LIBR 230 WEEK 5Industry Analysis

Why Analyze Industries?• Is the industry attractive or healthy?• Who are the competitors?• Will it faces challenges that diminish its overall value?

• Political, Economic, Social/Cultural, Technological, Legal, Environmental

• Competition/rivalry

Porter’s 5 Forces • Allows us to see the degree (level) and source (basis) of

competition• Helps form an answer to the question: Is this industry

viable? In good shape? Worth my time?

Rules of industry competition

1. Threat of new entrants

2. Bargaining power of suppliers

3. Bargaining power of buyers

4. Threat of substitute products or services

5. Degree of rivalry among existing competitors

Objective• Identify profit potential• Identify specific forces that could harm profitability in the

future• Protect and improve competitive advantage• Anticipate changes in industry structure

Threat of New Entrants

• Easy for new organizations to enter?

• Low or high ‘entry barriers’:• Costs (marketing, personnel,

etc.)• Experience• Distribution access• Switching costs of

consumers (soft and hard)• Government regulation• Product differentiation

Bargaining Power of Suppliers• Suppliers influence costs,

quality and availability of product or service delivery:• Concentration of suppliers

overall• Diversification of individual

suppliers• Switching costs• Organization (cartels, guilds,

unions etc.)• Government is an informal

‘supplier’ in many industries (land, licenses, rights to do business)

Threat of Substitutes

From other industries!

• While there is a threat from competition (e.g. choosing a competitor’s offering—dish soap?) there is also a threat from other industries providing an alternative to yours

• May disrupt or displace existing products

Degree of Rivalry

How intense is the competition?

• Market growth: High growth reduces rivalry and vice versa

• Cost structures: High costs, low demand intense rivalry! Low costs, high demand, not so much

• Barriers to exit: Too high to exit means rivalry intensifies

• Product switching: High differentiation may allow for less switching decreasing rivalry

• Diversity of organizations? Lots of diversity, less rivalry, little diversity (a few companies companies of similar) much rivalry

Porter’s 5 Pros and Cons

Pros

• Helps identify main sources of competition

• Helps organizations develop strategies to maintain competitive advantage

• Predicts future negative changes in industries

• Assist in long range planning

Cons

• Doesn’t fully recognize social, cultural and political factors (You still need PESTLE!)

• Underestimates core differentiating strengths of a company (think Apple)

• Places too much emphasis on industry structures; These may not be that important to a specific company due to diversification etc. (Again, think Apple)

What does this look like in practice?

Cable Industry

• Threat of entry? High entry barriers

• Threat of substitutes? Medium to High

• Bargaining power of buyers? Low due to government

• Bargaining power of suppliers? Low to medium but increasing

• Rivalry? Artificially low due to government licenses and contracts