2 - Industry analysis

Question 1

the business environment of a firm consists of

Answer 1

all the external influences that affect its decisions & performance

Question 2

PEST analysis provides

Answer 2

a simple yet systematic approach to identifying factors that are likely to shape the competitive conditions within an industry

Question 3

PEST stands for…

Answer 3

Political (licencing, taxation, trademarks)
Economic (costs of labor, economic activity)
Social (shifting attitudes)
Technological

Question 4

The prerequisite for profit is the

Answer 4

creation of value for the customer

Question 5

Value is created when

Answer 5

the price the customer is willing to pay for a product exceeds the costs incurred by the firm

Question 6

The profits earned by the firms in an industry are thus determined by three factors:

Answer 6

• value of the product to customers
• intensity of competition
• bargaining power of the producers relative to suppliers

Question 7

A widely used framework for classifying & analysing factors that determine the intensity of competition in different industries

Answer 7

is Porter’s five forces analysis

Question 8

These five forces of competition include 3 sources of horizontal competition:

Answer 8

competition from substitutes, competition from entrants & competition from established rivals

Question 9

2 sources of vertical competition:

Answer 9

the power of suppliers and power of buyers

Question 10

On Threat of Substitutes

Answer 10

• buyer propensity to substitute

- relative prices & performance substitutes

Question 11

On Supplier Power

Answer 11

factors determining power of suppliers relative to producers; same as those determining power of producers relative to buyers buyer power box

Question 12

On Buyer Power

Answer 12

Price sensitivity

• cost of product relative total cost
• product differentiation
• competition between buyers

Bargaining power

• size & concentration of buyers relative to producers
• buyers’ switching costs
• buyers’ information

Question 13

One of the main sources of economies of scale is

Answer 13

new product development

Question 14

Absolute cost advantages often result from

Answer 14

the acquisition of low-cost sources of raw materials

Question 15

In an industry where products are differentiated…

Answer 15

established firms possess the advantages of brand recognition and customer loyalty. New entrants to such markets must spend disproportionately heavily on advertising & promotion to gain levels of brand awareness similar to that of established companies.

Question 16

Barriers to entry also depend on

Answer 16

the entrants’ expectations as to possible retaliation by established firms.

Question 17

Industries protected by high entry barriers tend to

Answer 17

earn above‐average rates of profit.

Question 18

The effectiveness of barriers to entry depends on

Answer 18

the resources and capabilities that potential entrants possess.

Question 19

Seller concentration refers to

Answer 19

the number & size distribution of firms competing within a market

Question 20

the concentration ratio measures the

Answer 20

seller concentration

Question 21

Why does industry profitability tend to fall so drastically during periods of recession?

Answer 21

because of the balance between demand and capacity.

Question 22

Barriers to exit are

Answer 22

costs associated with capacity leaving an industry.

Question 23

Where fixed costs are high relative to variable costs,

Answer 23

firms will take on marginal business at any price that covers variable costs.

Question 24

The firms in an industry compete in two types of markets:

Answer 24

• in market of inputs

- in market of outputs

Question 25

In input markets, firms

Answer 25

purchase raw materials, components and financial and labour services.

Question 26

The extent to which buyers are sensitive to the prices depends on four main factors:

Answer 26

1. The VALUE of the item
2. Whether it is easily DIFFERENTIATED from other products
3. The more intense the COMPETITION among buyers, the greater their eagerness for price reductions from sellers.
4. The more critical an industry’s product to the quality of the buyer’s product or service, the less sensitive are buyers to the prices they are charged.

Question 27

Several factors influence the bargaining power of buyers relative to that of sellers:

Answer 27

1. Size & concentration of buyers relative to suppliers
2. Buyers’ information: The better‐informed buyers are about suppliers and their prices and costs, the better they are able to bargain.
3. Ability to integrate vertically: In refusing to deal with the other party, the alternative to finding another supplier or buyer is to do it yourself.

Question 28

Because raw materials, semi‐finished products and components are often commodities supplied by small companies to large manufacturing companies,

Answer 28

their suppliers usually lack bargaining power. Hence, commodity suppliers often seek to boost their bargaining power through cartelization

Question 29

The first stage of any industry analysis is

Answer 29

to identify the key elements of the industry’s structure.
It requires identifying who are the main players – the producers, the customers, the input suppliers and the producers of substitute goods.

Question 30

We can use industry analysis to understand

Answer 30

why profitability has been low in some industries and high in others but, ultimately, our interest is not to explain the past but to predict the future.

Question 31

To predict the future profitability of an industry, our analysis proceeds in three stages:

Answer 31

1. industry’s current & recent levels of competition & profitability are a consequence of its present structure
2. Identify trends that are changing industry structure.
3. Identify how these structural changes will affect the 5 forces of competition & resulting profitability of the industry

Question 32

what is architectural advantage?

Answer 32

all firms, even quite small ones, have the potential to influence the development of an industry’s structure to suit their own interests

Question 33

Architectural advantages results from three sources:

Answer 33

1. Creating one’s own bottleneck: Apple’s dominance of the music download market through iTunes is achieved through a digital rights management
2. Relieving bottlenecks in other parts of the value chain: Google developed Android to prevent other firms from gaining a bottleneck in operating systems for mobile devices
3. Redefining roles & responsibilities in the industries: IKEA’s ability to become the world’s biggest and most successful supplier of furniture was based upon a strategy that required a transfer of furniture assembly from furniture manufacturers to consumers.

Question 34

Effective positioning requires

Answer 34

the firm to anticipate changes in the competitive forces likely to affect its industry.

Question 35

segmentation is

Answer 35

the process of partitioning a market on the basis of characteristics that are likely to influence consumers’ purchasing behavior

Question 36

Segmentation stages

Answer 36

1. Identify possible segmentation variables: segmentation decisions are choices about which customers to serve and what to offer them, hence segmentation variables relate to the characteristics of customers and the product.
2. Construct a segmentation matrix: segmentation analysis generates far too many segmentation variables so it is necessary to reduce the number of variables to make the analysis more manageable.
3. Analyse segment attractiveness
4. Identify key success factors in each segment
5. Select segment scope: A firm needs to decide whether it wishes to be a segment specialist or compete across multiple segments.

Question 37

key success factors are

Answer 37

factors within the firm’s market that determine the firm’s ability to survive and prosper

Question 38

identifying KSFs

Answer 38

1. What do customers want?
   - who are our customers?
   - what do they want?
2. What does the firm need to do to survive competition?
   - what drives competition?
   - what are the main dimensions of competition?
   - how intense is competition?
   - how can we obtain a superior competitive position?