Industry Analysis Flashcards
1
Q
How is Industry Analysis a new approach to answering the ultimate question?
A
- Moving from corporate strategy to business strategy
- So far, we were concerned with corporate level strategy
- Now the perspective is that of a given business, not the corporation
2
Q
What are the components of industry analysis?
A
- Market defintion
- Crucial to identifying who your competitors are: part of the market definition
- Relevant features of industry structures
- e.g. insensitivity of competition, Concentration ratio; entry barriers etc
- Market Classification
- Structure, conduct, and performance of firms under competition, monopoly, monopolistic, and oligopical market structure
- Porters’ Five Forces
3
Q
What are the components of market definition??
A
- Demand side: group of customers who have strong commonality in their demand
- Supply side: boundary within which firms compete with each other
- Statistics to define markets
4
Q
How is the market defined with a supply side approach?
A
- “Competitors are firms who’s strategic choices directly affect one another”: Product substitutability
- Competition implies high cross-product elasticity
5
Q
What are the practical statistics to define markets?
A
- Industry classifications
- SSNIP
- Time Elasticity of Demand
- Flow analysis
6
Q
What are some common industry classifications used to define markets?
A
- Standard industry classifications (SIC); North American Industry Classification (NAIC) etc
- Sometimes competition within SICs is obvious; other times it is not
- Magazine and chewing gum (point of sale) sales suffer from smart-phones becoming more common etc.
- Competition could extend outside traditional classifications
- Sometimes competition within SICs is obvious; other times it is not
- Common use of raw materials (e.g. based on input-output tables for the economy)
- Common use of production techniques (handicraft, machine-based, service sector, etc)
7
Q
What is SSNIP used to define markets?
A
- Used by regulators
- Competitor identification
- Check if a market defined in a particular way is ‘worth monopolising’. That is, can a hypothetical monopoly of all firms in the market raise profits by increasing the price
- This would imply that consumer had no other choice but to buy from there entities and this therefore defines the market
- Premise: a market is well defined, and competitors identified if a merger among all the competitors within would lead to a small, but significant non transitory increase in price
8
Q
How is SSNIP used specifically?
A
- Small: >5%
- Nontransitory: > 1 year
- e.g. BMW & Audi merger: BMW’s view: in the ‘global luxury car’ market, this couldn’t reduce conception much; FTC view: it would if you consider the ‘German luxury car’ market
- If FTC’s view is correct: should be possible for them to increase profits by raising prices for at least one year by 5%
- If BMW’s view is correct: a price rise leads to losing money
9
Q
What is the consensus about SSNIP?
A
- Intuitive conceptually, but:
- Requires computing the effects of a hypothetical scenario
- Requires unusually detailed data on prices and profits
10
Q
How is the time elasticity of demand used to define the market?
A
- Rather than rely on geography, use the notion of ‘cost of travel’ to buy goods to identify competitors
- Increase travel times and see where people go for alternatives
- Same principle as SSNIP: uniformly making all options more unattractive and seeing if people have alternatives: if not, you have defined the entire market
11
Q
How is Flow analysis used to define the market?
A
- Little in from outside (LIFO)
- = 1 - patients in flows / patients treated in the area
- Little out from inside (LOFI)
- = 1 - patient out flows/ patients treated in the area
- LIFO and LOFI greater than 75% could identify markets correctly
12
Q
What is market structure in industry analysis?
A
- Once we have identified the boundaries of the market or industry, what features should we look at?
- How do we quantify the extent of competition?
- Simple measure: number of firms
13
Q
What are the market concentration measures?
A
- Try to summarise information on firm sizes and numbers; their focus is on depicting the distribution of firm sizes
- Aim is to provide a convenient numerical measure reflect the implications of the number and size of distribution of firms for the nature of conception in the industry
- N-firm concentration ratio
- Hefindahl - Hirchman Index
- Lorenz Curve
14
Q
What is N-Firm Concentration?
A
- Combined market share of the N largest firms in the market
- CRN = ∑Si
- Si = the market share of the ith firm
- Alternatively this can be seen as the size of the biggest firms in the industry as a proportion of the total industry size
15
Q
What are the n-Firm concentration ratios pros and cons?
A
- Pros
- Requires size data on the top n firms only, together with the aggregate industry measures
- Cons
- It is based only on the biggest firm: not representative
- It is invariant to changes in the sizes of the largest firms. C3 can be the same over two periods despite the market shares held by the three changing dramatically
- i.e. a merger between the top two firms in the industry will have no impact
16
Q
What is the HHI?
A
- Uses every point in the firm size distribution
- Employs a weighting system to account for the relative importance of individual firms. Market share of each firm is squared so larger firms receive a higher weighting in the index
- The higher the index, the less likely the industry is competitive. Basically, market share is concentrated in the hands of few firms
- HHI = ∑ (Si)2
17
Q
Pros/cons of HHI?
A
- Pros
- Accounts for skewed size distributions better than concentration ratios
18
Q
How is the HHI regulated?
A
- Deal scrutiny: HHI∆ > 100
- Unconcentrated markets: HHI < 1500
- Moderately concentrated: 1500 < HHI < 2500
- Highly concentrated: HHI > 2500
19
Q
How are markets classified by HHI?
A
- Perfect comp
- HHI < .2
- Mon Comp
- HHI < .2
- Oligolopy
- .2 < HHI < .6
- Monopoly
- HHI > .6
20
Q
How is the Lorenz curve used?
A
- Shows variation in the cumulative size of the n largest firms in an industry, as n varies from 1 to N
- Horizontal axis: firms from the largest to smallest
- Vertical axis: cumulative size
- If all firms are equal sized: 45 degree line
- If distribution is skewed: concave curve
21
Q
What are porter’s forces and what is the consensus on this system?
A
- Existing Internal Rivalry
- Threat of new entrants
- Bargaining power of suppliers
- Bargaining power of buyers
- Threat of substitutes/complements
- Critique
- All threats, no opportunities
22
Q
What can multipoint competition be?
A
- Tit-for-tat (intense) rivalry
* Forbearance (Tacit Collusion)
23
Q
What is tit-for-tat rivalry?
A
- Understood to arise in single-point rivalry
- BIC & Gillette
- BIC revolutionised the ball-point pen industry
- Gillette enters disposable pen market
- BIC responds by entering the disposable razor market
- Masters & Bunnings
- Wesfarmers buys Bunnings, then Coles, bringing it into competition with Woolworths
- Woolworths announces it is getting into the home home improvement: codename ‘project oxygen’: suck oxygen out of Bunnings
24
Q
What is forbearance?
A
- Understood to arise in multi-point rivalry (or at least softer competition)
- Punishments from a single market undercut/price war etc. can lead to widespread retaliation in all the other markets; not possible in single-point rivalry.
- Airline Price Collusions
- Overlapping markets lead players to be highly susceptible to price wars etc
- Need for intra-firm coordination
- Coordination across divisions within a firm can be hard
- Especially when the competition is across multiple product markets
- If firms are able to co-ordinate properly and collude effectively with multi-point contact, increased firms in the market can lessen rivalry
