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IIDS Lect 2_ Part 3 (1. Force: Threat of new entrants (Barriers to entry…
IIDS Lect 2_ Part 3
1. Force: Threat of new entrants
New entrants to an industry bring
new capacity
and a desire
to gain market share
.
If
entry barriers are high
and newcomers
expect high retaliation
from the entrenched competitors,
the profitability is also high
:
Barriers to entry
Supply-side economies of scale
• Demand-side benefits of scale scale
• Customer switching costs
• Capital requirements
• Incumbency advantages independent of size
• Unequal access to distribution channels
• Restrictive government policy
Expected retaliation
How potential entrants believe incumbents may react will influence their decision.
• Previous vigorous response to new entrants
• Substantial ressources possession
• Willingness to pay
• Newcomers can gain volume only by taking it from incumbents (crowding out)
2. Force: The power of suppliers
Powerful suppliers capture
more of the value
for themselves by charging
higher prices
, limiting
quality
or services, or shifting
costs
to industry participants.
The higher the bargaining power, the lower the profitability. A supplier group is powerful if:
– it is more concentrated than the industry it sells to
– it does not depend heavily on the industry for its revenues
– industry participants face switching costs in changing suppliers
– suppliers offer products that are differentiated
– there is no substitute for what the supplier group provides
– the group can credibly threaten to integrate forward into the industry
3. Force: The power of buyers
Powerful customers can capture
more value
by
forcing down prices
, demanding
better quality
and generally playing industry participants off against one another.
The higher the bargaining power ,the lower the profitability. A customer group has negotiating leverage if:
– there are few buyers purchasing large volumes
– the industry’s products are standardized or undifferentiated – buyers face few switching costs
– buyers can credibly threaten to integrate backward
Porter‘s Five Forces Analysis
Basic idea
: By analyzing all five competitive forces, you gain a complete picture of what’s influencing profitability in your industry.