Industry AnalysisMkt Definition Analysis of customers competitors and

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 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? ”