Week 4 - Industry Analysis, Dynamics and Competition Flashcards
1
Q
Industries, markets and sectors
A
- Industry is a group of firms producing products and services that are essentially the same. For example, the automobile industry and the fast moving consumer goods industry.
- Market is a group of customers for specific products or services that are essentially the same (e.g. geographical markets - the market for luxury cars in Germany).
- A sector is a broad industry group (or a group of markets) especially in the public sector (e.g. the health sector).
2
Q
Industry and sector environments key topics:
A
- Industry analysis -> Industry types and dynamics -> Competitor groups and segments
3
Q
Recommended reading - Porter (2008)
A
- Porter (2008) is an expansion of his earlier seminal work which outlined how ‘competitive forces’ shape strategy.
- The paper complements and adds depth and more complexity in terms of academic theory. - Key message is that an industry’s structure is the main driver for competition, profitability and attractiveness.
4
Q
Analysing an industry - Competitive forces: Five Forces frames
A
- Devised by Harvard Business School Professor Michael Porter in the late 1970’s as a response to a lack of rigour in SWOT analyses.
- A theory/tool used for analysing competition of business and competitiveness of industries and sectors.
- The framework draws on economic theory to outline the attractiveness/lack of attractiveness of an industry/sector
5
Q
Porters five forces frame and the concept of attractiveness:
A
- Attractiveness can be measured in this context as how profitable an industry or sector might be…can we earn high profits?
- Forces are high/strong where industries are not attractive.
- The main segments of Porter’s five forces framework help analyse how attractive an industry or sector is.
6
Q
Factors and Forces - nobody is ‘safe’
A
- The demise of Porter’s Monitor Group.
- In 2012 Porter’s own strategy consulting firm Monitor filed for bankruptcy protection due to factors relating to both the macro-environment and also industry ‘forces’. - Acquired by Deloitte and runs as Monitor Deloitte which specialise in strategy consulting.
7
Q
the Components of the 5 forces framework
A
1) The extent of rivalry between competitors (competitive rivalry).
2) The threat of entry.
3) The threat of substitutes.
4) The bargaining power of buyers.
5) The bargaining power of suppliers.
- The five forces constitute an industry ‘structure’
8
Q
1) Rivalry between existing competitors
A
- Competitive rivals are organisations with similar products and services aimed at the same customer group and are direct competitors in the same industry/market (distinct from substitutes)
- Rivalry can sometimes become vicious and be ethically and legally questionable.
- Well documented cases of competitive intelligence ‘gone too far’- such as Unilever vs P&G in the early 2000’s.
- It can also be aggressive and at times ‘petty’- supermarkets and the ‘battle of the big 4’ - price and marketing wars
9
Q
1) Degree of rivalry depends on
A
- Competitor concentration and balance.
- Industry growth rate.
- High fixed costs (e.g. high initial costs, cost cutting/price wars). - High exit barriers (i.e. the cost to exit a failing industry).
- Low differentiation (e.g. little to stop customers switching between competitors (banks, petrol- same general product/service, supermarkets- location?).
10
Q
2) The threat of entry
A
- Barriers to entry are the factors that need to be overcome by new entrants if they are to compete. The threat of entry is low when the barriers to entry are high and vice versa.
- The threat of entry and barriers to entry can vary over time.
- They can begin to change even in industries which have been traditionally very difficult to enter.
- Tech start-ups vs incumbents with large assets and legacy system issues is a good example of this, e.g. in Banking.
11
Q
2) Main barriers to entry are
A
- Economies of scale and experience (both expensive to match for new players).
- Access to supply and distribution channels.
- Differentiation and market penetration costs.
- Legislation or government restrictions (e.g. licensing).
- Expected retaliation – clout of ‘big players’.
- Incumbency advantages- (e.g. brand, patents, established R&D process).
12
Q
3) the threat of substitutes
A
- Substitutes are products or services that offer a similar benefit to an industry’s products or services, but have a different nature i.e. they are from outside the industry
- An example here might be hotels and disruptive and low cost alternatives (e.g. Airbnb).
- How do hotels respond in relation to price/performance, flexibility of booking locations?
13
Q
3) Customers will switch to alternatives (and thus the threat increase) if:
A
- The price/performance ratio of the substitute is superior (e.g. aluminium is more expensive than steel but it is more cost efficient for car parts).
- The substitute benefits from an innovation that improves customer satisfaction (e.g. high speed trains can be quicker than airlines from city centre to city centre on short haul routes).
- Extra-industry effects. Substitutes come from outside the incumbents’ industry which forces managers to look outside their own industry to consider more distant threats and constraints.
14
Q
4) The bargaining power of buyers
A
- Buyers are the organisation’s immediate customers, not necessarily the ultimate consumers. If buyers are powerful, then they can demand cheap prices or product/service improvements to reduce profits.
- The example of Tesco and Unilever, relating to Brexit and rising costs.
- Tesco didn’t want the cost passing onto the customer.
15
Q
4) Buyer power is likely to be high/a threat when
A
- Buyers are concentrated (few of them, suppliers fighting for their business).
- Buyers have low switching costs (ease of access to alternate suppliers).
- Buyers can supply their own inputs (i.e. supply itself, miss out the middle-man- backward vertical integration).
- Low buyer profits (under pressure to improve profits/stop buying).
