Session 2 Flashcards
What are the objectives of industry analysis?
Objectives of Industry Analysis:
- Understand the industry’s role in the external environment.
- Identify key structural factors shaping competition and profitability.
- Assess industry attractiveness and forecast profitability.
- Develop strategies to improve competitive positioning and industry appeal.
- Identify key success factors for a competitive advantage.
What are the key factors that influence the industry environment?
The key factors influencing the industry environment are:
- The (inter)national economy
- Technology
- Government and political forces
- The natural environment
- Demographics
- Social forces
The industry environment consists of suppliers, competitors, and customers.
What determines the threat of substitutes in an industry?
The extent of competitive pressure from producers of substitutes depends on:
- Buyers’ propensity to substitute – If buyers are willing to switch to alternatives, the threat increases.
- The price-performance characteristics of substitutes – If substitutes offer better value for money, they become a stronger threat.
What factors influence the threat of new entry in an industry?
The threat of new entrants depends on the height of entry barriers. Key barriers include:
- Capital requirements – High initial investment discourages entry.
- Economies of scale – Larger firms can produce at lower costs, making entry difficult.
- Absolute cost advantage – Established firms have lower costs due to experience, access to cheaper inputs, etc.
- Product differentiation – Strong brand loyalty makes entry harder.
- Access to distribution channels – If distribution is dominated by incumbents, entry is challenging.
- Legal and regulatory barriers – Licensing, patents, and regulations protect incumbents.
- Retaliation – Threat of aggressive reactions from incumbents discourages entry.
What factors determine the bargaining power of buyers?
Buyers influence industry profitability through:
Buyer’s Price Sensitivity:
- Cost impact – If the product represents a large share of total costs, buyers are more price-sensitive.
- Product uniqueness – If alternatives exist, buyers have more power.
- Buyer competition – If buyers compete heavily among themselves, they may accept higher prices.
- Importance to buyer’s business – If the product is crucial for quality, switching is less likely.
Relative Bargaining Power:
- Buyer size & concentration – Large or few buyers have stronger negotiation power.
- Information availability – Well-informed buyers can negotiate better deals.
- Ability to produce the product themselves (backward integration) – Buyers who can self-supply have more power.
What factors determine the bargaining power of suppliers?
Suppliers influence industry profitability through:
Supplier’s Price Sensitivity:
- Cost impact for buyers – If the supplier’s product is a major cost component, buyers are more sensitive.
- Availability of alternatives – If switching suppliers is easy, supplier power is lower.
- Product differentiation – Unique products give suppliers more pricing power.
- Impact on buyer’s product quality – If a supplier’s product is critical, buyers are less likely to switch.
Relative Bargaining Power:
- Supplier size & concentration – Few large suppliers have more power.
- Information advantage – If suppliers know more about market conditions, they can negotiate better terms.
- Ability to sell directly to buyers (forward integration) – Suppliers who bypass intermediaries gain more control.
What factors determine the intensity of rivalry between established competitors?
The extent to which industry profitability is reduced by competition depends on:
- Concentration – More firms increase competition.
- Diversity of competitors – Differences in goals, costs, and strategies affect rivalry.
- Product differentiation – If products are similar, price competition is stronger.
- Excess capacity and exit barriers – If firms cannot leave easily, they continue competing aggressively.
- Cost conditions:
=> Ratio of fixed to variable costs – High fixed costs encourage price cuts to cover expenses.
=> Extent of scale economies – Large-scale production can lead to price wars.
What are industry boundaries, and why are they important?
- Industry boundaries define the scope of a market and determine which companies and products compete with each other.
- These boundaries are not fixed and vary based on classification level and substitutability of products/services.
They help businesses and analysts:
- Understand market competition and customer choices.
- Identify key competitors and market opportunities.
- Develop strategies for pricing, expansion, and differentiation.
- Adapt to different decision types, as boundaries shift depending on competition, regulation, or investment.
How can industries be classified?
Industries can be classified in different ways:
- Broad categories – Group many related businesses (e.g., automobile industry).
- Narrow categories – Specialized segments within an industry (e.g., luxury sports cars).
- Geographical scope – Industries can be global, regional, or national, depending on company competition and operations.
Different perspectives may lead to different industry definitions based on competition, regulation, or market strategy.
What is demand-side substitution, and how does it affect industry boundaries?
Demand-side substitution refers to how easily consumers switch between products. It affects industry boundaries by determining product competition. Key questions:
- Can customers easily replace one product with another?
- Do they see different brands or product categories as interchangeable?
Higher substitutability leads to broader industry boundaries.
What is supply-side substitution, and how does it impact industry competition?
Supply-side substitution refers to how easily companies can shift production to different markets or product categories. It impacts industry competition by influencing market flexibility.
Key questions:
- Can companies switch production to serve different markets?
- How easily can businesses adjust to changes in demand?
High supply-side substitution increases competition and market adaptability.
How can businesses improve industry profitability through industry analysis?
Businesses can influence industry structure to enhance profitability by:
- Identifying structural factors that reduce profitability (e.g., high competition, strong supplier power) and finding ways to change them.
- Implementing strategies that are individual (company-specific) or collective (industry-wide collaborations) to shape the competitive landscape.
Methods to reduce competitive rivalry:
- Mergers and acquisitions.
- Lobbying for regulatory changes.
- Improving supplier relationships.
What is strategic positioning, and how does it help maximize profitability?
Strategic positioning helps companies position themselves optimally within an industry to maximize profitability by:
Selecting a market segment or strategy that takes advantage of profit-supporting factors while minimizing exposure to profit-depressing factors.
Using approaches such as:
* Differentiation – Offering unique products/services.
* Cost leadership – Competing on price efficiency.
* Niche focus – Targeting specialized market segments.
A company may choose to target premium segments where competition is lower, and customer loyalty is higher.
How can Five-Forces Analysis help forecast industry profitability?
The Five-Forces Analysis explains why an industry is currently profitable or unprofitable and helps predict future structural changes that may impact competition and profitability.
Key questions to consider:
- New entry – Are new competitors likely to enter the market?
- Concentration – Will mergers and acquisitions reduce the number of competitors?
- Capacity vs. demand – Will production capacity grow faster than demand?
- Innovation & substitutes – Will new technologies or alternative products disrupt the market?
These insights allow businesses to anticipate competitive shifts and adjust their strategies accordingly.
What are the limits of industry analysis?
While industry analysis is useful, it has limitations, especially in industries dominated by a single firm.
In winner-take-all industries, competition may be meaningless since one firm captures most profits, leaving little for others.
These industries often feature:
- Extreme scale economies – Large firms have massive cost advantages (e.g., search engines).
- Network effects – Value increases as more people use a product or service (e.g., social networks, online marketplaces).
What are the two key assumptions of traditional industry analysis, such as Porter’s Five Forces?
Traditional industry analysis assumes that:
- Industry structure determines competitive behavior – Market conditions shape how firms compete.
- Industry structure is relatively stable over time – Competitive forces remain largely unchanged.
However, competition itself can change industry structure, making markets more dynamic than traditional models assume.
What is Schumpeterian Competition (Creative Destruction), and how does it impact industries?
Schumpeterian Competition (Creative Destruction) refers to continuous industry disruption due to innovation.
Key points:
- Innovation frequently replaces market leaders with new entrants offering better technology, products, or business models.
- Industries are constantly reshaped, preventing long-term stability.
- Example: Smartphones replacing traditional cell phones or streaming services overtaking DVDs.
What is hypercompetition, and how does it differ from traditional competition?
Hypercompetition describes a fast-moving competitive environment where advantages are temporary.
Key points:
- Competitive advantages are temporary as companies quickly create and destroy advantages through innovation, pricing, and marketing.
- Firms must continuously adapt to stay ahead.
- Example: The tech industry, where companies frequently release new products and features to outcompete rivals.
How does the Five Forces model differ from dynamic competition (hypercompetition)?
- Traditional industry analysis works best in stable markets.
- In dynamic industries, companies must be proactive in shaping industry conditions through constant innovation and strategic moves.
- Businesses in hypercompetitive markets must focus on continuously renewing competitive advantages rather than relying on industry stability.
What is the sixth force in industry analysis, and why do complements matter?
The sixth force in industry analysis is complements—products or services that enhance the value of another product when used together (e.g., software and hardware, cars and fuel).
Why do complements matter?
* Complement suppliers can gain bargaining power if their product is crucial to industry success (e.g., app stores for smartphones).
* They influence competition and profitability, just like suppliers and buyers.
Strategic Implication:
* Firms must manage relationships with complement providers to maintain a strong competitive position.
What is a business ecosystem, and how does value migration occur?
What is a business ecosystem?
- A network of organizations, institutions, and individuals that interact and shape an industry.
- Includes partners, suppliers, customers, regulators, and technology providers.
How does value migrate?
- Industry shifts cause profits and competitive advantages to move between companies and groups.
- Example: The shift from physical music sales to streaming services changed who captured value in the music industry.
How can firms influence value migration?
- Position themselves as essential players (e.g., becoming a “guardian of quality” or an irreplaceable platform).
- Anticipate and adapt to industry shifts (e.g., reconfiguring the value chain or leveraging emerging trends).
What are the nine components of the Business Model Canvas (BMC), and how are they categorized?
The Business Model Canvas (BMC) is a visual framework that helps businesses design, document, and analyze their business model.
It focuses on how businesses create, deliver, and capture value efficiently.
The BMC consists of nine components, divided into four categories:
A. Infrastructure (Operations & Resources)
* Key Partners – Suppliers, strategic alliances, and external companies that support the business.
* Key Activities – Core activities required to deliver the value proposition.
* Key Resources – Essential assets (physical, intellectual, human, financial) needed to operate.
B. Value Proposition (Core Offering)
* Value Proposition – The bundle of products or services that create value for different customer segments.
C. Customer (Market & Delivery)
- Customer Segments – Target audiences or groups the business serves.
- Channels – The methods used to deliver products/services to customers.
- Customer Relationships – How the company interacts and builds relationships with customers.
D. Financial Viability (Revenue & Costs)
* Cost Structure – Breakdown of all costs incurred to run the business.
* Revenue Streams – The ways the business generates income from different segments.
Why Use the Business Model Canvas?
- Provides a clear overview of how a business operates.
- Helps identify key strengths and weaknesses in the model.
- Allows for quick adjustments to optimize value creation.
- Useful for startups, established companies, and strategic planning.
