Week 6 - Industry Analysis Porter's Five Forces Flashcards
What are the five forces?
Suppliers Potential Entrant Buyers Substitutes Suppliers Industry/Internal Rivalry
SEE GRAPH IN NOTES
What is Internal Rivalry?
The competition for market share among the firms in the industry
- Competition could be on price or some non-price dimension
- Price competition in particular erodes the price cost margin and profitability
When is Internal Rivalry likely to impact profitability negatively?
- There are numerous or equally balanced competitors
- Slow industry growth
- high-fixed costs or storage costs
- Lack of differentiation or switching costs
- Capacity augmented in large increments
- Diverse competitors
- High strategic stakes—how important is this industry?
- High exit barriers
When does Price rivalry heat up?
- There are many sellers
- Some firms have cost advantage over others
- There is excess capacity in the industry
- Products are undifferentiated and switching costs are low
- Prices and sale terms are easily observable
How does Entry hurt the profitability of incumbments?
- By cutting into the incumbents market share
- By intensifying internal rivalry and leads to a decline in price cost margin
What are some barriers to entry?
- Exogenous (nature of the industry)
- Endogenous (incumbents’ strategic choices)
If entrants are not substantially differentiated from incumbents then what are the deleterious effects?
1) market shares of incumbent firms fall and
2) competition to protect share leads to lower prices and therefore to lower profit margins.
When is entry a key threat to the stability of markets?
When there has been low internal rivalry
-Entrants can be ignored if small, but failure to retaliate may invite more entry
What are the factors that affect the threat of entry?
- Minimum efficient scale relative to the size of the market
- Government policies that favour the incumbents
- Brand loyalty of consumers and value placed by consumers on reputation
- Entrants’ access to critical resources such as raw material, technical know how and distribution network
When are barriers to entry high?
There are economies of scale Product differentiation -Capital requirements are high -There are switching costs -Access to distribution channels (for example, channel crowding) -Cost disadvantages independent of scale -Proprietary product technology -Favourable access to raw materials -Favourable locations -Government subsidies -Learning or experience curve -Government policies
What are the factors that affect the threat to entry?
- Steepness of the learning curve
- Network externalities that give the incumbents the benefit of a large installed base
- Incumbents’ reputation regarding post-entry competitive behavior
How do the availability of substitutes and complements alter the demand of the industry?
- Substitutes erode the demand for the industry’s output
- Complements boost industry demand
How are substitute products similar in effect to entry?
Same effect as entry, distinction a matter of degree
Close substitutes lead to greater price rivalry and theft of market share than do weak substitutes.
When do Substitute products pose the biggest threat?
greatest threat when they represent new technologies that will benefit from a learning curve and may eventually prove superior to the technologies they substitute for.
What are the things a company must be wary of when considering substitutes and compliments?
trends that improve the price-performance of substitutes for the industry’s product
substitutes produced by industries with higher profits than the industry under consideration
trends that reduce the price-performance of complements to the industry’s product
