Analysis of industry competition

Question 1

Steps in applying 5 forces model

Answer 1

1 Define the industry 
2 determine whether each force is strong or weak 
3 conclude overall 
4 Develop recommendations 
5 Consider complementary models

Question 2

The intensity of competitive rivalry in an industry arises from:

Answer 2

Industry’s competitive structure
Concentration ratio (% share held by largest firms)
Diversity of competitors
Degree of product differentiation
Demand (growth or decline) conditions in industry.
Height of industry exit barriers.

Question 3

Buyers (customers) are most powerful when:

Answer 3

There are many small sellers and few large buyers.
Buyers purchase in large quantities.
A single buyer is a large customer to a firm.
Buyers can switch suppliers at low cost.
Buyers purchase from multiple sellers at once.
Buyers can easily vertically integrate to compete with suppliers.
Buyers are knowledgeable about their suppliers.

Question 4

Suppliers have bargaining power when:

Answer 4

Their products have few substitutes and are important to buyers.
The buyer’s industry is not an important customer to the supplier.
Differentiation makes it costly for buyers to switch suppliers.
Suppliers can integrate forward to compete with buyers and buyers can’t integrate backward to supply their own needs.

Question 5

Sometimes authors advocate ‘complementors’ as a “6th force”:

Answer 5

Suppliers of complementary products make a company’s products more valuable to customers.
Complementors can exercise bargaining power, like other industry players.

Question 6

Strategic Group Analysis

Answer 6

Presents a finer-grained analysis of the industry than the 5-force model

Question 7

A strategic group map

Answer 7

Represents the competitive structure of an industry.
Identifies which firms are strategically similar
Similar strategies and similar resource endowments
May or may not be closest competitors

Question 8

Strategic groups can be important because:

Answer 8

• Mobility barriers inhibit movement from one group to another
• But sometimes these exist mainly in the minds of managers in those firms
• Firm performance varies between groups
• The map can reveal strategic spaces with no current competitors

Question 9

Steps in Strategic Group Analysis

Answer 9

1 Select appropriate axes-typically differ for each industry
2 Plot companies on the resulting graph
3 Interpret
4 Consider alternative axes

Question 10

3 Dimensions for strategic group analysis

Answer 10

• Ownership and financial
• Operations and scope
• Market orientation

Question 11

Ownership and financial

Answer 11

Ownership structure, coporate effects, size of organisation, level gearing

Question 12

Operations and scope

Answer 12

Extend of vertical integration, geographical coverage, capacity utilisation, cost position, R&D or innovation intensity

Question 13

Market orientation

Answer 13

Pricing policy, product or service quality, distribution channels

Question 14

Limitations of industry analysis models

Answer 14

-They focus on the industry not the firm
Industry structure explains about 7-19% of the variance in firm profitability.
-The models provide a fairly static view
Innovation can alter the competitive environment.
-A good firm can do well in a bad industry.
-A good firm can make an unattractive position attractive.