Class #5

How do Suppliers Threaten Profitability?

• Powerful Suppliers can exert pressure on an industry’s profit potential by:

  • demanding higher prices or limiting quality of their inputs, capturing more economic value created

  • Economic surplus = WTP - Cost

• Suppliers are powerful when:

  • There are few alternatives for their buyers

    • concentrated industry

    • no substitute products

  • There are many buyers, either within or across industries

  • it is expensive for their buyers to switch, high switching costs, difficult to shop around

  • They can credibly threaten to forward-integrate

    FI: a company expands by taking control of activities that happen later in its supply chain, like distribution or retail

    ex: manufacturer that starts selling its products directly to consumers instead of relying on third-party

    —> Short:

  • Few alternatives for buyers

  • Concentrated industry

  • No substitute products

  • High switching costs for buyers

  • Ability to threat forward integration

How do buyers limit profitability?

• they can demand lower prices, higher qulaity, and/or better service

• Threat to industry profits:

• limited # of buyers (volume discount)

• undifferentiated products (no customer pref)

• no switching costs

• credible threat of backward integration

Consumers are price-sensitive when:

• A purchase represents a significant portion of its procurement budget

• Buyers earn low profits or are short of cash

• Buyers product/service quality (cost) is not much affected by quality (costs) of inputs

Threat of Substitutes

• Substitutes meet the same basic customer ned

  • in a different way

  • from outside the given industry

• Limit the pricing power of incumbents

• Factors influencing threat:

  • Price/performance tradeoffs

  • Low switching costs

Examples:

• software vs professional services

• Energy drinks vs coffee

• zoom vs business travel

When is Rivalry Among Competitors High?

• Conditions for high rivalry:

  • Many competitors of equal size

  • Slow industry growth

  • High exit barriers

  • Strong commitment from incumbents

  • Direct substitute products

  • High fixed costs and low marginal costs

  • Excess capacity

*Did the Soft drink discussion

Industry Structure Predicts Rivalry

• Industry competitive structures range from:

  • Perfect competition: many small firms, low entry barriers, low-profit potential

  • Monopolistic competition: differentiated products, medium barriers, some pricing power

  • Oligopoly: few large firms, high entry barriers

  • Monopoly: one firm, very high entry barriers, significant pricing power

A Sixth Force: Complements

• Complement is a product, service, or competency that adds value wen used with the original product

  • the availability of complements increase (or decrease) deman for the primary product (charging stations)

  • affects the profit potential for the industry and the firm

• Co-Opetition: cooperation among competitors for strategic objectives

Entry Choices:

• when

• how

• what

• where

• who

Industry Dynamics:

• PESTEL and 5 Forces Models provide static snapshots;

  Changes in: paying attention to industry dynamics recognizes

  • Industry structure

  • Industry shocks

    • deregulation, legislation, technological innovation, globalization

Industry Convergence

• Unrelated industries satisfying the same customer needs due to technological advances;

  • Ex: Media industries

    • moving content online

    • newspapers, magazines, TV, radio, movies, music, books

Airline Distinction:

Group A: low cost, point-to-point

• spirit

• frontier

• jetblue

—- Mobility Barrier ——

Group B: differentiated, hub and spoke

• delta

• American

• united