Structural Analysis of Industry Competition and LongRun ROIC

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Structural Analysis of Industry Competitionand
Long-Run ROIC
Potential Entrants
Industry Competitors Rivalry Among
Existing Competitors
Customer Buying Power
Supplier Bargaining Power
Potential Substitutes
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Rivalry Among Existing FirmsThe Considerations

• Industry growth rate and State of Life Cycle
• Concentration within industry / number of firms
• Product differentiation
• Costs of switching (changing the way a firm
  does something)
• Economies of Scale
• Cost structure (fixed versus variable)
• Excess capacity
• Exit barriers

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Potential Entrants

• Economies of scale (lock on business by existing
  firms)
• First mover advantage
• Access to distribution channels or extent tied up
  by currents firms
• Product differentiation
• Relationships
• Capital requirements (similar to economies of
  scale)
• Legal barriers governmental policy
• Reaction of existing firms

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Potential Substitutes

• Relative price performance
• Technological shifts
• Sociological shifts

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Suppliers Bargaining Power

• Number of supplier firms (competition among
  suppliers)
• Is the industry important to supplier
• Switching costs to supplier
• Potential for horizontal merger
• Knowledge

Customer Buying Power

• Volume purchased by buyers
• Product is large cost to buyer
• Buyer switching costs
• Buyer profits
• Potential for horizontal merger
• Knowledge