Industry and market environment

Industry and market environment

1. Industry life cycles

   • • Introduction - new product/service invented - can be significant first mover advantage for the first firms in the market (in terms of reputation and experience)
       • Growth - rapid growth in this stage, market becomes attractive to new entrants, competitive rivalry is relatively low as firms experiencing growth without having to increase market share
         • Shakeout - market growth slows, weaker players forced to leave industry or merge with another co
           • Maturity - stable period of low growth - as growth slows down at start of maturity phase, price comp intensifies and smaller competitors shook out of industry
             • Decline - sales vols start to fall as demand for industry declines - firms leave industry and eventually it ceases to exist
       • Industry life cycles may mirror the underlying product life cycle (industry ceases when product discontinued) - however industry life cycles can be expanded by product innovation

2. Porter's five forces

   • Analysis can be used to assess attractiveness of industry
     • Threat of new entrants, bargaining power of suppliers and of customers, threat of substitutes -> competitive rivalry
       • New entrants - is the market attractive? High industry growth, high profit margins, few existing competitors, easy customer switching - barriers to entry = economies of scale, brand loyalty, capital requirements, access to distribution, patents, government subsidies
         • Competitive rivalry (among existing firms) - higher if: large no. of existing competitors, high levels of fixed costs, low industry growth, low switching costs, high exit barriers, high strategic importance
           • Threat of substitutes - availability of subs from different industries (e.g rail travel vs bus travel), or from sub-industries (e.g MP3 vs CDs) - increased likelihood if price of subs is low, relative performance is comparable, and customers can easily switch
             • Power of customers - do customers have enough bargaining power to drive down prices? - higher if there are: small no. of large competitors, large numbers of competitors, low levels of product differentiation, low switching costs, customers own profitability of low, high degree of price transparency in the market
               • Power of suppliers - do they have enough power to increase their prices? - increased if there are few large suppliers, products are differentiated, high switching costs, and supplier has other buyers they can sell to instead

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