Free «Business and Economics» Essay Sample
Table of Contents
Threat of Entry
The new entrant to the industry increases the market share thus increasing the pressure on the prices, cost, and the rate at which businesses are likely to compete. The threat of entry causes changes in the strategic action of the company. For instance, to reduce and shock the new entrants, the company can raise the fixed cost of competition through increasing the expenditures of the marketing.
The Power of Suppliers
When the supplier is powerful, he will gain more value for himself through charging higher prices, limiting the quality of the goods and the services as well as shifting the cost to the industry participants. Therefore, powerful supplies influence the strategy of the company through choosing one that neutralizes them. For example, the company can decide to find more vendors to reduce the suppliers’ power. It can also change the technology in a bid to evade all the powerful suppliers at once. In addition, the company can improve its strategy by choosing the less powerful supplier.
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The Power of Buyers
A powerful buyer captures more value by reducing prices of goods and services and improving their quality at the expense of profitability of the company. To counter and control the powers of the buyer, the company can improve strategic action in many ways. For example, it may raise the services that increase the switching cost of the buyer or even find other means of attracting customers. It may also choose the buyers who possess the least power.
Rivalry among the Existing Competitors
Rivalry among the existing competitors takes many forms thus decreasing the company’s profit. With the appreciation of underlying rivalry, the industry chooses the strategies that will change the form of competition in a more positive direction. For example, to reduce rivalry, the company can come up with a unique product or increase the services that support the customer.
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The Threat of Substitute
The increased threat of substitutes will lead to the decrease in the profitability of the industry. It influences the strategy of the company by making it choose the one that limits their threat. For instance, to reduce the substitutes, the company can give a wide access to the product or come up with several new features. It may also apply the strategies such as product performance and marketing to take advantage over the substitute.
Good industry analysis requires a person to look at the structures that will increase the profitability of the company. It involves knowing the suitable length the time of the industry which is guided by its full business cycle. The length of the time depends on the industry. For example, some need between three to the five years while others require a decade or more. Therefore, the analyst should focus on the average profit of the business in the particular period rather than the profit of the whole year.
The good analysis also requires the analysts and effective strategists to understand the competition in the industry by examining the economic relationship between the strength of competitive forces and the prices. For example, it is important to consider how the strength of the buyer’s power reduces the prices or increases buyers’ demand cost, how strong supplies increase the input cost, and how low barriers to the entry or close substitutes can reduce sustainable prices level.
In addition, good analysis requires understanding of the strength of the competition and factors that increase the profit of the industry. This involves analyzing the structure of the industry quantitatively rather than being satisfied with the qualitative factors.
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Rather than just listing pluses and minuses, good industry analysis requires seeing an industry in overall systematic frame. For instance, to have true strategic insights into the industry, the analyst may try to answer questions such as which forces underpin or constrain the profit of the industry. How might shift in one competitive force trigger reaction in others?
Define the relevant industry. It is good for industrial analysis. Before you analyze the company, it is worth identifying the products that are in the particular industry, which ones are parts of the distinct industry as well as the scope of the competition.
Identify and categorize the business participants into different sets. It is important to determine buyers and their group as well as supplies and their group, those who will compete with your business, substitutes, and possible entry groups.
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Assess what motivates each competitive force to determine their strength and weakness and the reasons behind them. This will help the industries to apply different strategies in relation to the strength and weakness of the forces.
Determine the overall industrial structure and test analysis of consistency. This is done by analyzing the profit level of the industry, identifying the forces that control it, inquiring if the analysis is consistent with the profit of the company in a long run. It should be also examined whether the most profitable players are in a better position depending on the forces of competition.
Analyze the current and possible positive and negative changes in every force. The competitive forces enable the industry to expect both the positive and negative changes in the organization of the industry before they occur thus enabling the management to prepare in advance.
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Identify the aspects of the industry structure that might be affected by all the players. Due to the existing competition and persistent changes, it is important to think about the structure of the company and the aspects that can be affected by competition. The identified industrial structure is important for every investor as well as the manager.