industry and sector analysis

Question 1

what does the industry environment include?

Answer 1

• suppliers
• competitors
• customers

Question 2

what are the determinants of industry profitability?

Answer 2

• the value of product/service to customers
• the intensity of competition among suppliers of the product/service
• the relative bargaining power of industry members relative to their suppliers and buyers

Question 3

what is perfect competition?

Answer 3

• concentration = many firms
• entry and exit barriers = no barriers
• product differentiation = homogenous product (similar products)
• information = perfect information

Question 4

what is oligopoly?

Answer 4

• concentration = a few firms
• entry and exit barriers = significant barriers
• product differentiation = potential for product differentiation
• information = imperfect availability of information

Question 5

what is duopoly?

Answer 5

• concentration = two firms
• entry and exit barriers = significant barriers
• product differentiation = potential for product differentiation
• information = imperfect availability of information

Question 6

what is a monopoly?

Answer 6

• concentration = one firm
• entry and exit barriers = high barriers
• product differentiation = potential for product differentiation
• information = imperfect availability of information

Question 7

what elements are there in Porter’s five forces of competition framework?

Answer 7

• potential entrants (threat of entrants)
• buyers (bargaining power)
• substitutes (threat of substitutes)
• suppliers (bargaining power)
• competitive rivalry

Question 8

explain rivalry between established competitors

Answer 8

the impact of aggressive price competition on industry profitability depends on:
- industry concentration (number and size distribution firms)
- product differentiation
- excess capacity
- exit barriers
- cost conditions

Question 9

explain the threat of entry

Answer 9

entrants’ threat to industry profitability depends upon the height of barriers to entry

Question 10

what are the main barriers to entry?

Answer 10

• capital requirements
• economies of scale
• absolute cost advantage
• product differentiation
• access to supplier or distribution channels
• legislation or government action
• expected retaliation

Question 11

explain the threat of substitutes

Answer 11

customers will switch to alternatives (and thus threat increases) if:
- the price/performance ratio of the substitute is superior (e.g. aluminium is more expensive than steel, but it is more cost efficient for car parts)
- the substitution benefits from an innovation that improves customer satisfaction (e.g. high speed trains can be quicker than airlines from city centre to city centre on short haul routes)
- extra-industry effects: substitutes from outside the industry force managers to consider external threats and constraints

Question 12

who are buyers?

Answer 12

the organisation’s immediate customers, not necessarily the ultimate consumers
- if buyers are powerful they can demand cheap prices or product/service improvements

Question 13

when is buyer power likely to be high?

Answer 13

• buyers are concentrated (only a few of them)
• buyers have low switching costs
• buyers can supply their own inputs (backward vertical integration)
• low buyer profits and impact on quality

Question 14

what are suppliers?

Answer 14

those who supply what organisations need to produce and the product or service; powerful suppliers can reduce an organisations profit

Question 15

when is supplier power likely to be high?

Answer 15

• the suppliers are concentrated (only a few of them)
• suppliers provide a specialist or rare input
• high switching costs
• supplier can integrate forwards

e.g. low cost airlines have cut out the use of travel agents

Question 16

what are the implications of the five forces analysis?

Answer 16

which industries to enter or leave?
- identifies the relative attractiveness of industries, for example, those where forces are weak

how can the five forces be managed?
- managers should identify strategic positions to defend themselves and exploit forces. e.g. they can build the barriers to entry by becoming more vertically integrated

how are competitors affected differently?
- large firms with more resources can often deal with barriers to entry more easily than small firms

Question 17

what are strategic groups?

Answer 17

organisations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases
- there are many different characteristics that distinguish between strategic groups
- these can be grouped into 2 major categories of strategic dimensions
- strategic groups can be mapped onto 2-dimensional charts (maps) - these can be useful tools of analysis

Question 18

some characteristics for identifying strategic groups

Answer 18

scope of activities:
- extent of product or service range
- extent of geographical coverage
- number of segments served
- distribution channels used

resource commitment:
- product or service quality
- extent of vertical integration
- size of organisation and marketing effort
- r&d spending and technological leadership

Question 19

uses of strategic group analysis

Answer 19

• understanding competition
• analysis of strategic opportunities
• analysis of mobility barriers

Question 20

explain understanding competition

Answer 20

enables focus on direct competitors within a strategic group rather than the whole industry
- e.g. Tesco will mainly focus on Aldi, Lidl and Asda

Question 21

explain analysis of strategic opportunities

Answer 21

helps identify attractive strategic spaces within an industry

Question 22

explain analysis of mobility barriers

Answer 22

• obstacles to movement from one strategic group to another
• these barriers can be overcome to enter more attractive groups. barriers can be built to defend an attractive position in a strategic group

Question 23

what are market segments?

Answer 23

a group of customers who have similar needs from customer needs in other parts of the market

Question 24

explain market segments

Answer 24

not all segments are attractive or viable market opportunities, evaluation is essential:
- customer needs vary for a variety of reasons: focusing on customer needs that are highly distinctive is one means of building long-term strategy
- specialisation within a market segment can be an important basis for a successful ‘niche strategy’

Question 25

what are blue oceans?

Answer 25

new market spaces where competition is minimised

Question 26

what are red oceans?

Answer 26

where industries are already well defined and rivalry is intense

Question 27

explain blue ocean thinking

Answer 27

it encourages entrepreneurs and managers to be different by finding or creating market spaces that are not currently being served

Question 28

what is a strategy canvas?

Answer 28

compares competitors based on key success factors to measure differentiation

Question 29

what are critical success factors?

Answer 29

factors that are either particularly valued by customers or can provide a significant advantage in terms of cost
- they are likely to be an important source of competitive advantage if an organisation has them (or a disadvantage if an organisation lacks them)
- different industries and markets have different CFs (e.g. in low-cost airline industry, the CFs are punctuality and value for money whereas in full-service airlines it is all about quality of service)