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STRATEGY
INTRODUCTION
3. Customer switching costs- Switching costs can be a major factor that can
deter new players. If the users of the product face high switching costs they
are unlikely to shift to a new vendor especially a new entrant to the market.
Suppliers can majorly affect the profitability of the user industry. Supplier
power is high if there exist:
1. Large number of suppliers
2. Low percentage share of the industry in the supplier’s revenue
3. High supplier switching costs
4. Easy availability of substitutes of the input
5. High possibility of forward integration
Powerful buyers demand better quality or more service which raises costs.
The bargaining power of buyers is high when:
1. Number of buyers is low
2. Volume of purchase is high
3. Standardisation of products is high
4. Switching costs are high
5. Possibility of backward integration is high
Substitutes are products that perform the same functions as the original
product. Substitutes limit the price an industry can charge. The threat from
substitutes depends on the following factors:
The Porter’s 5-force model can enable a company to clearly determine its
industry structure and develop its strategy accordingly. The 5-force analysis
provides a complete picture of where the company stands versus buyers,
suppliers, entrants, rivals, and substitutes. This environment analysis can
help the company decided its strategy with respect to the following:
A company can determine which parts of the market witness the highest
competitive rivalry and which ones are relatively less competitive. The
company can accordingly select its positioning and target those areas of the
market where it expects the highest returns. The company will also have to
alter its product and other processes accordingly.
For ex. With the increased internet usage, airline companies soon realized
that customers preferred purchasing tickets over the net. The airlines which
initially adopted e-ticketing gained majorly and also reduce their costs.
Moreover travel agents who solely relied on air ticket commission were slow
to change and now are a dying breed. This change also opened up new
opportunities and online sites like makemytrip.com came into existence.
A company which clearly recognizes the major forces that are affecting the
industry structure can work towards altering these forces to transform the
industry, which ultimately benefits all players. There are 2 ways through
which the industry can be reshaped. The company may work towards
redividing profitability or towards expanding the profit pool.
For ex. In the west, Walmart, the world’s largest retailer, took advantage of
its sophisticated distribution to garner a greater share of the value chain
from the suppliers. It forced them to streamline their processes and
distribution. Soon other retailers also gained he same benefits. Similarly in
India, organized retailers are capturing a greater percentage of the price of a
product despite selling at prices lower than mom and pop stores due to their
increased bargaining power with suppliers.
For ex. When the stock exchanges in India moved over to electronic trading
they significantly expand the profit pool for all players. Companies found it
easier to manage registration of transfers. This significantly reduced the
settlement time and attracted new buyers. The exchanges made it cheaper
for their members to trade which increased their volume significantly.
Similarly when the brokers started offering online trading to their clients at
lower costs volumes jumped. They could offer lower rates since all players
i.e. banks, depositories and brokers themselves coordinated and reduced
their costs.
The competitive forces explain the main drivers of industry competition. The
company strategy has to take into consideration that competition stretches
well beyond existing competitors. A study of the industries competitive
forces can help a manger gain crucial insight. He can determine the value
gaining and value draining part of the operations and make suitable
changes. He can spot new opportunities and exploit them accordingly.
Moreover he forecast future danger spots like new entrants, price wars and
prepare accordingly. In a world of more open competition and relentless
change, it is more important than ever to think structurally about
competition.