Chapter 2: Industry Analysis and Evolution in 21st Century Sorina Panfil MGT 770 Due 02/18/2014

1. Explain how industries are classified within the United States. In the United States firms are systematically classified in industries. The older version was the Standard Industrial Classification (SIC) System which grouped firms according to the similarity of the produced goods and/or services. Today, as a result of the NAFTA, the old system is being swapped with the North American Industry Classification System (NAICS). It is constructed based upon the International Standard Industrial Classification (ISIC) System. The later classifies firms into industry groups throughout the entire world and it is much more detailed than the original SIC system. For example, first comes the 3 digit subsector which is really a wide concept, the 4th digit represents the sub-sector with more precision, the next two digits show the Us industry code and the last number represents the product class. 2. Identify Porters 5 forces. What is the primary purpose of these forces? Michael Porter developed a certain framework that would help with the analysis of industries as his model looks at five key structural features that look at the degree of competition within an industry. One element that should be considered according to Porter is the Threat of New Entrants which addresses the likelihood that firms outside of an industry will ever enter that industry. To determine that threat, new companies need to analyze the deterrents specific to that industry, such as economies of scale, power of the brand name within the industry, the necessity of building up infrastructure or government policy. Another element to discuss is the bargaining power of suppliers. This force analyzes the interdependent relationship between sellers and buyers. The greater the degree of concentration of suppliers, the greater their power. They can truly impact an industry by highly

Chapter 2: Industry Analysis and Evolution in 21st Century Sorina Panfil MGT 770 Due 02/18/2014
manipulating prices.OPEC is one example where the bargaining power of suppliers seems to be tremendous. When reviewing the bargaining power of buyers, the attention falls on consumers and switching costs. The lower the switching cost, the higher the power that consumers can exert on an industry. In the auto and beverage industries consumers have many options and they can pinpoint to what their individual needs are whereas in the pharmaceutical industry buyers have little control over the industry. Next, the attention is drifted to the Threat of substitutes. This addresses how the customers actually see the products. If the consumer has a broad selection of substitutes, then the price becomes an elastic variable. Other industries with strong brands, such as fashion items do not have highly elastic prices. Lastly, the degree of rivalry within an industry is extremely dependant on a few factors such as number of competitors, product differentiation, etc. 3. Identify the stages of industry evolution. It is believed that industries move through life cycles that consists of introduction, growth, maturity and decline stages. At the introduction stage, products are developed and commercialized for the first time. Here, advertising plays a crucial role as consumers must learn about the product. Also, this stage requires high financial investments as a whole new infrastructure has to be developed. The growth stage comes next .As products are beginning to find their place in the industry, demand keeps on increasing . With increased demand , competition increases as well. Other companies start to design very similar products to the one that the original company developed. At this stage, the firms that invented the product may decide to add on value . They

Chapter 2: Industry Analysis and Evolution in 21st Century Sorina Panfil MGT 770 Due 02/18/2014
take on this extra activity in order to differentiate itself and stay ahead of competition. Also, the growth stage may be a good time for companies to test the international market. Maturity stage is the stage of efficiencies. The firm with the largest market share can become more efficient through higher automation, higher production or TQM. Here advertising increases again as companies desire to create a higher perceived value. Firms may also desire to build a larger scale through diverse mergers and acquisitions. Lastly, in the decline stage the demand starts to reduce as products get older. Investments in R&D are non-existent as firms prefer to move them towards more attractive industries. Production is reduced for the products going through the decline stage and it is directed towards more attractive ones. 4. Why is it important to understand what stage an industry is in? By understanding at which stage a company is currently stationed might help take the correct steps towards creating a more successful company. Also, the analysis of the five forces model for each stage might help with very important decisions like launching a new product, continuing with the existing production base, adding value to existing products, increasing production capacity, international expansion, etc. A firm that truly understands these processes has a golden ticket to success . Of course, an in depth knowledge on the part of the management team is a must. The companies that dedicate resources to scanning and understanding the environment are those likely to succeed. 5. How do firms compete within the different industry life cycle stages? In the introduction stage, we can state that competition is minimal to non-existent. Because the industry is new, potential competitors wait to ensure that consumers indeed want the new product. They evaluate if the industry may be profitable.

Chapter 2: Industry Analysis and Evolution in 21st Century Sorina Panfil MGT 770 Due 02/18/2014
The growth stage is practically marked by the entrance of new competitors. Therefore, competition is moderate. In such a phase, customers choices are diverse and substitutes exist. Therefore, a firm competing in such an environment should look at two main options: the addition of value to their existing line of products or expansion of their scale of operation. Also, this is the perfect time for increasing brand loyalty and listening to consumers if they require a differentiated product that is feasible. Competing during the maturity stage is rather harsh. Competition is often based on price rather than value and it is extremely vigorous. Again, firms might decide to add production capacity in order to gain reduced costs. However, this is a rather risky step as soon, the demand for the product will significantly decrease. If at a previous stage, the company was able to create a close relationship with the buyer through product differentiation, it may continue with the same route. However, due to the fact that companies may be approaching decline, they are very careful in deciding whats worth the R&D investment and whats not. The chance of new competitors entering the market at this stage is not very likely due to the existing fierce competition that has enough power to scare the potential new entrants. The decline stage is the end of an era for the business. At this point, competition is no longer quintessential as new entrants do not perceive the industry as investment worthy. The power of buyers is rather important in this stage. Brand loyalty is needed to convince buyer that they still want the product even at the reduced price. Firms also reduce the numbers of suppliers and redirect their resources to more attractive industries. 6. Explain how industry analysis and industry evolution impact firm level strategy. The industry analysis lets the analyst know if that industry has potential of profits. It shows what is happening in particular industries, who are the suppliers, what do the buyers want, how fierce is competition .Therefore, analysis helps decide if industry entry is a logical,
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Chapter 2: Industry Analysis and Evolution in 21st Century Sorina Panfil MGT 770 Due 02/18/2014
profitable step. If a company decides that it may be a good idea to enter a certain industry it will analyze the evolution of the industry overall. This last analysis will tell the company if it is dealing with a growing industry or a matured one. If the industry is in the growth stage, companies might decide to enter it. If it has reached maturity, companies know that decline is coming and companies might decide to step back. However, if everything points to the feasibility of the entry, firms will use all the knowledge to create the strategy that would best match the existing situation.

7. Which force of industry analysis is most important for the Capstone Simulation industry? In my opinion, in the Capstone simulation we cant talk about the threat of substitutes without linking it to the degree of rivalry. I believe the two are much interconnected and one cant exist without the other. The industry, in my perception, is in the growth stage as there are already many competitors on the market and therefore the degree of rivalry can be felt. But, of course, the single strongest force for the Capstone simulation is threat of substitutes. Everyone knows what consumers want and everyone has access to the same information that could help with the decisions regarding production. Therefore, crafting a product to suit the needs of consumers is fairly easy. Capsim companies must learn to adapt to this environment and find creative ways of staying above the competition. 8. Why will innovation be crucial as we move further into the 21st century? Due to the fact that consumers and companies are much closer to each other grace to the increased technology available, they can better communicate. This leads to better and faster communication between the two counterparts. Therefore, clients know who can deliver the perceived benefit better and companies learn faster what new benefit consumers seek. Therefore,
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Chapter 2: Industry Analysis and Evolution in 21st Century Sorina Panfil MGT 770 Due 02/18/2014
innovation has to grow at a higher level than the demand for improved products. History shows that in the past innovation was slow and was happening only every other decade. Fortunately, modern technologic times have lead to an era where innovation happens on a daily basis and becomes part of who we are. The further we advance in the 21st century the more dependant we are on innovation. Innovation empowers. Innovation builds the picture of tomorrow.