Comment on the following: All of wisdom contained in the five-forces framework is reflected in the economic identity: Profit = (Price Average Cost) x Quantity [? = (P-AC) x Q] Porters all five competitive forces affect the variables in equation: (1) Rivals: If competition within industry is high, profit ? will be lower due to lower P . (2) Entry: If barriers to market entry are weak, new entrants in industry will boost competition, reducing P in order to avert market entry.
Or new competitors will increase supply (Q), driving P & ?down. In addition to this, firms operating at full capacity will be left with only choice of raising P to maximize ?. (3) Substitutes: Availability of substitute goods can limit price level P, so as to deter buyers from switching to substitute product or service. (4) Suppliers: High bargaining power of suppliers can cause firms AC to increase, as a result driving Q down. (5) Buyers: Buyers high market power will force P to reduce. 3. How does the magnitude of scale economies affect the intensity of each of the five forces?
(1) Rivals: Scale economies would take advantage of market power by cooperating to discourage competition forcing prices to rise. (2) Entry: Scale Economies concentrate market and prevent rivals from entering the market. Startup firms incapable of achieving MES can make market entry only at cost disadvantage. Firms with higher economies of scale would highly restrict market entry, leading to higher ?. (3) Substitutes: Firms with increasing scale economies will bring down unit cost of production resulting in lower prices for buyers, limiting threat of substitutes. (4).
Suppliers: Higher scale economies can maximize ?by limiting bargaining power of suppliers. (5) Buyers: Firms with increasing scale economies will cause market impact of buyers to decrease, lowering buyers potential for higher ?. 4. How does capacity utilization affect the intensity of internal rivalry? The extent of entry barriers? Rivalry: Firms capable of excessive production would boost sales volume by increasing production at cost advantage reducing P. On other hand, firms incapable of increasing production capacity will be unable to produce extra Q to gain market share, threatening firms position to join price competition..
Entry: If the firm is operating at full capacity, new entrant is more likely to gain market share. Incumbent Firm cannot compete on price any more because of unsatisfied market demand. Excessive production capacity deters market entry because of firms ability to increase production at a lower P, causing entrant to leave the market. 5. How does the magnitude of consumer switching costs affect the intensity of internal rivalry? Of entry? Rivalry: If the cost the buyer has to absorb to switch to another firms product is low.
Incumbent will be forced to maintain low P in order to hold market share. So is on contrary. Entry: Low cost to switch to substitutes facilitates market entry, because firm has small pool of customers loyal to the brand. Competitive advantage on sunk cost to build brand loyalty would make entrant more competitive. So is on contrary. 6. How do exit barriers affect internal rivalry? Entry? Rivalry: If barriers to leaving an industry are high, firms will exhibit greater rivalry and lower prices. High exit barrier forces firm to stay and compete for market share to survive and sustain..
Entry: Despite low prices, high exit barriers discourage firms to enter market due to cost of leaving the market if business turned unsuccessful. 7. Consider an industry whose demand fluctuates over time. Suppose that this industry faces high supplier power. Briefly state how this high supplier power will affect the variability of profits over time. Industry will relatively experience low profit variability. Rise in bargaining power of suppliers will cause industrys ? to fall. When business is good, supplier can raise profit by supplying at higher P.
On contrary, when business is down, supplier can charge low price in an attempt to survive as supplier in industry. This is coopetition scenario; supplier market power is no longer a threat. 8. What does the concept of coopetition add to the five forces approach to industry analysis? Porter five forces framework thinks of rivalry, new entrant, substitutes, supplier and buyer as factors to limit profit maximization. Coopetition concept focuses on a another dimension considering these forces as cooperation forces of firms value net acting to maximize firms profit.
Firms can assist one another on several fronts to achieve common goal to miximize profit. Firms can improve efficiency by collective thinking on technical standards. Firms can combine through trade associations to promote regulations in their mutual good. Mutual cooperation can make a firm highly productive. When a firm is facing hard times, buyers and sellers gaining from firms existence can take steps to revive and support 9. Coopetition often requires firms to communicate openly. How is this different from collusion? How can antitrust enforcers distinguish between coopetition and collusion?
Coopetition has nothing to do with dividing market, setting prices or limiting production through any illegal secretive agreement to limit competition. Companies make their policies public through promotion, pricing and media. It is hard for antitrust law enforcement to find evidence against competitors to prove collusion through secretive arrangements, pricing, limiting production or dividing market area. Firms can legally form trade unions and associations to influence political decisions in industrys favor, or openly make arrangement to observe new industrial standard.