Analyzing Competitivee

1. Supply Side
Economies of Scale
• These economies arise
when firms that produce
at larger volumes enjoy
lower cost per unit,
because they can spread
fixed costs over more
unites, employ more
efficient technology or
command better terms
from suppliers

2. Supply side
Economies of
scale
available to
existing firms
• Lower unit costs make
it difficult for smaller
newcomers to break
into the market and
compete effectively
on the bases of price.
• Economies of scale by
the current
competitors mean
more availability of
the competitors
products in the
market.

3. Demand Side Economies of Scale
• aka Network Effects
• More people/service use the product, more valuable it becomes.
• These benefits, arise in industries where buyers’ willing to pay for a
company’s product increase with the number of other buyers who
also use the company.
• In essence the company becomes more valuable as more people use
the product.

4. – Is a function of users
– Buyers may trust large companies for crucial
products
– Buyers may value being in a “network” with a
larger number of fellow customers.
– Demand-side benefits of scale discourage entry
by limiting the willingness of customer to buy
from a newcomer
Demand side benefit of scale

5. Customer
switching
cost
• Switching costs are costs that
buyers face when they change
suppliers.
• It can be tangible or
intangible cost
• If the switching cost is high
for the consumer the threats
of new entrants will be low.
• The larger the switching costs,
the harder it will be for an
entrant to gain customers.

6. Regulatory and legal
restrictions
• Governments can restrict or prohibit
new entrants.
• Patents provide legal barriers to
imitators.
• Foreign investment barriers can
protect local businesses.
• Regulations that are costly to comply
with can deter new entrants.

7. Incumbency
advantage
independent
of size
No matter what their size,
incumbents may have cost or
quality advantages not available
to potential rivals.
Example: Proprietary technology,
preferential access to the best
raw material sources, prevention
of the most favorable geographic
locations, established brand
identities, or cumulative
experience that has allowed
incumbents to learn how to
produce more efficiently.

8. Product differentiation (including
branding)
Existing products with
strong USPs(unique
selling points/prices)
and/or brand increase
customer loyalty and
make it difficult for
newcomers to gain
market share.

12. • A lack of access will make it difficult for newcomers
to enter the market.
• Big companies, or group of companies can unionize
and pressure suppliers to not sell raw materials to
newcomers.
• The more limited the wholesale or retail channels
are and the more that existing competitors have tied
them up, the tougher entry into an industry will be.
• Distribution channels with contractual obligation or
with limited capacity present a barrier to entry.
• Many people can make a movie, but few can get
their movie distributed to cinemas across the
country.
Access to
suppliers
and
distribution
channels

13. Direct
Retaliation
by
established
companies
• The threat of price war will act
to discourage new entrants.
Example is: Predatory Pricing.
• Predatory pricing occurs when a
company with substantial
market power or share of a
market sets is prices at a
sufficiently low level with the
purpose of damaging or forcing
a competitor to withdraw from
the market or stop others from
entering the market.

14. • A substitute product can be
regarded as something that
meets the same need
• Substitute products are
produced in a different
industry –but crucially satisfy
the same customer need.
• Substitutes compete for
industry profits, but from
outside the industry
• If there are many credible
substitutes to a firm’s product,
they will limit the price that
can be charged and will
reduce industry profits.
Threat of substitute
products

15. Substitute example
• Videoconferencing is a substitute
for….
• …. Business travel.
• Netflix is a substitute for….
• renting DVDs or buying DVDs, going to
movies.
• Sometimes, the threat of
substitution is indirect and come
from a totally different industry:
• Smartphones have become substitutes
to point-and-shoot camera industry.

16. Substitute
can be
confusing
….
• Who is part of your industry and who is
not?
• For this class, and your project, you will
need to use sound judgment to decide
who are part of the substitute
industry?
• Ask questions like,
• What experience are we trying to
provide with our product and
services, and which other
companies from a different industry
can provide similar experiences?
• Which companies and services you
do not think about as immediate
threats but can take your target
business a way in certain situations.

17. Potential development of substitute products
• The extent of the substitute products threat depends upon the
following things:
• The extent to which the price and performance of the
substitute can match the industry’s products/services
• The willingness of customers to switch; Customer loyalty
• Switching costs for the customer
Factor Example/Rationale
“Closeness” of
substitute
The closer the substitute, the easier it is to switch to it
Performance/
Price ratio of
substitute
A substitute offers slightly lower performance at a much
lower price is more of a threat than one that offers
slightly lower performance with only a small reduction in
price

18. Potential
development
of substitute
products
• If an industry does not distance
itself from substitutes through
product performance, marketing,
or other means, it will suffer in
terms of profitability—and often
growth potential.
• Substitute products or services
puts a ceiling on the price that
can be charged before consumers
switch to a substitute product.
• E.g. eye glass/contact lenses
versus laser eye surgery

19. Bargaining power of suppliers
• A producing industry requires raw materials- labor, components, and other
supplies. This requirement leads to buyer-supplier relationship between the
industry and the firms that’s provide it the raw materials used to create
products.
• If an industry’s or a firm within that industry’s suppliers have bargaining power they
will:
• Sell their products at a higher price
• Squeeze industry profits
• Example:
• Microsoft, for instance, has contributed to the erosion of profitability among
personal computer makers by raising prices on operating systems.
• PC makers competing fiercely for customer who can easily switch among them,
have limited freedom to raise their price accordingly.

20. Suppliers
find
themselves
in a
powerful
position
when:
There are only a few large suppliers. It is
more concentrated than the industry it
sells to
The cost of switching to an alternative
supplier is high.
There are no or few substitute resources
available or suppliers offer products that
differentiated.
Supplier group does not depend heavily
on the industry for its revenues.
Competition for the input from other
industries
The supplier can threaten to integrate
forwardly.

21. Suppliers
find
themselv
es in a
powerful
position
when:
• There are only a few large suppliers. It
is more concentrated than the industry it
sells to.
• Example: MS in operating system,
Oil companies
• The cost of switching to an alternative
supplier is high.
• There are no or few substitute resources
available or suppliers offer products that
differentiated.
• Pilots Union over airline industry,
patented medicine.
• Patented drugs for hospitals and
patient

22. • Supplier group does not depend heavily on the
industry for its revenues.
• If the suppliers are serving many industries it will focus on
maximizing their profit from each one. But if a particular
industry accounts for a large portion of supplier group’s
volume or profit, supplier will want to protect the industry.
• The supplier can threaten to integrate
forwardly.
• If industry participants are making too much
money

23. Bargaining power
of consumers /
Buyers
• The power of buyers is the
impact that customers have
on a producing industry
• Stronger the buyers they
get, closer the get to what
the economist call
Monopsony.
• Monopsony: A market
similar to a monopoly
except that a large buyer
not seller controls a large
proportion of the market
and drives the prices
down. Sometimes referred
to as the buyer's
monopoly.

24. Bargaining power of
consumers / Buyers
Bargaining power of consumers are high when:
a) Customers are concentrated or buy in
large volumes relative to the size of a
single vendor.
b) Products/ services are undifferentiated
c) Switching costs are low
d) The demand for the product falls
e) Buyers can credibly threaten to integrate
backward and if the vendors are too
profitable. Ex- Soda industry
f) If they are well informed about sellers’
products, prices and costs

25. Forces High Medium Low
1.
2.
3.
4.
5.

26. Any Question?