Chapter 5: The industry and market environment

Question 1

What is an industry?

Answer 1

An industry is a group of organisations supplying a market offering similar products using similar technologies to provide customer benefits.

Question 2

What are the key stages in the industry life cycle?

Answer 2

Introduction
 New product or service is invented.
 There can be significant first mover advantage for the first firms in the market (in terms of reputation and experience).

Growth
 This stage is characterised by rapid growth.
 The market becomes attractive to new entrants.
 Competitive rivalry is relatively low as firms are experiencing growth without having to increase market share.

Shakeout
 The market growth begins to slow.
 Weaker players are forced to leave the industry or merge with another company.

Maturity
 This is a stable period of low growth.
 As growth slows down at the start of the
maturity phase price competition intensifies and smaller competitors (who lack scale economies) are shook-out of the industry.

Decline
 Sales volumes start to fall as demand for the industries products decline.
 Firms leave the industry and eventually it ceases to exist.

Industry lifecycles may mirror the underlying product life cycle (the industry ceases to exist when the product is discontinued).

However, industry life cycles can be expanded by product innovation.

Question 3

What can you use Porter’s five forces analysis for?

Answer 3

Porter’s five forces analysis can be used to assess the attractiveness of an industry in terms of long run profitability

Question 4

What are Porter’s five forces?

Answer 4

Competitive rivalry is affected by: Threat of new entrants, bargaining power of suppliers, threat of substitutes, bargaining power of customers

Question 5

Explain what you would consider when looking at the threat of new entrants and the barriers to entry?

• When is a market attractive?
• What are some barriers to entry?
• What contributes to competitive rivalry?

Answer 5

How likely is it that new players will enter the market?

Is the market attractive?
 High industry growth
 High profit margins
 Few existing competitors
 Easy customer switching

Barriers to entry
 Economies of scale
 Brand loyalty
 Capital requirements
 Access to distribution
 Patents
 Government subsidies

Competitive rivalry (among existing firms)
How intense is the competition among existing players in the market?
This will be higher if there are:
 large numbers of existing competitors
 high levels of fixed costs
 low industry growth
 low switching costs
 high exit barriers
 high strategic importance

Question 6

Explain the threat of substitutes

Answer 6

Are substitutes available and are consumers likely to switch to them?

Availability of substitutes
 From different industries (e.g. rail travel vs bus travel)
 From sub-industries
(e.g. CDs vs MP3 downloads)

Increased likelihood
 Price of substitute is low
 Relative performance of the substitute is comparable
 Customers can switch easily

Question 7

Explain the bargaining power of customers?

Answer 7

Do customers have enough bargaining power to push down prices?
This will be higher if there are:
 small numbers of large customers
 large numbers of competitors
 low levels of product differentiation
 low switching costs
 the customers own profitability is low
 high degree of price transparency in the market

Question 8

Explain the power of suppliers

Answer 8

Do suppliers have enough bargaining power to increase their prices?
Several different types of suppliers should be considered. These include:
 Providers of raw materials
 Service providers and outsourced services
 Employees and hire workers

Their bargaining power will be increased if:
 There are a few large suppliers
 The supplier’s products are differentiated
 High switching costs for the customers (the industry being analysed)
 The supplier has other buyers they can sell to instead