Final
Project: Industry Analysis Section
A.
Industry Overview: This section is a general overview of
the industry group or segment to be examined. For this reason, you must include
the SIC, NAICS, or SITC codes for the industry group under review. This will
allow you to narrow your focus and it will assist in completed future sections
of the industry analysis. This should be no more than one page in length.
B.
The Five Forces that Shape
Strategy: This section
will cover the five forces discussed in Porter’s five forces model.
1.
Threat of new entrants: Discuss
barriers that will make it difficult to enter an industry and the retaliation
expected from current participants. Entry barriers make it difficult for new
firms to enter an industry and often place them at a competitive disadvantage,
even when they are able to enter. Barriers to entry can include economies of
scale, product differentiation, capital requirements, switching costs, access
to distribution, cost disadvantage not due to scale, and government policy. New
entrants may try to find market niches that incumbents are not servicing.
2.
Bargaining power of suppliers:
Increasing prices and reducing the quality of products are potential means
suppliers use to exert power over firms competing within an industry. If a firm
is unable to recover cost increases by its suppliers through its own pricing
structure, its profitability is reduced by its suppliers actions. A supplier
group is powerful when:
·
It is dominated by a few large
companies and is more concentrated than the industry that it serves
·
Satisfactory substitute
products are not available to industry firms
·
Industry firms are not a
significant customer for the supplier group
·
Suppliers’ goods are critical
to buyers’ marketplace success
·
The effectiveness of suppliers’
products has created high-switching costs for industry firms
·
It poses a credible threat to
integrate forward into the buyers’ industry. Credibility is enhanced when
suppliers have substantial resources and provide a highly differentiated
product.
3.
Bargaining power of buyers: Buyers
want to buy products at the lowest possible prices, the point at which the
industry earns the lowest acceptable rate of return on its invested capital. To
reduce their costs, buyers bargain for:
·
Higher quality
·
Greater levels of service
·
Lower prices
Customers (buyer groups) are powerful when:
·
They purchase a large portion
of an industry’s total output
·
The sales of the product being
purchased account for a significant portion of the seller’s annual revenues
·
They could switch to another
product for little, if any, cost
·
The industry’s products are
undifferentiated or standardized, and the buyers pose a credible threat if they
were to integrate backward into the seller’s industry
4.
Threat of substitute products: Substitute
products are goods and services from outside a given industry that perform
similar or the same functions as a product that the industry produces.
·
For example, NutraSweet, and
other sugar substitutes, places an upper limit on sugar manufacturers’ prices. NutraSweet
and other substitutes perform the same function, though with different
characteristics.
·
Product substitutes present a
strong threat to a firm when customers face few, if any, switching costs and
when the substitute product’s price is lower or its quality and performance
capabilities are equal to or greater than those of the competing product.
·
Differentiating a product along
the dimensions that customers’ value (quality, service after the sale, and
location) reduces a substitute’s attractiveness.
5.
Current rivalry of competitors:
First, in order to make sure that you have relevant competitors, you need to
use the SIC, NAICS, or SITC codes to search for competitors in the industry
segment under review. Because an industry’s firms are mutually dependent,
actions taken by one company usually invite competitive responses. Competitive
rivalry intensifies when a firm is challenged by a competitor’s actions or when
a company recognizes an opportunity to improve its market position. Firms
within industries are rarely homogenous; they differ in resources and
capabilities and seek to differentiate themselves from competitors. Common
dimensions on which rivalry is based, include:
·
Price
·
Service after the sale
·
Innovation
C.
Summary: In the summary section of the industry
analysis, you need to make an assessment as to whether this is an attractive
industry segment to pursue as a new entrant into the segment. The way to begin
to determine this is to assess the impact of each of the five factors on the
industry. One way to do this is to rate the factors ashigh, medium,or low and
then make a general determination of the industry. Effective industry analysis is
a product of careful study and interpretation of data and information from multiple
sources. A wealth of industry-specific data is available to be analyzed. Because
of globalization, international markets and rivalries must be included in the
firm’s analyses. In fact, research shows that in some industries, international
variables are more important than domestic ones as determinants of strategic
competitiveness.
