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?