Structural Analysis of Industries Flashcards
What is the Purpose of Industrial Structural Analysis (ISA)?
To understand the forces influencing a Firm’s ability to compete and profit in an Industry.
Porter, Competitive Strategy — P. 31.
What is an Industry?
A group of Firms producing products that are close substitutes for each other.
Porter, Competitive Strategy — P. 34.
How does Industrial Structural Analysis inform Competitive Strategy?
It allows a Firm to:
- See the underlying competitive pressures in its industry;
- Understand its strengths and weaknesses; and
- Plan strategies across various time horizons that leverage and fortify its position.
Porter, Competitive Strategy — P. 32.
What are the Five Basic Competitive Forces?
Otherwise known as Porter’s Five Forces.
- Threat of Entry.
- Intra-Incumbent Competition.
- Buyers’ Bargaining Power.
- Suppliers’ Bargaining Power.
- Threat of Substitute Products.
Porter, Competitive Strategy — P. 32.
Each Force is influenced by several Underlying Factors, but the Forces themselves are distinct and exist above them.
What is the Threat of Entry?
The prospect of Entrants who can bring new capacity and gain market share.
Porter, Competitive Strategy — P. 35.
Which Factors influence the Threat of Entry?
- Barriers to Entry.
- Expected Retaliation.
Sometimes called ‘Entry Barriers’.
Porter, Competitive Strategy — P. 36.
Which Factors influence Barriers to Entry?
- Switching Costs.
- Government Policy.
- Economies of Scale.
- Capital Requirements.
- Product Differentiation.
- Access to Distribution Channels.
- Cost Disadvantages Independent of Scale (CDISs).
Porter, Competitive Strategy — P. 36.
What are Switching Costs?
The costs a Buyer incurs for switching Suppliers.
Porter, Competitive Strategy — P. 38-39.
These may include employee retraining, new support staff, new equipment, product redesign, etc.
How do Switching Costs deter Entry?
They force Entrants to majorly improve on cost or performance in order to draw Buyers away from Incumbents.
Porter, Competitive Strategy — P. 39.
How does Government Policy deter Entry?
If strict and complex, it forces Entrants to incur significant compliance costs and decreases their operational flexibility.
Porter, Competitive Strategy — P. 42.
Such things include licensing requirements, limits on access to raw materials, regulatory codes and standards, and the like.
What are Economies of Scale?
Sometimes called ‘Scale Economies’.
The declines in unit costs as absolute volume increases.
The more you make of something, the cheaper it is to make.
Porter, Competitive Strategy — P. 36.
Common sources of Scale Economies include bulk purchasing, administrative cost sharing, learning effects, and technological investment.
How do Economies of Scale deter Entry?
It forces an Entrant to either:
- Enter at large scale and risk strong retaliation; or
- Enter at small scale and accept a cost disadvantage to maintain discretion.
Both are suboptimal.
Porter, Competitive Strategy — P. 36.
What are Capital Requirements?
The minimum financial resources an Entrant needs to reasonably compete.
Porter, Competitive Strategy — P. 38.
How do Capital Requirements deter Entry?
- If large, they disallow entry to most Firms.
- If necessary for high-risk activities, like R&D, they decrease the risk-adjusted profitability of entry.
Porter, Competitive Strategy — P. 38.
What is Product Differentiation?
The degree to which brands and products are distinct and customer loyalties are entrenched.
Porter, Competitive Strategy — P. 38.
How does Product Differentiation deter Entry?
It forces Entrants to spend heavily, usually over an extended period, to overcome existing customer loyalties.
Porter, Competitive Strategy — P. 38.
This is particularly risky since an Entrant would have nothing to salvage if their entry failed.
How does Access to Distribution deter Entry?
If limited or monopolized, it forces Entrants to negotiate on relatively weaker terms with Distributors to win their business.
Porter, Competitive Strategy — P. 39.
Such things include price breaks, cooperative advertising allowances, and the like.
What are Cost Disadvantages Independent of Scale?
Cost advantages that are irreplicable by Entrants through Economies of Scale.
Porter, Competitive Strategy — P. 40-41.
Such things include intellectual property, rights to essential inputs, prime real estate, government contracts and subsidies, and efficiencies of proprietary experience.
How do Cost Disadvantages Independent deter Entry?
It forces Entrants to operate at a relative disadvantage, and therefore to compete more fiercly, often to their short-to-medium term detriment.
Porter, Competitive Strategy — P. 40.
What causes Barriers of Entry to change?
- Incumbents’ actions; and
- Environmental changes.
Porter, Competitive Strategy — P. 44.
Strengthening one Barrier may weaken another. For instance, increased volume (Economies of Scale) may decrease exclusivity (Product Differentiation) or leave fewer resources for R&D (CDISs).
What is Expected Retaliation?
The likelihood that Incumbents will respond forcefully to an Entrant’s arrival.
Porter, Competitive Strategy — P. 42.
Which Factors influence Expected Retaliation?
- The Industry’s maturity.
- Incumbents’ degree of reliance on the Industry.
- Incumbents’ quantity of disposable resources.
- The Industry’s historical disposition toward retaliation.
Porter, Competitive Strategy — P. 42.
What is the Entry Deterring Price?
The structure of prices and terms beyond which entry is economically unviable and consequently deterred.
Porter, Competitive Strategy — P. 43.
Which Factors influence Intra-Incumbent Competition (IIC)?
- High Stakes.
- High Fixed Costs.
- High Exit Barriers.
- Slow Industry Growth.
- Low Strategic Diversity.
- High Quantity of Incumbents.
- Low Product Differentiation or Switching Costs.
Porter, Competitive Strategy — P. 46-49.
How does the Quantity of Incumbents influence IIC?
If numerous, the likelihood of mavericks increases and Firms can move unnoticed more easily.
Porter, Competitive Strategy — P. 46.
How does the Rate of Industry Growth influence IIC?
If low, competition goes to turn on market share, consequently becoming fiercer and more volatile.
Porter, Competitive Strategy — P. 47.
How do High Fixed Costs influence IIC?
They strongly pressure Firms to fill capacity, often leading to price cutting spirals when there is excess capacity.
Porter, Competitive Strategy — P. 47.
What you should pay attention to is fixed costs relative to value added, and not fixed costs as a proportion of total costs.
How does the Lack of Product Differentiation or Switching Costs influence IIC?
It intensifies pressure for price and service competition, both of which are particularly fierce and volatile.
Porter, Competitive Strategy — P. 47.
How does Strategic Diversity influence IIC?
Multiple Firms with distinct differences will compete differently, and resultantly, may conflict often.
Porter, Competitive Strategy — P. 48.
Core differences include commercial objectives, tactics, strategies, origins, personalities, relationships to parent companies, etc.
How do High Stakes influence IIC?
The more Firms need to succeed in an Industry, the fiercer and more volatile the competition will be.
Porter, Competitive Strategy — P. 49.
How do High Exit Barriers influence IIC?
They inflate competition by keeping uncompetitive Firms active for longer than is optimal.
Porter, Competitive Strategy — P. 49.
Which Factors influence Exit Barriers?
- Fixed costs of exit.
- Socio-political restrictions.
- Strategic interrelationships.
- Management’s emotional disposition.
- Specialized assets with low liquidation values or high costs of transfer.
Porter, Competitive Strategy — P. 49.
What is the Threat of Substitute Products?
The risk that a more attractive price-performance alternative will displace demand for a Product at a certain price, effectively capping profits.
Porter, Competitive Strategy — P. 52.
What is a Substitute Product?
A Product that performs the same function as another Product, minor differences and native Industries notwithstanding.
Porter, Competitive Strategy — P. 53.
Particularly problematic Substitutes are those that: (1) are improving in price-performance metrics; or (2) are produced by high-growth Industries expecting slower growth.
How does Buyers’ Bargaining Power influence Industry Profitability?
If high, it decreases profitability by increasing competition over prices and service quality.
Porter, Competitive Strategy — P. 53.
When does a Buyer Group have high Bargaining Power?
- It has full information.
- It faces few Switching Costs.
- It is purchasing an Undifferentiated Product.
- It does not particularly need the Seller’s Product.
- It represents a majority of the Seller’s trading volume.
- It can influence downstream purchasing decisions.
- It poses a credible threat of backward integration.
- It must spend frugally, whether due to low profits or the Product’s necessity and expensiveness.
Porter, Competitive Strategy — P. 53-55.
How does Suppliers’ Bargaining Power influence Industry Profitability?
If high, it decreases profitability by increasing prices or decreasing service quality, usually to cover Suppliers’ own cost increases.
Porter, Competitive Strategy — P. 56.
Labor must also be recognized as a Supplier, and one that exerts great power. Scarce, highly skilled employees or tightly unionized labor can bargain away a significant fraction of Industry profits.
When does a Supplier Group have high Bargaining Power?
- It has full information.
- It poses a credible threat of forward integration.
- Its Product is Differentiated.
- Its Product cannot be Substituted.
- Its Buyers need its Product.
- Its Buyers face high Switching Costs.
- Its Buyers represents a minority of its trading volume.
Porter, Competitive Strategy — P. 56-57.
What distinguishes an Effective Competitive Strategy?
It fortifies the Firm against the Five Forces by:
- Defensively positioning it; while
- Influencing the Forces; and
- Anticipating and exploiting changes therein to maximise its welfare.
Porter, Competitive Strategy — P. 59.
How does a Firm Defensively Position itself?
It finds and occupies the position in an Industry where the Forces are weakest, from which it can most effectively confront and avoid competition.
Porter, Competitive Strategy — P. 59.
How does a Firm influence the Forces?
By understanding the degree of influence it can exert over which Underlying Factors and developing tactics accordingly.
Porter, Competitive Strategy — P. 60.
How does a Firm anticipate and exploit changes in the Forces?
By understanding which trends, budding and prevailing, are most likely to affect which Underlying Factors and developing tactics accordingly.
Porter, Competitive Strategy — P. 60.
