Chapter 4 - Industry and sector analysis Flashcards
Porter’s Five Forces
assists industry analysis and helps to identify industry attractiveness in terms of five competitive forces:
1. Extent of rivalry between competitors
2. Threat of entry
3. Threat of substitutes
4. Power of buyers
5. Power of suppliers
Competitive rivalry/extent of rivalry between competitors
The exisisting players in an industry are The “Incumbents”
Rivals are organizations aiming are the same customer groups and with similar products and services.
Five factoirs of industry rivals:
* Competitor concentration and balance
* Degree of differentiation
* Industry growth rate
* High fixed costs
* High exit barriers
The threat of entry
How easy it is to enter the industry influences the degree of competition. The bigger the threat of entry is, the worse it is for incumbents in an industry. Attractive industries have high barriers of entry.
Five important entry barriers are:
* Economies of scale
* Access to supply or distribution and other incumbecy advantages
* Customer switching costs
* Capital requirements
* Expected retaliation
The threat of substitutes
Substitutes are products or services that offer the same or a similar function and benefit to an industry’s own products or services but have a different nature.
When there are several substitutes, you can identify the biggest threat compared by ranking them. Two important points about substitutes:
* Extra-industry effects are the core of the substitution concept. Managers should look beyond their own industry for more distant threats and constraints.
* The price/performance ratio is critical to substitution threats. A substitute can be more expensive and still be a threat, if the substitute offers performance advantages that customers value. It is the ratio of price to performance that matters, rather than simple price.
The power of buyers
Buyers are the organization’s immediate customers, not the ultimate consumer. If buyers are powerful, then they can demand low prices or costly product or service improvements. Buyer pwer is high when:
* Concentrated (a few, but large) buyers. A few large customers account for the majority of sales, buyer power is increased.
* Low switching costs. Where buyers easily can switch between suppliers, which gives them a stronger negotiation position. Switching cost are low for:
Standardized products
Undifferantiated commodities
When buyers are fully informed about prices and product performance
* Buyer competition threat. If the buyer has the capability to supply itself it tends to be powerful.
* Vertical integration, in negotiation with suppliers, threat of doing the suppliers’ job themselves, moving back to sources of supply.
The power of suppliers
Suppliers supply the organization with what it needs in order to produce the product or service. Eg: fuel, raw materials, equipment, labor and sources of finance. Opposite factors to those for buyer power. Thus, supplier power is likely to be high where there are:
* Concentrated suppliers. Few producers dominate supply → supply power over buyers.
* High switching costs. If it is expensive to move from one supplier to another → buyer dependent and weak.
* Supplier competition threat.Suppliers have increased power where they are able to enter the industry themselves. Forward vertical integration, moving up closer to the ultimate customer (not through immediate customers ICA, Coop etc.).
* Differentiated products. When the products or services are highly differentiated, suppliers will be more powerful.
Monopoly
An industry with just one firm with a unique product or serviec and therefore no competetive rivalry
* Great power over buyers and suppliers
* Very profitable
* Firms can still have monopoly power where they are simply the dominant competitor based on network effects (60% marketshare)
* Industries can be monopolistic becaouse of economies of scale, unneconomic for smaller players to compete
Oligopoly
An oligopoly is where just a few large firms dominate an industry, with the potential for limited rivalry and threat of entrants, while having great power over buyers and suppliers.
- With only a few competitors, the actions of any one firm are likely highly influential on the others → all firms must carefully consider the actions of all others.
- Can be highly profitable, but depends on the extent of rivalrous behaviour.
- Oligopolistic firms want to minimise rivalry between each other to maintain a common front against buyers and suppliers.
- Where there are just two oligopolistic rivals it’s a duopoly.
Perfect competition
Perfect competition exists where barriers to entry are low, there are countless equal rivals each with close to identical products or services, and information about prices, products and competitors is perfectly available.
Industry Life Cycle
Proposes that industries go through a cycle:
1. Start small in their development or introduction stage
2. Then go through a period of rapid growth (the equivalent to ‘adolescence’ in the human life cycle)
3. Culminating in a period of ‘shake-out’
4. Then a period of slow or even zero growth (‘maturity’)
5. And then the final stage of decline (‘old age’)
Ecosystems
A business ecosystem 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.
Complementors
Complementor enhances another organisation’s business attractiveness such that customers value the organisation’s product or service more when they also have the complementor’s product or service.
Example: App providers are complementors to iPhones because customers value the iPhone more if there are apps to download. → Apple needs to take app provider complementors into consideration when forming their strategies and vice versa.
Strategic groups
Strategic groups are organisations within the same industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases.These characteristics are different from those in other strategic groups in the same industry or sector.
