UNIT 3- The sector/ industry Flashcards
Industries and sectors
Industry changes can be analyzed in terms of the industry life cycle, hypercompetitive models of competition, and the comparative five forces radar plots.
- clusters
- competitive forces
- industry life cycle
- competitive cycles
The five forces framework
In the middle: Competitive rivalry
To the right: Buyer power
To the left: Supplier power
From above: Threat of substitution
From under: Threat of new entrants
Buyer power
The power is high when:
* concentrated buyers (few)
* low switching cost
* buyer competition threat
(backward vertical integration)
Supplier power
The power is high when:
* concentrated suppliers (few)
* low switching cost
* supplier competition threat (forward vertical integration)
Potential entrants:
*scale and experience,
* access to supply or distribution channels (ex.: direct ownership - vert. integration, loyalty, sold directly by e- commerce),
* expected retaliation,
* legislation or government action,
* differentiation
Substitutes
Important points to bear in mind:
1) price/performance rate
* aluminium vs. Steel;
* LCD vs. LED 2-95
2) extra-industry effects
* video-conference vs. business travel
Competitive rivalry
- competitor balance (high - intense competition)
- industry growth rate (low – price competition)
- high fixed cost (high volumes - low prices)
- high exit barriers * low differentiation
The threat of entry: barriers to entry
- Scale and experience
- Access to supply and distribution channels
- Expected retaliation
- Legislation or government action
- Differentiation
Why are substitutes a threat?
Substitutes can reduce demand for a particular class of products as customers switch to alternatives.
- price/ performance ratio
Example: aluminum vs steel/ plastic vs glass - extra-industry effects
Example: airlines vs video-conference/ mobile vs watch and camera
The power of buyers
- Are buyers concentrated? (few)
Example: milk- few retailers domain the market - What are the costs of switching? Buyers can easily switch their suppliers?
- Does backward vertical integration exist? Buyers can easily supply itself or buy a supplier?
Example: mobile phone manufacturers producing their own batteries
The power of suppliers
- Are suppliers concentrated?
Example: iron industry (in the hands of 3 main producers) leaving the steel companies fragmented - What are the costs of switching? Suppliers can easily switch their clients?
- Does forward vertical integration exist? Suppliers can easily eliminate the need of intermediaries?
Example: Airline companies- travel agencies- clients
Degree of competitive rivalry
- Competitor balance- equal size competitors
- Industry growth rate- Growing with the market (growth - life cycle) or growing at the expense of a rival (maturity)
- High fixed costs- reduction of unit cost by economy of scale
- High exit barriers- tends to increase rivalry
- Low differentiation- price competition
Managerial implications
- Which industries should we enter or leave?
- invest in industries where the 5 forces work in their favor - What influence can we exert or bring to bear?
- Increasing customers loyalty – increasing advertising
- Buying up competitors – reducing rivalry and increasing power over suppliers - How are competitors differently affected?
- small players are usually more affected
Other issues in a Five Forces Analysis
- Define the “right” industry. Right industry-right segment
Example: airline industry (domestic or long distant flight; leisure, business or freight) - Determine whether industries are converging
Example: photography industry, video, music, TV,
mobile phone, laptops, digital watch, video games - Identify complementary products
Example: computer / smart phones and
software companies create a VALUE NET with related products and services
Cluster
A cluster is a geographic concentration of interconnected businesses in a particular field: suppliers, clients and competitors.
Examples:
- Silicon Valley- tech
- Las Vegas- casinos
- Hollywood and Bollywood- movies
- Clusters of wine in Spain and Portugal
