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