Chapter 3 Flashcards
Why is Industry Analysis important?
Industry analysis is a critical component of strategy analysis, as it helps firms understand the external environment in which they operate. The primary task of industry analysis is to identify the sources of profit in the external environment.
What is Environmental Analysis? (Eg PEST analys)
The process of identifying and analyzing the external factors that affect a firm’s performance.
What three players builds the business (Industry) environment?
Customers: The individuals or organizations that purchase a firm’s products or services.
Suppliers: The individuals or organizations that provide a firm with the inputs it needs to create its products or services.
Competitors: The individuals or organizations that compete with a firm for customers and market share.
What factors determine the profitabillity of an industry?
Value of the product to customers: The amount that customers are willing to pay for a product or service.
Intensity of competition: The degree to which firms compete with each other for customers and market share.
Bargaining power of industry members relative to their suppliers and buyers: The ability of firms to negotiate prices and terms with their suppliers and buyers.
What are the two types of Industry Structure?
Monopoly: A single firm is protected by high barriers to entry.
Perfect Competition: Many firms supply a homogeneous product and there are no entry barriers.
What is Porter’s Five Forces of Competition Framework?
This framework provides a structured approach to analyzing the competitive forces that shape an industry.
Threat of Entry:
The degree to which new firms can enter an industry.
Bargaining Power of Suppliers:
The ability of suppliers to negotiate prices and terms with firms.
Bargaining Power of Buyers:
The ability of buyers to negotiate prices and terms with firms.
Rivalry between Established Competitors:
The degree to which firms compete with each other for customers and market share.
Threat of Substitutes:
The degree to which substitutes can replace a firm’s products or services.
Barriers to Entry: Disadvantages that new entrants face relative to established firms.
What are the sources of barriers to entry?
Sources of Barriers to Entry:
Capital Requirements
Economies of Scale
Absolute Cost Advantages
Product Differentiation
Access to Channels of Distribution
Governmental and Legal Barriers
Retaliation
what factors affect industry rivalry?
Concentration:
The number and size distribution of firms competing within a market.
Diversity of Competitors:
The ability of rival firms to avoid price competition by coordinating their prices.
Product Differentiation:
The more similar the offerings among rival firms, the more willing are customers to switch between them.
Excess Capacity and Exit Barriers:
Unused capacity encourages firms to offer price cuts to attract new business.
Cost Conditions:
The ratio of fixed to variable costs affects the level of price competition.
What is The bargaining power of buyers influenced by?
Price Sensitivity: The extent to which buyers are sensitive to the prices they are charged.
Concentration: The degree to which buyers are concentrated in the industry.
Backward Integration: The extent to which buyers integrate backward into their suppliers’ industries.
What are The bargaining power of suppliers is influenced by?
Concentration: The degree to which suppliers are concentrated in the industry.
Differentiation: The extent to which suppliers’ products are differentiated from those of other suppliers.
Switching Costs: The costs that firms incur in switching from one supplier to another.
How to Forecast Industry Profitability
1.Examine how the industry’s current and recent levels of competition and profitability are a consequence of its present structure.
2.Identify the trends that are changing the industry’s structure.
3.Identify how these structural changes will affect the five forces of competition and resulting profitability of the industry.
How can Firms influence industry structure to moderate competition?
Mergers and Acquisitions: Reducing the number of competitors in the industry.
Building Entry Barriers: Creating barriers to entry for new firms.
Differentiation: Differentiating their products from those of other firms.
How can Firms position themselves to shelter from competition?
Identifying Attractive Segments: Identifying segments of the industry that are less competitive.
Developing Unique Products: Developing products that are unique and difficult to replicate.
Building Strong Relationships: Building strong relationships with customers and suppliers.
How do you define industries and markets?
In everyday usage, the term industry tends to refer to firms within a broad sector, whereas a market refers to the buyers and sellers of a specific product.
What are demand side and supply side substitutability?
Demand-side substitutability: If customers are willing to substitute between different products or services, then these products or services are part of the same market.
Supply-side substitutability: If firms are able to apply their production facilities and distribution networks to supply different products or services, then these products or services are part of the same industry.
