Lecture 3/4 - Strategy: Industry/Environment Flashcards
What is the definition of “Industry”?
Firm or group of firms that produce and/or sell the same or similar products/services to the same market.
Why should we try to avoid being too inclusive or exclusive when defining an industry?
Too inclusive: Factors that differ across heterogeneous markets cannot be detected
Too exclusive: Important threats are missed
What are the 5 objectives of industry analysis?
- Understand where VALUE is being derived in the industry
- Understand drivers of PROFITABILITY
- Understand why some industries are more ATTRACTIVE than others
- Understand MACRO-ECONOMIC influences/trends
- Understand KEY SUCCESS FACTORS
What are the 4 main tools we use for Industry Analysis?
- Industry Value System
- Porter’s 5 Forces
- PEST/PESTEL
- Key Success Factors
What is an Industry Value System?
- A system of activities/steps that links raw materials through to the final product being delivered.
- The objective is to add value at each step.
- Usually, a firm performs a LIMITED NUMBER of activities in the value system (the more activities they perform, the greater control they have)
Differentiate between forward and backward integration.
Backward integration - purchasing suppliers
- E.g., starbucks growing their own beans
Forward integration
- E.g., a wine maker/manufacturer opening their own store
What is a Firm Value Chain?
A system of interdependent activities performed BY A FIRM.
The goal is to maximize value created and develop a long-term competitive advantage.
List Porter’s 5 Forces
- Threat of New Entrants
- Buyer Power
- Supplier Power
- Threat of substitutes
- Rivalry among existing firms
What does Porter’s 5 Forces analysis tell us about the industry?
The collective strength of forces determines the ULTIMATE PROFIT POTENTIAL of an industry.
How can you keep the threat of new entrants low?
- Economies of Scale
- High product differentiation
- High capital requirements
- Access to distribution channels
- Government policies
What is meant by “substitute” products or services? Give an example.
A good (or service) is said to be a substitute good for another kind insofar as the two kinda of goods can be consumed or used in place of one another in at least some of their possible uses.
Example: Substitutes for soft drinks include water, tea, juice, energy drinks, etc.
What influences make suppliers more powerful?
Suppliers are more powerful if:
- A few companies dominate the suppliers’ industries and are more concentrated than the industry of firms to which they sell
- There are no other substitute products to be sold into the industry
- The supplier’s product is an important input to the buyer’s business
- They sell to a number of different industries and their product is differentiated
- There are large switching costs in changing suppliers
What influences make buyers more powerful?
Buyers are more powerful if:
- They are concentrated or purchase in large volumes
- They have full information
- They face few switching costs (i.e., are not locked to a single supplier)
- They earn low profits
What factors impact rivalry among existing competitors?
- Number of competitors
- Growth of the industry
- Differentiation
- Switching costs
- High fixed costs
- High exit barriers
What are the limitations of 5 Forces Analysis? How do we get past these limitations?
- Only a snapshot in time
- Does not reflect shifting trends/macro-economic factors
- Often only captures one geographic area
To get past these limitations, we combine 5 forces with PEST analysis.
