Chapter 2: Industry Analysis
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Transcript of Chapter 2: Industry Analysis
Team 4: Peter Hogue, Cameron Lloyd, Breann Flores, Jonathon Jordan,
Chapter 2: Industry Analysis
Defined as: All of the external influences that affect its decisions and performance.
There are a large number of the influences so it helps to categorize them.
Business Environment of a Firm
2 ways of classifying influences◦ Source: political, economic, social and
technological factors (PEST analysis)◦ Proximity: “Micro Environment” can be
distinguished from the “Macro Environment”
Classifying Environmental Influences
4 factors examined in a PEST Analysis◦ Political: How the government restricts your
product and how they select who is allowed to do what
◦ Economic: How the current economy affects business. (America’s recent recession)
◦ Social: How people view your product. Safety, fashion, etc.
◦ Technological: Are you staying ahead of the curve?
PEST Analysis
Formed by relationship with three sets of players◦ Customers: Firm must understand its customers in
order to create value for them.◦ Suppliers: Firm must understand suppliers and
manage relationships with suppliers◦ Competitors: Firm must understand competitors,
because their profitability depends on it.
Core of a Firm’s Business Environment
To have profit in a firm, value has to be created for the customer.
But, value doesn’t directly equal profit. Consumer surplus vs. producer surplus
What determines the level of profit in an industry?
The value of the product to customers The intensity of competition The bargaining power of the producers in
relation to their suppliers
Profits earned by the firms in an industry are determined by
Some industries earn high rates of profit Others earn much lower rates of profit Small markets vs. large markets
How the industry’s structure determines the level of profitability
Three stages to predict future profitability of an industry
1.) examine current levels of competition and profitability
2.) Identify trends that are changing in the industry 3.) Identify how these structural changes will affect
the five forces of competition and resulting profitability of the industry
Forecasting Industry Profitability
“ The threat of entry rather than actual entry may be sufficient to ensure that established firms constrain their prices to the competitive level”
Contestability Sunk costs “hit-and-run” entry
Barrier to entry Capital requirements Absolute cost advantage Product differentiation Government and legal barriers Retaliation
Threat of Entry
Input market firms Output markets firms
Buyers price sensitivity Bargaining power
Bargaining Power of Buyers
Concentration Concentration ratio
Diversity of competitors Product differentiation Excess capacity and exit barriers Cost conditions
Industry Rivalry
Buyer propensity to substitutes Relative prices and performance substitutes Cigarettes example Wind farms vs. Natural gas
Threat of Substitutes
Porter’s Five Forces
Horizontal Competition◦ Competition from substitutes◦ Competition from entrants◦ Competition from established rivals
Vertical Competition◦ Power of suppliers◦ Power of buyers
Porter’s Five Forces
Availability of substitutes◦ Ex. Coke and Pepsi
Absence of close substitutes◦ Ex. Gasoline◦ Ex. Cigarettes
Impact of the internet◦ Ex. Travel agencies◦ Ex. Telecommunications
Competition from Substitutes
Capital requirements Economies of scale Absolute cost advantage Product differentiation Access to distribution channels Government and legal barriers Retaliation by established producers
Competition from Entrants
Concentration Diversity of competitors Product differentiation Excess capacity and exit barriers Cost conditions
Competition from Established Rivals
Bargaining Power◦ Supplier◦ Buyer
Complex component manufacturers◦ Ex. Disk drives
Power of Suppliers
Buyers’ Price Sensitivity◦ Cost of product relative to total cost◦ Product differentiation◦ Competition between buyers
Power of Buyers
Relative Bargaining Power◦ Size and concentration of buyers relative to
producers◦ Buyers’ switching costs◦ Buyers’ information◦ Buyers’ ability to backward integrate
Power of Buyers
Identifying Key Success Factors
To survive and prosper in an industry, a firm must meet two criteria: first it must supply what customers
want to buy; second it must survive competition.
Who are our customers and what do they want?
What does the firm need to do to survive competition?
Identifying Key Success Factors
Combining the industry competition analysis with what the customers want we can discover what the key success factors are
Key Success Factors
Prerequisites for success
What do customers want?
How does the firm survive competition?
Analysis of demand•Who are our customers?•What do they want?
Analysis of competition•What drives competition?•What are the main dimensions of competition•How intense is competition?•How can we obtain a superior competitive position?
Key Success Factors
http://www.youtube.com/watch?v=zrnPbZVlLQI
Caterpillar View on Customers
What do customers want?
How do firms survive competition?
Key success factors?
Steel •Low price•Product consistency•Reliability of supply•Specific technical specifications for special steel
•Commodity products, excess capacity, high fixed cost, excess capacity, intense price competition•Cost efficiency and financial strength essential
•Cost efficiency requires: large-scale plants, low-cost location, rapid capacity adjustment•Alternatively high technology, small-scale plants can achieve low costs through flexibility and high productivity
Questions?