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
Markets
Products/Services
Same
Different
Same
A
B
Different
C
D
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 crossprice 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
Threat of substitute
products
Bargaining
power
of buyers
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?”