What are the critical drivers of industry profitability?
Rivalry Among Existing Firms. The greater the degree of competition among firms in an industry, the lower average profitability is likely to be. The factors that influence existing firm rivalry are industry growth rate, concentration and balance of competitors, degree of differentiation and switching costs, scale/learning economies and the ratio of fixed to variable costs, and excess capacity and exit barriers.
Threat of New Entrants. The threat of new entry can force firms to set prices to keep industry profits low. The threat of new entry can be mitigated by economies of scale, first mover advantages to incumbents, greater access to channels of distribution and existing customer relationships, and legal barriers to entry.
Threat of Substitute Products. The threat of substitute products can force firms to set lower prices, reducing industry profitability. The importance of substitutes will depend on the price sensitivity of buyers and the degree of substitutability among the products.
Bargaining Power of Buyers. The greater the bargaining power of buyers, the lower the industry's profitability. Bargaining power of buyers will be determined by the buyers' price sensitivity and their importance to the individual firm. As the volume of purchases of a single buyer increases, its bargaining power with the supplier increases.
Bargaining Power of Suppliers. The greater the bargaining power of suppliers, the lower the industry's profitability. Suppliers' bargaining ability increases as the number of suppliers declines when there are few substitutes available.
You might also like to view...
The last step in preparing a work sheet is to
a. prepare an adjusted trial balance; b. prepare a trial balance; c. total the Income Statement and the Balance Sheet columns; d. journalize the adjusting entries; e. analyze the financial statements.
Sean works for a defense contractor. This contractor has a contract to sell 2 million pocket
flashlights per year to the military at a price of "one dollar more than the cost to produce". The contractor has elaborate and detailed reports on the cost of making these flashlights. Copies of these reports are submitted to the government. Sean knows that some of the information in these reports calculating a cost per flashlight of $243.00 is false. Which of the following is true? A) Sean can report this information to the government, but Sean cannot gain financially by doing so. B) Because of Sean's knowledge, he is equally guilty as the corporation of committing fraud. C) Sean could possibly receive a portion of the recovery, but only if the government chooses to not intervene in the suit. D) Sean could file a suit against the contractor under the Civil False Claims Act, and if the case is successful, receive a portion of the recovery.
Hubert borrows $100,000 from Integrity Mortgage Mart to buy a home. Soon after obtaining the mortgage, Integrity convinces Hubert to refinance. This is
A. a short sale. B. a subprime mortgage. C. loan flipping. D. steering and targeting.
Why is the phase after the growth stage of the industry life cycle referred to as the shakeout stage?
A. Rivalry among competitors decreases in this stage. B. The weaker firms are forced out of the industry in this stage. C. The firms in the industry yield the highest profits during this phase. D. The barriers to entry increase during this stage.