IV. Supplier Power
A producing industry requires raw materials - labor, components, and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products. Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry's profits. The following tables outline some factors that determine supplier power.
|Suppliers are Powerful if: |Example | |Credible forward integration threat by suppliers |Baxter International, manufacturer of hospital supplies, acquired American | | |Hospital Supply, a distributor | |Suppliers concentrated |Drug industry's relationship to hospitals | |Significant cost to switch suppliers |Microsoft's relationship with PC manufacturers | |Customers Powerful |Boycott of grocery stores selling non-union picked grapes | | | |Suppliers are Weak if: |Example | |Many competitive suppliers - product is |Tire industry relationship to automobile manufacturers | |standardized | | |Purchase commodity products |Grocery store brand label products | |Credible backward integration threat by |Timber producers relationship to paper companies | |purchasers | | |Concentrated purchasers |Garment industry relationship to major department stores | |Customers Weak |Travel agents' relationship to airlines |
V. Barriers to Entry / Threat of Entry
It is not only incumbent rivals that pose a threat to firms in an industry; the possibility that new firms may enter the industry also affects competition. In theory, any firm should be able to enter and exit a market, and if free entry and exit exists, then profits always should be nominal. In reality, however, industries possess characteristics that protect the high profit levels of firms in the market and inhibit additional rivals from entering the market. These arebarriers to entry. Barriers to entry are more than the normal equilibrium adjustments that markets typically make. For example, when industry profits increase, we would expect additional firms to enter the market to take advantage of the high profit levels, over time driving down profits for all firms in the industry. When profits decrease, we would expect some firms to exit the market thus restoring a market equilibrium. Falling prices, or the expectation that future prices will fall, deters rivals from entering a market. Firms also may be reluctant to enter markets that are extremely uncertain, especially if entering involves expensive start-up costs. These are normal accommodations to market conditions. But if firms individually (collective action would be illegal collusion) keep prices artificially low as a strategy to prevent potential entrants from entering the market, such entry-deterring pricing establishes a barrier....