CHAPTER 16 ASSIGNMENT
Part A: Knowledge
1. There are four major states of the industry or product life cycle.
a) Pioneering
In the pioneering stage, there is rapid growth in demands for the product or industry. For industries, there may be many start-up companies competing for market share in that industry. For products, there would be a rapid increase in buyers, and potentially other companies that produce the same product.
b) Expansion
By the time the product or industry reaches the expansion stage, the main “players” in that industry or the primary manufacturers of a certain product are clear. The weaker firms competing for market share would have already dropped out. In this stage, the demand for the product is still growing, but at a steadier pace. Companies should be stable and have already established financial policy, expanding their capital with common shares.
c) Stabilization
In the stabilization stage, the demand has stabilized. Growth is moderate to none. The products produced become less innovative and more of a standard. The prices of the products have also stabilized.
d) Decline
Page 1 Simeon Wong As an industry is declining, demands for the products produced decrease. This is usually due to a change in consumer demands caused by the release of hew products. The new products render the old industries obsolete.
Page 2 Simeon Wong 2. Some qualitative methods of industry analysis include looking at:
a) Historical performance
Looking at historical performance allows us to get an idea of which part of the industry life cycle it may be in. It can also be used to get a general idea of where the industry may be going by extrapolating trends.
b) Competition in the industry
Competition can be determined to looking at whether the industry is relatively protected from new entrants, or if it easy for a small company to gain entry into the industry market and potentially take over. Existing competition in the industry must also be considered. Competition in an industry forces companies to reduce their prices to gain more customers, or otherwise spend more money to attract more. This reduces their profit margins.
c) Government effects and intervention
Government regulations and actions can have a major impact on companies operating in certain industries. For example, if strict environmental regulations are implemented, carbon-intensive energy industries would be heavily affected.
d) Structural changes in society
Changes in the structure of a society also affect industries. For example, for the past several decades, Canada’s society has been switching from a manufacturing- focused society to an information-technology society. Industries such as steel and manufacturing continue to see decline while industries such as aerospace, nanotechnology and electronics continue to see growth.
Part B: Thinking
1. It is sometimes difficult to classify industries because some companies or products may fall into multiple “categories”. Some companies may also operate in multiple industries. Classifying industries is even more difficult due to various classification systems that are in place across the world, which may or may not have equivalent classifications as another system.
2. During the pioneering stage of the industry life cycle, investors in the new companies face the highest risk of losing their investment. This is because it is still not clear whether or not the new product or industry will become popular, or whether it will simply fail. Companies competing for market share within the industry may also collapse and fail, while others may be successful.
Page 3 Simeon Wong 3. Industry analysis is important because it will help investors to determine which industries would be favourable to invest in. When done correctly, industry analysis will reveal which industries have the highest potential for growth at certain times. With this knowledge, investors can then make informed decisions about which industries and corporations to invest in.
4. Three industries I expect should perform well in the next decade include:
a) Environmental
Currently, the world is turning towards “clean” and “sustainable” ways to live. Governments are searching for alternate fuel sources that are not polluting to the environment and sustainable for the future. Environmental companies such as those offering “clean energy” are expected to grow rapidly in the near future.
b) Nanotechnology
Nanotechnology is a rapidly growing industry that deals with extremely small things on the nanometer scale. Because of the world’s needs for smaller and faster electronics, nanotechnology will become increasingly more important. Nanotechnology also finds applications in everyday objects from microfiber dishcloths to sports equipment. Most microprocessor chips found in cellphones, computers and almost every electronic device are built using transistors measuring only tens of nanometers across.
c) Communications technology
Communication between human beings has always been an integral part of society. The advent of increasingly powerful communications technologies makes it possible for communicate with others over longer distances, in higher quality for cheaper prices. All that has caused our society to be heavily reliant on this type of technology, which is expected to experience continued growth as an increasing number of people rely on being connected on the go in more places.
Part C: Application
1. The five factors that affect industry competitiveness include:
i. Threat of new entrants
If it is easy for a new entrant to enter the market for that industry, it means that there will likely be new entrants trying to eat away at the market shares of the existing companies. This will in turn, create more competition and force companies to reduce prices.
ii. Bargaining power of buyers
Page 4 Simeon Wong If buyers have lots of bargaining power, it means that they can talk down prices offered by companies. If the company does not agree to the lower prices, the customer can simply shop around for another company with the lowest price. iii. Rivalry among existing firms
The easier it is to switch between companies in an industry, the harder the companies must compete against each other to maintain competitive pricing and products. If it is simple and relatively costless to switch, then another incentive, quality or price, must be used to keep customers with the company. iv. Threat of substitute products or services
Substitute products of services of competing companies can influence the amount of competition in an industry. If an industry leader has a brand name product, but a smaller firm offers a product of the same function but with a lower price, customers will be inclined to switch. v. Bargaining power of suppliers
The ability of suppliers to bargain up prices for raw materials will affect a company’s ability to lower prices and its profit margin. If a supplier raises prices too much, a company will have to increase their prices in order to remain viable.
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