CFA Level 1 - Equity Investments
Government policies can affect how industries relate to competition. Through government policies, the government can control competition. The open-skies laws, which restrict air transportation to foreign carriers, is an example of how governments can control competition. In this case, the governments are giving their domestic airlines an unfair advantage in the industry. Additionally, a government can alter industry competition through subsidies to domestic companies.
Market Competition
When analyzing an industry or a global business, market competition is important to analyze. A firm needs not only be concerned with competition in its domestic market, but potential competition for other firms globally. A perfect example is the television industry. Not only do U.S.
Rivalry Intensity
This can be characterized as the degree of competition within an industry. As barriers to entry come down and government policies become more relaxed with respect to increased global competition, the intensity of competition will become more intense.
Competition Along the Value Chain
Inputs, whether they are raw materials or labor, are an important cost component of a firm's profitability. If competition for inputs intensifies as a result of the global competitive landscape, the more a company's profitability will erode.
Forces that Determine Industry Competition
When analyzing an industry, it is important to determine what competitive forces affect the industry. Michael Porter discussed the concept of industry competition in numerous books and articles.
He believes that there are 5 main competitive forces that drive industry competition:
1.Rivalry among existing competitors.
2.Threat of new entrants.
3. Threat of substitute products.
4.Bargaining power of buyers.
5.Bargaining power of suppliers.
Rivalry Among Existing Competitors.
Porter believes that competition among existing firms must be analyzed with respect to
(1) the intensity of competition and
(2) whether the competition among existing firms is growing.
(1) the intensity of competition and
(2) whether the competition among existing firms is growing.
Threat of New Entrants.
When analyzing industry competition, it is not only important to analyze the existing competitors currently within the industry, but also any competition from a potential new entrant into the industry. This force can be analyzed by understanding an industry's barriers to entry.
Threat of Substitute Products.
From basic economics, it is understood that if a product has a substitute, the potential profit from that product is limited because consumers will switch to the substitute product if the initial product is too costly. In analyzing an industry, it is important to identify potential substitute products to determine the flexibility of demand within an industry.
Bargaining Power of Buyers.
Much like substitution, it is important to analyze the bargaining power of buyers and how that relates to the profitability of the industry. If the bargaining power of the buyers is high, the industry profitability will be driven by the buyers so that greater attention to a buyer's wants or needs, will determine competition within the industry.
Bargaining Power of Suppliers.
Suppliers are an important factor in a company's competitiveness as they can alter the profitability of the company and industry. As such, it is important to determine who the suppliers to the industry are as well as the level of bargaining power the suppliers have. If the bargaining power of the suppliers is high, the industry profitability will be driven by the suppliers.
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