portion of Tesla cars went to owners of Luxury cars such as McLaren, Aston Martin, Maserati and Ferrari. This result accounts for the assumption that Tesla also competes in the luxury exotic cars segment. These automotive industry segments and sub-segments are all characterized with completely different structures and different needs of their target market. They all fulfill the basic need for self-transportation, but each one of them has a very different purchase drivers, hence completely different marketing mix – product development, pricing levels, distribution channels, advertising and communication.
It is of vital importance for every business how it defines its industry, because that ultimately reflects on how it defines its target market and its target market needs. And how you define your target market needs defines who you are.
According to Michael Porter, industry analysis is the fundament for every business strategy and industry definition is the starting point. All businesses, especially start-ups, need to know exactly what they offer, otherwise they will fail to identify their competitors, substitute products and, ultimately, customers and markets. They will struggle with the analysis of the industry structure, cost of entry and exit, barriers to entry, bargain power of suppliers and customers. Thus, they will ultimately fail to develop their competitive strength. Which brings us to the question, how do you define the market you serve and your market needs?
Challenges in defining the needs of a Market
In his seminal paper Marketing Myopia, Ted Levitt gave numerous examples of industries and companies that struggled, with some of them still struggling, just because they have lost sight of their market needs. Probably the most famous example is about the railway industry in the USA, that in the late 50’s of the last century so narrowly defined its industry as “railroad transportation,” that it completely failed to see other means of transport that were likely to satisfy the actual need for transportation. Such need for transportation wasn’t necessarily railroad transportation. This myopic view almost drove railroad companies to bankruptcy. Another major industry disruption in the 50’s came for Hollywood companies. They defined themselves as movie producers and ultimately ignored the rise of the Television as possible threat for them. It turned out that both compete in the entertainment industry and the tiny at that time newly born TV companies almost crumbled the well-established film making business. While some of the examples in Ted Levitt’s original article are little outdated his logic is more applicable than ever. Let us give you some examples. The record labels industry that made billions from full-length album sales has already rapidly declined. The advancement of technology gave rice to services like iTunes and companies like Spotify that find better cost-effective ways to deliver music to the market. Traditional music recording companies have failed so far to develop the same technological competences and resources. Another example is the newspaper industry. It has already faced slumping prices of advertising sales, falling newspaper prices and sharp drop in newspaper purchases. Do people read less these days? On the contrary. The demand, in fact, is rising but it is just the internet and on-line publishing that fill in that demand. Publishing companies and newspaper brands that were wise enough to anticipate that trend and quick enough to adapt to it have made it through, while the rest fell behind. How likely is that this happens to the cable television or broadcasting industry? Very likely. How likely is that this happens to the retail industry or transportation industry? Well the answer once again is likely. However, many industries and companies may lose track of their customers’ needs. Why that happens? Simply because the goods and services they offer have been fulfilling these needs for so long, that they associate these needs with their products.
“People don’t want to buy a quarter-inch drill. They want a quarter-inch hole.” (Ted Levitt)
Different Levels of Competition
Michael Porter defined the industry as set of companies which market products that are close substitutes for each other. However, as in the case of Tesla, we saw that the basic need for transportation may be fulfilled from any car manufacturing company. So we need to further define that by adding extra dimensions that would better describe that need. In that case that would be higher quality, better performance, higher image, environmental friendly and means of self-transport. It makes sense, then, that we define and analyse each of these industry segments separately. These dimensions are related to the level of price and perceived quality/image. Further differentiation may be achieved if we include the market coverage. In purely geographic sense, the car industry in Norway may be very different from that in Germany, Latin America or China. In the case of Tesla, Norway’s benefit system for cars with zero-emissions makes it the second best market for Tesla after the US. Similarly, a university in London will face greater competition by other universities in London and less competition by universities in Scotland or France. So they are all in the same industry of higher education, but in the same time we could define their industry as higher education in London. And because the perceived quality is different as well, Metropolitan University will compete more for students with Kingston, Greenwich and Middlesex and less with UCL, LSE or Queen Mary. Hence, by segregating industry segments we may define our direct competition. These are the competitors that offer goods or services that are immediately interchangeable in the eyes of customers and offer the same level of perceived value at comparable prices.
However, without risking losing sight of our customers’ needs, we have to look at the industry we compete in a broader sense. In the example with the educational industry, there are alternative or substitute services that fulfil the same basic need in a slightly different way. Therefore, educational institutions as a whole may face competition by on-line providers of training and education such as Coursera. In this case this service is an alternative way to satisfy the need for education. If we continue to think in that direction, we may actually go so far that we could assume that there are customers who may decide to buy a car instead of going to a university. In this case, Metropolitan may face competition by Tesla. This is the third level of competition which is known as “available spend” competition. In other words, the customer has a certain amount of money to spend and is yet to decide on what product. You may have heard someone saying something like: I will either go on vacation or buy a new stereo system. Of course, there are as many combinations possible as many are the customers. Nevertheless, for some businesses, a trend may occur especially when companies compete for the “same-occasion” money. Typical example for such competition is a shopping malls, where apparel, food retail, restaurants, cinema, ice-cream vendors, and whatever you could think of compete against each other, although they are in completely different industries.
To summarize, there are four basic levels of competition:
- Direct Brand Competition – companies that offer similar products with similar perceived quality at comparable prices.
- Broad Industry Competition – all companies that offer similar products.
- Form Competition – substitute or alternative products that fulfill the same basic market need.
- Generic Competition – all companies that compete for the money of the same customers.
An integrated step-by-step approach for defining the industry and not losing sight of the market needs
As we already stated, defining the industry, in other words defining the business one competes in, is a complex task that requires significant analysis of the business, its customers’ needs and the external environment. There is always a room for mistake. However, even attempting to do so will bring valuable insights and help managers understand better their competitive landscape.
In this section we will try to give guidance for a business to define its industry – both in broad and narrow sense. Furthermore, this guidance will help the business identify its competitors on different levels of competition. All that is examined through the perspective of the business offerings, its goods and services, and the need they fulfil in the market. It makes sense for a business to define more than one industry, but a few business battle fields. That will ultimately help and contribute to further industry analysis – a corner stone in strategic analysis and development of strategic business development options.
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