A note on Porter’s Five Forces Model Essay

a) Rivalry between accomplished competitorsWhat ar the major factors determining the nature and intensity of competition between realized unassail adequate to(p)s?Concent symmetrynIn general, the fewer the number of firms in an industry, the easier is coordination of pricing behaviour, and the sm any the chance that one firm testament initiate aggressive set competition An industry dominated by a single firm give aways little competition and the dominant firm cornerstone exercise extensive discretion all all over the prices it charges. Diversity of competitorsThe ability of the firms in an industry to forfend competition depends not only upon the number of firms but also on their similarities in terms of objectives, costs, strategies. subject Oil suppliers in OPEC they were aligned in the 70s and prices rose up. They were disaligned in the 80s and prices fallProduct specialismThe much than similar the offerings of rival firms, the more will be customers to move fr om one supplier to the other. Where point of intersections are indistinguishable, the product is a commodity and the sole basis for competition is price display case of commodities knifelike materials crude oil, gold bullionsSome finished products DRAM chips, US exchequer billsExcess capableness and turn over restraintsThe propensity of firms in an industry to fall back to aggressive price competition depends upon the eternal sleep between capacity and output. The forepart of unused capacity encourages firms to compete for additional business in crop to spread fixed costs over a great gross revenue volume. Excess capacity may be the result of declining securities industry admit or cyclical foodstuff bespeak or over coronation.The period during which special capacity overhangs an industry depends on the ease with which firms and resources can leave the industry. cost and other impediments to leaving an industry are barriers to exit. Barriers to exit may be substantia l where resources are durable and specialized, or where employees are entitle to job protection sample Closure of mines in the 80s in western countries were difficult as miners were heavily unionizedCost condition economies of master and the ratio of fixed to variable costs The more important the economies of home base 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 willness of firms to reduce prices in order to employ spare capacityExample This is typically the case in petrochemicals, tires, steel.b) menace of launchIf 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 outside 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 determines the extent to which an industry can in the ample term enjoy profitsThe principal barriers to entry are chapiter requirementsExample Exxon in the 80s spent almost $1 Billion in a vain attempt to catch up with existing players and rifle a player in the office computer systems securities industry Economies of outdoIn some industries, particularly those which are capital intensive or research intensive, efficiency requires producing at a very large scale. saucy 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 custom 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 Absolute cost advantagesSuch advantages are usually associated with freshman mover advant ages by being early into the industry the established firms may have been able to acquire low cost sources of raw materials and by being longer they benefit from economies of learning. Example in petroleum will power of oil fields prevents any second mover Product differentiationIn an industry where products are differentiated, established firms possess an advantage over new entrants by virtue of brand recognition and customer loyalty. modernistic entrants must spend heavily on advertising and promotion to further 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 manufacturing business productExemple Ice cream storage in small outletsgovernmental and legal barriersSeveral barriersGranting of a license by a semipublic authorityExamples Taxi-cab services, broadcastingIn knowledge intensive industries patents, copyrights and trade secrets procurance regulation the costs of becoming listed as an approved supplier are a barrierEnvironmental and safety standards the costs of compliance fight 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) contender from substitutesWhen there are few substitutes for a product, customers willing to pay a potentially high price In micro economic terms, demand is in viscoelastic to priceExamples Gasoline CigarettesIf there are c lose substitutes for a product, then there is a limit to the price customers are willing to pay and any increase in price will exploit some customers to switch towards substitutes In micro economic terms, demand is elastic with respect to price. Example frozen foods versus canned food and fresh promoteThe extent to which the threat of substitutes is high depends upon two factorsThe propensity/willingness of emptors to substitutesExample Efforts by city planners to relieve traffic congestion either by charging the motorist or by subsidizing public transport have been ineffective in the US in encouraging motorists to forsake their cars for busesThe price performance characteristics of substitutes (ie the coitus performance of alternative products in relation to their price)If two products meet the kindred customer needs and one performs better than the other across all criteria, the price of the superior products determines the maximum price for the inferior product  object lesson batteries of identical size and voltage the one with the shorter life expectancy 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 ordinariness than Japanese motorcycles, but priced higherDifficulty in perceiving performance differences can also inhibit substitution on the basis of priceExample The subjective 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) Bargaining power of buyersFirms operate in two markets the market for inputs (raw materials, grammatical constituents, finance, labor services) and for outputs (products and services sold to customers be distributors, consumers or o ther manufacturers).In both markets the coition profitability of the two parties to a motion depends upon congener economic power.Two factors are important in determining the intensity of buying powerBuyersprice sensitivitySome 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, coat cans are one of the largest single items in their purchase of materials. These companies are exceedingly sensitive to the prices of metal cans2) The less differentiated are the products of the supplying 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 reach price reductions from their sellers Example Automobile manufacturers place high pressures on their component suppliers4) Th e greater the importance of the sold product to the quality of the buyers product or service, the less sensitive are buyers to the prices they are supercharged Example PC vendors had to accept Microsofts Software pricesRelative dicker 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 credibleness 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) coat and concentration of buyers relative to suppliersThe smaller the number of suppliers, the less easy is it for a supplier to find alternative customers if one is lost.The bigger the purchases of the customer, the greater is the ravish from losing the customer.The larger the size of the buyer relative to the supplier, the better able is the buyer to withstand any financial losses arising from failure to reach agreement.Example Buying consortiums are created to pool orders2) Buyers informationThe source essential 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 chargeNote that knowledge of price is of little lever if the characteristics of a product or service are not easily ascertain before purchase Example It isdifficult to assess beforehand the value of investment advices, management consulting (or baldness treatment)