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28 September 2015 |
"Industry" refers to a sector of an economy, grouping together companies that are related in terms of their primary business activities. An example could be the automotive industry, which is the grouping together of companies focusing their business on the sale, manufacturing, production, design and marketing of motor vehicles.
An industry analysis aims to establish the attractiveness of a particular industry. Profit margins (the amount of profit generated per item after deducting the average cost of producing each item) vary between different industries, and tools used to analyse industries can pinpoint why that is the case. This helps to understand the competitive environment in which a company operates.
Case studies often present candidates with a hypothetical scenario in which a (fictional) client is looking to acquire a (fictional) company. Candidates are then often asked to state whether they think the acquisition of the company should go ahead, i.e. would be beneficial to the client. In such a case study interview it is crucial to possess the ability to account for the strengths and limitations of the industry within which the company being analysed operates. This understanding forms part of what is often referred to as a candidate"s commercial awareness. Commercial awareness includes the ability to understand the wider factors underlying, and potential limitations to, a company"s operations and profit potential.
Understanding, and being able to apply, at least one simple framework for industry analysis will help candidates stand out in case study interviews and will also strengthen candidates" ability to analyse a business case.
This framework identifies five factors to be crucial for understanding the strengths and limitations of a particular industry.
Threat of Substitutes
Bargaining Power of Buyers
Bargaining Power of Suppliers
Barriers to Entry/Threat of New Entrants
When products are (almost) impossible to distinguish between. Examples include gold (one gram of gold is no different to another gram of gold), oil, cocoa, coal.
Monetary switching costs can be, for instance, the cost of cancelling a contract or initiation fees. Lifestyle switching costs could be, for instance, the perceived social cost of changing form driving a car to using public transportation.
***Excess Production Capacity
Where the industry is producing less than what is achievable or optimal. The demand is lower than what the industry collectively could produce.
****Integrate into the Supply Chain:
The supply chain is comprised of contributors involved in the process leading up to the sale of a product (e.g. manufacturers). Typically, each contributor will charge prices that include a profit margin. If one company takes control of two or more stages in the supply chain, it will not have to pay this additional margin and costs will consequently decrease.
The process by which a product is made more distinguishable from other (similar) products so as to avoid commoditisation (see above).
******Economies of Scale
The cost advantage gained as output increases. This cost advantage arises when fixed costs are spread across a greater quantity of sales.