Industry and Environmental Analysis, Slides of Economics

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Industry and Environment

Analysis: Business Opportunities

Identification

Topic 1 (Applied Economics: Tereso S. Tullao Jr. PhD)

FORMATIVE/RECITATION

• The students will bring a

product that shows a

competitive advantage to

its competitors.

Continued:  Industry Analysis - the focus on environmental scanning is made to show the impact of the various spheres where industry operates on its profitability.  SWOT Analysis- these conditions for profit maximization, the five forces of competition, and the various internal and external spheres affecting an industry and synthesized on how they actually and potentially enhance profitability of a company

Economic Analysis of Profit

Maximization

Objective of the firm: To earn profit which is the difference between revenues and costs.  Reaping Maximum profit as an optimal decision goal.

Two components of Total

Revenue

1. Output Produced - it is based on the demand on the product. (is formed primarily by the benefits and satisfaction derived by the consumers.) 2. Price of the commodity - this implies that changes in the production of a monopolistic firm can have significant bearing on the market demand for the product and its price.

Factors leading to Profit

Maximization

Some degree of Product differentiation Limited Information Limited Market Power Oligopoly or Monopolistic Competition One Seller Scale and Legal Barriers (Govt Barriers) Highly Differentiated Product Very limited Information High market power Monopoly Product Differentiation Information Market Power Market Structure Perfect Information for all Participants Many Sellers No Barriers to Entry Homogenous Good No Market Power Perfect Competition Profitability Factors Minimal Profit Medium Profit High Profit Market Concentration Market Entry Few Sellers Some scale barriers contestable market

Continued Market Concentration - is diluted with market power absent in a competitive market due to the numerous sellers and buyers in the market.

Definition of Barriers to Entry Refer to inherent features of the industry and various means devised in the market to prevent the entry of potential players and competitors that want to take advantage of the enormous profit in industry.

Continued

2. Legal Barriers - refer to proprietary rights and their corresponding legal protection extended to existing market players in the production and distribution of a product or service.

• Protection preventing potential competitors in copying their products, services, technologies, marketing strategies and distribution arrangements.

Product Differentiation The ability of a business firm to create a market niche through several means of varying its products and services. Is to enable the firm to design a new product or service from similar products and services.

Porter’s Five Forces of

Competitive Position

This framework was developed by Michael Porter (1979) as an alternative perspective on profitability analysis and on the attractiveness of an industry for business ventures.

Porter’s Five Forces of

Competitive Position

1. Competition among rival firms within the industry.
2. The bargaining power of consumers.
3. The bargaining power of suppliers
4. The threats of entry of rival firms
5. Threat of substitute products or services

Porter’s Five Forces of

Competitive Position

Environmental Scanning in

Industry Analysis

A business venture does not only operate in an environment where rival firms interact in an industry. It does not only respond to the competitive forces and threats that directly affect the industry