Tutorial 7 & 8 Flashcards
Which questions should you ask yourself when analysing an industry using Porter’s five forces framework?
(Internal rivalry
Internal Rivalry
- How many firms are there in the market?
- Is demand growing or declining?
- Are there switching costs?
- Is there a history of price leadership?
- Are there strong barriers to exit?
Which questions should you ask yourself when analysing an industry using Porter’s five forces framework?
(Entry)
Entry
- Are fixed costs of entry high?
- Are incumbents protected by regulations?
- How did incumbents respond to entry in the past?
Which questions should you ask yourself when analysing an industry using Porter’s five forces framework? (Substitutes & Complements)
Substitutes and Complements
- Are products differentiated or are they close substitutes?
- Are substitutes priced high? if high —> customers are less likely to switch
- Are complements priced low? if low it can boost demand as products are used together
Which questions should you ask yourself when analysing an industry using Porter’s five forces framework? (Suplier power)
Supplier Power
- How concentrated is the group of suppliers?
- Is there a threat of forward integration by suppliers?
- Can suppliers price discriminate? (If yes -> higher power, charge different price for each buyer)
Which questions should you ask yourself when analysing an industry using Porter’s five forces framework? (Buyer power)
Buyer Power
- How concentrated is the group of buyers?
- Is there a threat of backward integration by customers?
- Is it possible to price discriminate among consumers?
Comment on the following:
All of Porter’s wisdom contained in the five forces framework is reflected in the economic identity:
Profit = (Price – Average Cost) x Quantity
(FOocus on: Internal rivalry, entry)
Internal rivalry
High internal rivalry might
- drive prices down
- cause a redistribution of market shares (i.e. quantities)
- drive up costs (e.g. high advertising expenditures)
Entry
- High barriers to entry prevent potential entrants from entering
- So incumbents can save costs while maintaining higher prices and larger quantities
Comment on the following:
All of Porter’s wisdom contained in the five forces framework is reflected in the economic identity:
Profit = (Price – Average Cost) x Quantity
(FOocus on: Substitutes & complements)
Substitutes and complements
- The availability of close substitutes limits the price that a producer can charge and potentially increases the producer’s costs (e.g. advertising)
- substitute products can also reduce quantity (e.g. when substitutes are priced lower and demand for the product is elastic)
- The price and quantity of a given product are also affected by the availability of complements and their price
Comment on the following:
All of Porter’s wisdom contained in the five forces framework is reflected in the economic identity:
Profit = (Price – Average Cost) x Quantity
Focus on buying pwoer and supplier power)
Buyer Power
- Buyers force the price down if they hold high bargaining power
- Costs might go up due to investments in relationship-specific assets
- Quantity might decrease as a result of backward integration by buyers
Supplier Power
- If suppliers of an input hold bargaining power, they can increase the prices they charge for inputs
- This might be reflected in the cost, price, and quantity of the good for which the input is needed
How does the magnitude of switching costs affect
a)the intensity of internal rivalry and
b) entry?
Intensity of Internal Rivalry
Low switching costs
- When a competitor offers a better price or service, consumers are inclined to switch
- Internal rivalry increases as firms try to steal customers
High switching costs
- It is hard to poach consumers from another firm when they are ‘lockedin’
- Therefore the intensity of rivalry is smaller than in the case of low switching cost
How does the magnitude of switching costs affect
a) the intensity of internal rivalry and
b) entry?
Entry
- High switching costs represent an entry barrier
- Entrants cannot easily entice away incumbents’ consumers
- Potential entrants should therefore seek niches or target specific clusters that are not locked-in
How do the following industry characteristics affect rivalry
among firms?
a) Fixed costs of production are high
b) Products are differentiated
High fixed costs of production
- Strong barriers to entry for new firms
- Market has few participant
- Rivalry is limited
How do the following industry characteristics affect rivalry
among firms?
a) Fixed costs of production are high
b) Products are differentiated or NOT
Differentiated products
- When products are NOT differentiated (and switching costs are low), firms are more likely to try to steal market share –>price reductions, advertising battles,…
- With differentiation, firms target different customer segments
–> Rivalry is limited
What are the limitations of the five forces model?
- The framework pays limited attention to factors that affect demand
- It focuses on a whole industry rather than on individual firms
- The framework does not explicitly account for the role of the government
- In the Five-Forces other firms are considered as threats to profitability
What is the differentiate the value net model from the five forces model?
- In the value net model interactions between firms can also be positive (coopetition)
- So the value net complements the five forces approach by considering opportunities posed by each force
The value net consists of:
suppliers, customers, competitors and complementor
What are the five dimensions develop by Brandenburger & Nalebuff to develop business strategies?
- Step 1: Identify Players
- Step 2: Calculate Added Value
- Step 3: Define Rules
- Step 4: Identify Tactics
- Step 5: Define Scope
