Deck 5: External Environmental Assessment: Industry and Competitors

Question 1

Define the term "industry" and distinguishing it from the term "market".

Answer 1

$\bullet$ The two terms are often interchanged, but have useful purposes when distinctly defined. "Industry" refers to a group of organizations, usually for-profit businesses, engaged in creating and selling similar lines of products and services to similar markets. A "market" is a group of customers who have demands for similar products and services intended to satisfy similar needs. An industry is composed of organizations and a market is composed of people or organizational buyers.

Question 2

Explain the concept of the "industry value chain". Draw a diagram of the value chain for the pharmaceutical industry.

Answer 2

$\bullet$ The process by which a product or service is brought to a market for purchase by consumers can be viewed as a long, interconnected chain of sequential activities, each one adding a little bit more value to the product or service until a finished good emerges at the end for sale to a consumer. These activities may be performed by several different businesses, each one with its one internal chain of value-adding activities. Those individual value chains feed into each other and, arrayed sequentially, make up the industry value chain.
$\bullet$ A value chain for the pharmaceutical industry would consist of the internal value chains of several entities arranged sequentially. The first entity might be a vendor of raw materials used in the manufacture of the drugs, the vendor of equipment also employed in that manufacture, or even a small biotech firm that carried out the initial drug discovery work. The second entity would be the large pharmaceutical company that does further development work on the drugs and then uses the equipment and raw materials to produce and package them. After that, the drugs are sold to a wholesaler that then redistributes them to the next link in the chain - either hospitals, physicians, or health plans that provide them to their patients, or the retail pharmacies that sell them to the patients.

Question 3

What does Michael Porter's Five Forces Model attempt to explain? Describe each of the five forces.

Answer 3

$\bullet$ The Five Forces Model: is an attempt to describe succinctly the key variables in the dynamics of competition that occurs in an industry, particularly the nature and intensity of that competition. The interplay of the five forces determines the profit potential of the industry, and how successful a business might be in operating there.
$\bullet$ Competitive Intensity: The intensity of the rivalry among competitors that currently make up the industry, measured by the frequency, magnitude, and persistence of the combative activities in which they engage.
$\bullet$ Threat of Entry by Competitors from Outside the Industry: The entry of new firms into an industry can raise the intensity of competitive interaction. The new entries may be existing businesses in other industries that see opportunities for expansion and growth in a new industry, or entirely new businesses that start up within the industry. The likelihood of new competitors emerging depends on the barriers to entry into the industry and the expected reactions from existing competitors.
$\bullet$ Availability of Equivalent, Substitute Products: Industry competition can be heightened by the availability of very different products that function as substitutes for the industry's traditional products. It is only necessary that they perform the same functions, or that consumers believe that they perform the same functions.
$\bullet$ Bargaining Power of Buyers or Customers: When an organization's customers have substantial bargaining power in their relationship with the organization, they can exert pressure that increases the competitive intensity in the industry. They may be able to force the organization to sell at lower prices, or demand higher quality, additional product features, or better service. They may also play industry competitors off against each other.
$\bullet$ Bargaining Power of Suppliers or Employees: When a business's suppliers have disproportionately strong bargaining power, they can threaten to raise prices or reduce quality or product features in order to increase their own profits. This makes it more difficult for the business to compete against its rivals.

Question 4

Name at least five factors that are likely to increase the intensity of competition in an industry.

Question 5

What are some of the factors that tend to prevent new competitors from entering an industry?

Question 6

Describe the concept of "economies of scale" and how it works.

Question 7

What are some equivalent, substitute products and services that customers might be inclined to purchase in place of traditional health care products and services?

Question 8

Describe several different generic types of competitors that an organization might want to be concerned about.

Question 9

Explain the concept of "strategic groups" and how it may be used to facilitate the process of competitor analysis.

Question 10

List eight pieces of information that an organization might want to know about its competitors' strategic desires and capabilities.