Ch.5 - Industry and market environment

Question 1

What is industry life cycle?

Answer 1

introduction -> growth -> shakeout + maturity -> decline

Question 2

How can we assess the attractiveness of industry in terms of long-run profitability?

Answer 2

• using Porter’s Five Forces

Question 3

What are Porter’s Five Forces?

Answer 3

• used to assess the attractiveness of industry in terms on long-run profitability

1. Threat of new entrants
2. Competitive rivalry
3. Treat of substitutes
4. Power of customers
5. Power of suppliers (raw materials, services and employees)

Question 4

What factors should be considered in threat of new entrants?

Answer 4

o Is the market attractive, i.e. high industry growth, high profit margins, few competitors, easy customer switching
o Are there any barrier to entry, i.e. brand loyalty, capital requirements, parents, government subsidies, economies of scale,…

Question 5

What factors should be considered in competitive rivalry?

Answer 5

o Large number of existing competitors, high fixed costs, low industry growth (not enough profit to be shared between everyone), low switching costs (for customers), high exit barriers (e.g. oil industries), high strategic importance (e.g. audit)

Question 6

What factors should be considered in threat of substitutes?

Answer 6

o Availability of substitutes, increased likelihood (e.g. price of substitutes is low, relative performance is comparable, customers can switch easily)

Question 7

What factors should be considered in power of customers?

Answer 7

o Small number of large customers, large number of competitors, low product differentiation, low switching costs, high degree of transparency, low profitability of customers (trying to find cheapest product)

Question 8

What factors should be considered in power of suppliers?

Answer 8

o Few large suppliers, products are differentiated, high switching costs, supplier has other buyers to sell to