Chapter 8 - Industry analysis

Question 1

an industry analysis based on frameworks facilitates:

Answer 1

• assessment of industry and firm performance
• identification of key factors affecting performance in vertical and horizontal relationships
• determination of how changes in the business environment may affect performance
• identification of opportunities and threats in the business landscape

Question 2

limitations of the five forces framework

Answer 2

• pays limited attention to factors that might affect demand (ignores changes in consumer income, tastes, firm’s strategies for boosting demand such as advertising)
• focus on a whole industry rather than individual firms with unique positions that insulate them from some competitive forces
• does not explicitly account for the role of government (only as a supplier/buyer)
• it is a qualitative analysis

Question 3

five forces

Answer 3

• internal rivalry
• supplier power
• buyer power
• entrants
• substitutes

Question 4

internal rivalry

Answer 4

the jockeying for share by firms within a market

Question 5

nonprice competition

Answer 5

erodes profits by driving up fixed costs to the extent that firms can pass cost increases along to consumers (higher prices)

Question 6

price competition

Answer 6

difficult to reduce costs by enough to maintain price-cost margins

Question 7

conditions that tend to heat up price competition

Answer 7

• many sellers in the 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 sale are unobservable/prices cannot be adjusted quickly
• large/infrequent sales orders
• industry does not use facilitating practices or have a history of cooperative pricing
• strong exit barriers
• high industry price elasticity of demand

Question 8

exogenous entry barriers

Answer 8

result from technological requirements

Question 9

endogenous entry barriers

Answer 9

result from strategic choices made by incumbent

Question 10

factors tending to affect threat of entry

Answer 10

• production entails significant scale economies - MES is large relative to market size
• government protection of incumbents
• consumers highly value reputation/consumers are brand loyal
• access of entrants to key inputs
• experience curve
• network externalities
• expectations about post entry competition

Question 11

factors to consider when assessing substitutes and complements

Answer 11

• availability of close substitutes and/or complements
• price-value characteristics of substitutes/complements
• price elasticity of industry demand

Question 12

indirect power (supplier)

Answer 12

when suppliers can sell their services to the higher bidder. price depends on supply and demand in upstream market

Question 13

direct power (supplier)

Answer 13

suppliers can also erode industry profits if (a) they are concentrated or (b) their customers are locked into it because of relationship-specific investments

Question 14

indirect power (buyer)

Answer 14

in competitive markets, the price they pay will depend on the forces of supply and demand

Question 15

direct power (buyer)

Answer 15

when buyers are concentrated or suppliers made relationship-specific investments, buyers yield direct power, demanding lower (higher) prices when suppliers are thriving (struggling)

Question 16

what to keep in mind when analyzing supplier/buyer power

Answer 16

• competitiveness of the input market
• relative concentration of the industry in question (upstream/downstream industries)
• availability of substitute inputs
• relationship-specific investments by the industry and its suppliers
• threat of forward integration by suppliers
• ability of suppliers to price discriminate

Question 17

value net

Answer 17

consists of suppliers, customers, competitors and complementors

Question 18

amount a firm can expect to reap from participating in the value net (formula)

Answer 18

Firm X’s profit from value net

overall value of the value net when firm X participates
-
overall value of net when it does not participate