5.6 industry and competitive analysis Flashcards
The ultimate objective of industry and competitive analysis is to
to determine if a company’s competitive strategy and positioning within its industry give it an advantage over its peers.
what most likely explains a company’s best and worst case scenario?
industry-level factors are highly determinative of a company’s best-case scenario, but company-specific factors are more likely to explain its worst-case scenario
Global Industry Classification Standard (GICS)
The GICS was designed for global comparisons of industries.
It classifies companies in both developed and developing economies according to their primary business activity (as measured by revenue).
The four levels (from broadest to narrowest) are sectors, industry groups, industries, and sub-industries.
Industry Classification Benchmark (ICB
The ICB classifies companies based on the source of the majority of their revenues.
The broadest groupings are called industries, followed by supersectors, sectors, and subsectors at the most granular level.
The Refinitiv Business Classification (TRBC)
Unlike the GICS and ICB, which are limited to public companies, this scheme includes private companies, non-profits, and government entities.
From the broadest to narrowest categories, companies are classified into economic sectors, business sectors, industry groups, industries, and activities.
Limitations of Third-Party Industry Classification Schemes
Categories may be defined too broadly. For example, a “software applications” category may include companies that have all developed proprietary software and have similar business models, but do not compete with each other.
Categories may be defined too narrowly. For example, different types of retailers may be classified into various different subcategories despite competing for the same target market.
Multi-product companies must be assigned to a single category. This is a particular concern with the emergence of large companies (e.g., Amazon, Google) that are active in a diverse range of sectors. It is a challenge to classify a company that generates a majority of its revenue from one sector while producing most of its profits from another sector.
While some industries are truly global, others are subject to regulations that limit competition to the national or local level. For example, there is not a global market for the delivery of healthcare services. Companies that have been classified as peers and have similar business models may not actually compete with each other. Conversely, some industries that were once local or regional (e.g., television distribution) have become global in scope.
Industry statistics can be affected by change in classification schemes. For example, the financial sector became significantly smaller when real estate investment trusts (REITs) were removed to create a new, separate real estate sector. Statistical comparisons over time must reflect the most recent classifications. A related concern is the potential for survivorship bias due to companies regularly being added to or removed from categories.
Return on invested capital (ROIC)
a useful measure of profitability because it captures after-tax operating profits per currency unit of invested capital, regardless of differences in how company’s have chosen to finance their assets.
Herfindahl-Hirschman Index (HHI)
a way to quantify the level of concentration within an industry
the sum of squared market shares for each firm.
–> A higher HHI score indicates greater concentration.
the five forces in Porter’s framework are:
- threat of entry
- threat of subs
- bargaining power of customers
- bargaining power of suppliers
- rivalry among existing competitors
Sustaining innovations
improve products or service without fundamentally changing their functionality.
For example, a photographer from the 1960s would likely be able transition relatively seamlessly to a camera produced in the 1990s or early 2000s and enjoy the benefits of numerous technological improvements.
disruptive innovations
fundamentally alter a market or offer a very different value proposition that may not initially appeal to existing customer
the reluctance to deviate from a successful business model is known as
the innovator’s dilemma
he research that produced the Five Forces framework also identified three generate corporate strategies that have been used to achieve above-average performance:
Be a cost leader
Differentiate
Focus on specific segments within an industry
An alternative method of grouping companies by geography is least likely to be completed using:
a) location of head office.
b) geographic composition of revenue.
c) primary listing of its equity securities.
b) geographic composition of revenue.
The CEO of a large law firm is concerned about a new mobile application that uses algorithms to auto-complete legal forms and questions in discovery and provides recommendations for small-claims matters at a much lower cost than a traditional law firm charges. As a result, the CEO is contemplating whether the firm should develop and launch its own branded application, which would affect its short-term profitability but maintain its existing customer base, or give up market share to focus on more complex claims with higher profitability. This scenario is an example of:
a) defensiveness.
b) innovator’s dilemma.
c) sustaining innovation.
b) innovator’s dilemma.
The described mobile application represents a fundamental change in the business model of a law firm. The application is a disruptive, not sustaining, innovation, as it brings new entrants into the market but with a very different value proposition. The CEO’s decision represents the “innovator’s dilemma”: the firm can either invest in the disruptive innovation, speeding the decline of its existing business but not losing market share, or ignore the innovation and lose market share while continuing to generate strong profits in the near term.
