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 / threats
business / 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
Ways to neutralize rivalry
  • 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
Ways to neutralize buyers
  • 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.
Ways to neutralize 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
Ways to neutralize new entrants
  • 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