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Competition
Entry
Suppliers
Customers
External Analysis
Itai Ater
School of Management
Tel Aviv University
November 3, 2015
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The Goal
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Market/Industry Definition
The first step in the external analysis is identifying the
relevant markets that the firm operates in:
Products/services
Geography
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The Tool
Porters five forces.
Michael porter introduced this organizing scheme at
the end of the 1970s. Became one of the most,
applied frameworks in strategy.
Most ideas are based on the economics literature on
industrial organization. Therefore, we will mainly
emphasize economic principles.
The scheme is taken from the Newtonian world:
various forces work on the firm and determine its
position.
Pedagogical note: every topic includes a check list.
In class we will focus on a small subset and pass
quickly through others.
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General
We say that a force has a strong effect on the firm if it
reduces the firms current or future earnings.
Later we claim that the strategic positioning of the firm
should be characterized by low pressure from the
various forces.
We will discuss these forces sequentially.
The framework is supposed to address two main
questions:
1
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Market Structure
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Competition Intensity
Competition is intense if
Many competitors or similar competitors.
Similar products and low switching costs.
Slow growth (cellular).
Price/product information is available.
High barriers to exit:
Different long-term goal (Ideology, commitment to
workers).
Liquidation problems (e.g. problematic re-renting,
obligations).
Biased view of the future.
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Competition Dimension
Possible dimensions
Price.
Price transparency, easy to imitate.
The strongest effect is when the firms are involved in a
price competition.
Quality.
Technology.
Service, availability (e.g. flights to Europe)
Advertising.
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Price Competition
Price competition happens frequently when:
Low differentiation, low switching costs, weak loyalty
(cellular, airlines).
Large fixed costs and small variable costs (freight
railroads, but not hotels).
Perishable goods (vegetables, one-shot events).
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Differentiation
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Barriers to Entry
Barriers to Entry - the difficulties a firm expects to
encounter upon entering a new market.
Coffee shops:
Relatively low costs of entry
low-tech technology
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Incumbency advantages
Example: connections, reputation (repeated game).
Example: unequal access to distribution channels (first
mover advantage).
Regulation
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Incumbents Reaction
New entrants fear that the incumbents reaction will
make their entry unprofitable.
Such fear may be based on:
Past experience.
Multi-market contact.
The incumbents do not exhaust their resources.
Prices are high.
Slow growing sector.
Predatory pricing.
Generally defined as sales below cost by a dominant
firm over a long enough period of time for the purpose
of driving a competitor off the market.
Good for consumers?
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Is Entry Certain?
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Further Issues
The Role of Commitment
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High Prices.
Limited service (as part of transferring expenses to the
firm).
Limited products or quality (exclusivity, premium).
Intervention in the firms policy (especially pricing
policy).
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The firm has large fixed costs and therefore must sell
(soccer tickets). However,
Repeated game.
Part of strategy (upgraded economy seats).
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Intermediate Customers
Example 1: Publisher, book store, readers.
Example 2: Seed company, farmers, wholesale
chains.
Example 3: Politician, votes supplier (e.g. head of
union), voters.
Complicated scenario:
The intermediate customers can affect the decisions of
the end customers.
Therefore, they have bargaining power with the initial
suppliers.
Therefore, the initial suppliers may try to bypass the
intermediate customers in marketing.
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Definition
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Examples
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Complements
Definition:
Two products are complements if they serve
complementing purposes.
Economics: Two products are complements if an
increase in the price of one leads to a decrease in the
demand for the other.
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Summary - Porter
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Value Net
The five forces framework views other firms - entrants,
competitors, suppliers or buyers - as threats to
profitability
The Value Net model introduce the concept of
coopetition and emphasize potential
complementarities across players:
Firms cooperate in setting industry standards that
facilitate industry growth.
Firms cooperate in lobbying for favorable regulation or
legislation.
Firms cooperate with buyers/suppliers to improve
inventory management.
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