The art market in which Saffronart operates is notoriously cyclical with booms followed by inevitable busts. The strategic issue it faces is the uncertainty of where the art market is heading. The problem is that Saffronart cannot extend its sources of competitive advantage to markets outside of India and modern schools of art. For this reason, Saffronart is recommended to vertically integrate in India by entering the primary market and competing with galleries and dealers. This solution is optimal and actionable in India if Saffronart uses its sources of competitive advantage. Industry Analysis
The fine art industry is profitable as most forces as buyer power, supplier power, threat of new entrants, threat of rivalry, and threat of substitutes are low. Buyer Power: Medium/Low
Buyers are wealthy individuals who consider their social status among the elite individuals of their society important. Thus, they will always be willing to pay a high price for fine art of the dominant schools. In addition, industry products are highly customized, and customers cannot produce the product themselves. Also, customers purchase in small volumes, while still significantly impacting Saffronart’s total stock (Saffronart only sold roughly 1000 items by the end of 2005) (Khaire and Wadhwani , exhibit 9). Supplier Power: High
Suppliers are art galleries/dealers and get exclusive access to the artists and their works that they represent. Suppliers can create demand for specific art styles by building up a particular art collection to send a message to end users of what school of art is dominating or trending. The case states that, “prices rise when museums buy examples of particular schools of art.” (Khaire and Wadhwani, pg. 4). So, suppliers have significant power over the profitability of the industry since they influence demand, and therefore, price. In addition, suppliers offer products that are not substitutable or available at any other gallery.
Note that although supplier power is high, “a thriving secondary market is important for the existence of a strong primary market” (Khaire and Wadhwani, pgs. 3-4). Thus, suppliers in the primary market will not drive profits down in the secondary market because the only way galleries win is if firms win as well. In fact, commission revenues that suppliers collect depend on secondary market sales (33%-50%) (Khaire and Wadhwani, pg. 3). So, we can dismiss the fact that high supplier power usually implies unprofitability in the industry. Threat of New Entrants: Low
New firms will find it difficult to establish relationships with galleries and artists with no reputation or track record. In addition, there is little incentive for new firms to enter since there are large initial capital costs (a single painting can go for more than $100,000, but does not necessarily sell easily). Competitive Rivalry: Low
Barriers to entry are high (refer to threat of new entrants), and those with no established reputation will find it difficult to establish relationships with galleries and customers in the industry. In addition, exit barriers are high since firms cannot easily liquidate stock of $100,000 paintings. However, entry barriers are much higher than exit barriers, so threat of rivalry is low.
Threat of Substitutes: Low
Firms do not have unique substitutes, signature art pieces or “must-have” works since different fine art provides a specific sense of culture that is nonexistent with other substitute luxuries such as a Rolex watch or luxury car. This also applies to other artworks, as most high-profile artists don’t replicate their work multiple times. Firm Analysis
Saffronart’s strategy is to sell high-priced exclusive modern Indian art to international and domestic customers via online auctions lasting 2-3 days. With a team of 26 employees and 5 tech savvy individuals passionate about art, Saffronart implements a differentiation strategy. That is, it raises customer...