the structural analysis of industries

8/12/2019 The Structural Analysis of Industries

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- )conomies of scope +sharing of operations or functions

Brand names" e#pensive to establish and maintain. 1nce established additional cost of

applying it to other related products is low. eady to eat breakfast cerealcompanies. Automobile companies.

Air travel and air cargo services" Technological considerations make it impossible to fillplane up with people. 2pace for cargo. *ncremental cost of e#panding intocargo business is very low.

- 3apital re4uirements

1ften sunk capital re4uired. )g. (ineral e#traction companies.

- !roduct 5ifferentiation

``3ustomer loyalties.'' *nvestment made through advertising, customerservices, and product design differences. )ntrant faces large start up costs toovercome this advantage. These costs are sunk and have no ``salvage value''if they fail. )g. baby care products, baby food, over the counter drugs.

- 2witching costs for buyers

5oes buyer have to incur costs when buying entrant's products )g. kits used for medical

diagnoses, heavy machinery, computer operating systems.

- Access to 5istribution 3hannels

3ost associated with forming new relationships with wholesalers and retailers. 5oes entranthave create its own distribution channel )g. food processing firms, mailorder catalogue companies.

- *ncumbent cost advantages

!roprietary knowledge or technology. !atents, secret formulas +3oca 3ola, American ome

!roducts.

6ocation is a scarce resource7

)#perience or position on the ``learning curve.'' A type of technological change that occursonly as a result of producing and selling. )g. %irms with skilled labor,universities, investment banks, accounting firms etc.8 also comple# assemblyre4uirements. This barrier is not the same as economies of scale7


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- 9overnment policy

6icensing re4uirements8 pollution controls and standards for product testing increase fi#edcost of entry. 2ome regulations may delay entry providing incumbents withtime to ad:ust strategies.

)#piration of !atents. )g. )stablished drug faces competition from ``generic'' drugs8$odak enters to compete with !olaroid's instant camera.

o )#pected retaliation

- 5o firms in the industry have a history of engaging in price cutting when encounteringnew rivals 5o they have the resources to engage in a prolonged period of price

discounting )g. ma:or airlines with new carrier begins service on one of theirroutes.

o )ntry 5eterring !rice

- 5o firms price at a point where short run marginal revenue is less than short run marginalcost. This means output is larger and price lower as a way of deterring entrants. *feconomies of scale a factor as output e#pands this would be a further deterrent.

0. *ntensity of ivalry Among *ncumbents

o 3ompetition occurs because a rival sees an opportunity of improve its position +ie.profitability. owever, rivals ``moves'' have effects on the firm as well as othercompetitors. The pattern of reaction among competitors may or may not leave the producerbetter off.

- !rice competition especially dynamic. !rice reductions easily met by rivals. 3ompetitionoccurs not only with price, but with product 4uality, service, warranties, advertisingetc. *ndustry may derive more benefits from some forms of non-price competition.

o %actors contributing to intensity of rivalry.

- igh e#it barriers" 2pecialied assets with low salvage values often associated withsubstantial economies of scale +see ne#t tick 8 interrelationships between businessunit and other units in the firm8 especially common outside the ;nited 2tates,government restrictions. )g. *n *ndia, legal environment makes closing a plant with employee difficult.

- igh fi#ed costs production methods" &hen ``e#cess capacity'' is present +ie. very lowmarginal costs price cutting occurs. )g. *n paper products industry, production


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process often most efficient when let to run 0? hours a day @ days a week. 2torageor inventory costs associated with bulky items becomes important consideration inpricing. %ishing industry faces similar challenges.

- *nability to differentiate product" 2uccessful product differentiation makes producersproduct a poorer substitute for other products in the industry. This differentiationmakes the demand for the producer's product less sensitive to price changes. 6owconsumer ``switching'' cost intensifies competition in a similar manner.

- (any e4ually balanced competitors +including foreign competitors" *ndustry with manyfirms and little concentration likely will e#perience more intense competition thanone with a similar number of firms, but greater concentration of output among a fewfirms. +3orresponds to iew C0 in lecture on *ndustries &ith %ew 2ellers.

- 2low industry growth" 3ompetition over the sie of producer's market share appears to bemore important part of its strategy.

D. 3ompetition %rom 2ubstitute !roducts

o *ndustries selling substitute products limit profit potential because their product pricescreate a ``ceiling'' on the producer's prices. *dentify such products by finding those thatwhile different perform the same function. + )g. ``6ow end'' chain restaurants and (programs in grocery stores8 2ugar producers compete with corn syrup industry8 fiberglassinsulation and rock wool and styrofoam8 security guards and electronic alarm andsurveillance systems.

?. Bargaining !ower of Buyers

o Buyers affect industry profitability by their ability to hold out for lower price, higher4uality, better service. An important determinant is the number of buyers +consumers in theindustry. )g. ready to wear clothing producers and retail department stores. *n the e#tremecase, there may be only one or a few buyers of a service. )g. tank gunners may findemployment only with the military or as a mercenary. An even better e#ample is theE3AA. The buyers do not take price +wage as given and instead realie that their decisionsabout the employment of factors affect price. &hen there also are few sellers, pricesdetermined as a result of bargaining +although more advanced economic analyses suggests

the range of ``rational'' price and output outcomes is limited.

o 1ther factors affecting buyer power.

- !roduct is a significant fraction of buyer's +consumer's total cost

- !roducts purchased from an industry producing standardied +as opposed to customiedproducts


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- Buyer +3onsumer encounters low switching costs.

- Buyers could integrate backwards and produce the product themselves" istorically true inthe ;.2. automobile industry.

- Buyer +consumer is well informed

the structural analysis of industries

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