Question

1) What are the links between industry structure and profitability?
2) How is industry structure utilized for understanding the dynamics of competition?
3) How do you assess (determine) the power of suppliers and buyers?
4) What are the measures of competitive success?
5) How are competitive advantages and the activities in a company’s value chain related?
6) What are the activity choices that reflect the distinct customer segment chosen by each company?
7) What is strategy in terms of activities and value?
8) What is switching costs and how does it relate to substitution?

Answer 1

1. The economic profits and industry structure is closely linked. When there only few suppliers they have the power to influence quantity and price through its production decision and thus can improve upon its profit.

When the industry is concentrated between few firms/suppliers they try to maximize their economic profit by supply less than what they would have been supplying if the market was competitive. When one firms reduces its supply then it affects the industry supply and given the demand doesn't change it increases the price and in turn their profits.

The more concentrated the industry is the more they can earn the profit like a monopoly or duopoly, and as industry gets competitive many firms enters industry the profits get disappear. As it is in the case perfect competition.

2. The understand the dynamics of competition in any industry we need to see how many firms are operating there in that industry. If number of such firms is significantly high we can sure of that the industry is competitive because as number of firms in any industry increases the market power of individual firms decreases. And firms gets into competition of providing that good or service at lower cost to gain advantage.

The higher is the number of firms operating the higher is the competition in that particular industry.

3. The power of buyers and suppliers depend on their ability to influence price or quantity level. If there is only single buyer of any good then it has all the power to influence market outcome. That is, if he decides to buy more the price will go up on account of increased demand and similarly if he decides to buy less the price will go down on account of decreased demand.

And similarly with case of suppliers, if the industry is perfectly competitive that is there is large number of buyers and suppliers such that no buyer can influence the market outcome in which case there is power in the hands of individual buyer and supplier.

And in contrast when the industry structure is kind of monopoly that is only producer and supplier with large number of buyer then the supplier has power to influence the market outcome.

4. The measures of competitive success can be the price. The lower is the price the successful is the competition in making good affordable and bringing down its price. You see as the competition increases the firms get into price war with each other in pursuit of gaining market share as a result of which prices fall to a level below which no reduction is possible. Such that market operates at price equal to marginal cost. Firms don't change anything over and above marginal cost.

5. Competition advantage is most important factor deciding activity in companies value chain. Competitive advantage is defined as having a lower cost of production than others. In today's world global value chains are very pronounced. Countries produce parts in which they have a competitive advantage and MNC's set their manufacturing units in countries where they get competitive advantage in terms of lower cost of production.

If the company has competitive advantage in any activity of production than others then they will be part of supply chain. Hence competitive advantage and activities in company's value chain is positively related.