2. What is the relative strength of the five forces driving industry competition?
force / Relative strength / Strategic implications for the industry / Strategic implications for the company / opportunities / threatsbusiness / functional / business / functional
Industry rivalry
Attributes that increase the threat of rivalry:
- Large number of competing firms
- Competing firms are the same size and have the same influence
- Slow industry growth
- Lack of product differentiation
- Productive capacity added in large increments
- Compete on dimensions besides price: cost leadership, product differentiation, cooperation, diversification
Buyers
Indicators of threat:
- Number of buyers is small
- Products sold to buyers are undifferentiated and standard
- Products sold to buyers are a significant percentage of a buyer’s final costs
- Buyers are not earning significant economic profits.
- Buyers threaten backward vertical integration
- Reduce buyer uniqueness: forward vertical integration, product differentiation, seeking additional customers
Suppliers
Indicators of threat:
- Supplier’s industry is dominated by a small number of firms.
- Suppliers sell unique or highly differentiated products
- Suppliers are not threatened by substitutes.
- Suppliers threaten forward vertical integration.
- Firms are not important customers for suppliers.
- Reduce supplier uniqueness: backward vertical integration, develop second sources
New entrants
Barriers to entry
- Economies of scale
- Product differentiation
- Cost advantages independent of scale (proprietary technology, know-how, favorable access to raw materials, favorable geographic locations, learning curve cost advantages)
- Contrived deterrence
- Government regulation of entry
- Erect barriers to entry: create and exploit economies of scale, differentiate products, reduce costs independent of scale, implement contrived deterrence, use government policy to deter entry
Substitutes
(Substitute products or services meet approximately the same customer needs but do so in different ways.)
Ways to neutralize
- Improve product attractiveness compared to substitute: cost leadership, product differentiation, cooperation, diversification
Contrived deterrence strategies
Dixit, A.K. 1982. Recent developments in oligopoly theory. Papers and Proceedings of the American Economic Association.
Pm = monopolist profits
Pd = duopolist profit
Pw = “warring”duopolist profit
C = costs
The incumbents profit is listed first in each ordered pair.
1. There is one new entrant, and the incumbent makes no contrived deterrence investments.
no entry (Pm, 0)
entrant(Pd, Pd)
accommodate
entryincumbent
(Pw, Pw)
fight
2. There is one incumbent and one new entrant, and the incumbent makes a contrived deterrence investment that costs C.
Profit implications: Pm > (Pm, – C) > Pd > (Pd, - C) > Pw > 0
no entry(Pm, 0)
entrant(Pd, Pd)
accommodate
No entryincumbent
Investment(Pw, Pw)
fight
Incumbent
Invest
no entry(Pm – C, 0)
entrant (Pd – C, Pd)
accommodate
entry incumbent
(Pw, Pw)
fight