Industry Analysis

Week 5

Understanding Industries

Gives us context Shows competitive strength/advantage or

weakness/disadvantage Two commonly used analytical models:

Porter’s Five Forces PEST, PESTLE, STEP

Porter’s Five Forces

Gauges industry ‘attractiveness” Five forces:

1. Threat of new entrants

2. Bargaining power of suppliers

3. Bargaining power of buyers

4. Possibility of substitution or replacement

5. Degree of rivalry

The 5 forces show us

Profit potential overall Potential forces that could harm profitability Sources of competitive advantage Predicted change in industry structure

Threat of New Entrants

Entry price could be high (automobiles?) Incumbent retaliation (education?) Experience of existing companies means

increased competitiveness compared to new companies (grocery stores?)

Distribution access Switching costs are high for customers so

new entrants have to differentiate/encourage switching

Bargaining Power of Suppliers

Raw material costs that are high have an impact on profitability

Few suppliers concentrated in one area can drive up supplier costs enormously (lithium!)

Government is considered a ‘supplier’ and can have a significant impact upon profitability (expansion for example)

Bargaining Power of Buyers

Quality Differentiation

Degree of Rivalry

Costs structures Market growth Product switching Barriers to exit (asset specialization,

emotional attachment, market importance) could make it difficult to leave, intensifying rivalry

How to Analyze with 5 Forces

Collect information related to the 5 forces Rate on a scale of 1-5 is common

Assess and Evaluate Develop Strategy/Make Decisions that

ensure fit between external environment and what organization will deliver

Example: Airlines

Threat of Entry: 4 (HIGH) Deregulation Can lease aircraft Use secondary airports

Threat of Substitutes: 3 (MEDIUM) Could drive Use technology etc

Bargaining Power of Buyers 4 (HIGH) Bargaining Power of Suppliers 4 (HIGH) Degree of Rivalry 5 (HIGH)

Environmental Analysis

Internal Environment Operating Environment (suppliers,

competitors, partners) General/External Environment

Huge impact on the success or failure of an organization

Includes customers and the forces that shape them (social, economic, technological etc.)

What’s in a Name

PEST STEEP PESTLE

Social Technological Economic Ecological/Environmental Political/Legal/Regulatory

Why do it?

Relates trends to business issues Allows for decision makers to forecast future

direction By understanding these influencing factors an

organization can predict and refine its products/services and maintain relevancy to the marketplace

How?

Data gather Apply Decide Subjective to a degree but the idea is simple:

Inform, Inform, Inform