2.31-2 The Industry Environment: Part 1-2

What is an industry

group of firms who produce similar products and/or services • • Similar customers with similar needs Similar suppliers with similar goods/services

•What makes firms competitors?

Competing for customer dollars •Meeting similar needs •Adding similar types value for customers

Competitors—too broad?

Hard to be clear about who competitors actually are • Example: Thirsty

Competitors—too narrow?

NAICS •May miss key threats or opportunities • Example: Kodak and Polaroid

What is profitability?

•Price –Cost

The 5 forces:

Substitites, Suppliers, Potential Enterants, Buyers, Complements

High Buyer Power

Few buyers •Standardized products/services •Buyers have low switching costs •The buyer is price sensitive •The buyers could integrate into the industry by producing themselves

HigherSupplier Power

•Higher concentration than the focal industry •Hard to switch to other suppliers •Suppliers offer differentiated products or services •There are no substitutes •The suppliers could potentially enter the industry themselves •The suppliers don’t depend heavily on the focal industry

HigherRivalry

•Product/service is undifferentiated •Fixed costs are higher •Capacity has to be expanded in large increments •The product is perishable •There are lots of competitors • Industry growth is slow •Exit barriers are high •Rivals are committed and have different approaches to the business

HigherThreat of Substitutes

•When the substitute has good customer utility • If the industry of the substitute is: • In line with trends that that improve their offering in terms of the customer utility • Facing high competition which could drive the prices dow

HigherThreat of New Entrants

•Economies of scale are not needed in the industry •Network effects do not matter •Lower switching costs •Lower capital requirements •Limited incumbent advantages that aren’t just size •Equal access to distribution channels •Limited government policies that might restrict firms

Compliments 

A product or service that is used together with the product/service of the focal industry • Impact may be ambiguous so it is not a structural impact like the others and its impact is seen through the other forces…according to Porter

6 Step Industry Analysis Process

Steps

1. Define the industry by both its product scope and geographic

scope

2. Identify the players constituting each of the 5 forces and, where

appropriate, segment them into groups

3. Assess the underlying drivers of each force

4. Step back and assess the overall industry structure

5. Analyze recent and likely future changes for each force

6. How the firm can position itself in relation to the 5 force