1. Part II: Business Environment Introduction to Business 3e 5 Copyright © 2004 South-Western. All rights reserved. Assessing Industry Conditions

2. Copyright © 2004 South-Western. All rights reserved.5–2 Assessing Industry Conditions

3. Copyright © 2004 South-Western. All rights reserved.5–3 Learning Goals Identify industry conditions that impact business performance. Explain why some firms are more exposed to industry conditions. Explain how a firm can compete in its industry.

4. Copyright © 2004 South-Western. All rights reserved.5–4 Industry Characteristics Firm performance can be highly dependent on industry characteristics: –Industry demand –Industry competition –Labor environment –Regulatory environment

5. Copyright © 2004 South-Western. All rights reserved.5–5 Small Business Survey Are Firms Affected by Industry Regulations?

6. Copyright © 2004 South-Western. All rights reserved.5–6 Impact of Industry Demand Industry demand –Total demand for the products in an industry can be affected by:  Population growth  Seasons and weather  Economic conditions  Changes in consumer income levels and preferences –Impacts the performance of individual firms in an industry.

7. Copyright © 2004 South-Western. All rights reserved.5–7 Industry Competition Each industry has firms that compete against each other for customers. –Level of competition varies across industries  Intense competition can reduce market share and profitability of individual firms. –Weak competition in an industry  Increased market share for individual firms allows firms to charge higher prices and not lose customers.

8. Copyright © 2004 South-Western. All rights reserved.5–8 Labor Environment Labor characteristics differ by industry: –Cost of labor –Impact of unions  Can increase cost of labor  Possibility of labor strikes –Managers must try to estimate how the labor environment might impact labor expenses.

9. Copyright © 2004 South-Western. All rights reserved.5–9 Regulatory Environment Federal regulations –Environmental rules –Restrictions on operating in particular locations –Restrictions on who can engage in particular types of business –Restrictions on the types of services that can be provided –Regulations that promote competition

10. Copyright © 2004 South-Western. All rights reserved.5–10 Summary of Industry Characteristics Consider the impact of all industry characteristics on firm performance –Changes in demand and competition  Impact quantity of products produced, revenues and operating costs –Changes in labor and regulatory environment  Impact expenses

11. Copyright © 2004 South-Western. All rights reserved.5–11 Industry Effects on a Firm’s Performance Exhibit 5.1

12. Copyright © 2004 South-Western. All rights reserved.5–12 business online

13. Copyright © 2004 South-Western. All rights reserved.5–13 Sources of Industry Information Many firms attempt to monitor industry conditions on their own. –Good sources of industry information  Value Line Investment Survey –Information about publicly traded firms: financial characteristics, earnings forecasts, general information  Standard and Poor’s Industry Outlook –Industry data to help forecast industry demand, competition, the labor and regulatory environments

14. Copyright © 2004 South-Western. All rights reserved.5–14 Exposure to Industry Characteristics Some firms are more exposed to industry conditions than other firms. Factors that impact a firm’s exposure: –The firm’s market share –The firm’s focus on its main industry  Smith Corona in typewriters and word processors  Motorola in telecommunications

15. Copyright © 2004 South-Western. All rights reserved.5–15 Influence of Market Share on Exposure to Industry Conditions Exhibit 5.2

16. Copyright © 2004 South-Western. All rights reserved.5–16 Comparison of Performance across Industries Exhibit 5.3

17. Copyright © 2004 South-Western. All rights reserved.5–17 Reducing Exposure Diversification –Developing and acquiring businesses in a variety of industries or markets to reduce business risk.  Attempts to create a more stable return on investment than focus on a single industry.  Firms should only diversify into businesses for which the firm has sufficient expertise.

18. Copyright © 2004 South-Western. All rights reserved.5–18 How Diversification Can Influence the Return on Equity Exhibit 5.4

19. Copyright © 2004 South-Western. All rights reserved.5–19 Competing Within an Industry Intense competition can separate the performance of well-managed firms from poorly managed firms To enhance performance potential, firms should: –Assess its competitors. –Develop a competitive advantage.

20. Copyright © 2004 South-Western. All rights reserved.5–20 Assess the Competition Identify industry segments and main competitors by: –Segmenting by type of business  Degree of competition differs by segment –Segmenting by perceived quality Measure the degree of competition –Anticipate changes in competition  Entry and exit of competitors  Expansion of existing firms  Increases in price competition

21. Copyright © 2004 South-Western. All rights reserved.5–21 Identifying Industry Segments Exhibit 5.5

22. Copyright © 2004 South-Western. All rights reserved.5–22 Develop Competitive Advantage Ways to maintain or increase market share: –Low-cost production  Set a lower price to gain market share. –Better quality than competitors  Create higher quality without incurring excessive costs. –Product differentiation  Satisfy customer needs in ways that are different than competitors.

23. Copyright © 2004 South-Western. All rights reserved.5–23 SWOT Analysis Firms use SWOT analysis to develop a competitive advantage –Assess strengths and weaknesses –Identify opportunities and threats –Use strengths to capitalize on opportunities and reduce exposure to threats.

24. Copyright © 2004 South-Western. All rights reserved.5–24 Chapter Summary Industry demand, competition, and the labor and regulatory environments influence business performance. Firms that have large market share and focus most of their business on that industry will be most affected by industry conditions. Firms can successfully compete by assessing their main competitors and developing a competitive advantage.