Lecture Unit 7: Industry Analysis (1/2) Flashcards
What are the key purposes of industry analysis?
- the assessment of industry and firm performance
- the identification of factors that affect performance,
- the determination of the effect of changes in the business environment on performance
- the identification of opportunities and threats (SWOT analysis)
What frameworks are used for strategic analysis in industry analysis?
- Porter’s five forces framework
- the value net by Brandenburger and Nalebuff.
What must strategic analysis account for in industry analysis? What does industry
- It must account for both cooperation and competition within an industry
- industry analysis helps in the assessment of generic business strategies.
What are the five forces of porter?
= identifies the economic forces that affect industry profits
- Internal Rivalry
- Entry
- Substituates and complements
- Supplier power
- Buyer power
What is internal rivalry from the 5 forces?
- is the competition for market share among firms in the industry, which can be based on price or non-price dimensions.
Internal rivalry
How does price competition affect profitability?
Price competition erodes the price cost margin and profitability.
Internal rivalry
Why is non-price competition less likely to erode profits than price competition?
Can you give examples of non-price competition?
- It focuses on factors other than price, such as quality, features, and branding, which are less likely to erode profits.
Example
- Include couture fashion [style and image competition), cola (advertising and new product varieties),
- and pharmaceuticals (R&D “patent races”).
When does price competition get heated up?
- There are many sellers in the market
- Some firms have cost advantages over others
- Some firms have excess capacity
- Products are undifferentiated and switching costs are low
- Prices and sales are easily observable and prices cannot be adjusted quickly
- There are large/infrequent orders
- The exit barriers are strong
- The price elasticity of demand is high
What does entry (5 forces) do to the incumbents?
= Entry hurts the incumbents by
- by cutting into the incumbents’ market share,
- by intensifying internal rivalry (leads to a decline in price cost margin)
What are the two types of barriers to entry? (Entry 5 forces)
Barriers to entry can be
- exogenous (nature of the industry) or
- endogenous (incumbents’ strategic choices)
What are factors that affect the threat of entry?
- Government policies (that favor incumbents)
- Consumers (highly value reputation; are brand loyal)
- Access to key inputs (technological know-how, raw materials, distribution, locations)
- Experience curve
- Network externalities (give the incumbents the benefit of a large installed base)
- Expectations (about postentry competition)
Substitutes and complements
How does the availability of substitutes and complements affect demand for an industry’s output?
- Availability of substitutes erodes the demand for the industrys output
- Complements boost industry demand
What happens when the price elasticity of demand is large in the presence of substitutes?
(substitutes and complements 5 forces)
- When the price elasticity of demand is large, the pressure from substitutes will be significant.
changes demand as a consequence of substitutes and complements
What is the effect of changes in demand due to substitutes and complements to internal rivalry & entry/exit in a market?
Changes in demand can affect internal rivalry and entry/exit.
What are the different forms of supplier power?
We can distinguish between
- direct (relationship-specific investments; concentration) and
- indirect (suppliers can sell their service to the highest bidder) supplier power
What are factors that determine supplier power?
- Competitiveness of the input market
- relative concentration of the industry
- Relative concentration of upstream and downstream firms
- Purchase volume by downstream firms
- Availability of substitute inputs
- Extent of relationship specific investments
- Threat of forward integration by suppliers
- Suppliers’ ability to price discriminate
What is meant with buyer power?
- Buyer power is analogous to supplier power, buyers can influence the market by demanding lower prices, higher quality or more services.
- Power is stronger when they are a few, purchase in large volumes, or can easily switch to competing products
- Buyers have indirect power in competitive markets
How do buyers exert indirect power in competitive markets?
Buyers have indirect power in competitive markets through their ability to choose among competing suppliers.
What can lead to direct buyer power?
Buyer concentration or relationship-specific assets can lead to direct power.
How is buyer power relative to upstream suppliers analogous?
Buyer power relative to upstream is analogous to supplier power relative to downstream
What are the strategies that are propsed by the five forces framework, two main strategies firms can develop to outperform rivals?
- develop a cost advantage or
- a differentiation advantage
Firms can seek an industry segment where the five forces are less severe
How can firms cope with the five forces by targeting industry segments?
Firms can seek an industry segment where the five forces are less severe.
What actions/strategies can firms use to change the five forces?
- Strategies to reduce internal rivalries (internal rivalry)
- Moves that increase switching costs (substitutes)
- Entry deterring strategies (threat of entry)
- Integration to reduce buyer/supplier power
what are the limitations of the five forces framework?
- The framework pays limited attention to factors that might affect demand
- The framework focuses on a whole industry rather than on individual firms
- The framework does not explicitly account for the role of the government, except when the government is a supplier or buyer
What are the factors that the 5 forces pays limited attention to regarding their effects on the demand?
- It pays limited attention to changes in consumer income, tastes, and firm strategies for boosting demand, such as advertising.
Why is focusing on a whole industry a limitation of the Five Forces framework?
It may overlook individual firms that occupy unique positions and are insulated from some competitive forces.
How does the Five Forces framework handle the role of the government?
It does not explicitly account for the role of the government, except when the government is a supplier or buyer.
What is the difference betwee nthe five forces framework and the value net model?
- Five forces tends to view other firms (competitors, suppliers or buyers) as threats to profitability
- The value net model (Coopetition) interactions between firms can be positive or negative
–>It complement the 5 forces by considering opportunities posed by each force
How does the Five-Forces Framework view other firms?
It views other firms—competitors, suppliers, or buyers—as threats to profitability.
