industry and sector analysis Flashcards
what does the industry environment include?
- suppliers
- competitors
- customers
what are the determinants of industry profitability?
- 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
what is perfect competition?
- concentration = many firms
- entry and exit barriers = no barriers
- product differentiation = homogenous product (similar products)
- information = perfect information
what is oligopoly?
- concentration = a few firms
- entry and exit barriers = significant barriers
- product differentiation = potential for product differentiation
- information = imperfect availability of information
what is duopoly?
- concentration = two firms
- entry and exit barriers = significant barriers
- product differentiation = potential for product differentiation
- information = imperfect availability of information
what is a monopoly?
- concentration = one firm
- entry and exit barriers = high barriers
- product differentiation = potential for product differentiation
- information = imperfect availability of information
what elements are there in Porter’s five forces of competition framework?
- potential entrants (threat of entrants)
- buyers (bargaining power)
- substitutes (threat of substitutes)
- suppliers (bargaining power)
- competitive rivalry
explain rivalry between established competitors
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
explain the threat of entry
entrants’ threat to industry profitability depends upon the height of barriers to entry
what are the main barriers to entry?
- capital requirements
- economies of scale
- absolute cost advantage
- product differentiation
- access to supplier or distribution channels
- legislation or government action
- expected retaliation
explain the threat of substitutes
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
who are buyers?
the organisation’s immediate customers, not necessarily the ultimate consumers
- if buyers are powerful they can demand cheap prices or product/service improvements
when is buyer power likely to be high?
- 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
what are suppliers?
those who supply what organisations need to produce and the product or service; powerful suppliers can reduce an organisations profit
when is supplier power likely to be high?
- 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
what are the implications of the five forces analysis?
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
what are strategic groups?
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
some characteristics for identifying strategic groups
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
uses of strategic group analysis
- understanding competition
- analysis of strategic opportunities
- analysis of mobility barriers
explain understanding competition
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
explain analysis of strategic opportunities
helps identify attractive strategic spaces within an industry
explain analysis of mobility barriers
- 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
what are market segments?
a group of customers who have similar needs from customer needs in other parts of the market
explain market segments
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’
