Industry Analysis

Question 1

What is the definition of an industry?

Answer 1

A firm or group of firms that produce and sell the same or similar products to the same market

Question 2

What is the challenge for drawing industry boundaries?

Answer 2

There is no definitive rule. You must avoid being too inclusive as factors that differ across heterogeneous markets cannot be detected. You also cannot be too exclusive as important threats will be missed

Question 3

What are some ways you can define an industry?

Answer 3

1. Look at products/services offered
2. Look at geographic scope
3. Are the rivals, suppliers, or buyers (forces) the same?

Question 4

What are the objectives of industry analysis?

Answer 4

1. Understand where value is being derived in the industry
2. Understand drivers of profitability
3. Understand why some industries are more attractive than others
4. Understand macro-economic influences and trends
5. Understand key success factors

Question 5

What are some industry analysis tools?

Answer 5

1. Industry value chain
2. Porter’s 5 Forces
3. PEST
4. Key success factors
5. Game theory
6. Scenario planning
   Know when to use each based on industry characteristics

Question 6

What is the industry value chain?

Answer 6

A chain of activities that link raw materials through to the final product. A firm typically performs a limited number of activities in the chain

Question 7

What is the objective of the industry value chain?

Answer 7

Objective is to add value at each step. Each activity has its own revenues and costs

Question 8

What does the profitability of each stage in the value chain indicate?

Answer 8

Indicates power or imporanceof that value system stage

Question 9

What is the difference between backward and forward vertical integration?

Answer 9

Backward is performing the activities of your suppliers in the value chain.
Forward is performing the activities of your customers in the value chain such as distributors

Question 10

Why does the value chain matter?

Answer 10

Helps you to determine what part of the chain you want to be in based on profitability and what chain you want to be a part of

Question 11

What are the 5 forces in porter’s model?

Answer 11

1. Threat of entrants
2. Buyer power
3. Supplier power
4. Substitute products
5. Industry rivalry

Question 12

What is the threat of entry based on?

Answer 12

Height of barriers to entry
Potential response by incumbents

Question 13

What is the issue with threat of entry?

Answer 13

Brings in new capacity and takes market share which puts a cap on profits

Question 14

What are some examples of barriers to entry?

Answer 14

1. Supply side economies of scale
2. Demand side economies of scale like network effects
3. Customer switching costs
4. Access to distribution channels
5. Capital requirements
6. Government policy
7. Incumbent advantage
8. Expected retaliation

Question 15

Why do incumbents have an advantage in an industry?

Answer 15

1. They may have proprietary technology
2. Cost or quality advantage is not available to potential entrants
3. They have access to raw materials
4. Established brand
5. Have learning and experience in the industry

Question 16

What is a substitute good?

Answer 16

The two kinds of goods can be consumed or used in place of one another in some of their uses. Fulfill the same wants and needs

Question 17

When is the threat of substitutes high?

Answer 17

1. When it offers an attractive price-performance tradeoff
2. When switching costs are low

Question 18

What increases supplier power in an industry?

Answer 18

1. High supplier concentration
2. Low supplier dependency on the industry
3. Limited switching costs
4. Substantial threat of forward integration
5. Substantial product differentiation
6. Limited substitutes

Question 19

What increases buyer power in an industry?

Answer 19

1. Buyer purchases high volumes
2. High level of product standardization in industry
3. Low switching costs for buyers
4. Substantial threat of backward integration
5. Substantial price sensitivity
6. Significant product impact on buyer’s final product cost
7. Significant product impact on buyer’s final product quality
8. Limited wages or profits earned by the buyer

Question 20

What increases rivalry within an industry?

Answer 20

1. Many competitors
2. Slow or backward industry growth
3. Substantial exit barriers
4. Limited product differentiation
5. High fixed costs
6. Large capacity increases increments
7. Short product shelf life

Question 21

When is competing on price more likely?

Answer 21

When:
1. Fixed costs are high
2. Capacity can only be extended in large increments
3. The product is perishable
4. Other features like quality and service improve value for customers or defend against substitutes

Question 22

What percentage of profits can be explained by industry conditions?

Answer 22

Up to 10%

Question 23

What are some common pitfalls to avoid during industry analysis?

Answer 23

1. Treating all forces equally instead of digging into important forces
2. Doing a static analysis and ignoring trends
3. Using analysis to declare industry as attractive or not instead of guiding strategic choice

Question 24

What is PEST?

Answer 24

Political
Economic
Social
Technological
and Environmental and Legal
macro-economic forces that impact strategy

Question 25

Why do managers need to be able to scan the external environment?

Answer 25

To:
1. Identify important external developments
2. Assess their impact and influence
3. Adapt the company’s direction and strategy as needed

Question 26

What are key success factors?

Answer 26

Factors dictated by industry characteristics that all firms in the industry must possess to be viable

Question 27

What two questions help to identify key success factors for an industry?

Answer 27

1. What do customers want? What basis do they use to choose between offerings?
2. How does the firm survive competition? What drives it? What dimensions do firms compete on?