2 - Industry analysis Flashcards
the business environment of a firm consists of
all the external influences that affect its decisions & performance
PEST analysis provides
a simple yet systematic approach to identifying factors that are likely to shape the competitive conditions within an industry
PEST stands for…
Political (licencing, taxation, trademarks)
Economic (costs of labor, economic activity)
Social (shifting attitudes)
Technological
The prerequisite for profit is the
creation of value for the customer
Value is created when
the price the customer is willing to pay for a product exceeds the costs incurred by the firm
The profits earned by the firms in an industry are thus determined by three factors:
- value of the product to customers
- intensity of competition
- bargaining power of the producers relative to suppliers
A widely used framework for classifying & analysing factors that determine the intensity of competition in different industries
is Porter’s five forces analysis
These five forces of competition include 3 sources of horizontal competition:
competition from substitutes, competition from entrants & competition from established rivals
2 sources of vertical competition:
the power of suppliers and power of buyers
On Threat of Substitutes
- buyer propensity to substitute
- relative prices & performance substitutes
On Supplier Power
factors determining power of suppliers relative to producers; same as those determining power of producers relative to buyers buyer power box
On Buyer Power
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
One of the main sources of economies of scale is
new product development
Absolute cost advantages often result from
the acquisition of low-cost sources of raw materials
In an industry where products are differentiated…
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.
Barriers to entry also depend on
the entrants’ expectations as to possible retaliation by established firms.
Industries protected by high entry barriers tend to
earn above‐average rates of profit.
The effectiveness of barriers to entry depends on
the resources and capabilities that potential entrants possess.
Seller concentration refers to
the number & size distribution of firms competing within a market
the concentration ratio measures the
seller concentration
Why does industry profitability tend to fall so drastically during periods of recession?
because of the balance between demand and capacity.
Barriers to exit are
costs associated with capacity leaving an industry.
Where fixed costs are high relative to variable costs,
firms will take on marginal business at any price that covers variable costs.
The firms in an industry compete in two types of markets:
- in market of inputs
- in market of outputs
In input markets, firms
purchase raw materials, components and financial and labour services.
The extent to which buyers are sensitive to the prices depends on four main factors:
- The VALUE of the item
- Whether it is easily DIFFERENTIATED from other products
- The more intense the COMPETITION among buyers, the greater their eagerness for price reductions from sellers.
- 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.
Several factors influence the bargaining power of buyers relative to that of sellers:
- Size & concentration of buyers relative to suppliers
- Buyers’ information: The better‐informed buyers are about suppliers and their prices and costs, the better they are able to bargain.
- 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.
Because raw materials, semi‐finished products and components are often commodities supplied by small companies to large manufacturing companies,
their suppliers usually lack bargaining power. Hence, commodity suppliers often seek to boost their bargaining power through cartelization
The first stage of any industry analysis is
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.
We can use industry analysis to understand
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.
To predict the future profitability of an industry, our analysis proceeds in three stages:
- industry’s current & recent levels of competition & profitability are a consequence of its present structure
- Identify trends that are changing industry structure.
- Identify how these structural changes will affect the 5 forces of competition & resulting profitability of the industry
what is architectural advantage?
all firms, even quite small ones, have the potential to influence the development of an industry’s structure to suit their own interests
Architectural advantages results from three sources:
- Creating one’s own bottleneck: Apple’s dominance of the music download market through iTunes is achieved through a digital rights management
- 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
- 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.
Effective positioning requires
the firm to anticipate changes in the competitive forces likely to affect its industry.
segmentation is
the process of partitioning a market on the basis of characteristics that are likely to influence consumers’ purchasing behavior
Segmentation stages
- 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.
- 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.
- Analyse segment attractiveness
- Identify key success factors in each segment
- Select segment scope: A firm needs to decide whether it wishes to be a segment specialist or compete across multiple segments.
key success factors are
factors within the firm’s market that determine the firm’s ability to survive and prosper
identifying KSFs
- What do customers want?
- who are our customers?
- what do they want? - 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?
