The industry and market environment Flashcards
An industry
An industry is a group of organisations supplying a market offering
similar products using similar technologies to provide customer benefits.
Industry life cycles
Whole industries may pass through different phases in their ‘life’. (In terms of sales:)
Introduction
Growth
Shakeout
Maturity
Decline
Industry lifecycles may mirror the underlying product life cycle (the industry ceases to
exist when the product is discontinued).
However, industry life cycles can be expanded by product innovation.
Industry life cycles: Introduction
New product or service is invented.
There can be significant first mover advantage for the first firms in the market (in
terms of reputation and experience).
Industry life cycles: Growth
This stage is characterised by rapid growth.
The market becomes attractive to new entrants.
Competitive rivalry is relatively low as firms are experiencing growth without
having to increase market share.
Industry life cycles: Shakeout
The market growth begins to slow.
Weaker players are forced to leave the industry or merge with another company.
Industry life cycles: Maturity
This is a stable period of low growth.
As growth slows down at the start of the maturity phase price competition
intensifies and smaller competitors (who lack scale economies) are shook-out of
the industry
Industry life cycles: Decline
Sales volumes start to fall as demand for the industries products decline.
Firms leave the industry and eventually it ceases to exist.
Porter’s Five Forces: Used for?
Porter’s five forces analysis can be used to assess the attractiveness of
an industry in terms of long run profitability
Porter: The five forces
The five competitive forces (below) determine the level of competition and therefore profitability of the industry.
Bargaining power of customers
Threat of new entrants
Bargaining power of suppliers
Threat of substitutes
Porter’s Five Forces: Threat of new entrants
How likely is it that new players will enter the market?
Is the market attractive?
High industry growth
High profit margins
Few existing competitors
Easy customer switching
Barriers to entry
Economies of scale
Brand loyalty
Capital requirements
Access to distribution
Patents
Government subsidies
Porter’s Five Forces: Competitive rivalry (among existing firms)
How intense is the competition among existing players in the market?
This will be higher if there are:
large numbers of existing competitors
high levels of fixed costs
low industry growth
low switching costs
high exit barriers
high strategic importance
Porter’s Five Forces: Threat of substitutes
Are substitutes available and are consumers likely to switch to them?
Availability of substitutes
From different industries
(e.g. rail travel vs bus travel)
From sub-industries
(e.g. CDs vs MP3 downloads)
Increased likelihood
Price of substitute is low
Relative performance of the
substitute is comparable
Customers can switch easily
Porter’s Five Forces: Power of customers
Do customers have enough bargaining power to push down prices?
This will be higher if there are:
small numbers of large customers
large numbers of competitors
low levels of product differentiation
low switching costs
the customers own profitability is low
high degree of price transparency in the market
Porter’s Five Forces: Power of suppliers
Do suppliers have enough bargaining power to increase their prices?
Several different types of suppliers should be considered. These include:
Providers of raw materials
Service providers and outsourced services
Employees and hire workers
Their bargaining power will be increased if:
There are a few large suppliers
The supplier’s products are differentiated
High switching costs for the customers (the industry being analysed)
The supplier has other buyers they can sell to instead
