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Chapter 2 - Analyzing Industry Structure 2

This document provides an overview of analyzing industry structure using Porter's Five Forces framework. It discusses the five competitive forces that shape industry structure and determine the intensity of competition and profitability: threat of new entry, threat of substitutes, bargaining power of buyers, bargaining power of suppliers, and rivalry among existing competitors. For each force, it identifies factors that influence the degree of competition and outlines how firms can gain competitive advantage by understanding industry forces. The overall summary is that Porter's Five Forces framework analyzes how these competitive pressures determine the profit potential of an industry.

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Ngọc Yến
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33 views

Chapter 2 - Analyzing Industry Structure 2

This document provides an overview of analyzing industry structure using Porter's Five Forces framework. It discusses the five competitive forces that shape industry structure and determine the intensity of competition and profitability: threat of new entry, threat of substitutes, bargaining power of buyers, bargaining power of suppliers, and rivalry among existing competitors. For each force, it identifies factors that influence the degree of competition and outlines how firms can gain competitive advantage by understanding industry forces. The overall summary is that Porter's Five Forces framework analyzes how these competitive pressures determine the profit potential of an industry.

Uploaded by

Ngọc Yến
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Chapter 2

ANALYZING INDUSTRY
STRUCTURE
Fundamental Principle of Business
Strategy
“If everyone can do it, it is difficult to create and capture value
from it”
Or, alternatively
“In a perfectly competitive market, no firm realizes economic
profits (rents).”
The role of Industry Structure

The industrial Organization Perspective:

 Premise that industry structure matters


most
 Economics rents due to barriers to
competition (i.e monopoly rents)
 Some industries are more profitable than
others
Two perspectives on Rents
The Strategist’s Toolkit: Five Forces
Analysis
1. Threat of Entry

 Entry is less likely when….


 Entrant faces high sunk costs
- Sunk costs are investments that cannot be recovered
 Incumbents have a competitive advantage
- Potential entrants are a at a competitive disadvantage
compared to existing players, simply not profitable to enter
 Entrant faces retaliation
- Potential entrants are likely to be forced out of business by
strategic (pricing) behavior of incumbents.
Competitive Advantages

 Patents and licences


 Pioneering brands
 Pre-commitment contracts (e.g distribution)
 Large economies of scale (relative to demand)
 Steep learning (experience) curves
 Others
Economies of Scale
Learning curves
Learning curve for Semiconductor
Memories
Likelihood of Retaliation

 Excess capacity of incumbents


 Economies of scale or other cost advantage
 Substantial exit cost
 Exist costs are payments that must be made upon exit
 Exit costs provide an incentive to fight
 Aggressive reputation of incumbents
 Must be credible
 Suffer from free-riding problem
2. Threat of substitutes

 Substitute products are less of a threat when….


 Cross-price elasticity of demand is low
 Switching costs are high
- One-time costs customers incur when switching to a new
product or service
Cross-Price Elasticity
The ratio of the % change in demand for one goods given a %
increase in price of another goods.
Cross-Price Elasticity
The ratio of the % change in demand for one goods given a %
increase in price of another goods.
3. Bargaining Power of Buyers

 Buyers have less power when…


 Buyers are not concentrated (no monopsony)
- Many potential buyers
- Each accounts for a small fraction of sales
Relative Concentration
Bargaining power of Buyers

 Buyers have less power when…


 Buyers have few options
- Products are differentiated
- High switching costs
- Buyer cannot backward integrate
Bargaining power of Buyers

 Buyers have less power when…


 Buyers are segmented
- Price information is not widely available
- Price discrimination possible
- Bundling possible
Price Discrimination
Price Discrimination
Self-Sorting
2nd Degree Price Discrimination
Self-Sorting
2nd Degree Price Discrimination
Self-Sorting
2nd Degree Price Discrimination
Sorting by Groups
3rd degree Price Discrimination
4. Bargaining Power of Suppliers

 Suppliers are less of a threat when….


 Sellers are not concentrated (no monopoly)
 Firms have many alternatives
- Many substitutes for supplier’s products
- Firms face low switching costs
- Supplier cannot forward integrate
 Sellers may not treat segments differently
5. Intensity of Rivalry

 Rivalry is less intense when……


 The number of competitors is small!
 Incentives to “fight” are low
- Substantial market growth
Especially if capacity constrained
- Opportunities to differentiate
- Low exits costs
- Little excess capacity
Demand is not cyclical
Intensity of Rivalry (cont)

 Rivalry is less intense when……


 Coordination is feasible
- Explicit price/market fixing
Antitrust violation!
- Tacit coordination
Implicitly holding prices high, differentiating
6. Strategist’s Toolkit: Five Forces
Analysis

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