Chapter 4: Industry and Sector analysis Flashcards
What is an industry?
An industry is a group of firms producing products and services that are essentially the same (Car industry)
What is a market?
A market is a group of customers for specific products or services that are essentially tbe same (Geographical market)
Shortly describe porters five forces
Porters five forces framwork assists industry analysis and help to identify industry attractiveness in terms of five competetive forces
- Extent of rivalry between competitors
- Threat of entry
- Threat of substitutes
- Power of buyers
- Power of suppliers
How do you define an industry
If the industry is defined incorrectly –> analysis can become flawed
- Not too broad, not too narrow
- The broader industry value chain needs to be considered (Analyse the broaqder value chain seperatly)
- Most industries can be analysed at different levels (Ex. Different geographies)
Explain competetive rivalry!
At the center of the five forces framework - Analysing the rivalry between existing players “Incumbents”
Competitive rivalrs - Organisations aiming at the same customer groups and with similar products or services
Five factors tend to define the extent of rivalry in an industry or market
- Competitor concentration and balance - Equal size and power –> danger of intense rivalry as one tries to gain dominance –> Price cuts
- Degree of differentiation - Commodity market –> low differentiatied products –> High rivalry as customer can switch between competitors (Can only compete on price)
- Industry growth rate - An organisation can grow with the market but at times with low growth rate in the market –> the organisation can grow at the expense of rivals –> resistance from competitors –> Price war during low market growth
- High fixed costs - High fixed costs –> highly rivalrous. Companies will try to spread fixed costs by selling more volume –> lowering prices –> price war
- High exit barriers –> Increase rivalry
Explain The threat of entery!
The greater the threat of entery = The worse it is for incumbents in an idustry
Attractive industries have high barriers to enter –> reduce the threat of new competition
Five important entery barriers are
- Economies of scale - Scale is important in projects with high R&D –> Once a copany have high volume –> it is difficult and expensive for competition to match (Higher unit costs)
- Customer switching costs
- Capital requirements - High capital requirements to enter a industry –> prevent many new entrants
- Access to supply or distribution channals and other incumbency advantages - Incumbents have had control over the supply or distribution channels
- Expected retaliation- If an entrant feel that an existing player might retaliate in a costly manner –> entery might be prevented
Explain the power of buyers
Buyers power is likely to be high when some of the following conditions prevail
- Concentrated buyers - Few buyers (majority of sales) –> power is increased
- Low switching costs - Buyers can easily switch between suppliers –> strong negotiating position
- Buyer competition threat - If the buyer can supply itself with its own capabilities –> high power (backwards vertical integration)
Explain The threat of substitutes
Substitutes = Products or services that offer the same or similar functions
Two points to bear in mind about substitutes
Extra industry effects are the core of the substitution concept - Substitutes come from outside the invumbents industry and should not be confused with competitors threat from within the industry
The Price/Performance ratio - Expensive substitutes might be a threat if it provides an performance advantage
Explain the powers of suppliers
Suppliers = Those who supply the organisation with what it needs to produce a product or service (Labour, Material)
Suppliers power is likely to be high when
- Concentrated suppliers - Few suppliers dominate –> More power
- High switching costs - If it is expensive and time consuming to switch supplier –> High power for supplier
- Supplier competition threat - Increased power when the supplier can enter the industry and cut out the buyer as a middleman
- Differentiated products - When the products are highly differentiated –> More power (EX. proctor and gamle –> high negotiating power)
Name the three industry types!
Monopoly - One firm
Oligopoly - Few competitors
Perfect competition - Many competitors
What does industry convergence mean?
Industrys are overlaping each other (telephone and computer –> today a phone can act as a computer) - This is important to consider when doing an industry analysis
Explain the industry life cycle!
- Development - Few players, little rivalry, weak five forces.
- Growth - Low rivalry and plenty of market opportunity, likely with low barriers to enter.
- Shake out - Cluttered and saturated market with competitors, different profits –> some out of business
- Maturity - Increasing barriers to enter (control over distribution, economies of scale, experience curve) - standardise products –> price is key
- Decline - Extreme rivalry (especially when there are high exit barriers) –> survivors are still profitable –> can lead to monopoly
What is a business ecosystem?
A Business ecosyste 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 (Nespresso capsules work in some other coffee machines)
What is a complementor?
A complementor enhances another organisations business attractiveness such that customers value the organisations product or service more when they also have the complementors product or service (Value nespresso capsule higher when they have “Krups” coffee machine –> –> They are therefore dependent on each other)
What are the three characteristics of complementors and core business ecosystems that need to be considered?
Non-generic, unique complementarities - “A does not function without B”
Ecosystem leaders - Generic complementarities can be turned into specific ones by an organisation that designs and leads an ecosystem
Network effects - There are network effects in an industry when one customer of a product or service has positive effect on the value of that product for other customers (Ebay, Facebook)
What are strategic groups?
Strategic groups are organisations within the sam industry or sector with similar strategic characteristics, following silimar strategies or competing on similar bases
What is a market segment
A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market
