Ch.4 Industry and sector analysis Flashcards
What are the three issues to consider in defining an industry?
- Must not be defined to broadly or too narrowly: to wide variety risks analysis of becoming meaningless, too narrow risk excluding important competitors.
- The broader industry value chain needs to be considered: Different industries often operate in different parts of value chain/value system and should be analysed separately. Ex: iron ore → steel manufacturers → numerous industries = should be analysed separately.
- Most industries can be analysed at different levels: Ex diff geographies, markets, products or service segments within them. Ex Airplane: Geography - EU and China: Service segment - Leisure and business.
Describe Porter’s Five Forces Framework. What are the five forces?
Assist in industry analysis and helps to identify industry attractiveness in terms of 5 forces. Where they are strong = industry not attractive, implications for how to form competitive strategies.
- Extent of rivalry between competitors
- Threat of entry
- Threat of substitutes
- Power of buyers
- Power of suppliers
Five Forces Framework: Describe Competitive Rivalry.
Examines competition among existing players (incumbents) in the industry. The more
competitive rivalry, the less attractive the industry - the worse for incumbents.
Ex. SAS and KLM are rivals, aiming at the same customer groups with similar products and services. High Speed train = substitute
Five Forces Framework: Competitive Rivalry: What are the five factors defining extent of rivalry?
i. Competitor concentration and balance: Where numerous competitors equal power/size → danger of intense rivalry as competitors try to gain dominance over others → ex through aggressive price cuts. Less rivalrous industries: 1 or 2 dominant orgs with smaller players reluctant to challenge larger directly (ex by focusing on niche to avoid the attention of the dominant).
ii. Degree of differentiation: Commodity market - p/s poorly differentiated → rivalry increased cuz customers can switch between competitors. Price = only way to compete.
iii. Industry growth rate: In situations of strong growth - an organisation can grow with the market. Low
growth/decline - any growth likely to be at the expense of a rival. Low growth markets: price competition
and low profitability. Industry life cycle influences growth rates → also competitive conditions.
iv. High fixed costs: Ex. industries requires high investments in capital equipment/initial research - highly rivalrous. Companies seek to spread fixed costs (ex reduce unit costs) by increasing their volumes: → cut prices → competitors do the same → triggering price wars = all competitors in industry suffers.
v. High exit barriers: High closure or disinvestment costs - tends to increase rivalry, especially in declining industries.
Five Forces Framework: Describe Threat of Entry.
How easy it is to enter the industry influences the degree of competition. Attractive industry =
high barriers to entry that reduces the threat of new competitors.
Five Forces Framework: Threat of Entry: What are the five important entry barriers?
i. Economies of scale: Scale more Important in some industries (pharmaceuticals - high fixed costs for R&D
& Marketing). Expensive for new entrants to match, to reach incumbent → until similar volume = higher
unit costs. Experience cure effect incumbents have cost advantage and Network.
1. Experience curve effects: Another scale barrier, that give incumbents a cost advantage because
learned how to do things more efficiently. Until new entrant build up same level of experience - will
produce at higher costs.
2. In addition to supply side economies of scale there are ‘Demand or buyer side’ economies of scale, or
‘Network’ of a large number of customers.
ii. Customer switching costs: Switching between large integrated software systems may incur high switching
costs. Switch could lead to extra costs.
iii. Capital requirements: Financial resources needed to enter can prevent entry (Pharmaceutical industry
huge R&D investments over many years). Large corporations may have access to the capital needed, it may limit the number of likely entrants.
iv. Access to supply or distribution channels and other incumbency advantages: in many indu. incumbents have control over supply and distribution channels through direct ownership (vertical integration), customer/supplier loyalty, incumbents may have access to proprietary technology (patents) or brand identity (coca cola).
1. Vertical integration: a business arrangement in which a company controls different stages along
the supply chain. Instead of relying on external suppliers, the company strives to bring production
processes in-house
v. Expected retaliation: retaliation of incumbents so great → prevent entry or entry too costly = a barrier. Can take form in price war or marketing blitz. ust knowledge that incumbents are prepared to retaliate - often discouraging to act as a barrier.
Five Forces Framework: Describe Threat of Substitutes.
Analyses products or services that can replace those in the industry. Substitutes can limit
price increases. Substitutes can reduce the demand for a type of product when customers switch to alternatives.
But does not have to be much actual switching for the substitute threat to have an effect.
→ Substitutes can limit price increases. Puts cap on prices that can be charged in an industry. Ex: Eurostar
trains have no direct competitors - train services London - Paris, but prices it can charge is limited by cost of flights.
Five Forces Framework: Describe Power of Buyers.
Evaluates the influence buyers have on pricing and product quality. Concentrated buyers or low
switching costs can increase their power.
Buyers - organisation’s immediate customers, not necessarily the ultimate consumers.
If buyers are powerful - can demand low prices/costly product or service improvements.
Five Forces Framework: Power of Buyers: Which three examples give buyers high power?
- Concentrated buyers: Few large customers account for majority of sales.
- Low switching costs: buyers can easily switch between competitors → strong negotiating power/position
→ can squeeze suppliers who are desperate for their business. Ex. Often low for: standardised products or
undifferentiated commodities. - Buyer competition threats: has capability to support itself or acquire such capability → Powerful. Threat: doing supplier job themselves = backward vertical integration - moving back to sources of supply (might occur if satisfactory prices or quality from suppliers can’t be obtained).
Five Forces Framework: Describe Power of Suppliers.
Assesses the power suppliers have in influencing organizations. Concentrated suppliers or
high switching costs can increase their power.
Most organisations have many supplier, important to concentrate analysis on the most important ones or
types. If power is high, suppliers can capture all their buyers’ own potential profits simply by raising their prices.
Five Forces Framework: Power of Suppliers: Which four examples give suppliers high power?
i. Concentrated suppliers: Few producers dominate supply → high supplier power vs buyers. Ex Iron ore = 3 main producers → steel companies, weak negotiation power.
ii. High switching costs: If expensive/disruptive to switch supplier → buyer becomes relatively dependent and weak. (Microsoft is a powerful supplier because of the high switching costs of moving from operating
system to another. Microsoft knows buyers prepared to pay premium to avoid trouble).
iii. Supplier competition threat: Increased power where able to enter the industry themselves or cut out buyers acting as intermediaries. (Thus, Airlines been able to negotiate with travel agencies as rise of
online booking allowed them to create a direct route to customers) = Forward vertical integration, moving up closer to the ultimate customer.
iv. Differentiated products: Products/services highly differentiated → suppliers more powerful. (Although
discount retailers Walmart extremely powerful, suppliers with strong brands P&G Gillette still have high negotiating power) Also, if no or few substitutes for the input, the supplier group will be more powerful.
What are the three implications of the Competitive Five Forces?
Managing the Five Forces: Managers should identify strategic positions where the organisation best can defend itself against strong competitive forces, exploit weak ones or influence them. Should try to influence and exploit
any weak forces to its advantage and neutralise any strong ones.
Choosing Industries: Organizations should invest in industries where the five forces are favourable and avoid or divest from industries where they are unfavourable.
Entrepreneurs sometimes choose markets because entry barriers low, unless barriers are likely to rise quickly, it’s the wrong reason to enter. Invest in industries where 5 forces work in favour and avoid/disinvest from markets where strongly unfavourable.
Effect on Competitors: Not all competitors will be affected equally by changes in industry structure, deliberate or spontaneous. Barriers rising (increased R&D/advertising spending) → smaller players in industry may not be able
to keep up → squeezed out. Growing buyers power → hurt small competitors most.
What are the three basic industry types?
Monopoly, Oligopoly and Perfect competition
Industry types: Describe monopoly.
Industry with with just 1 firm with unique product/service → no competitive rivalry. Lack of choice between rivals and few entrants →potentially great power over buyers and suppliers → can very profitable. Firms
can have monopoly power if they are the dominant competitor based on network effects: Google - 60% market
share of US search engine market → gives price setting power.
a. Other industries monopolistic because of economies of scale: water utility companies - uneconomic for
smaller player to compete.
Industry types: Describe Oligopoly.
Few often large firms dominate an industry: potential for limited rivalry, threat of entrants, great power over buyers and suppliers. With only few competitors → actions of one firm are likely influential on the others =
firms must consider actions of all others. Can be highly profitable but much depends on the extent of rivalrous behaviour, threat of entry and substitutes, growth of final demand in key markets.
a. Firms have interest in minimising rivalry between each other to maintain a common front against buyers and
suppliers. Airbus & Boeing = duopoly.
Industry types: Describe perfect competition.
Existence: barriers to entry low, countless equal rivals each with close to identical
products/services, information about prices, products, competitors is perfectly available.
a. Competition focuses on price (similar products, no major innovations or marketing initiatives to make them dissimilar) → condition: firms unable to earn more profit the the bare minimum required to survive. (agriculture, street food). Slightly imperfect (restaurants, hairdresser).
Industry types: What are Hypercompetitive industries?
Hypercompetitive industries involve frequent rivalry boldness and aggression of competitor interactions. Rivals tend to invest in disruptive innovation, expensive marketing initiatives, aggressive price cuts with negative impacts on profits.
Describe Convergence relating to industry structure dynamics.
Industries can change from one type to another due to macro-environmental factors, industry maturity, and competitive strategies.
Additionally Industry boarders can change over time - needs to be considered when defining an industry. Especially in high-tech areas, leading to convergence of previously separate industries.
Ex. Convergence: where previously separate industries begin to overlap or merge in terms of activities, technologies, products and customers. Samsung (phones), Sony (cameras), Apple (computers) = now same smartphone industry.
What are the two approaches for understanding change in industry structure?
The industry life cycle & Comparative industry structure analysis
Industry structure dynamics: Describe the industry life cycle. What are the five stages?
Describes stages from development to decline, with varying competitive forces and conditions.
- Development
- High growth
- Shake-out
- Maturity
- Decline
The power of the Five Forces varies with each stage. Industry characteristics and competitive
forces evolve throughout the life cycle. Industries may not follow a predictable life cycle and can be rejuvenated
through innovation.
Industry structure dynamics: Describe Comparative industry structure analyses.
Uses radar plots to understand current strength of the competitive
forces and how it may change over time.
Radar plots compare competitive forces over time.
The size of the enclosed area in the plot represents profit potential.
Dynamic analysis helps anticipate changes in competitive forces.
Radar plots provide a useful summary and initial analysis of industry structure.
What is a business ecosystem?
A business ecosystem then is an arrangement through which a group of mutually dependent and collaborative partners interact and combine their individual offerings into a coherent customer solution to create value for all.
They emphasize collaboration, alignment, and the creation of customer value.
Participants in ecosystems interact and combine their offerings to provide coherent customer solutions.
Ecosystems are crucial for innovations and can involve both cooperation and competition among organizations.
Different from regular customer-supplier relations: here customers can choose among products/offering elements
supplied by the ecosystem participants without the need of a single supplier integrate these for the customer.
The participants are interdependent and bound together based on som standard in a ‘core ecosystem’ (figure
4.5).
What are Complementors within an industry?
Complementors are organizations that enhance another organization’s business attractiveness.
Customers value an organization’s product or service more when it is complemented by another product or service. Complementors need to be analysed in addition to suppliers, distributors, substitutes, etc., when forming business strategies.
Example: Customers value Nespresso’s capsules more when they have DeLonghis’ coffee machine → So not only suppliers, distributors, substitutes etc. need to be analysed but companies that independently provide
complementory products/services direct to mutual customers = complementors. → Nespresso 6 DeLonghi
dependent on each other to create value and need to consider this in their strategies.
Complementors: What are the three characteristics of complementors and core business ecosystems?
- Non-generic unique complementarities that require coordination and alignment. “A does not function without B”
a. Complementarities generic and not unique - where no need for an ecosystem to align and structure various
independent participants to create value. Electricity - complementary to many products/services but can be purchased generically on the market. - Ecosystem leaders: Organizations can turn generic complementarities into specific ones by designing and
leading ecosystems.
a. Generic complementaries can be turned into specific ones by an organisation that designs and lead an
ecosystem. = Nespresso - took generic complementaries → turned them into non-generic unique complementaries by putting coffee in patented capsules, inviting external manufacturers. = created tightly integrated and coordinated set of actors, bound together by standards, patent.
Network effects: occur when the value of a product or service increases as more customers use it.
Network effects can lead to high barriers to entry and low intensity of rivalry, making an industry structurally attractive.
The more customers that use the product, the better for everyone in the customer network. →
Complementarity between diverse customers’ activities. Important for Facebooks ecosystem. → Need to be
carefully analyses as they can make an industry structurally attractive with high barriers to entry, low intensity of rivalry and power over buyers - as entrants and and rivals can’t compete with other companies’ larger network and buyers become locked to them.
What is a Strategic group?
Organisations within the same industry or sector with similar strategic characteristics, following
similar strategies or competing on similar bases. These groups differ from each other in terms of strategic dimensions, such as the scope of activities and resource commitment.
Identifying strategic groups helps in understanding competition more specifically within an industry. Also, mobility
barriers exist between strategic groups, making it challenging to move from one group to another. Analysing strategic groups also identifies strategic opportunities within an industry.
Strategic group: What are the two major categories of strategic dimension?
- Scope of an organisation’s activities
- Resource commitment
The Strategic group concept is useful in at least three ways, which?
- Understanding competition: Managers can focus on their direct within strategic group (rivalry often stronger between these) instead of whole industry. More specific industry analysis as strategic group influenced differently
by competitive forces. - Analysis of mobility barriers: Moving across strategic group map costs. Requires difficult decisions and rare resources. Therefore, strategic groups are characterised by ‘mobility barriers’, obstacles to movement from on
strategic group to another. Mobility barriers = barriers to entry in 5 forces analysis. Good to be in successful
strategic group protected by strong mobility barriers, to impede imitation. - Analysis of strategic opportunities: Strategic group maps can identify the most attractive competitive positions within an industry and the bases for these. Some positions may also be relatively under-occupied, thus unexploited opportunities.
Describe Market segments.
Industries can also be disaggregated into smaller and specific market sections - segments. Focuses on differences in
customer needs.
Market segments are specific sections within an industry that focus on differences in customer needs. These
segments represent groups of customers with similar needs that are different from customer needs in other parts of
the market.
Niches: Market segments where Customer groups relatively small.
Dominating a market segment or niche can be valuable, for same reasons that dominance of an industry can be
valuable following the 5 forces reasoning. For doing so, identifying unique customer needs within a segment is
crucial for building a successful segment strategy.
Segment analysis should reflect an organization’s strategy and align with customer needs.
Market segments: What are the two particularly important issues in market segment analysis?
- Variation in customer needs: Building a long-term segment strategy = focusing on customer needs that are highly distinctive from those typical in the market. Crucial bases of segmentation vary according to market. Being able to
serve a highly distinctive segment that other orgs find difficult to serve is often the basis for a secure long-term strategy. - Specialisation within a market segment van also be important for successful segmentation strategy. Sometimes
called a ‘niche strategy’. Orgs that have built up most experience in serving particular market segment should have lower cost in doing so and built relationships that are difficult for others to break down. Experience &
Relationship - likely to protect a dominant position in a particular segment. Specialised producers may have difficulties to compete in broader basis.
