Forces that shape competition:
The configuration of the five forces differs by industry. The strongest competitive force or forces determine the profitability of an industry and become the most important to strategy formulation.
1) Rivalry among existing competitors:
Rivalry competition is intensity because rivalry among existing competitors could include price discounting, new product introductions, advertising campaigns and service improvement.
The intensity of rivalry is greatest if:
There are many competitors or few but equal in size, power and in same situation. Industry growth is slow.
Exit to barriers are high, if organization earns low or negative returns. Rivals are highly committed to the business and have aspirations for leadership. Firms can’t read each other’s signals because of competition between them.
The competition not only occur through intensity, but also can occur in price. As price competition transfers profits directly from an industry to its customers.
Price competition can occur if:
Rivals have similar products or services with few switching costs for buyers. Capacity must be expanded in large increments to be efficient. The product is unsold or perishable.
Finally, Competition can be occur on different dimensions, like price, product features, support services, delivery time and brand image
Same dimensions competition can occur if many competitors aims to meet the same needs or compete on the same attributes
2) The threat of substitutes:
A substitute performs the same or similar function as an industry’s product by different means.
Threats of substitutes is high if:
It offers an attractive price-performance trade-off to the industry’s product. The buyer’s cost of switching to the substitutes is low.
3) Threat of new entrant:
new entrants to an industry bring new capacity and a desire to gain market share that puts pressure on prices, costs and the rate of investment which is needed.
Barriers to entry
a) Supply-side economics of scale: arises when a firms that produce larger volume enjoy lower costs per unit. Because new entries must accept a cost disadvantage.
b) Demand-side benefits of scale: arises when more buyers wants to buy the product, they will be more willing to reduce the price. c) Customer switching costs: switching costs are fixed when buyers or customers change suppliers. The larger the switching costs, the harder it will be for an entrant to gain customers. d) Capital requirements: the need to invest large financial resources to compete can deter new entrants. e) Incumbency advantage independent of size: no matter what their size, incumbents may have cost or quality advantages not available to rivals. f) Equal Access to distribution channels: Entrants firm will have limited capacity within distribution channels and suppliers. g) Restrictive government policy: New entrants require license by public authority and there will be barriers such as copy-right. h) Expected retaliation: new firms should expect retaliation if: Incumbents have previously bad history to new entrants.
Incumbents have rare resources to fight back, including excess cash and unused borrowing power. Incumbents likely to cut prices because they are committed to retaining market share or the industry has high fixed costs. Industry growth is slow so new comers can gain volume only by taking it from incumbents.
4) The power of supplier:
Powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants
Company can depend on different suppliers. Supplier can be powerful if: It’s more concentrated than the industry it sells. Like Microsoft, it’s near to monopoly operating the system The supplier group doesn’t depend heavily in the industry for its revenues. It arises when supplier serving many companies. Firm faces switching costs in changing suppliers....
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