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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
Chapter 2: Industry Analysis

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


Business environment of a firm
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
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
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
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
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
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
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
Forecasting Industry Profitability 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
Threat of Entry profitability

  • “ 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
    Bargaining Power of Buyers profitability

    • Input market firms

    • Output markets firms

      • Buyers price sensitivity

      • Bargaining power


    Industry rivalry
    Industry Rivalry profitability

    • Concentration

      • Concentration ratio

  • Diversity of competitors

  • Product differentiation

  • Excess capacity and exit barriers

  • Cost conditions


  • Threat of substitutes
    Threat of Substitutes profitability

    • Buyer propensity to substitutes

    • Relative prices and performance substitutes

    • Cigarettes example

    • Wind farms vs. Natural gas


    Porter s five forces
    Porter’s Five Forces profitability


    Porter s five forces1
    Porter’s Five Forces profitability

    • Horizontal Competition

      • Competition from substitutes

      • Competition from entrants

      • Competition from established rivals

    • Vertical Competition

      • Power of suppliers

      • Power of buyers


    Competition from substitutes
    Competition from Substitutes profitability

    • 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
    Competition from Entrants profitability

    • 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
    Competition from Established Rivals profitability

    • Concentration

    • Diversity of competitors

    • Product differentiation

    • Excess capacity and exit barriers

    • Cost conditions


    Power of suppliers
    Power of Suppliers profitability

    • Bargaining Power

      • Supplier

      • Buyer

    • Complex component manufacturers

      • Ex. Disk drives


    Power of buyers
    Power of Buyers profitability

    • Buyers’ Price Sensitivity

      • Cost of product relative to total cost

      • Product differentiation

      • Competition between buyers


    Power of buyers1
    Power of Buyers profitability

    • 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

    Identifying Key Success Factors profitability

    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 factors1
    Identifying Key Success Factors profitability

    • Who are our customers and what do they want?

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


    Key Success Factors profitability

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


    Prerequisites for success profitability

    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
    Caterpillar View on Customers profitability

    • http://www.youtube.com/watch?v=zrnPbZVlLQI


    Questions? profitability


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