Potential entrants: threat of new entrants Five Forces Model Challenges: 1) Defining the industry Product & geographical scope 2) Choosing the appropriate level of analysis 3) Dealing with other factors 4) Dealing with uncertainty and rapid structural change Prerequisites for success: 1)What do customers want? 2)How do firms survive competition? 1) Customers 2) Suppliers 3) Competitors THE DETERMINANTS OF INDUSTRY PROFIT: DEMAND & PROFIT Consumer Surplus: the stronger the competition among producers, the more the consumer surplus Producer Surplus: the stronger the competition among producers, the less the producer surplus Profits are determined by: 1) The value of the product to customers 2) The intensity of competition 3) The bargaining power of the producers relative to their suppliers Industry analysis brings these 3 factors into a single analytical framework ANALYZING INDUSTRY ATTRACTIVENESS Industry profitability is determined by the systematic influences of the industry’s structure o For example, the pharmaceutical industry produces highly differentiated product protected by patents (forming a monopoly) that are purchased by price-insensitive
customers. Whereas the personal computer industry comprises many firms, produces commoditized products, and is squeezed by powerful suppliers Small markets are often more profitable since they may be dominated by a single firm Porter’s Five Forces of Competition Framework Horizontal Competition: o Competition from Substitutes o Competition from Entrants o Competition from Established Rivals Vertical Competition: o Power of Suppliers o Power of Buyers Competition from Substitutes The price consumers are willing to pay for a product depends, in part, on the availability of substitute products Travel agencies, newspapers, and telecommunication providers have all suffered damaging competition from Internet-based substitutes The Threat of Entry If the entry of new firms is unrestricted, the rate of profit will fall o Threat of entry may be sufficient to ensure that established firms keep prices competitive An industry where no barriers to entry or exit exist are contestable Capital Requirements The capital costs of getting established in the industry can be so large as to discourage all but the largest companies. Economies of Scale In capital-, research-, or advertising-intensive industries, efficiency requires large-scale operation.
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- Fall '09