LESSON 5

MARKET ANALYSIS
Need for market analysis
- Understand the industry
- Understand the competitive structure
- Devise informed negotiation strategy
Defining an industry
An industry is a group of firms that market products which are close substitutes for each other
(e.g. the car industry, the travel industry). Some industries are more profitable than others. Why?
The answer lies in understanding the dynamics of competitive structure in an industry. The most
influential analytical model for assessing the nature of competition in an industry is Michael
Porter's Five Forces Model.
Porter explains that there are five forces that determine industry attractiveness and long-run
industry profitability. These five "competitive forces" are
- The threat of entry of new competitors (new entrants)
- The threat of substitutes
- The bargaining power of buyers
-The bargaining power of suppliers
- The degree of rivalry between existing competitors
Threat of New Entrants
New entrants to an industry can raise the level of competition, thereby reducing its attractiveness.
The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in
some industries whereas other industries are very easy to enter Key barriers to entry include;
- Economies of scale
- Capital / investment requirements
- Customer switching costs
- Access to industry distribution channels
- The likelihood of retaliation from existing industry players.
- Existing loyalty to major brands
Threat of Substitutes
The presence of substitute products can lower industry attractiveness and profitability because
they limit price levels. The threat of substitute products depends on:
- Buyers' willingness to substitute
- The relative price and performance of substitutes
- The costs of switching to substitutes
Bargaining Power of Suppliers
Suppliers are the businesses that supply materials & other products into the industry.
The cost of items bought from suppliers (e.g. raw materials, components) can have a significant
impact on a company's profitability. If suppliers have high bargaining power over a company,
then in theory the company's industry is less attractive. The bargaining power of suppliers will be
high when:
- There are many buyers and few dominant suppliers
- There are undifferentiated, highly valued products
- Suppliers threaten to integrate forward into the industry
- Buyers do not threaten to integrate backwards into supply
- The industry is not a key customer group to the suppliers
Bargaining Power of Buyers
Buyers are the people / organizations who create demand in an industry
The bargaining power of buyers is greater when
- There are few dominant buyers and many sellers in the industry
- Products are standardized
- Buyers threaten to integrate backward into the industry
- Suppliers do not threaten to integrate forward into the buyer's industry
- The industry is not a key supplying group for buyers
Intensity of Rivalry
The intensity of rivalry between competitors in an industry will depend on:
- The structure of competition - for example, rivalry is more intense where there are
many small or equally sized competitors; rivalry is less when an industry has a clear
market leader
 - The structure of industry costs - for example, industries with high fixed costs
encourage competitors to fill unused capacity by price cutting
- Degree of differentiation - industries where products are commodities (e.g. steel, coal)
have greater rivalry; industries where competitors can differentiate their products have
less rivalry
- Switching costs - rivalry is reduced where buyers have high switching costs - i.e. there is
a significant cost associated with the decision to buy a product from an alternative
supplier
- Strategic objectives - when competitors are pursuing aggressive growth strategies,
rivalry is more intense. Where competitors are "milking" profits in a mature industry, the
degree of rivalry is less
- Exit barriers - when barriers to leaving an industry are high then competitors tend to
exhibit greater rivalry

Analyzing the macro-environment

PESTEL analysis
There are many factors in the macro-environment that will affect the decisions of the managers
of any organization. Tax changes, new laws, trade barriers, demographic change and government
policy changes are all examples of macro change. To help analyze these factors managers can
categorize them using the PESTEL model. This classification distinguishes between:
 Political factors. These refer to government policy such as the degree of intervention in
the economy. What goods and services does a government want to provide? To what
extent does it believe in subsidizing firms? What are its priorities in terms of business
support? Political decisions can impact on many vital areas for business such as the
education of the workforce, the health of the nation and the quality of the infrastructure of
the economy such as the road and rail system.
 Economic factors. These include interest rates, taxation changes, economic growth,
inflation and exchange rates. As you will see throughout the "Foundations of Economics"
book economic change can have a major impact on a firm's behaviour. For example:
- higher interest rates may deter investment because it costs more to borrow
- a strong currency may make exporting more difficult because it may raise the price in
terms of foreign currency
- inflation may provoke higher wage demands from employees and raise costs
- higher national income growth may boost demand for a firm's products
 Social factors. Changes in social trends can impact on the demand for a firm's products
and the availability and willingness of individuals to work. In the UK, for example, the
population has been ageing. This has increased the costs for firms who are committed to
pension payments for their employees because their staff are living longer. It also means
some firms such as Asda have started to recruit older employees to tap into this growing
labour pool. The ageing population also has impact on demand: for example, demand for
sheltered accommodation and medicines have increased whereas demand for toys is
falling.
 Technological factors: new technologies create new products and new processes. MP3
players, computer games, online gambling and high definition TVs are all new markets
created by technological advances. Online shopping, bar coding and computer aided
design are all improvements to the way we do business as a result of better technology.
Technology can reduce costs, improve quality and lead to innovation. These
developments can benefit consumers as well as the organizations providing the products.
 Environmental factors: environmental factors include the weather and climate change.
Changes in temperature can impact on many industries including farming, tourism and
insurance. With major climate changes occurring due to global warming and with greater
environmental awareness this external factor is becoming a significant issue for firms to
consider. The growing desire to protect the environment is having an impact on many
industries such as the travel and transportation industries (for example, more taxes being
placed on air travel and the success of hybrid cars) and the general move towards more
environmentally friendly products and processes is affecting demand patterns and
creating business opportunities.
 Legal factors: these are related to the legal environment in which firms operate. In recent
years in the UK there have been many significant legal changes that have affected firms'
behaviour. The introduction of age discrimination and disability discrimination
legislation, an increase in the minimum wage and greater requirements for firms to
 recycle are examples of relatively recent laws that affect an organization’s actions. Legal
changes can affect a firm's costs (e.g. if new systems and procedures have to be
developed) and demand (e.g. if the law affects the likelihood of customers buying the
good or using the service).

Different categories of law include:

 consumer laws; these are designed to protect customers against unfair practices such as
misleading descriptions of the product
 competition laws; these are aimed at protecting small firms against bullying by larger
firms and ensuring customers are not exploited by firms with monopoly power
 Employment laws; these cover areas such as redundancy, dismissal, working hours and
minimum wages. They aim to protect employees against the abuse of power by managers
 Health and safety legislation; these laws are aimed at ensuring the workplace is as safe as
is reasonably practical. They cover issues such as training, reporting accidents and the
appropriate provision of safety equipment
Determining the balance of power
Power as simply the ability to get things done the way you want them done. For example, the
power of the manager who wants increased financial resources is his ability to get the desired
resources. Power can have significant influence on negotiations and is related to both
organizational and personal factors. Organizational power could be reflected in the following
ways;
 Market power; this is related to degree of competition. Generally the less competition the
supplier or the buyer organization faces, the more powerful is their position
 Relative value power; this reflects the relative importance of the deal to each side in the
negotiation. If it is very important for the purchaser, but not for the supplier then the
buyer is likely to be at disadvantage
 Financial power; the level of financial resources available to each of the sides will impact
on the negotiation power
 One of the sides may have a very prominent position not only because of economic clout,
but also because of their image or brand name. in such a case the other party may be
 willing to give up more in the negotiation that would otherwise in order to gain prestige
by association with the purchaser
 Time power. The organization that has more time on its hands has more power thus if
you have to buy urgently your negotiation position is diminished
 Reward power; this is the ability of the organization to be able to offer rewards to the
other party if the negotiation is concluded satisfactorily
 Power of choice; this means that a reasonable alternative is available to the organization
if the negotiation should not succeed
Personal power
An individual negotiators power can be enhanced in a number of ways;
 Physical power
 Expert power; this is the power that is vested in someone because of their acknowledged
expertise
 Charismatic power which is the degree of popularity of the individual and their
exceptional social skills. Can be enhanced by their position or expert status
 Negative power which is the ability to stop things from happening such as buyer who
refuses to place a contract with a supplier
 Legitimate power. Legitimate power is derived from the ability to influence because of
position. A person at a higher level has power over the people below. Legitimate power is
used in many ways during negotiation. People with a lot of legitimate power could use
their positions of authority to 'instruct' other parties to follow certain procedures.
The negotiation team
The number of people as well as which departments should be involved will often depend on the
complexity of the negotiation as well as the types of expertise and experience required. The
negotiation team should have;
 Chairman; who takes the lead for the team and has authority to make decisions
 Specialized support who provides the required in depth expertise
 Summarizer; who takes notes and interjects with frequent summaries
 Observer; who performs the quiet but very important role of listening the other sides
comments and watching for verbal and non-verbal signals