L15 - Industries Flashcards
What is an industry and a market?
A group of firms producing products and services that are essentially the same
Industries and sectors are often made up of several specific markets
Market – a group of customers for specific products or services that are essentially the same
What is the five forces framework?
Porter’s Five Forces Framework 6 helps identify the attractiveness of an industry in terms of
five competitive forces: (i) threat of entry, (ii) threat of substitutes, (iii) power of buyers,
(iv) power of suppliers and (v) extent of rivalry between competitors
The five forces together – an industry’s structure
An attractive industry structure offers good profit potential – if the 5 forces are high, unattractive industry
Aim – an assessment of the attractiveness [assume you are IN it] of the industry and any possibilities to manage strategies in relation to the forces to promote long term survival and competitive advantage” (p. 60)
What is competitive rivalry and what do we look at when examining it?
Competitor balance and concentration - competitors of roughly equal size – intense rivalry.
Industry growth rate – low-growth markets often associated with price competition and low profitability; growth likely to be at the expense of the rival. Influenced by industry life cycle
Product differentiation
Brand identity
High fixed costs – tend to be highly rivalrous. Companies want to spread costs – i.e. increase volumes – trigger price wars. If extra capacity can only be added in large increments – short-term over-capacity in the industry leading to increased competition
High exit barriers
What do we look at when examining the threat of entry?
Capital requirements
Scale and experience – economies of scale, experience curve (cost advantage)
Product differentiation
Access to supply or distribution channels
Absolute cost advantages (incumbency advantage)
Expected retaliation
Legislation or government action
What is the threat of substitutes and what is it influenced by?
The simple risk of substitution puts a cap on the prices that can be charged in an industry
The price/performance ratio – substitute is still an effective threat even if more expensive, so long as it offers performance advantages that customers value. Price of substitute relative to YOUR products
Buyer propensity to substitute for your products
What is the power of buyers and what is it influenced by?
Immediate customers
Likely to be high if:
(1) concentrated buyers – a few large customers account for the majority of sales, if product or service accounts for high percentage of buyer’s total purchases
(2) low switching costs
(3) low differentiation of your products
(4) threat of backward integration by buyers into your industry
What is the power of suppliers influenced by?
Supplier power likely to be high if:
(1) concentrated suppliers
(2) high switching costs
(3) high differentiation of suppliers products
(4) high threat of forward integration by suppliers into your industry
What are 3 Caveats, Limitations of a Five Forces Analysis?
There may be complementors
There may be Network effects; “when more customers for a product or service has a positive effect on the value of that product for other customers (e.g. Facebook p. 58).
Define the industry appropriately: neither too broad nor too narrow p. 59
What are complementors?
An organisation is your complementor if it enhances your business attractiveness to customers or suppliers
Complementors may cooperate to increase total value available
Opportunities for cooperation can be seen through a value net – a map of organisations in a business environment demonstrating opportunities for value-creating cooperation as well as competition
What is the industry life cycle and how does it relate to Porter’s five forces?
The power of the Five Forces typically varies with the stages of the industry life cycle
(1) development (introduction) – experimental, few players, little direct rivalry and high differentiation. Five Forces likely to be weak, though profits might be scarce due to high investment requirements
(2) growth – low rivalry as plenty of opportunities, barriers to entry might still be low, suppliers can be powerful
(3) shake-out – begins as market becomes increasingly saturated and cluttered with competitors, profits are variables as weakest competitors are forced out of business
(4) maturity – barriers to entry increase, products or services tend to standardise with relative price becoming key, buyers may become more powerful, profitability relies on market share providing leverage against buyers and competitive advantage in terms of cost
(5) declines – extreme rivalry, especially if high exit barriers, survivors may still be profitable if competitor exit leaves them in monopolistic position
The nature and strength of the five forces change as the industry evolves through its life cycle
Life Cycle model helps managers anticipate how the forces will change as the industry evolves and to formulate appropriate strategies
What are strategic groups?
Organisations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases
These characteristics are different from those in other strategic groups in the same industry or sector
Two major categories for distinguishing between strategic groups: (1) the scope of an organisation’s activities (such as product range, geographical coverage and range of distribution channels used). (2) the resource commitment (such as brands, marketing spend and extent of vertical integration).
Which characteristics are relevant differs from industry to industry, but typically important are those characteristics that separate high performers from low performers
Can be mapped onto two-dimensional charts, one method for choosing key dimensions is to identify top performers and compare with low performers. Characteristics shaped by top performers but not low are likely to be particularly relevant
What are 4 ways strategic groups are useful?
Understanding competition – managers can focus on direct competitors rather than whole industry, establish the dimensions that distinguish them from other groups – more detailed strategic positioning within the industry (compared to 5 forces)
Analysis of strategic opportunities – identify the most attractive ‘strategic spaces’ within and industry
Identifying the most successful strategies within the industry
Analysis of mobility barriers – obstacles to movement from one strategic group to another, similar to barriers of entry
What are market segments?
Difference in customer needs – a group of customers who have similar needs that are different from customer needs in other parts of the market, when small – niches
Variation in customer needs - Focusing on customer needs that are highly distinctive from
those typical in the market is one means of building a long-term segment strategy. Being able to serve a
highly distinctive segment that other organisations find difficult to serve is often the basis
for a secure long-term strategy.
Specialisation – ‘niche strategy’. Organisations that have built up most experience in servicing a particular market segment should not only have lower costs in so doing, but also have built relationships which may be difficult for others
to break down. Experience and relationships are likely to protect a dominant position in a particular segment.
What is the strategy canvas and blue oceans?
Two concepts that help think about the relative positioning of competitors in the environment
Strategy canvas – compares competitors according to their performance on key success factors in order to establish the extent of differentiation
Blue oceans – new market spaces where competition is minimised
What are the 3 features of the strategy canvas?
CSF’s – those factors that are particularly valued by customers or provide significant advantage in terms of costs.
Value curves – a graphic depiction of how customers perceive competitors’ relative performance across the CSF’s.
Value innovation – the creation of new market space by excelling on established CSFs on which competitors are performing badly and/or by creating new CSFs representing previously unrecognised customer wants (company C). A value innovator is a company that competes in ‘Blue Oceans’
