Th e strength of ea ch of th ese co mp etitive for

Th e strength of ea ch of th ese co mp etitive for ces is deter min ed by a n umb er of
key structural variabl es , as sh ow n in Fi g ur e 3.3.
Competition fr om Subs t itut es
The p ri ce that customers are willing to pay for a pro du ct depe nd s, in part, on th e
availab il ity of subs ti tute products. The ab se n ce of cl ose su bs titut es for a p rodu ct,
as in the c as e of gas o li ne or ci ga re tt es , m ea ns th at co ns um ers are co mparati ve ly
in sensitiw to p ri ce (dema nd is inel as tic with resp ec t to pr ice). Th e existen ce of
cl ose substitut es me an s that custom ers w ill switch to s ub sti tu t es in r es pon se to pr ice
in creases fo r the pro du ct (dema nd is elastic with r es pect to pr i ce ). Th e i nt ern et h ::is
C HAPl' ER 3 IND UST RY ANALYS IS, THE F UN DAME NTALS
FI GU RE 3 .2
Po rt er' !-- f l\ e
fo rc e~
o f cor np e tit ,o n I
r. 111 1e\\
ork
SU PPLIE RS
Ba rga i nm g pow er
I
of s uppli ers
IN DU STRY
COMPETITORS
POTENTIAL
ENTRANTS
Thr e at of
f~
I
Thre at of
I
SUBSTITUTES
it:
subs tit ut es
new en trant s
Rivalry a mong
existing firms
Bar ga ining powe r j of buye rs
BU YE RS
FIGURE 3.3 The
~lruCLur" I
dc: termina nr s of the f'n ·e for ces of C1) 111p c: tition
SUPP LIE R P OW ER
• B uye r s' pr ice sensi ti vity
• Re l ative barga i ni ng power
(See B uye r Powe r fo r det ail)
THREAT OFEN TRY IN DUS TRY R IV ALRY SUBS TIT UT E
• Capital requ iremen ts
,--...,.
• Conce nt ration
~
CO MP ETm ON
• E co n omies of s cale
• Diversity of competitors • Buyers' p rope n sity to
• Ab so lu te co st
• Produ ct d iff e rentiatio n
subs tit u te
advant ages
• Excess capac i ty an d
• Rela tive prices and
• Pr od u ct differentiati on exit barriers
perfor m ance of
• Ac cess to di str ib ut io n
• Cost con ditio ns
substitut es
• Legal bar r ier s
• Retaliation
B UY ER PO WER
Pric e sensitivi ty
Barg ain i ng p ow er
• Cost of p ro du ct
• Size and concen tr a tion
relative to to tal cost
of buy ers rela tive to produ c er s
• P rodu ct
• Buyers' s wi tc hi ng c os ts
di ff erentiation
• Bu ye rs' informa tion
• Compe titi on
• B uy ers' a bil i ty to
betw ee n buy ers
back wa rd i nt eg rate
69

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.....
70
PART II THE TOOLS OF STRATEGY AN ALY SIS
provided a n ew so urce of substirute competition that has pr oved d evas tating for a
number of estab li sh ed indus tri es. Travel agenci es , n ews pap ers, and telecommunica-
ti on providers have a ll suffered severe co mpetition fr om internet-b ase d s ub stitutes.
The ex tem to which substitutes d ep ress prices a nd profits depe nd s on the pro-
pensity of bu yers
to
substitute between alternatives. This, in turn, depe nds on
their price-per fo rman ce characte ri s ti cs. If city- ce nter to city-center travel be twee n
Washington and New Yo rk is 50 minutes quicker by air than by train a nd the a ve rag e
traveler va lues tim e at S30 an hour, the implication is that the train w ill be co mpe ti -
1iv e at fares of $25 below 1h os e charged by the airlines. The mor e co mpl ex a prod uct