2. What is the relative strength of the five forces driving industry competition?force Relative strengthStrategic implicationsfor the industryStrategic implicationsfor the companyopportunities threatsbusiness functional business functionalIndustry rivalryAttributes that increase the threat of rivalry:- Large number of competing firms- Competing firms are the same size and have the same influence- Slow industry growth- Lack of product differentiation- Productive capacity addedin large incrementsWays to neutralize rivalry- Compete on dimensions besides price: cost leadership, product differentiation, cooperation, diversificationBuyersIndicators of threat:- Number of buyers is small- Products sold to buyers are undifferentiated and standard- Products sold to buyers are a significantpercentage of a buyer’s final costs- Buyers are not earning significant economic profits.- Buyers threaten backwardvertical integrationWays to neutralize buyers- Reduce buyer uniqueness:forward vertical integration, product differentiation, seeking additional customersSuppliersIndicators of threat:- Supplier’s industry is dominated by a small number of firms.- Suppliers sell unique or highly differentiated products- Suppliers are not threatened by substitutes.- Suppliers threaten forward vertical integration.- Firms are not important customers for suppliers.Ways to neutralize suppliers:- Reduce supplier uniqueness: backward vertical integration, develop second sourcesNew entrantsBarriers to entry- Economies of scale- Product differentiation- Cost advantages independent of scale (proprietary technology, know-how, favorable access to raw materials, favorable geographic locations, learning curve cost advantages)- Contrived deterrence- Government regulation ofentryWays to neutralize new entrants- Erect barriers to entry: create and exploit economies of scale, differentiate products, reduce costs independent of scale, implement contrived deterrence, use government policy to deter entrySubstitutes(Substitute products or services meet approximately the same customer needs but do so in different ways.) Ways to neutralize- Improve product attractiveness comparedto substitute: cost leadership, product differentiation, cooperation, diversificationContrived deterrence strategiesDixit, A.K. 1982. Recent developments in oligopoly theory. Papers and Proceedings of the American Economic Association.Pm = monopolist profitsPd = duopolist profitPw = “warring”duopolist profitC = costsThe incumbents profit is listed first in each ordered pair.1. There is one new entrant, and the incumbent makes no contrived deterrence investments.no entry (Pm, 0)entrant (Pd, Pd)accommodateentry incumbent(Pw, Pw)fight2. There is one incumbent and one new entrant, and the incumbent makes a contrived deterrence investment that costs C.Profit implications: Pm > (Pm, – C) > Pd > (Pd, - C) > Pw > 0 no entry (Pm, 0)entrant (Pd, Pd)accommodateNo entry incumbentInvestment (Pw, Pw)fightIncumbentInvestno entry (Pm – C, 0)entrant (Pd – C, Pd)accommodateentry incumbent(Pw,
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