Industry Analysis

Question 1

Identify the five forces described by Michael Porter as determining the operating attractiveness and likely long-run profitability of an industry.

Answer 1

1. Threat of entry into the market by new competitors
2. Threat of substitute goods or services
3. Bargaining power of customers of the goods or services
4. Bargaining power of suppliers of inputs used by the industry
5. Intensity of rivalry within the industry

Question 2

Identify factors that would help determine the level of rivalry in an industry.

Answer 2

1. Relative size of competitors in the industry
2. Degree of product differentiation
3. Cost structure of the industry
4. Strategic objectives of firms in the industry
5. Cost to customers of switching providers
6. Cost associated with exiting industry

Question 3

Define an “industry” for purposes of competitive analysis.

Answer 3

An industry consists of those entities that produce goods or provide services which are identical or close substitutes and which compete for the same customers.

Question 4

Identify factors that would help determine the extent to which new competitors are likely to enter an industry.

Answer 4

1. Capital investment required
2. Access to raw materials, technology, and suppliers
3. Economies of scale required for profitability
4. Customer loyalty and customer cost of switching providers
5. Access to distribution channels
6. Governmental impediments to entry

Question 5

Identify factors that would help determine the level of threat posed by substitute goods or services.

Answer 5

1. Availability of substitutes
2. Ease of use of substitutes
3. Relative price and performance of substitutes
4. Buyers’ brand loyalty
5. Cost to buyers of switching to substitutes

Question 6

Identify factors that would help determine the bargaining power of buyers in an industry.

Answer 6

1. Extent of product standardization
2. Number of suppliers
3. Extent to which there are dominate buyers of the good/service
4. Extent to which information about the good or service is available
5. Cost to buyers of switching suppliers

Question 7

Identify factors that would help determine the bargaining power of suppliers in an industry.

Answer 7

1. Extent of substitutes for the product or service
2. Relationship between the number of users (buyers) and suppliers (sellers)
3. Ability of supplier to move downstream in the distribution/sales channel
4. Extent to which supplier is unionized