Market Forces

Market Forces - Introduction to Strategy and Porter’s...

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Unformatted text preview: Introduction to Strategy and Porter’s Five Forces MANEC 387 Economics of Strategy David F. Benson David Benson © 2010 What is Strategy? • A planned sequence of actions to achieve a goal or result • Sequences of moves and countermoves among competitors where each is trying to achieve a more favorable position relative to others • A pattern in a stream of decisions David Benson © 2010 How to Secure Profit? Exploit the Conditions of Imperfect Competition Perfect Competition • • • • Numerous sellers and Numerous buyers unable to affect price buyers Perfect Information Homogenous products No barriers to entry or exit; No mobile resources mobile • • • • Imperfect Competition Few competitors, numerous Few suppliers and buyers suppliers Asymmetric Information Heterogeneous Products Barriers to entry Barriers Zero Economic Profits Zero David Benson © 2010 Positive Economic Profits Positive (also referred to as supernormal profit) profit) Definition: Sustainable Competitive Advantage (SCA) • Earning positive economic profit in the presence of attempts by others to imitate or substitute the firm’s source of competitive advantage David Benson © 2010 The Structure of Industries Threat of new Entrants Bargaining Power of Suppliers Competitive Rivalry Bargaining Power of Customers Threat of Substitutes David Benson © 2010 From M. Porter, 1979, “How Competitive Forces Shape Strategy” The Structure of Industries Threat of new Entrants • Entry barriers • Pricing Bargaining Power of Suppliers • Supply curves • Production theory Competitive Rivalry • Game theory • Perfect competition, monopoly, oligopoly Bargaining Power of Customers • Demand curves • Own­price Elasticity Threat of Substitutes From M. Porter, 1979, “How Competitive Forces Shape Strategy” • Demand curves • Cross­price Elasticity David Benson © 2010 How Industry Structure Influences Profitability 100 20 80 Percent of Market 4 Others (>10) Green Giant Campbell 60 40 20 0 99 Others (>10,000) 17 25 90 Others (>1000) Swanson 34 ConAgra 1 Farmers 5-10% ROE Stouffer Frozen Entree Makers 20-25% ROE American Kroger 4 Safeway Food Retailers 8-12% ROE 32 David Benson © 2010 How Industry Structure Influences Profitability 100 20 80 Percent of Market 4 Others (>10) Green Giant Campbell 60 40 20 0 99 Others (>10,000) 17 25 90 Others (>1000) Swanson 34 ConAgra 1 Farmers 5-10% ROE Stouffer Frozen Entree Makers 20-25% ROE American Kroger 4 Safeway Food Retailers 8-12% ROE 32 David Benson © 2010 Distribution of Industry Profits 50 Number of Industries* 45 40 35 30 25 20 15 10 5 0 12 % % % % % % % 0% 2% 5% 7% 9% % 19 20 % 16 14 ­9 ­7 ­5 ­2 + *two­digit SIC Source: Compustat 1990-2000 David Benson © 2010 Threat of New Entrants What lowers the threat of entry? • Industry A B C D • • • • • • • Scale economies Scope economies Capital requirements (combined with uncertainty) – – e.g., retailing e.g., aerospace industry – e.g., aerospace industry Switching costs (due to learning, prior investment, network effects) – e.g., Windows operating system Access to scarce resources (e.g. inputs, distribution, locations) Product Complexity Learning Curve – – e.g., Tobacco – e.g., Honda motorcycles (motors) – e.g., DeBeers (diamonds), Coke (distribution) e.g., supercomputers, microprocessors Entry deterring regulations David Benson © 2010 Threat of Substitutes When are substitutes a threat? Industry A • Many alternative products available with similar functionality C D B Customers – Transportation: Car vs. Train vs. Plane (e.g. East Coast travel) – Entertainment: DVD Rental vs. Movie Theater – Gaming: Arcade vs. TV console games (e.g. early 1990s) – Eating: Restaurant vs. Homecooked David Benson © 2010 Bargaining Power of Suppliers and Buyers When can suppliers or buyers extract value? Suppliers have Power when… • • • • • High supplier concentration – Few vs many suppliers High volume – Large proportion of component cost sold by one supplier Product differences – Firm dependence on unique features Threat of forward integration – Ability to become competitor Switching costs – Limitations on ability to change suppliers David Benson © 2010 Buyers have Power when… • • • • • High buyer concentration – Few vs many customers High volume – Large proportion of product output purchased by one buyer Alternative products available – Many competitors offer similar products Threat of backward integration – Ability to become a competitor Switching costs – Threat of switching suppliers Competitive Rivalry Industry A What makes industries more rivalrous? • Many direct competitors & substitutes • Industry growth rates C – Ease of signaling, sharing the market – Fast versus slow growth B • Exit barriers • Fixed costs – e.g., specialized assets, emotional barriers – e.g. capacity increments Competitive rivalry can focus on many factors, including price, quality, technology, features, service, etc. • Lack of product differentiation • Switching costs – How easy can customers switch? – e.g. differences in functionality, performance David Benson © 2010 ...
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This note was uploaded on 03/20/2011 for the course MANEC 437 taught by Professor Benson during the Winter '11 term at BYU.

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