Question 1: What is your analysis of the structure of the portable electric tool industry? Has it been structurally attractive?
Degree of Competitive forces in the Portable Electric Power Tool industry (Structural Analysis)
Barriers to Entry: High
The major barriers to entry in this industry were found in terms of 1. Technology,
2. Capital investment,
3. Economy of scale in manufacturing, and
4. Brand reputation in specific market segments & product categories.
Barriers to Entry (Technology/Capital Investment): Per the data given in the case study (Pg 3, Para 3), typically it required 2-4 years for a team of 4-6 engineers to develop a new tool. This also needed approx. $200,000-$700,000 per year investment in R&D and $250,000-$700,000 in tooling. Therefore it can be concluded that having the right technology and resources was a huge entry barrier for new organizations.
Barriers to Entry (Economy of Scale in manufacturing): All of the major cost components in manufacturing have significant economy of scale. The cost of molding, machining and die casting depended on the volume per part; cost of motor and final assembly depended on the volume per product family [Ref Pg. 6, Para 9]. However, it is interesting to note that, no manufacturer had the technology and scale to produce all the necessary components. Even in case of typical large manufacturers, only the critical components that directly affected the performance of the product where produced in-house and rest were purchased
from specialized suppliers. The cost of purchased components was determined by the volume of purchase. Companies also had to bear large investments in R&D to come up with new product designs and had to spend extra for creating new manufacturing setup. Reduction of average variable cost was also possible through automation in manufacturing, which required capital investments.
Barriers to Entry (Brand Reputation): In 1979, portable tools market grew by 50%, leading to the theory that the traditional distinction between consumer and industrial tools was diminishing [Ref Pg. 2, Para 7]. The advertising had become very aggressive for consumer market and most of the hobbyists; do-it-yourself consumers were more susceptible for brand advertising and promotions.
Power of Suppliers: Low
Critical components were manufactured in-house, strategically to avoid giving any bargaining power to the suppliers. For the rest of the components purchased, since the supplier’s industries were mature, it may be assumed that the competition in their respective industries were high, leaving no bargaining power with them.
Power of Buyers: Low
Although the switching cost for buyers was low and the consumers were price conscious, the power of buyers was diffused by making products available at various price points with varying quality and features. Few of the buyers (or distribution channels) had some advantage in terms of volume discounts. Per the case, each manufacturer had roughly more than 10 price point variants for each product, based on performance, durability, quality and service.
Threat of Substitutes: Low
Although stationary power tools and non-electric (gas and pneumatic) power tools are substitutes to Portable Electric Power Tool industry, none of them had an attractive price-performance (utility) trade off to influence this industry. They were not so popular and were infrequently available in the market.
Rivalry among existing competitors: Moderately high
Competition was largely domestic and the basis of competition was primary on product differentiation in terms of offering multiple product lines with varying quality & features for specific market needs, after-sales service support etc. Companies also advertised jointly with distribution channels and also in media. The industry growth rate was moderate at 8% in industrial market segment and much higher in the consumer market segment.
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