Chapter 2 Flashcards
Industry
a group of companies that produce
competing products or services
Critical Success Factors
elements of the strategy that are promote (but do
not guarantee) success within a given industry.
Primary vs secondary industry
A primary industry consists of a firm’s most direct
competitors. A secondary industry also includes
less direct rivals.
Ways of determining an industry
old SIC system and its successor, the NAICS,
can be used as a starting point. Outside sources
can help define an industry, but top managers must
make their own determination.
Market Share
represents the proportion
of industry sales attributed to a particular
rival.
Relative Market Share
When data is not readily available or a firm wishes to focus on only a subset of the industry, relative market share— the firm’s percentage of sales in an “industry” restricted to select competitors—is a useful measure.
Industry Life Cycle Stages
Introduction, Growth, Shakeout, Maturity, Decline
Shakeout
Shakeout occurs when industry growth is no longer rapid enough to support the increasing number of competitors. As a result, a firm’s growth is contingent on its resources and competitive positioning instead of a high growth rate within the industry.
Maturity
Maturity is reached when the market demand for the industry’s outputs is becoming saturated. Virtually all purchases are upgrades or replacements, and industry growth may be low, nonexistent, or even negative.
Decline stage and growth
Growth is difficult to achieve when an industry is in decline.
Hypercompetition
industries emerge, develop, and evolve so rapidly that attempting to remain in the current stage may be neither possible nor worthwhile.
Porter’s 5 Forces
- The intensity of rivalry among incumbent firms (middle)
- The threat of new competitors entering the industry (up down)
- The threat of substitute products or services (up down)
- The bargaining power of buyers (left right)
- The bargaining power of suppliers (left right)
Essentials of Porter’s 5 forces
Collectively, the five forces determine an
industry’s potential for profitability. However,
forces do not guarantee that an individual
firm will be profitable or unprofitable. Ideally, firms should seek to compete in industries with a high potential for profitability.
Intensity of Rivalry Factors
- Concentration of Competitors
- High Fixed or Storage Costs
- Slow Industry Growth
- Lack of Differentiation or Low Switching Costs
- Capacity Augmented in Large Increments
- Diversity of Competitors
- High Strategic Stakes
- High Exit Barriers
Colins High Sloths Switch Caps During Happy Holidays
Threat of Entry
New entrants threaten the hold existing firms have on an industry and thereby tend to lower profits. The likelihood that prospective competitors will join an industry depends on barriers to entry. Firms often erect entry barriers to keep potential competitors out of the industry.
Threat of Entry Factors
- Economies of Scale
- Brand Identity and Product Differentiation
- Capital Requirements
- Switching Costs
- Access to Distribution Channels
- Cost Advantages Independent of Size
- Government Policy
Eve Brands Caps, Switches, And, Costly Goods
Pressure from Substitute Products
Substitute products come from outside of the industry, not from competitors. Substitutes present acceptable alternatives in some cases, but not others.
Buyers have bargaining power when
- Buyers are concentrated, or each one purchases a significant percentage of total industry sales.
- The products that the buyers purchase represent a significant percentage of the buyers’ costs.
- The products that the buyers purchase are standard or undifferentiated.
- Buyers face few switching costs and can freely switch from one rival to another.
- Buyers earn low profits, creating pressure for them to reduce their purchasing costs and negotiate more aggressively with industry firms.
- Buyers can engage in backward integration by becoming their own suppliers.
- The industry’s product is relatively unaffected by the quality of the buyers’ products or services, thereby creating an incentive for firms to change suppliers and demand the lowest prices.
- Buyers have access to the same product, market, and cost information as producers in the industry.
Colin’s significant standard switches lose by unrated icecream
Suppliers have bargaining power when
- The supplying industry is dominated by one or a few companies.
- There are no substitute products, weakening an industry’s rivals in relation to their suppliers.
- The industry as a whole is not a major customer of the suppliers.
- The suppliers pose a credible threat of forward integration by “becoming their own customers.”
- The suppliers’ products are differentiated or have built-in switching costs, thereby reducing the buyers’ ability to play one supplier against another.
Limitations of Porter’s 5 forces model
Assumes a clear, recognizable industry and does not consider partner firms. Assumes that large firms cannot influence the industry structure. Assumes industry factors, not firm resources, are primary profit drivers. Difficult to apply to firms operating in multiple countries where industry environments vary considerably.
Case Analysis Steps
- Identify industry and competitors
- Potential Profitability of the Industry
- Industry successes and failures
