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Chapter 2: Industry Analysis. Team 4: Peter Hogue, Cameron Lloyd, Breann Flores, Jonathon Jordan, . Business Environment of a Firm. Defined as: All of the external influences that affect its decisions and performance.

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Chapter 2: Industry Analysis

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Chapter 2: Industry Analysis

  • Team 4: Peter Hogue, Cameron Lloyd, Breann Flores, Jonathon Jordan,

Business Environment of a Firm

  • Defined as: All of the external influences that affect its decisions and performance.

  • There are a large number of the influences so it helps to categorize them.

Classifying Environmental Influences

  • 2 ways of classifying influences

    • Source: political, economic, social and technological factors (PEST analysis)

    • Proximity: “Micro Environment” can be distinguished from the “Macro Environment”

PEST Analysis

  • 4 factors examined in a PEST Analysis

    • Political: How the government restricts your product and how they select who is allowed to do what

    • Economic: How the current economy affects business. (America’s recent recession)

    • Social: How people view your product. Safety, fashion, etc.

    • Technological: Are you staying ahead of the curve?

Core of a Firm’s Business Environment

  • Formed by relationship with three sets of players

    • Customers: Firm must understand its customers in order to create value for them.

    • Suppliers: Firm must understand suppliers and manage relationships with suppliers

    • Competitors: Firm must understand competitors, because their profitability depends on it.

What determines the level of profit in an industry?

  • To have profit in a firm, value has to be created for the customer.

  • But, value doesn’t directly equal profit.

  • Consumer surplus vs. producer surplus

Profits earned by the firms in an industry are determined by

  • The value of the product to customers

  • The intensity of competition

  • The bargaining power of the producers in relation to their suppliers

How the industry’s structure determines the level of profitability

  • Some industries earn high rates of profit

  • Others earn much lower rates of profit

  • Small markets vs. large markets

Forecasting Industry Profitability

  • Three stages to predict future profitability of an industry

    • 1.) examine current levels of competition and profitability

    • 2.) Identify trends that are changing in the industry

    • 3.) Identify how these structural changes will affect the five forces of competition and resulting profitability of the industry

Threat of Entry

  • “ The threat of entry rather than actual entry may be sufficient to ensure that established firms constrain their prices to the competitive level”

  • Contestability

    • Sunk costs

    • “hit-and-run” entry

  • Barrier to entry

    • Capital requirements

    • Absolute cost advantage

    • Product differentiation

    • Government and legal barriers

    • Retaliation

  • Bargaining Power of Buyers

    • Input market firms

    • Output markets firms

      • Buyers price sensitivity

      • Bargaining power

    Industry Rivalry

    • Concentration

      • Concentration ratio

  • Diversity of competitors

  • Product differentiation

  • Excess capacity and exit barriers

  • Cost conditions

  • Threat of Substitutes

    • Buyer propensity to substitutes

    • Relative prices and performance substitutes

    • Cigarettes example

    • Wind farms vs. Natural gas

    Porter’s Five Forces

    Porter’s Five Forces

    • Horizontal Competition

      • Competition from substitutes

      • Competition from entrants

      • Competition from established rivals

    • Vertical Competition

      • Power of suppliers

      • Power of buyers

    Competition from Substitutes

    • Availability of substitutes

      • Ex. Coke and Pepsi

    • Absence of close substitutes

      • Ex. Gasoline

      • Ex. Cigarettes

    • Impact of the internet

      • Ex. Travel agencies

      • Ex. Telecommunications

    Competition from Entrants

    • Capital requirements

    • Economies of scale

    • Absolute cost advantage

    • Product differentiation

    • Access to distributionchannels

    • Government and legal barriers

    • Retaliation by established producers

    Competition from Established Rivals

    • Concentration

    • Diversity of competitors

    • Product differentiation

    • Excess capacity and exit barriers

    • Cost conditions

    Power of Suppliers

    • Bargaining Power

      • Supplier

      • Buyer

    • Complex component manufacturers

      • Ex. Disk drives

    Power of Buyers

    • Buyers’ Price Sensitivity

      • Cost of product relative to total cost

      • Product differentiation

      • Competition between buyers

    Power of Buyers

    • Relative Bargaining Power

      • Size and concentration of buyers relative to producers

      • Buyers’ switching costs

      • Buyers’ information

      • Buyers’ ability to backward integrate

    Identifying Key Success Factors

    To survive and prosper in an industry, a firm must meet two criteria: first it must supply what customers want to buy; second it must survive competition.

    Identifying Key Success Factors

    • Who are our customers and what do they want?

    • What does the firm need to do to survive competition?

    Key Success Factors

    • Combining the industry competition analysis with what the customers want we can discover what the key success factors are

    Prerequisites for success

    What do customers want?

    How does the firm survive competition?

    • Analysis of competition

    • What drives competition?

    • What are the main dimensions of competition

    • How intense is competition?

    • How can we obtain a superior competitive position?

    • Analysis of demand

    • Who are our customers?

    • What do they want?

    Key Success Factors

    Caterpillar View on Customers



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