Analyzing the Industry Environment

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Analyzing the Industry Environment

The business environment consists of all external influences that affect its decisions and performance. These should be analysed systematically and with continuous scanning, keeping in mind that it needs to be cost effective and not create too much information. You need to distinguish the vital from the merely important. One can focus on the industry environment for example, especially on customers, suppliers and competitors.

An industries profit comes from how perfect the market is. In general the price a customer wants to pay needs to exceed the cost the company incurrs. With growing competition that gap will close and in a perfect market, there will be perfect competition and hence virtually zero margin. The other extreem would be a monopoly with most markets sitting in between, being oligopolies.

Porter's five forces framework is one way to look at industry stucture. It looks at the bargaining power of suppliers, threat of substitutes, bargaining power of buyers, threat of new entrants and industry competitors.

Competition from substitutes limits the price that can be asked. In case for gasoline, there is no substitute, meaning demand is inelastic in respect to price.

The threat of entry of other companies is especially valid once companies within that industry earn a return on capital in excees of its cost of capital. In many cases, only the threat is important enough. The absence of sunk costs, make an industry vulnerable to hit and run entry and exit of other companies. Barriers would here be capital requirements, economies of scale, absolute cost advantages, product differentiation (companies have brand recognition and loyalty, meaning high spending necessary.), access to channels of distribution, governmental and legal barriers and retaliation.

The nature and competition between existing firms can be found in: - Concentration (how many companies make up how much of the market) - diversity of...
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