Chapter 3
Industry Analysis

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3-1

Five Forces Analysis
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Five forces analysis: Technique for understanding an industry, by examining the interactions among:
– Competitors in an industry
– Potential new entrants to the industry
– Substitutes for the industry’s offerings
– Suppliers to the industry
– Industry’s buyers

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Purpose of the analysis is to identify how much profit potential exists in an industry
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3-2

Porter’s Five Forces

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3-3

The Threat of New Entrants
• Profits of established firms in the industry may be eroded by new competitors
• High entry barriers lead to low threat of new entries
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Economies of scale
Product differentiation
Capital requirements
Switching costs
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4-4

If we were to open our bowling alley in Carrollton, what would the threat of new entrants be? How would you evaluate Porter’s other forces for this industry? Explain.

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4-5

The Bargaining Power of Suppliers
• Suppliers exert power by threatening to raise prices or reduce the quality goods and services • A supplier group will be powerful when – It is dominated by a few companies and is more concentrated than the industry it sells to
– It is not obliged to contend with substitute products for sale to
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4-6

Question

• Which suppliers do we need for our bowling alley?
• How can they exert power?

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4-7

The Intensity of Rivalry among
Competitors in an Industry
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Jockeying for position

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Price competition
– Rivals easily match price cuts

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Advertising battles
– Expand overall demand or enhance level of product differentiation

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Product introductions

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Increased customer service or warranties (c) 2012 Flat World Knowledge

4-8

The Intensity of Rivalry among
Competitors in an Industry
• Interacting factors lead to intense rivalry –
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Numerous or equally balanced competitors
Slow industry growth
High fixed or shortage costs
Lack of differentiation or switching costs
Capacity augmented in large increments
High exit barriers
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4-9

The Bargaining Power of Buyers
• Buyers threaten an industry
– Force down prices
– Bargain for higher quality or more services
– Play competitors against each other

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4-10

The Bargaining Power of Buyers
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A buyer group is powerful when
– It is concentrated or purchases large volumes relative to seller sales – The products it purchases from the industry are standard or undifferentiated – The buyer faces few switching costs – It earns low profits
– The buyers pose a credible threat of backward integration
– The industry’s product is unimportant to the quality of the
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4-11

The Threat of Substitute
Products and Services
• Substitutes