E.  Industry Analysis

1.  Framework

a.  Assessment of industry and firm performance

b.  Identification of key factors affecting performance in vertical trading relationships and horizontal competitive relationships

c.  Determination of how changes in the business environment may affect performance

d.  Identifying opportunities and threats in the business landscape

.

2.  Five-forces analysis

.

.

.

.

.

.

.

.

.

.

.

a.  Internal rivalry

• Competition for share by firms within a market

• Need to include all competitors

• Increased price competition if:

- Many sellers in a market

- Industry is stagnant or declining

- Firms have different costs

- Some firms have excess capacity

- Products are undifferentiated

- Buyers have low switching costs

- Prices and terms of sales are unobservable

- Prices cannot be adjusted quickly

- Large/infrequent sales orders

- Industry does not use "facilitating practices" or have a history of cooperative pricing

- There are strong exit barriers

- High industry price elasticity of demand

.

b.  Entry

• Market demand divided among more sellers

• Decrease in market concentration => greater internal rivalry

• Factors affecting threat of entry

- Production entails significant economies of scale => minimum efficient scale is large relative to size of market

-Government protection of incumbents

- Consumers highly value reputation / consumers are brand loyal

- Access of entrants to key inputs

- Learning curve

- Network externalities - advantage to incumbents with large installed base

- Expectations about postentry competition

.

c.  Substitutes and complements

• Substitutes => intensify internal rivalry

• Complements => enhance profit opportunities

• Factors

- Availability of close substitutes and/or complements

- Price-value characteristics of substitutes/complements

- Price elasticity of industry demand - higher elasticity => consumers more sensitive to prices

.

d.  Supplier power and buyer power

• Supplier power - ability of upstream input suppliers to negotiate prices

• Buyer power - ability of individual customers to negotiate purchase prices

• Factors

- Competitiveness of input market - more competitive => more power to input buyer, less to input seller

- Concentration of industry - higher concentration => more buying power, less selling power

- Concentration of upstream industries - more concentration => more power to seller, less to buyer

- Purchase volume of downstream firms - suppliers may give better service and lower prices to large purchasers

- Availability of substitute inputs - limits price that suppliers can charge

- Relationship-specific investments by industry and suppliers - less competition

- Threat of forward integration by suppliers - must accept high supply price or risk entry

- Ability of suppliers to price discriminate - suppliers can raise prices to more profitable firms