Strategic Analysis of an Industry

Determining which industries will earn economic profits (return on invested capital in excess of the cost of capital) is typically dependent on understanding the competitive environment within the industry. Strategic analysis is the analysis of the competitive environment with an emphasis on the implications of the environment for corporate strategy. Michael Porter’s “five forces” framework is the classic starting point for strategic analysis.

Porter’s Five Forces

Porter identified five determinants of competition intensity in an industry

  1. Threat of entry: the threat new competitors pose to existing competitors in an industry. A profitable industry will likely attract more competitors looking to achieve profits.
  2. Bargaining power of suppliers: the pressure suppliers can exert on businesses by raising prices, lowering quality, or reducing the availability of their products.
  3. Bargaining power of buyers: the pressure consumers can exert on businesses to get them to provide higher quality products, better customer service, and lower prices.
  4. Threat of substitutes: occurs when companies within one industry are forced to compete with industries producing substitute products or services.
  5. Rivalry among existing competitors: the extent to which firms within an industry put pressure on one another and limit each other’s profit potential.

Industry Life-Cycle Model

An industry’s life-cycle position often has a large impact on its competitive dynamics, making this position an important component of the strategic analysis of an industry. There are five stages in the industry life-cycle model, including the embryonic, growth, shakeout, mature, and decline stage. Each stage is characterized by different opportunities and threats, as we will see in a future learning objective.

cfa-industry-life-cycle

Question

In which industry life cycle stage is there focus on cutting costs because the competition is intensifying?

A. Shakeout stage

B. Mature stage

C. Decline stage

Solution

The correct answer is A.

The maturity phase begins with a shakeout period, during which growth slows and focus shifts toward expense reduction. Shakeout usually refers to the consolidation of an industry where some businesses are naturally eliminated because they are unable to grow along with the industry.

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