Chapter 8 - Industry analysis Flashcards
an industry analysis based on frameworks facilitates:
- assessment of industry and firm performance
- identification of key factors affecting performance in vertical and horizontal relationships
- determination of how changes in the business environment may affect performance
- identification of opportunities and threats in the business landscape
limitations of the five forces framework
- pays limited attention to factors that might affect demand (ignores changes in consumer income, tastes, firm’s strategies for boosting demand such as advertising)
- focus on a whole industry rather than individual firms with unique positions that insulate them from some competitive forces
- does not explicitly account for the role of government (only as a supplier/buyer)
- it is a qualitative analysis
five forces
- internal rivalry
- supplier power
- buyer power
- entrants
- substitutes
internal rivalry
the jockeying for share by firms within a market
nonprice competition
erodes profits by driving up fixed costs to the extent that firms can pass cost increases along to consumers (higher prices)
price competition
difficult to reduce costs by enough to maintain price-cost margins
conditions that tend to heat up price competition
- many sellers in the market
- industry is stagnant or declining
- firms have different costs
- some firms have excess capacity
- products are undifferentiated/buyers have low switching costs
- prices and terms of sale are unobservable/prices cannot be adjusted quickly
- large/infrequent sales orders
- industry does not use facilitating practices or have a history of cooperative pricing
- strong exit barriers
- high industry price elasticity of demand
exogenous entry barriers
result from technological requirements
endogenous entry barriers
result from strategic choices made by incumbent
factors tending to affect threat of entry
- production entails significant scale economies - MES is large relative to market size
- government protection of incumbents
- consumers highly value reputation/consumers are brand loyal
- access of entrants to key inputs
- experience curve
- network externalities
- expectations about post entry competition
factors to consider when assessing substitutes and complements
- availability of close substitutes and/or complements
- price-value characteristics of substitutes/complements
- price elasticity of industry demand
indirect power (supplier)
when suppliers can sell their services to the higher bidder. price depends on supply and demand in upstream market
direct power (supplier)
suppliers can also erode industry profits if (a) they are concentrated or (b) their customers are locked into it because of relationship-specific investments
indirect power (buyer)
in competitive markets, the price they pay will depend on the forces of supply and demand
direct power (buyer)
when buyers are concentrated or suppliers made relationship-specific investments, buyers yield direct power, demanding lower (higher) prices when suppliers are thriving (struggling)
