Industry is one that is characterized by a large number of firms of approximately equal size
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1 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall Entrepreneurship: Successfully Launching New Ventures, 4e (Barringer/Ireland) Chapter 5 Industry and Competitor Analysis 1) Element Bars, the company profiled in the opening feature for Chapter 5, has a unique position in its industry. It has positioned itself as: A) a generic energy bar company that resells energy bars to companies who want to create their own branded energy bars B) a niche energy bar company that sells in high-end outlets, like 5 star hotels and spas C) a premium energy bar company that only uses the most wholesome and healthy ingredients, and makes special bars for vegetarians and vegans D) a low-cost energy bar company that makes energy bars more accessible to people in all income brackets and still offers healthy ingredients E) a customizable energy bar company that sells to individuals online and also to companies who want to create their own branded energy bars Answer: E Diff: 2 Page Ref: 147 Topic: Industry Analysis AACSB: Reflective Thinking Objective: Describe the role of entrepreneurs and small business 2) Jeremy Banks recently started a new firm in the financial services industry. Prior to starting his firm, he spent considerable time doing research on the potential of the industry. The research that Jeremy was doing is called: A) industry analysis B) sector analysis C) commercial analysis D) business analysis E) target market analysis Answer: A Diff: 1 Page Ref: 148 Topic: Industry Analysis AACSB: Reflective Thinking Objective: Describe the role of entrepreneurs and small business 3) A(n) ________ is a group of firms producing a similar product or service, such as soft drinks, electronic games, or computers. A) cluster B) division C) sector D) industry E) network Answer: D Diff: 1 Page Ref: 148 Topic: Industry Analysis AACSB: Reflective Thinking Objective: Describe the role of entrepreneurs and small business What Is Concentration Ratio?The concentration ratio, in economics, is a ratio that indicates the size of firms in relation to their industry as a whole. Low concentration ratio in an industry would indicate greater competition among the firms in that industry, compared to one with a ratio nearing 100%, which would be evident in an industry characterized by a true monopoly. Key Takeaways
Understanding the Concentration RatioThe concentration ratio indicates whether an industry is comprised of a few large firms or many small firms. The four-firm concentration ratio, which consists of the market share of the four largest firms in an industry, expressed as a percentage, is a commonly used concentration ratio. Similar to the four-firm concentration ratio, the eight-firm concentration ratio is calculated for the market share of the eight largest firms in an industry. The three-firm and five-firm are two more concentration ratios that can be used. Concentration Ratio Formula and InterpretationThe concentration ratio is calculated as the sum of the market share percentage held by the largest specified number of firms in an industry. The concentration ratio ranges from 0% to 100%, and an industry's concentration ratio indicates the degree of competition in the industry. A concentration ratio that ranges from 0% to 50% may indicate that the industry is perfectly competitive and is considered a low concentration. A rule of thumb is that an oligopoly exists when the top five firms in the market account for more than 60% of total market sales. If the concentration ratio of one company is equal to 100%, this indicates that the industry is a monopoly. Example CalculationAssume that ABC Inc., XYZ Corp., GHI Inc., and JKL Corp. are the four largest companies in the biotechnology industry, and an economist aims to calculate the degree of competition. For the most recent fiscal year, ABC Inc., XYZ Corp., GHI Inc., and JKL Corp. have market shares of 10%, 15%, 26%, and 33%, respectively. Consequently, the biotech industry's four-firm concentration ratio is 84%. Therefore, the ratio indicates that the biotech industry is an oligopoly. The same could be calculated for more or less than four of the top companies in the industry. The concentration ratio only indicates the competitiveness of the industry and whether an industry follows an oligopolistic market structure. Herfindahl-Herschman IndexThe Herfindahl-Herschman Index (HHI) is an alternative indicator of firm size, calculated by squaring the percentage share (stated as a whole number) of each firm in an industry, then summing these squared market shares to derive an HHI. The HHI has a fair amount of correlation to the concentration ratio and can be a better measure of market concentration. What is a fragmented industry?Industry Fragmentation
Fragmentation happens when there is no clear leader within an industry. This means while many companies may operate in a specific industry, none of them have enough market share to influence prices, production, investment, and their competition.
What is a mature industry?A mature industry is one that has passed both the emerging and growth phases of industry growth. Companies in these industries tend to be larger, older, and more stable. At the beginning of the industry lifecycle, new products or services find use in the marketplace.
What is fragmented industry in entrepreneurship?A fragmented industry is one in which many companies compete and there is no single or small group of companies which dominate the industry. The competitive structure of the industry means that no one company is in an overly strong or influential position in the industry.
Is a group of firms producing a similar product or service such as soft drinks electronic games or computers?An industry is a group of firms producing a similar product or service, such as music, fitness drinks, or electronic games. 2. Industry analysis is business research that focuses on the potential of an industry.
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