BUS 800 Chapter Notes - Chapter 2: Sales Promotion, Suncor Energy, Pepsico
Chapter 2: Industry Analysis
Business environment- consists of all the external influences that affect its decisions and
performance
PESTEL analysis- environmental scanning framework
1. For a firm to make a profit it must create value for customers, therefore understand its
customers
2. In creating value the firm acquires goods and services from suppliers, therefore
understands its suppliers & manage relationships with them
3. The ability to generate profitability depends on the intensity of competition among firms
that compete for the same value creating opportunities, therefore the firm must
understand competition
• The core of the firm's business environment is formed by its relationships with three sets
of players: customers, suppliers, and competitors - this is the industry environment
The Determinants of Industry Profit: Demand and Competition
• starting point for industry analysis: what determines the level of profit in an industry?
• Prerequisite for profit is the creation of value for the customer
• Values created when the price the customer is willing to pay for a product exceeds the
cost incurred by the firm
• Profit earned by firms in an industry are determined by 3 factors
1. The value of the product to customers
2. The intensity of competition
3. The bargaining power of the producers relative to their suppliers
Analyzing Industry Attractiveness
• Some industries earn high rates of profit like tobacco and pharmaceuticals
• The basic premise that underlies industry analysis is that the level of industry profitability
is neither random nor the result of entirely industry specific influences - it is determined
by the systematic influence of the industry's structure
Porter’s Five Forces of Competition Framework
• These five forces of competition include three sources of “horizontal” competition—
competition from substitutes, competition from entrants, and competition from
established rivals—and two sources of “vertical” competition—the power of suppliers
and power of buyers
Competition from Substitutes
• The price customers are willing to pay depend on the availability of substitute products
• The absence of close substitutes for a product like gasoline/cigarettes means
consumers are comparatively insensitive to price (demand is inelastic with respect to
price)
• The existence of close substitutes means that customers wills witch to substitute in
response to price increases for the product (demand is elastic with respect to price)
• The internet has provided a new source of substitute competition for industries like travel
agencies, newspapers, etc
The Threat of Entry
• Threat of entry rather than actual entry may be sufficient to ensure that established firms
constrain their prices to the competitive level
• In an industry earns a return on capital in excess of its cost of capital it will act as a
magnet to firms outside the industry
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