Th e strength of ea ch of th ese co mp etitive for ces is deter min ed by a n

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

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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
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