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Subject 4. Industry Structure and External Influences PDF Download

A business has to understand the dynamics of its industries and markets in order to compete effectively in the marketplace. Porter identifies five forces that dictate the rules of competition in each industry. These forces determine industry profitability because they influence the prices, costs, and required investment of firms in an industry.

  • The threat of new entrants. How easy or difficult is it for new entrants to start competing? Barriers to entry are unique industry characteristics that define the industry. Barriers reduce the rate of entry of new firms, thus maintaining a level of profits for those already in the industry. From a strategic perspective, barriers can be created or exploited to enhance a firm's competitive advantage.

  • The threat of substitutes. Substitutes not only limit profits in normal times, they also reduce the bonanza an industry can reap in good times. The threat of a substitute is high if it offers an attractive price-performance trade-off to the industry's product and/or the buyer's cost of switching to the substitute is low.

  • The bargaining power of customers. How strong is the position of buyers? Can they work together in ordering large volumes? This force influences the prices that firms can charge. It can also influence cost and investment as powerful buyers demand costly services.

  • The bargaining power of suppliers. How strong is the position of sellers? Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry's profits. In some cases, a monopolist supplier can dictate its terms to entire industries. This force determines the cost of raw materials and other inputs.

  • The intensity of rivalry. Does strong competition between the existing players exist? Is one player very dominant or are all equal in strength and size?

PESTLE Analysis

A PESTLE industry analysis is a strategic tool used to assess and understand the external macro-environmental factors that can impact a specific industry. It focuses on the specific industry and how various factors may influence its competitiveness, growth, and overall performance.

The PESTLE industry analysis involves examining the following six key categories of external factors:

  • Political: This category considers the impact of political factors on the industry. It involves analyzing government policies, regulations, trade agreements, stability, and political influence that may affect the industry's operations and growth prospects.

  • Economic: Economic factors examine the state of the economy and how it affects the industry. This includes analyzing factors such as economic growth, inflation rates, interest rates, exchange rates, unemployment levels, and overall economic stability that can influence the industry's demand, costs, and profitability.

  • Social: Social factors look into the societal influences that may affect the industry. It involves examining demographic trends, consumer preferences, cultural shifts, lifestyle changes, and societal attitudes that can impact the demand for products or services within the industry.

  • Technological: This category considers advancements in technology that can influence the industry. It involves analyzing trends in research and development, automation, digitalization, innovation, and the adoption of new technologies that could shape the industry's competitive landscape and operations.

  • Legal: Legal factors involve assessing the impact of laws and regulations specific to the industry. This includes industry-specific regulations, environmental laws, intellectual property rights, safety standards, and any other legal considerations that could affect the industry's operations.

  • Environmental: This category looks at the ecological and environmental factors that may influence the industry. It involves analyzing factors such as sustainability practices, environmental regulations, resource availability, climate change, and their potential impact on the industry's operations and reputation.

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