Focal Task –Industry Analysis

Industry Analysis – you will only have to analyze THREE of the five forces.(See below.)

Steps to undertake 5 forces analysis:

• Define: Define the relevant industry by both its product scope and geographic scope. It is useful to cite the industry definition (this will help you specifically place rivals and substitutes).

• Identify: Identify the players constituting each of the five forces; where appropriate, segment them into groups.

• Assess: Assess the underlying drivers of each force. Which are strong? Which are weak? Why? Further, it is also important to step back and assess the overall industry structure. Which forces control profitability? Which firms are substantially more profitable than industry averages? Why?

The following guidance can be used to assess each driver:

• Threat of new entrants
  The greater the threat of new entrants into the industry (i.e. the lower the entry barriers to get into the industry) the higher the likelihood that new entrants will enter to capture profits, the lower the profitability of the industry. The threat of new entrants increases with the following (illustrative):
  • Low economies of scale within the industry
  • Low product differentiation and/or brand equity
  • Low capital requirements
  • Low switching costs for buyers
  • Easy access to distribution channels
  • No government policy restricting industry
  • Easy access to necessary inputs
  • Limited learning curve benefits for incumbents
  • Limited expected retaliation from incumbents
  • Limited patent and trademark protection

• Threat of substitutes

The greater the threat of substitute products, the higher the likelihood that buyers will switch their preferences if prices of industry products get too high, the lower the profitability of the industry. The threat of substitutes increases with the following (illustrative):

• Low switching costs
• High buyer inclination to substitute
• Low price-performance trade-off
• Easy ability to substitute

• Threat (bargaining power) of buyers

The greater the negotiating power of buyers, the more influence they have on negotiating lower prices and, hence, depress profits in the industry. The bargaining power of buyers increases with the following (illustrative):

• High buyer volumes
• Low buyer switching costs
• Increased information available to buyers
• High seller dependence on buyers (i.e. seller dependence on a few customers)
• High threat of backward integration by buyers
• Low levels of product differentiation
• Substitute products available to buyers

• Threat (bargaining power) of suppliers

The greater the negotiating power of suppliers, the more influence they have to increase prices and extract profits, the lower the profitability of the industry. The bargaining power of suppliers increases with the following (illustrative):

• High supplier concentration (i.e. few suppliers)
• High differentiation of inputs
• High switching costs to different suppliers
• Lack of substitute inputs
• High threats of forward integration by suppliers
• Cost relative to total purchases

• Threat (intensity) of rivalry

The higher the level of rivalry among competitors in the industry, the more they will be forced to lower prices or provide extra value to continue to attract customers, the lower the overall profitability of the industry. The intensity of rivalry increases with the following (illustrative):

• High exit barriers in the industry
• Low levels of industry concentration
• High fixed costs to operate
• Low industry growth
• Overcapacity in the industry
• Low product differences
• Low switching costs for buyers

• Analyze: Analyze recent and likely future changes for each force. How are they trending? What might happen in the future?

• Interpret and conclude: Is it a good industry to be in? How can a firm position itself in relation to the five forces? Is there a position where there is greater opportunity? Is it possible to exploit industry change?

Industry Analysis for the _____________________Industry(PICK THREE FORCES)

Narrative interpreting the template (Please summarize the key findings from the template on the previous page – 4/5 lines minimum)