Industry Analysis

Value creation and value capture
 * A firm's profit depends on its industry and position in industry
 * Industries differ in average profitability
 * Most of the difference is due to fundamental differences in economic characteristics. Some of it is due to business cycle fluctuations
 * Need industry analysis
 * Individual firm profits can vary greatly within an industry.
 * This is due to differences in strategic choices and resources

Total Surplus, Value Creation and Capture
 * MWP = Maximum Willingness to Pay
 * Consumer Surplus = MWP - Prevailing Market Price
 * Producer Surplus = Prevailing Market Price - Cost of Production
 * Total Surplus = Consumer Surplus + Producer Surplus
 * Value Creation = Ability for firms to create value from inputs
 * Value Capture = Ability for firms to capture the value created in form of profits

Porter's 5 Force Analysis

A general analysis of the industry, not a specific detail oriented analysis. A QUALITATIVE approach.
 * Need to first define the industry. Don't be too broad. The right definition of the industry depends on the question you are trying to answer. Consider geographic element.
 * Framework for constructing a background image. Expansive checklist of industry characteristics. A tool to identify one particular aspect.

Substitutes and Compliments
 * What substitutes are there? How many are there? How differentiated are they?
 * More substitutes means less profit for each firm. Depends on cross-price elasticity.
 * Compliments boost industry profits and increases value captured by consumers/complimenters. Value captured by complimentees are reduced if bargaining power is large.
 * How are the compliments networked? How can it increase the ability to use the product? What's the reputation and/or quality of the compliments?

Internal Rivalry
 * Internal Rivalry is not substitute products. They can be similar but not the same.
 * Size of industry. Number of competitors. Cost structure. Homogeneity of products. Brand Loyalty. Buyer switching costs. Size and frequency of sales. Buyer willingness to search.

Threat of Entry
 * Do entry barriers exist? If so how large are they? What type is it?
 * Pricing strategies of incumbents as entry barriers.
 * Entry erodes incumbent profits so incumbents want to prevent entry.
 * Economies of scale. Economies of learning. Access to input/logistics. Availability of tech. Brand reputation.

Consumer Bargaining Power
 * How much bargaining power do the consumers have?
 * Is there a consumer union? Is there independent consumer quality checking? Can they buy in bulk? Is there a way for consumers to communicate with each other? Can they leave reviews? What are the buyer switching costs? Can the buyers integrate backwards?

Supplier Bargaining Power
 * How much bargaining power do the suppliers have? To what extent can suppliers extract value from the value chain. Higher supplier bargaining power means less value captured by the firm by eroding profits.
 * How many suppliers are there? How much is being bought? How many firms are there? What is the supplier's ability to integrate forward? What is the firm's ability to integrate backward.