Conducting an Industry Analysis

Conducting an Industry Analysis

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Industry Risk Analysis

Bargaining Power of Supplier

Threat of new entrants

Threat of substitute

products or services

Bargaining Power of Buyer

Rivalry among existing

competitors

Michael Porter’s Five Forces Model

riz.ahmed - Financial Risk Management

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Rivalry among existing competitors - Rivalry determines

Industry Growth– What are the growth prospects of the industry– For slow growth industries, rivalry among existing competitors is likely to be high

as they strive to maintain the market share– In the growing markets, companies are able to increase revenues simply as a

result of the growing market

Fixed cost per value added– High fixed cost tend to increase rivalry amongst competitors– Because when fixed cost are high, the company must produce– High level of production lead to fight for market share– company seek to sell what it has produced– Company seek to sell quickly as possible that intensify the competition


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Rivalry among existing competitors

Intermittent over capacity– Intermittent over capacity will increase rivalry amongst companies as they strive

to improve efficiency by utilizing spare capacity

Product Differences– A low level of product differentiation tends to result in higher level of rivalry

Brand Identity– Products with strong brand identity tend to constraint rivalry

Switching cost– Product with high switching cost tend to constrain rivalry– Conversely, when switching costs are low it can be expected that rivalry will intensify


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Rivalry among existing competitors

Concentration & Balance– Concentration tends to decrease rivalry as there are only a small number of companies competing for the

same customer and resources.– However the rivalry can intensify if companies have a similar market share as they strive for market

leadership

Information complexity– The more complex a product or industry, the lower the rivalry amongst competitors.

Diversity of competition– The more diverse the competition, the higher the level of rivalry

Corporate Stakes– When a company is losing market share or has the potential to significantly

increase its market share, this will intensify the rivalry amongst companies

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competitors



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Threat of new entrants – entry barriers

Economies of scaleThe decrease in unit cost of a product resulting from large scale operations

It forces newcomers to enter on a large scale or accept a cost disadvantage

Proprietary Product DifferencesThe distinguishing of substitute products from one another by advertising and developing unique characteristics

It forces newcomer to spend heavily to overcome brand loyalty enjoyed by existing players


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Brand Identity or Brand EquityIf the brand exists with a strong identity, it will be more difficult for a new entrant to penetrate the market

Switching CostIf the cost are high, it will be more difficult for a new supplier to enter the market

Capital / Investment requirementsThe need to invest in large financial resources deter new entrants

Access to DistributionIf the distribution channels are restricted then this makes it more difficult for new buyer to enter the market


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Absolute Cost AdvantageWhere a company has achieved cost efficiencies in its production process, which would be difficult for a new entrant to replicate hence making the returns that could be achieved uneconomical.

Proprietary Learning CurveWhere a company has knowledge or experience not readily available to a new entrant to a market which would result in there being a lead time while this skill and knowledge is acquired thereby impacting profitability

Access to necessary inputsThe extent to which raw material and other inputs required for production process are readily accessible.


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Proprietary low cost production designWhere a company has develop a low cost production design which is not readily available to a new entrant and would be difficult to replicate

The existence of patents can also be a factor.

Government policies & Regulations

Expected retaliationWhere as existing industry players employs a strategy which aims to make the market less attractive for a new entrant.

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competitors



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Bargaining Power of Suppliers – determinants are

Differentiation of inputsAre the inputs standardized or special products

The less standardized the products and the stronger the brand, the greater the bargaining power of the supplier

Switching cost of suppliers and companies within the industryHow easy is it for suppliers to find new customers

The higher the difficulty for a supplier to find new buyers and high switching costs would reduce the bargaining power of the supplier

13riz.ahmed - Financial Risk Management


Bargaining Power of Suppliers

Presence of substitute inputsAre substitute inputs available

Are they comparable quality & price, if there is less substitute available, the bargaining power of the supplier will be strong

Supplier ConcentrationIf there is few dominating suppliers, the bargaining power of the supplier will be strong

Importance of volume to supplierDoes the supplier need to achieve a certain volume of sales to remain profitable

If volume is un-important the bargaining power of the supplier will be strong


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Bargaining Power of Suppliers

Cost Relative to total purchases within the industryWhat is the cost of input relative to the total purchases within the industry

If this is high it potentially weakens the bargaining power of the supplier as the cost to the buyer of seeking alternative solutions e.g. forward integration or substitute products is lessened.

Impact of inputs on cost or differentiationWhat is the cost of the inputs relative to the selling price of the product

Threat of forward integration relative to the threat of backward integration by companies in the industry

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competitors



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Bargaining power of buyers – determinants are

Bargaining LeverageIf the buyer has significant bargaining power relative to the supplier, then the buyer will have a greater level of leverage and vice versa

Buyer concentration Vs. company concentrationWhere buyers are concentrated amongst the few companies, the buyers will have greater bargaining power

Where one company has a significant market share but the remaining market is spread amongst number of companies, then the company with the large market share will have significant bargaining power e.g. large food retailer Vs. small food retailer


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Bargaining power of buyers

Buyer VolumeThe bargaining power of the buyer is further increased if they are purchasing from suppliers in industries with heavy fixed costs e.g. bulk chemicals, cement etc. as the supplier need to keep the capacity filled

Buyers switching costs relative to company’s switching costIf the cost of switching for a company are higher then they are for the buyer, then the buyer has the competitive advantage. However if the cost of switching for the buyer is relatively higher than for the company, then the buyer would be in a weaker position.


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Buyer InformationThe extent to which information on the buyers is available to suppliers e.g. buying behavior etc.

The more information that is available, the lesser the bargaining power of the buyer

Ability to backward integrateWhere as buyer possesses a credible backward integration threat e.g. purchasing a producing company or establishing its own facility

Substitute productsIf substitute products are readily available, then this strengthen the bargaining power of the buyer.


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Pull ThroughPull promotion in contrast to push promotion addresses customers directly with a view to getting them to demand a product and hence pull it down through the distribution channel

Buyer who use pull promotion will tend to have greater bargaining power

Price sensitivityWhat is the price sensitivity of demand for the product

Lower the price elasticity of demand the greater the bargaining power of the buyer


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Price / total purchasesWhat is the price of the product relative to the total purchase cost. The higher the price in relations to the total purchase cost, the greater the bargaining power of the buyer as the buyer can consider strategies to reduce its costs e.g. backward integration or substitute products.

Product differencesThe more standardized the product, the stronger the bargaining power of the buyer

Brand IdentityIf brand identity is important, the bargaining power of the buyer is likely to be weakened


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Impact on quality / performanceWhat is the importance of quality and/or performance of a product

If this is high, then the bargaining power of the buyer is likely to be weakened e.g. designer clothing Vs. mass produced clothing

Buyer ProfitsThe higher the profit margin the greater the bargaining power of the buyer as the buyer has greater flexibility in selecting suppliers

Decision Makers incentives

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Threat of substitute

products or services



competitors



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Threat of substitute products or services – determinants are

Relative price performance of substituteWhat is the price of the product relative to the substitute product

As more substitute become available the demand become more elastic since buyer have more alternatives

Switching CostThe higher the switching cost, the lower the likelihood that a buyer will switch to another product

Buyer propensity to substituteThis will be effected by a number of factors including brand loyalty, relationship with the suppliers etc.

Seven Questions for Industry Analysis

1. What are the industry dominant economic traits?

2. What competitive forces are at work in the industry and how strong are they?

3. What are the forces of change in the industry and what impact will they have?

4. Which companies are in the strongest/weakest competitive position?

5. Who’s likely to make what competitive moves next?

6. What key factors will determine success or failure?

7. How attractive is the industry in terms of its prospects for above average profitability?

Q1. What are the industry dominant economic traits?

Market size (Small markets don’t attract big fish)Scope of competitive rivalryMarket/industry growth rate (life cycle)– Fast growth breeds new entry; slowdowns lead to increased

competition.

Number of rivals and their sizeNumber of buyers and their sizeLevel of backward and forward integrationTechnological change (rate and scope)Level of differentiation between firms’ productsOpportunities for economies of scaleEase of entry and exitCapital requirements

Q1: Industry’s Dominant Economic Traits

Market– Size– Scope– Growth rate– Growth cycle– # & size of

competitors– Distribution

channels– Structure

Forward Integration

Backward Integration

Product– Differentiation– Potential for

economies of scale

– Learning effects– Entry / exit costs– Technological

change

Q2. What competitive forces are at work in the industry and how strong are they?

Porter’s Five Forces. Forces influencing industry and competitive advantage:– Competitive Intensity (Rivalry Among Sellers)– Barriers to Entry (Potential for New Entrants)– Bargaining Power of Suppliers– Bargaining Power of Customers– Threat of Substitute Products

pg. 33 in Applegate


The rivalry among sellers– Greater the rivalry, lower the avg. profitability– What causes rivalry to be strong or weak?

# of competitors

Size / capability of competitors

Financial status of competitors

Slow growth

Cost of exit barriers

Switching costs for customers

Variability in demand


Potential new entrants– Barriers to entry

Economies of scaleLearning curve effectsCustomer loyalty / brand preferencesResource / investmentAccess to distributionRegulationPatents, proprietary technology

– Level of industry profits


The relative power of suppliers– Importance of component– Switching costs– Backward integration threats– Substitutes

The relative power of buyers– Switching costs– % market share / size– # of suppliers– Product standardization– Potential for backward integration


Substitute products– Place a ceiling on prices and profits of

industry– Invite comparison shopping– E.g., eyeglasses vs. contact lenses– E.g., sugar vs. artificial sweeteners

Q3. What are the forces of change in the industry and what impact will they have?

The most dominant forces the cause the industry to change are called driving forces

Task 1 - identify the driving forces

Task 2 - assessing their impact on the industry (few are important, generally)

Common Driving Forces

Changes in long term industry growth rate

Changes in who buy the products and for what reason

Product innovation

Technological change

Marketing innovation

Increasing globalization

Regulatory changes

Changing societal concerns, attitudes and lifestyles

Environmental scanning

Q4. Which companies are in the strongest/weakest competitive position?

Using the strategic group mapping: two dimensional representation according to the competitive characteristics of the competitors in the industry

Axes should not be correlated

Size of circles proportional to combined sales

The closer the circles, the stronger the rivalry

See http://i.i.com.com/cnwk.1d/html/b/305,1,Competitive and http://www.quickmba.com/strategy/pest/ for more information.

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Product line/merchandise mix

http://i.i.com.com/cnwk.1d/html/b/305,1,Competitive

http://www.quickmba.com/strategy/pest/

Q5. Who’s likely to make what competitive moves next?

In order to outmaneuver your competition you have to evaluate the competitors’ future moves.

Identify competitors strategies

Evaluate who are the major players-- now

Who will be the major players

Evaluate what the major players are going to do

Q6. What key factors will determine success or failure?

Key success factors (KSF) are crucial elements that lead to success.

What are they now? What will they be?

In beer production KSF can be brewing skills

In retail apparel KSF can be low cost, superior service, superior design

In your industry, KSF=????

Q7. How attractive is the industry in terms of its prospects for above average profitability?

Growth potential

Driving forces

Entry/exit

Stability of demand

Competitive forces

Risk and uncertainty

Competition and its impact on the industry’s future

7 Questions

1. What are the industry dominant economic traits?

2. What competitive forces are at work in the industry and how strong are they?

3. What are the forces of change in the industry and what impact will they have?

7 Questions

4. Which companies are in the strongest/weakest competitive position?

5. Who’s likely to make what competitive moves next?

6. What key factors will determine success or failure?

7. How attractive is the industry in terms of its prospects for above average profitability?

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Conducting an Industry Analysis