business strat chapter 2

industry analysis

why analyse an industry?

• understand env: identify external factors that shape decisions, results, & risks

• locate profit pools: identify where value is created, who captures it, & which pressures erode margins

• make better choices: decide where & how to compete, & which capabilities are required

PESTLE

• political: gov, geopolitics, subsidies

• economic: inflation, interest rates, cycles, income

• social: demographics, habits, values

• technological: AI, data, automation, patents

• legal: competition, labour, safety

• environmental: climate, resources, sustainability

what determines industry profits?

• willingness to pay

• competitive intensity: how high competitors pressure each other with price, advertising, innovation, & capacity

• bargaining power: how much buyers, suppliers, & other key actors capture

4 basic industry structures

1. perfect competition: many firms, same product, high info available

2. oligopoly: few firms, significant barriers, strategic interdependence

3. duopoly: 2 firms, highly visible decisions, strong mutual reaction

4. monopoly: 1 firm, high barriers, greater market power

porter’s 5 competitive forces

• rivalry

• buyers

• suppliers

• substitute products

• potential entrants

horizontal competition

• rivalry among existing firms

• threat of new entrants & substitute products

vertical competition

• how value is divided along the chain

• bargaining power of buyers & suppliers

competitive forces

• exert pressures from diff directions

• stronger competitive forces = lower industry’s expected avg profitability

industry life cycle

1. intro: uncertainty, experimentation

2. growth: rapid demand, entry of rivals

3. maturity: efficiency, scale, & pricing

4. decline: exit, divestment, or renewal

strategic implications of industry life cycle

• intro: innovate, educate customers, absorb uncertainty

• growth: capture share, scale, set standards

• maturity: efficiency, segmentation, differentiation, cost control

• decline: harvest, niche, exist, or reposition

where does competitive pressure come from? (5)

• buyers: concentration, info, volume, integration

• suppliers: scarcity, differentiation, switching costs, talent

• substitutes: relative price, performance, propensity to switch

• entrants: scale, capital, brand, regulation

• rivalry: concentration, capacity, costs, differentiation

rivalry among existing competitors

• central determinant of competitive pressure & margins

• price wars, advertising, promotion, innovation, or service improvements

• intensifies when firms are similar, demand grows slowly, or there is excess capacity

assessing competitive intensity

• concentration: how many competitors? are they symmetric?

• diversity: do firms have similar objectives, costs, & strats?

• capacity & exit: excess capacity? leaving cost?

• costs: how much are fixed costs? are EOS important?

why are some industries especially aggressive?

• high FC: firms need high sales volume to spread FC across more units → when demand falls, price wars may emerge

• EOS: competing for volume may reduce AC, but can also encourage firms to chase market share even when margins fall

industry concentration

• # & relative size of competitors

• more concentrated = more strategic interdependence → moves visible to rivals

• strategic interdependence: a firm’s decision depends on how it expects its rivals to react

what happens when an industry is highly concentrated?

• small # of firms account for large share of market

• strategic interdependence increases

  • firms avoid destructive moves

• moves are more visible: price changes, promotions, new products, capacity expansions

• similar-sized rivals may compete aggressively

cross-price elasticity of demand

• = (% change in Qd of Y) / (% change in P of X)

• result > 0: substitutes → price of X falls, demand for Y falls

• result < 0: complements → price of X falls, demand for Y rises

• result = 0 → independent goods → little reaction across markets

• +ve result: closer rivals

managerial interpretation of cross-price elasticity

• high: close competitor → monitor prices, promotions, & positioning

• low: distant competitor or diff market → limited reaction

• -ve: complementer → cooperation opportunities

threat of substitute products

• substitutes cap the price customers are willing to pay

• no clear subs: inelastic demand & potentially higher margins

• close subs: elastic demand & more pricing pressure

3 warning signs of when substitutes are dangerous

1. relative price

2. performance

3. easy switching

threat of new entrants

• contestable market: industry with few relevant barriers → credible threat of entry

• non-contestable market: high barriers make entry costly, slow, or less credible

main barriers to entry

• capital

• cost advantages

• scale

• differentiation

• distribution

• regulation

barriers to entry in digital industries

• network effects: service becomes more valuable as more people participate

• data & algorithms: more use may improve prediction, personalisation, efficiency, & organisational learning

• switching costs: moving may cost a lot (monetary & social)

retaliation vs regulation & IP

• retaliation: incumbents cut prices, advertise, promote, litigate, or channel block

• regulation & IP: licenses, patents, tech standards, env rules, & compliance requirements may protect incumbents or make entry harder

• gradual entry: newcomers start in less visible segments to avoid an aggressive response

bargaining power of buyers

• ability to capture value when purchasing

• increases when buyers

  • are few, large, or purchase high volumes

  • are well informed, compare prices, or can switch easily

  • can integrate backward or credibly threaten to produce internally

bargaining power of suppliers

• ability to capture value when selling inputs

• increases when

  • there are few suppliers, or inputs are scarce

  • input is differentiated, critical, or hard to replace

  • supplier can integrate forward & become a competitor

powerful buyers vs powerful suppliers

• buyers: push prices down, demand quality, transfer risk, & reduce firm’s margins

• suppliers: raise costs, constrain availability, impose terms, & reduce the firm’s ability to differentiate

limitations of porter’s model

• static: takes screenshot of industry structure → doesn’t explain change

• limited treatment of demand: less focus on what drives or creates customer demand

• avg firm: treats firms in an industry similarly & overlooks differences in resources, strats, & CA

• gov & platforms: doesn’t consider influence of gov regulations, digital platforms, & tech ecosystems

• qualitative: requires judgement

• complements: not fully considered

coopetition

• cooperating & competing simultaneously

• core idea: mgers should examine threats & relationships that can increase total value created

• eg. tech standards, shared infrastructure, compatibility, industry lobbying, or joint quality improvements with suppliers

• cooperation doesn’t mean fixing prices or coordinating in an anticompetitive way

examples of coopetition

• platforms, manufacturers, & developers compete & complement each other at the same time

• infrastructure: operators share networks to reduce investment & improve coverage

• tech: rival firms collab on standards, compatibility, or pre-competitive R&D

how to apply analysis in a business plan

1. define industry & relevant market

2. assess each force using evidence

3. identify threats & opportunities

4. connect the diagnosis to strategic decisions