Industry Analysis/Mkt Definition Analysis of customers, competitors and industry are interdependent. Require balance between identifying too many and too few competitors. Many bases for competition. Different levels of competition.

Industry Analysis/ Mkt Definition Bases of Competition 1. Customer oriented (Who they are; When they use it; Why they use it) 2. Marketing oriented (Theme/copy strategy; Media; Distribution; Price) 3. Resource oriented (Raw materials; Employees; Financial resources) 4. Geographic Levels of Competition- 1. Product form; 2. Product category; 3. Generic; 4. Budget

Industry Analysis/Mkt Definition Methods of determining competition: 1. Existing categories 2. Technical feasibility of substitution 3. Managerial judgement

Industry Analysis/Mkt Definition Methods for determining competition (contd.): 4. Customer behavior based - Brand switching - Interpurchase times - Cross elasticity of demand 5. Customer judgement based - Overall similarity - Similarity of consideration sets - Product deletion - Substitution in use

Competitor Identification Identifying competitors by identifying substitutes Substitutes are products whose cross-price elasticities of demand are positive There is a distinction between direct and indirect competitors Similar products in different geographic markets may not be substitutes

Market Definition Market definition describes the market in which a firm competes Two firms are in the same market if they constrain each others ability to raise price Suppose all firms collectively set prices to maximize combined profits. Would they choose to raise prices by a least 5%?

Market definition If the own-price elasticity of a group of firms collectively is small, then this group of firms constitutes a well-defined market Antitrust agencies (Dept of Justice) looks at the above

Market Structure and Competition Market structure refers to the number and distribution of firms in a market Common measures are N-firm concentration ratio and Herfindahl index The Herfindahl index of an industry depends on the nature of competition in the industry

A typology of competition Perfect competition: - many sellers - homogenous products -well-informed consumers can costlessly shop around

A typology of competition Monopoly: -no competition for output Monopolistic competition: -many sellers -each sells a differentiated product Oligopoly: -few sellers, so the actions of one firm materially affects the others

A Tool for Assessing Industry Attractiveness: Porter’s Five Forces Threat of new entrants Bargaining power of suppliers Rivalry among existing industry firms Bargaining power of buyers Have students consider industry attractiveness for the cellular phone service industry. Five Forces Analysis of the Worldwide Cell Phone Service Industry In Early 2004 Rivalry is high leading to high customer churn: unfavorable Products are differentiated through new features and services, customer switching costs are low. Threat of new entrants is low: moderately favorable While rapid pace of technological change may bring new entrants based on new technologies (i.e.packet switching, satellites) new service providers must purchase a bandwidth licence by spending billions. Supplier power is high: moderately unfavorable Governments have raised the price of additional bandwidth through auctions. Buyer power is low: very favorable Even large customers have little power to set terms and conditions in this oligopolistic industry. Threat of substitutes is high: moderately unfavorable PDAs or new multimedia devices could replace cell phones. Overall conclusion: only 2 out of 5 forces are favorable. Thus the cellular phone industry is not particularly attractive at this time. Threat of substitute products

Performing the 5-forces analysis Assess each force by asking “Is it sufficiently strong to reduce/eliminate industry profits?” Internal rivalry -begin by defining market -price competition drives down prices -non price competition drives up costs -industry prices do not fall by themselves, so you ask “Who will reduce it and why?”