Industry Structural Analysis of theEmerging Commercial Suborbital Human Transportation Market (aka “Space Tourism”)

Introduction

The Industrial Structural Analysis (ISA) responds to the following questions:

  • What are the key factors for competitive success and the important industry opportunities and threats?
  • What are the sources of the five competitive forces?

All italicized paragraphs below are some form of instruction or guidance description.

Numbered italicized paragraphs below are action items that should be completed or waived during the conference working sessions.

Table of Contents

Force 1: Threat of Entry by Potential Entrants

Force 1a: Economies of Scale

Force 1b: Product Differentiation

Force 1c: Capital Requirements

Force 1d: Switching Costs

Force 1e: Access to Distribution Channels

Force 1f: Cost Disadvantages Independent of Scale

Force 1g: Government Policy

Force 2: Intensity of Rivalry Among Existing Competitors

Force 3: Pressure from Substitute Products

Force 4: Bargaining Power of Buyers

Force 5: Bargaining Power of Suppliers

Government as an Industry Competition Force

Appendix A: Glossary of Terms

Force 1:Threat of Entry by Potential Entrants

The threat of entry into an industry depends on the barriers to entry that are present, coupled with the reaction from existing competitors that the entrant can expect.

Entry Barriers

The following are factors that influence the entry barriers:

  1. Economies of Scale
  2. Product Differentiation
  3. Capital Requirements
  4. Switching Costs
  5. Access to Distribution Channels
  6. Cost Disadvantages Independent of Scale
  7. Government Policy
Properties
  • Entry barriers can and do change as the conditions previously described change.
  • Although entry barriers sometimes change for reasons largely outside the firm’s control, the firm’s strategic decisions also can have a major impact.
  • Some firms may possess resources or skills which allow them to overcome entry barrier into an industry more cheaply than most other firms.

For each of the BoEs factors of influence below, we will ask a series of questions to address these three BoE properties.

- Are the specific examples in this BOE influencing factor category independent of, or vary as a function of, the other BOE influencing factor categories?

- What can the firm do to control the specific examples in this BOE influencing factor category?

- Do the firms in this market possess resources or skills that would allow them to overcome the specific examples in this BOE influencing factor category more cheaply than their competitors?

Factors of Influence

The following is a list of factors that influence the strength of entry barriers into a given industry.

Force 1a: Economies of Scale

  1. Identify all business functions (e.g., manufacturing) and subfunctions (e.g., mfg of component A, mfg of component B) and estimate the economies of scale barrier strength of each. Provide examples.
  • Development
  • Development of subsystems
  • Development of ground systems
  • Testing
  • Manufacturing
  • Application
  • Research
  • Financing
  1. Are shared function operations possible for any of the industry players being considered? Provide examples. Is the benefit illusory? (see footnote 2 in the textbook)
  • Yes. Example: for testing, for manufacturing
  1. Do joint costs benefits exist? Provide examples.
  • Yes. Example: engines, avionics
  1. Do the industry members have intangible assets to exploit? Provide examples.
  • Yes. Examples: Intellectual Property (IP), hardware
  1. Do vertical integration economies exist? Provide examples.
  • No response.
  1. In general, what are the economies of scale barriers of entryin this market, if they even exist? Provide examples.
  • Economy of scale barriers of entry exist in this market. They include:
  • Capital
  • Large testing fields (test sites)
  • Knowledge
  1. How strong is each economies of scale barrier of entry?
  • Capital – very strong
  • Testing Field (Site) – weak (low)
  • Knowledge – weak (low)
  1. How strong is the overall barrier of entry category of economies of scale for this market?
  • Overall, the Very strong ($$ difficult!)
  1. Does the strength of the economies of scale barriers of entry favor smaller or larger companies? Provide examples.
  • The strength of the economies of scale barriers of entry favors large companies for each economy of scale barrier identified.
  1. Are the specific examples in the economies of scale barriers of entry independent of, or vary as a function of, the other barriers of entry influencing factor categories?
  • The economies of scale barriers of entry are not independent of the other barriers of entry, because they have a close relationship.
  1. What can the firm do to control the specific examples in the economies of scale barriers of entry?
  • Find a lot of money
  • Buy a large field (site).
  • Hire smart people.
  1. Do the firms in this market possess resources or skills that would allow them to overcome the specific examples in the economies of scale barriers of entry more cheaply than their competitors?
  • Already existing company already have investors, test facilities and man power.
  1. The presence of economies of scale always leads to a cost advantage for the large-scale firm (or firm that can share activities) over small-scale firms. However, even the economies of scale barriers of entry have strategic limits when used by incumbent firms. Are any of these limits applicable to this specific market?
  • Capital – there is a limit
  • Test Site – no limits
  • Knowledge – no limits

Force 1b: Product Differentiation

  1. What are the product differentiation barriersof entryin this market, if they even exist? Provide examples.
  • Cost of investment
  • Level of technology required
  1. How strong is each product differentiation barrier of entry?
  • Cost of investment - Strong
  • Level of technology required – Strong, but less than the Cost of Investment
  1. How strong is the overall barrier of entry category of product differentiation for this market?
  • This influence too much this market. (???)
  1. Does the strength ofproduct differentiation barriers of entry favor smaller or larger companies? Provide examples.
  • Product differentiation favors large companies.
  • Example: Virgin Galactic
  1. Are the specific examples in product differentiation barriers of entry independent of, or vary as a function of, the other barriers of entry influencing factor categories?
  • This factor is related to the other barrier of entry factor categories.
  1. What can the firm do to control the specific examples in product differentiation barriers of entry?
  • Money – Firms can try to associate with others or look for government funding.
  • Technology – improving the ability, knowledgment inside [the firm].
  1. Do the firms in this market possess resources or skills that would allow them to overcome the specific examples in product differentiation barriers of entry more cheaply than their competitors?
  • Resources – is cheaper if the firm have their own money
  • Skills – is cheaper if the firm has the ability and technology.

Force 1c: Capital Requirements

  1. What are the barriers of entry of capital requirementin this market, if they even exist? Provide examples.
  • High risk
  • Long-term investment
  • Lots of capital required
  1. How strong is each capital requirement barrier of entry?
  • From the perspective of the bank, etc.
  • High Risk = very bad [strong]
  • Long term = accepted [weak]
  • Lots of Capital = fine [weak]
  • From the perspective of the Venture Capitalist
  • High Risk = accepted [weak]
  • Long term = not good [medium - strong]
  • Lots of Capital = ?
  1. How strong is the overall barrier of entry category of capital requirementsfor this market?
  • Extremely important, strong.
  • Show stopper
  1. Does the strength of the capital requirement barriers of entry favor smaller or larger companies? Provide examples.
  • Capital requirements barriers of entry favor larger companies, because they have more capital and more experience.
  1. Are the specific examples in the capital requirement barriers of entry independent of, or vary as a function of, the other barriers of entry influencing factor categories?
  • The other barrier of entry influencing factor categories are influenced by capital.
  1. What can the firm do to control the specific examples in the capital requirement barriers of entry?
  • Firms can cut costs, decrease risk, and get to market early.
  1. Do the firms in this market possess resources or skills that would allow them to overcome the specific examples in the capital requirement barriers of entry more cheaply than their competitors?
  • No. But choice of location important. (US vs. EU)

Force 1d: Switching Costs

  1. What are the switching cost barriers of entry in this market, if they even exist? Provide examples.
  • Knowledge base for the particular market
  • Specific skills
  • Labor / Training
  • Patents (EADS -> Airbus)
  1. How strong is each switching cost barrier of entry?
  • Knowledge base – Strong
  • Specific Skills – Weak
  • Labor – Weak
  • Patents - Strong
  1. How strong is the overall barrier of entry category of switching costsfor this market?
  • Strong in the volatile beginning, but once an established market – not so hard.
  • Mergers / Acquisition problems.
  1. Does the strength of the switching cost barriers of entry favor smaller or larger companies? Provide examples.
  • Favors a company that can risk and has more money.
  1. Are the specific examples in the switching cost barriers of entry independent of, or vary as a function of, the other BOE influencing factor categories?
  • Related to Capital Requirements, Product Differentiation, Access to Distribution Channels, and Government Policy.
  1. What can the firm do to control the specific examples in the switching cost barriers of entry?
  • Agreements, MOUs, contracts, incentives
  • Partnerships and Collaborations.
  1. Do the firms in this market possess resources or skills that would allow them to overcome the specific examples in the switching cost barriers of entry more cheaply than their competitors?
  • No response.

Force 1e:Access to Distribution Channels

  1. What are the distribution channelsbarriers of entry for this industry, if they even exist?Provide examples.
  • Marketing [Attracting customers in a non-consumption market.]
  • Health Requirements [Medical testing and acceptance prior to flight]
  • Schedule Modification (season) [Irregularity of scheduled flights due to weather or technical issues may present schedule planning challenges.]
  1. Are the wholesale or retail distribution channels unable to accommodate new clients, or do they have excess capacity?
  • [Happy face, indicates that wholesale or retail distribution channels will be able to accommodate new clients?]
  1. How strong is each distribution channels barrier of entry?
  • Schedule modification – hard [strong]
  • Marketing in a new market – [strong]
  1. How strong is the overall barrier of entry category of distribution channels for this market?
  • [No response.]
  1. Does the strength of the distribution channels barriers of entry favor smaller or larger companies? Provide examples.
  • All companies are small, so no difference.
  1. Are the specific examples in the distribution channels barriers of entry independent of, or vary as a function of, the other BOE influencing factor categories?
  • [No response.]
  1. What can the firm do to control the specific examples in the distribution channels barriers of entry?
  • New market = develop from scratch!
  1. Do the firms in this market possess resources or skills that would allow them to overcome the specific examples in the distribution channels barriers of entry more cheaply than their competitors?
  • [No response.]

Force 1f:Cost Disadvantages Independent of Scale

Be careful not to lump cost decreases due to experience in with economies of scale.

  1. What are the cost disadvantages barriers of entry, independent of scale, if they even exist? (i.e., Do members of this market have scale-independent, critical advantages that represent cost disadvantages to their competitors?)
  • Product Differentiation (Boeing Aircraft…)
  • Capital Requirements
  • Switching Cost (advantage)
  • Access todistribution channels (vertical integration)
  • Cost disadvantage independent of scale (access to raw materials, favored sites and government subsidies)
  • Government policy
  1. Are there specific examples of proprietary technology among members of this market?
  • Engine design
  • 2 Plane Idea [dual fuselage design of White Knight 2]
  1. Are there specific examples of favorable access to raw materials among members of this market?
  • Virgin’s link to airplane industry.
  1. Are there specific examples of favorable locations among members of this market?
  • Deserts for testing
  • Launch in USA or near people with money to be customers.
  1. Are there specific examples of government subsidies among members of this market?
  • NASA support for commercial space
  1. Is this a market where cost declines with experience seem to be significant? Are firms in this market at the proper product development phase where this is a significant factor?
  • Fixed costs paid off with more flights
  • Having expertise, you develop better, less expensive R&D
  1. Are there any examples among members of this market of shared operations or related activities within the same company that can expedite the benefits of increased experience?
  • Probably not relevant to this market.
  1. How strong is each cost disadvantages barrier of entry?
  • Vertically integrated
  • Existing relationships
  • Access to material
  1. How strong is the overall barrier of entry category of cost disadvantages for this market?
  • [No response]
  1. Does the strength of the cost disadvantages barriers of entry favor smaller or larger companies? Provide examples.
  • Larger, with existing relationships.
  1. Are the specific examples in the cost disadvantages barriers of entry independent of, or vary as a function of, the other barriers of entry influencing factor categories?
  • [No response]
  1. What can the firm do to control the specific examples in the cost disadvantages barriers of entry?
  • [No response]
  1. Do the firms in this market possess resources or skills that would allow them to overcome the specific examples in the cost disadvantages barriers of entry more cheaply than their competitors?
  • [No response]
  1. Experience is a more ethereal entry barrier than scale, and even though it can be just as effective keeping new firms from entering the market, it too, just as in the case of economies of scale, has limitations. Are any of these limits applicable to this specific market?
  • [No response]

Force 1g: Government Policy

  1. What are the government policy barriers of entry for this market, if they even exist?
  • Increase Requirements of Call for Tender (to win government work)
  • Regulation
  • Access to space
  • Launch Facilities
  • Safety
  • Taxes
  • Limits the number of companies who win government work
  1. How strong is each government policy barrier of entry?
  • Favor companies experienced
  • Favors big groups
  • Favors companies which have prestige
  1. How strong is the overall barrier of entry category of government policy for this market?
  • Countries with less rules will attract more entrpreneurs
  • On the contrary, escape of entrepreneurs
  1. Does the strength of the government policy barriers of entry favor smaller or larger companies? Provide examples.
  • Influencing larger companies
  1. Are the specific examples in the government policy barriers of entry independent of, or vary as a function of, the other barrier of entry influencing factor categories?
  • All barrier of entry influencing factor categories are dependent on each other.
  1. What can the firm do to control the specific examples in the government policy barriers of entry?
  • Be the first
  • Collaboration
  • Accumulate knowledge
  • Lobby government
  1. Do the firms in this market possess resources or skills that would allow them to overcome the specific examples in government policy barriers of entry more cheaply than their competitors?
  • Varies by country, but Yes!

Competitor Reaction

  1. Provide and estimation of competitor reaction strength supported by specific examples for each industry.
  • [Not addressed]

Summary Remarks

  1. Overall, how would you prioritize the factors influencing the BoEs to this market? Which is the strongest, and which is the weakest?
  2. What implications might this ranking of BoEs have on strategic decisions of new entrants and incumbent firms in this market?
  • [Not addressed]

Do we want to discuss and make an estimate of the Entry Deterring Price?

  • [Not addressed]

Force 2:Intensity of Rivalry Among Existing Competitors

Intense rivalry is the result of a number of interacting structural factors.

  • Numerous or Equally Balanced Competitors.
  • Slow Industry Growth.
  • High Fixed or Storage Costs (relative to value added)
  • Lack of Differentiation or Switching Costs.
  • Capacity Augmented in Large Increments.
  • Diverse Competitors.
  • High Strategic Stakes.
  • High Exit Barriers.

Exit barriers are economic, strategic, and emotional factors that keep companies competing in businesses even though they may be earning low or even negative returns on investment. Major sources of exit barriers include: Specialized assets, Fixed costs of exit, Strategic interrelationships, Emotional barriers, Government and social restrictions

  • Mutual Dependency: A market state in which “competitive moves by one firm have noticeable effects on its competitors and thus may incite retaliation or efforts to counter the move.”
  1. Can you cite specific examples of mutual dependency between firms in this market?
  • Safety – if proven unsafe, market size would shrink considerably.
  • Dependence on the same supply chain.
  1. If mutual dependency exists in this market, what are its advantageous and disadvantageous effects on the market?
  • Safety
  • Disadvantages include the market size is dependent on a competitor
  • Advantages if safe, market confidence and size will increase
  • Supply Chain Dependence
  • Disadvantage – Reliance of industry on single supplier
  • Advantage – more purchase power to lower cost
  1. What is the status of the different interacting structural factors listed above and what does that indicate about the intensity of rivalry in this market?
  • Safety – It would indicate a level of collaboration within the industry.
  1. What can you say about the number of firms in this market? How do they match up against each other? Do a small number of firms dominate the market? Are there any non-U.S. entities in this market, and how do they stack up? Does this tend toward market stability or instability? Why?
  • Emerging market, lots of different ideas, few serious companies both US and non-US.
  1. What is the growth rate of this market? What implications does that have on the nature of the competition among firms in this market?
  • Large projected growth,
  • maybe not
  • Competition will increase as market develops (as new firms enter)
  1. In this market, is a high fixed/storage cost with respect to value added (e.g., is this product hard or costly to store?), pressuring a trend to fill capacity by cutting price in times of excess capacity?
  • Not a high storage cost. Made to order type of product.
  1. Is the product of this market seen as a commodity? What is the resulting level of volatility of this market’s rivalry as a result?
  • Not a commodity.
  • High volatility.
  1. What is the size of the increment that capacity can be added in this market, and what does that mean for competition?
  • Not many, because now it’s too expensive and if many companies will be involved, it will destroy the environment.
  • As fast as you can get a part of market, it will be better for your company.
  1. In terms of strategies, origins, personalities, and relationships with their parent companies, what is the level of diversity of the firms in this market?
  • Very similar origins and personalities reducing diversity in the market.
  1. Are the strategic stakes in this market high or low?What implications does that have on the nature of the competition among firms in this market?
  • Stakes are high
  • Need to be the first then the cheapest.
  1. What is the state of each of the major sources of exit barriers in this market? What implications does that have on the nature of the competition among firms in this market?
  • Only brand loyalty.
  • High competition for repeat customers (low exit barriers)
  1. What is the relationship between, and the joint level of, entry barriers and exit barriers? Often, they are related.Refer to Fig 1-2 in the text.
  • [No Response]
  1. What are the time-dependant characteristics of the rivalry in this market due to market maturity, acquisitions, and technological innovation?
  • Highly technical so it will be hard for another company to play catch-up.
  • This will likely make acquisitions attractive.

Force 3:Pressure from Substitute Products