Chapter 5 The industry and market environment Flashcards
1.1 Industry life cycles
An industry is a group of organisations supplying a market offering similar products using similar technologies to provide customer benefits. The industries pass through different phrases in their life, including:
- Introduction: new product or service is invented. There can be significant first mover advantage for the first firms in the market
- 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 competitor who lack scale economies and 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. However, industry life cycles can be expanded by product innovation.
2.1 Porter’s five forces
The five competitive forces determine the level of competition and therefore profitability of the industry.
- Threat of new entrants: this determines how likely a new player will enter the market. The market is attractive if it has high industry growth, high profit margins, few existing competitors and easy customer switching. The barriers to entry include economies of scale, brand loyalty, capital requirements, access to distribution, patents and government subsidies
- Competitive rivalry: 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 and high strategic importance
- Threat of substitutes are substitutes available and are consumers likely to switch to them. The availability of substitutes are included from different industries and from sub-industries. Increased likelihood are the price of substitute is low, relative performance of the substitute is comparable and customers can switch easily
- Power of customers: do customers have enough bargaining power to push back 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 and high degree of price transparency in the market
- Power of suppliers: 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 and employees and hire workers.
