Industrial Analysis

Industry Analysis
Topics
• SCP Model
• Five Forces Model
• Porter’s value Chain

The Industry
• A group of businesses that provide a particular
product or service
• One of the external factors that affect managerial

decisions
Structure
• The structure of an industry focuses on the

differences on technology, concentration and
market condition of an industry
Industry Concentration
• Refers to size distribution of firms in an industry
• Industry concentration is a factor that affects

managerial decisions
Ways to measure industry
concentration
• Four-Firm Concentration Ratio
• Herfindahl-Hirshmann Index (HHI)

Four-Firm Concentration Ratio
• The sum of the market shares or sales of the four

biggest firms in the industry
C4 = (S1 + S2 + S3 + S4) / St
• S1 – S4 are sales of 4 largest firms and St is the
total sales of all firms
Four-Firm Concentration Ratio
• Also:
C4 = W1 + W2 + W3 + W4
Where
W = S / St
• The closer to zero, the less concentrated is the

industry
Herfindahl-Hirshmann Index
• The sum of the squared market shares of all
firms in an industry multiplied by 10, 000 to
eliminate decimals
• HHI = 10, 000 Σw2

Limitations
• Does not take into account penetration of

foreign firms
• Based on national data
• Aggregation among product classes

Firm Sales in Millions
Firm V Php. 12, 694

Firm W Php. 66, 387
Firm X Php. 22, 935
Firm Y Php. 28, 857
Firm Z Php. 5, 604
Technology
• One of the most prominent differences among

structures of industries are the technologies used
for production
Demand And Market Conditions
• Industries may differ in the number of demand,
which most of the time, dictates the number of
firms in an industry
• Also, the availability of information in the
market is a factor for both managerial decisions
and consumer behavior
• The elasticity of demand for products are
different among industries
Demand And Market Conditions
• A demand for a product with a number of

substitute is highly elastic but the same is not the
case if the we are to look at the overall industry
demand
Rothschild index
A measure of the elasticity of industry demand for
a product relative to the elasticity of a single firm:
R = ET / EF
• ET = elasticity of demand for the total market
• EF = elasticity of demand for the product of an
individual firm.
When an industry is composed of many firms,
each producing similar products, the Rothschild
index will be close to zero and close to 1 when
there is a monopoly
Potential for Entry
• Industries differ in the ease of entry in the

industry such as explicit cost and economies of
scale
Conduct
• Focuses on differences on how firms behave in

the market
Pricing Behavior
• Firms in different industries vary in terms of

charging mark ups
Lerner Index
L = (P - MC) / P
• A measure of the difference between price and
marginal cost
• Computing for mark-up factor:

P = (1/(1-L)) MC
• 1/(1-L) is the markup factor
Integration and Merger Activity
• Friendly
• Hostile
Integration and Merger Activity
• Vertical Integration
• Horizontal Integration
• Conglomerate Mergers
Vertical Integration
• As mentioned earlier, vertical integration

involves putting up a plant to produce its own
input. In this case, companies merge in order to
be part of the production of a single product
• This is usually done to eliminate transaction
costs
Horizontal Integration
• Merging of two firms producing the same

products
• Undertaken usually to enjoy the savings of

economies of scale and to enhance market power
Horizontal Integration
• Horizontal integration tends to lessen

competition and increase industry concentration
Conglomerate Mergers
• Firms with different product line merged into

one firm
• This merger is usually performed in order to

improve cash flows of products with cyclical
demands
Conglomerate Mergers
• Though this type of integration is viewed as

counter productive because it leads to lack of
specialization, it can be argued that with this
setting, revenues derived from one product can
be used as capital for another product with low
demand
Research and Development
• In reference to the difference in technology

among industries as mentioned during the
discussion of industry structure, how firms
invest in research and development creates
differences in technologies of production
Advertising
Performance
• Performance refers to profits and social welfare

of an industry
Profits
• Profits is the most known measurement of

industry performance
• In this aspect, manager examines how firms earn

profits regardless of the size of the investment
Social Welfare
• The amount of consumer and producer surplus

generated in the market
Dansby-Willig Performance Index
Ranks industries according to how much social

welfare would improve if firms within each industry
expanded output in the socially efficient manner
Structure–Conduct–Perfomance
Paradigm
• Causal View
• Feedback Critique
Five Forces Framework
Five Forces Framework
• Entry
• Power of Input Suppliers
• Power of Buyers
• Industry Rivalry
• Substitutes and Complements

Entry
• The barriers to entry performance of an industry
• Barriers to entry dictates the number of firms in

an industry as well as firm concentration in a
given industry
Entry
• Formation of new companies
• Globalization strategies by foreign companies
• Introduction of new product lines

Power of Input Suppliers
• Industry performance are better when suppliers
have the power to negotiate terms of sale to their
favor
• When inputs are standardized, firms are not

concentrated or there are numerous substitutes
available, there is not much room for specialized
investments and suppliers power tends to be low
Power of Buyers
• The power of buyers is similar to that of the
suppliers
• Industry performance are better when buyers
have the power to haggle
• If there are lots of close substitutes available the
higher the power of buyers
Industry Rivalry
• There is more intensity in the rivalry of firms in

an industry if there is less industry concentration
Industry Rivalry
Rivalry in terms of the following affects the

performance of the industry:
• Product differentiation
• Consumer switching cost are low
Substitutes and Complements
• The performance of the industry depends on the

price and value of interrelated products and
services
• Products with close substitutes decreases

profitability
Value Chain
• Activities performed by firms to create value for
its consumers
Porter's Value Chain
Primary Activities
• Inbound logistics – These are all the processes
related to receiving, storing, and distributing inputs
internally. Your supplier relationships are a key
factor in creating value here.
• Operations – These are the transformation
activities that change inputs into outputs that are
sold to customers. Here, your operational systems
create value.
• Outbound logistics – These activities deliver your
product or service to your customer. These are
things like collection, storage, and distribution
systems, and they may be internal or external to
your organization.
Primary Activities
• Marketing and sales – These are the
processes you use to persuade clients to
purchase from you instead of your competitors.
The benefits you offer, and how well you
communicate them, are sources of value here.
• Service – These are the activities related to
maintaining the value of your product or service
to your customers, once it's been purchased.
Secondary Activities
• Procurement (purchasing) – This is what
the organization does to get the resources it
needs to operate. This includes finding vendors
and negotiating best prices.
• Human resource management – This is
how well a company recruits, hires, trains,
motivates, rewards, and retains its workers.
People are a significant source of value, so
businesses can create a clear advantage with
good HR practices.
Secondary Activities
• Technological development – These activities
relate to managing and processing information, as
well as protecting a company's knowledge base.
Minimizing information technology costs, staying
current with technological advances, and
maintaining technical excellence are sources of value
creation.
• Infrastructure – These are a company's support
systems, and the functions that allow it to maintain
daily operations. Accounting, legal, administrative,
and general management are examples of necessary
infrastructure that businesses can use to their
advantage.
Thank You!

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Industry Analysis

• Five Forces Model

• Porter’s value Chain

• One of the external factors that affect managerial

• The structure of an industry focuses on the

• Refers to size distribution of firms in an industry

• Industry concentration is a factor that affects

• Four-Firm Concentration Ratio

• Herfindahl-Hirshmann Index (HHI)

• The sum of the market shares or sales of the four

• The closer to zero, the less concentrated is the

• HHI = 10, 000 Σw2

• Does not take into account penetration of

• Based on national data

• Aggregation among product classes

Firm V Php. 12, 694

• One of the most prominent differences among

• A demand for a product with a number of

• Industries differ in the ease of entry in the

• Focuses on differences on how firms behave in

• Firms in different industries vary in terms of

• Computing for mark-up factor:

• As mentioned earlier, vertical integration

• Merging of two firms producing the same

• Undertaken usually to enjoy the savings of

• Horizontal integration tends to lessen

• Firms with different product line merged into

• This merger is usually performed in order to

• Though this type of integration is viewed as

• In reference to the difference in technology

• Performance refers to profits and social welfare

• Profits is the most known measurement of

• In this aspect, manager examines how firms earn

• The amount of consumer and producer surplus

Ranks industries according to how much social

• Power of Input Suppliers

• Substitutes and Complements

• The barriers to entry performance of an industry

• Barriers to entry dictates the number of firms in

• Formation of new companies

• Globalization strategies by foreign companies

• Introduction of new product lines

• When inputs are standardized, firms are not

• There is more intensity in the rivalry of firms in

Rivalry in terms of the following affects the

• The performance of the industry depends on the

• Products with close substitutes decreases

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