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19_Porter_Industry_Analysis_FW

19_Porter_Industry_Analysis_FW - Industry Analysis Industry...

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Industry Analysis Industry Analysis
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• Key Concept of Business: Economic Profit Economic profit is the revenue earned by a firm above the economic cost required to generate that revenue. – Economic Cost = Accounting Cost + Opportunity Cost – Opportunity cost is the return available from the next best use of the resources used in the venture – Economic Profit = Accounting Profit–Opportunity Cost Why do we include opportunity cost? Because a key cost of using resources in one way is not being able to use them in another way. Economic Profits
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• Firms use invested capital to purchase resources – Investors will require the best available estimated return, accounting for the risk of the venture – So, the cost of capital provides a measure of the opportunity cost • A convenient definition for economic profits that we use: Economic Profit = Revenue – Accounting Cost – Capital Cost Economic Profits: Measuring Opportunity Cost
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Firms exist to generate economic profit for their owners. – Firms use owners’ resources. Their contribution is to provide a return above what the owner could get from another use. • Key Question: What are the determinants of a firm’s economic profitability? • Industry profitability: – Depends on the economic structure of an industry and how that structure affects competition • The firm and its position in the market – Firm’s resources and capabilities – Do these lead to a competitive advantage or disadvantage in an industry? Determinants of Economic Profitability
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Industry Analysis
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Industry analysis is useful: – Understand the context of firm decisions so we can make decisions within context - building blocks of strategy formulation • Essential to making effective decisions about entry, exit, expansion, product positioning, cost reduction, etc. • It helps identify potentially attractive/unattractive areas for growth. • Understanding the current “rules of the game” in the industry is a precondition for eventually changing them. • To outperform your industry, you need to understand its structural conditions and the key competitive forces that operate in it now (and to forecast future conditions).
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