SCP Model

What is it?

The Structure-Conduct-Performance model is used to trace the causes of industry performance. It is based on a model of Cause and Effect: Industry financial Performance is caused by the competitive Conduct of players in the industry; this Conduct is is turn caused by the industry Structure.

When is it useful?

This model can be used to justify consolidation in the industry. If Structure drives Performance, one way to improve performance is to create a more attractive industry Structure.

This analysis is similar to the competitve intensity dimension of Porters 5 forces analysis.

The usefulness of this model is diminished when industry boundaries are blurred and primary threats are coming from outside the industry.

An Example?

How do you do the analysis?

Highlight in Structure

  • Industry concentration (Herfindal index) – from monopoly to perfect competition
  • Market share pattern – is there a dominant leader?
  • What is the Minimum Efficient Scale?
  • Is it vertically integrated? Why?
  • Ownership of major companies (if they are listed/family/state-owned)

Highlight in Conduct

  • Where do they compete? Prices? Service? Advertising investment? War for Talent? Product innovation?
  • Is the conduct stable, or is it erratic, linked to the industry cycle?
  • Do player try to differentiate, or follow “me-too”  strategy?
  • Do competitors try to grow the pie (“good competitors”), or fight to enlarge their share (“bad competitors”)?

Highlight in Performance

  • Long term Total Shareholder Returns (TSR)?
  • Return on Capital Employed? (ROCE)
  • Economic Profit
  • 80/20 rule – if you calculate this for the largest companies, your estimate for the industry will be accurate. If you can’t get the data for some private companies or divisions, then identify the best comparable company and assume the same profitability
  • Quantify, and average over several years to remove the industry cycle effect

I want to know more

How can you adapt this concept?

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