A note on Porter’s Five Forces Model Essay

a) Rivalry between establish competitorsWhat be the major factors ascertain the nature and intensity of competition between established sozzleds?ConcentproportionnIn general, the fewer the number of squiffys in an industry, the easier is coordination of pricing behaviour, and the delicateer the chance that one firm will initiate aggressive price competition An industry dominated by a single firm displays little competition and the dominant firm can exercise considerable discretion over the prices it charges. Diversity of competitorsThe ability of the firms in an industry to avoid competition depends not only upon the number of firms solely also on their similarities in terms of objectives, costs, strategies. theoretical account Oil suppliers in OPEC they were aligned in the 70s and prices rose up. They were disaligned in the 80s and prices decr salvedProduct differentiationThe more similar the offerings of rival firms, the more spontaneous are customers to move from one suppl ier to the other. Where products are indistinguishable, the product is a commodity and the sole basis for competition is priceExample of commoditiesRaw materials crude oil, gold bullionsSome finished products DRAM chips, US Treasury bills trim mental ability and exit barriersThe propensity of firms in an industry to resort to aggressive price competition depends upon the balance between efficacy and output. The presence of unused capacity encourages firms to compete for additional business in order to spread fixed costs over a great sales volume. Excess capacity whitethorn be the leave behind of declining market demand or cyclical market demand or overinvestment.The period during which excess capacity overhangs an industry depends on the ease with which firms and resources can leave the industry. Costs and other impediments to leaving an industry are barriers to exit. Barriers to exit may be substantial where resources are durable and specialized, or where employees are entitle d to job protection Example Closure of mines in the 80s in Western countries were difficult as miners were heavily unionizedCost power economies of scale and the ratio of fixed to variable costs The more important the economies of scale are, the greater are the incentives for expanding sales at the expense of competitors.The higher the ratio of fixed to variable costs, the greater the willingness of firms to reduce prices in order to utilize spare capacityExample This is typically the case in petrochemicals, tires, steel.b) Threat of first appearanceIf an industry is earning a return on invested capital in excess of the cost of capital, that industry will act as a magnet to firms alfresco the industry.An industry where no barriers to entry or exit exist is contestable. However in most industries, new entrants cannot enter on equal terms to those of established firms. The size of the advantage of established over entrant firms measures the height of barriers to entry, which determ ines the extent to which an industry can in the long term enjoy profitsThe spark advance barriers to entry areCapital requirementsExample Exxon in the 80s spent almost $1 Billion in a vain attempt to catch up with existing players and become a player in the office computer systems market Economies of scaleIn some industries, particularly those which are capital intensifier or research intensive, efficiency requires producing at a very large scale.New entrants are faced with the choice of entering either on a small scale and accepting high unit costs, or a large scale and running the risk of drastic under utilization of capacity while they build up sales volumeExample Commercial jet engines for commercial airliners Big economies of scale, thus only 3 players General Electric/Snecma Pratt and Whitney Rolls Royce authoritative cost advantagesSuch advantages are usually associated with first mover advantages by being early into the industry the established firms may have been able to take away low cost sources of raw materials and by being longer they benefit from economies of learning. Example in petroleum ownership of oil fields prevents any secant mover Product differentiationIn an industry where products are differentiated, established firms possess an advantage over new entrants by virtue of brand erudition and customer loyalty. New entrants must spend heavily on advertising and promotion to gain similar levels of brand awareness, or accept a small market share which can be gradually expandedExample Auditing, advertising, investment banking established reputations and relationships are entry barriersAccess to channels of distributionThis barrier to entry is due to the distributorss preference for established firms products Limited capacity within distribution(eg shelf space), risk aversion, and fixed costs associated with carrying an additional product result in distributors reluctance to carry a new manufacturer productExemple Ice cream storage in sma ll outletsGovernmental and legal barriers some(prenominal) barriersGranting of a license by a public authorityExamples Taxi-cab services, broadcastingIn knowledge intensive industries patents, copyrights and trade secrets Procurement regulation the costs of fair listed as an approved supplier are a barrierEnvironmental and safety standards the costs of compliance weigh more heavily on newcomersretaliationThe effectiveness of all these barriers to entry in excluding potential entrants depends upon the entrants expectations as to possible retaliation by established firms. Example of retaliation Aggressive price-cutting, increased advertising, or legal maneuversc) Competition from substitutesWhen there are few substitutes for a product, customers willing to pay a potentially high price In micro sparing terms, demand is inelastic to priceExamples Gasoline CigarettesIf there are close substitutes for a product, then there is a limit to the price customers are willing to pay and any inc rease in price will cause some customers to switch towards substitutes In micro economic terms, demand is elastic with venerate to price. Example frozen sustenances versus canned food and fresh produceThe extent to which the threat of substitutes is high depends upon deuce factorsThe propensity/willingness of vendees to substitutesExample Efforts by city planners to assume traffic congestion either by charging the motorist or by subsidizing public transport have been ineffective in the US in supporting(a) motorists to forsake their cars for busesThe price mathematical operation characteristics of substitutes (ie the relative performance of alternative products in relation to their price)If two products meet the same customer needs and one performs ameliorate than the other across all criteria, the price of the superior products determines the maximum price for the inferior product example batteries of identical size and voltage the one with the shorter life history expectanc y will only sell if it undercuts the price of the longer-life battery Where products are meeting more complex needs and no product dominates all performance dimensions, a niche position in the market may be sustainable despite premium pricingExample Harley Davidson inferior speed, acceleration, technical mundanity than Japanese motorcycles, but priced higherDifficulty in perceiving performance differences can also inhibit substitution on the basis of priceExample The inhering nature of flagrance makes comparison difficult forthe consumer. Direct copies (same ingredients) of popular perfumes at less than half the price have not gained substantial market shared) talk terms power of buyersFirms operate in two markets the market for inputs (raw materials, components, finance, labor services) and for outputs (products and services sold to customers be distributors, consumers or other manufacturers).In both markets the relative profitability of the two parties to a transaction depen ds upon relative economic power.Two factors are important in determining the strength of buying powerBuyersprice aesthesiaSome key points on buyersprice sensitivity1) It depends on the importance of the item as a proportion of their total cost Example For food processing companies, metal cans are one of the largest single items in their purchase of materials. These companies are highly sensitive to the prices of metal cans2) The less differentiated are the products of the provide industry, the more willing is the buyer to switch suppliers based on the basis of priceExample Supermarket chains can switch suppliers of packaged white breads3) The greater the competition between buyers, the lower their profit margins, the greater their eagerness to achieve price reductions from their sellers Example Automobile manufacturers place high pressures on their component suppliers4) The greater the importance of the sold product to the quality of the buyers product or service, the less sensiti ve are buyers to the prices they are charged Example PC vendors had to accept Microsofts Software pricesRelative bargaining powerBargaining power rests ultimately upon refusal to deal with the other party. The balance of power between the two parties to a transaction depends on the credibility and effectiveness with which each makes this threat.Key determinants of the relative bargaining power the relative costs which each party sustains as a result of the transaction not being consummated the expertise of each party in leveraging its position through gamesmanship 3 factors are likely to be important in determining the bargaining power of buyers relative to that of sellers1) Size and concentration of buyers relative to suppliersThe smaller the number of suppliers, the less palmy is it for a supplier to find alternative customers if one is lost.The bigger the purchases of the customer, the greater is the damage from losing the customer.The larger the size of the buyer relative to th e supplier, the better able is the buyer to withstand any financial losses arising from failure to reachagreement.Example Buying consortiums are created to pool orders2) Buyers informationThe first indispensable for the exercise of bargaining power by buyers is that they are able to compare the prices and qualities of different suppliers products or services.Examples Lawyers, doctors, traders in the bazaars of Istanbul do not display the prices they charge keep that knowledge of price is of little value if the characteristics of a product or service are not easily ascertained before purchase Example It isdifficult to assess beforehand the value of investment advices, management consulting (or baldness treatment)