1. Threat of New Entrants:
§
Economies of scale mean larger
firms can produce at lower cost per unit.
This tends to lower the number of firms in the industry and reduce
competition.
§
Proprietary product differences
are the characteristics that make a product appeal to a large market segment. But only those characteristics that cannot be
copied at low cost by competitors (“proprietary”) will be a barrier to entry.
§
Brand identity is the extent to
which buyers take the brand name into account when making purchase decisions.
§
Capital requirements are the total
cost of acquiring the plant and equipment necessary to begin operating in the
industry.
2. Bargaining Power of Suppliers:
§ Differentiation
of inputs means that different suppliers provide different input
characteristics for inputs that basically do the same job. The greater the degrees of differentiation
among suppliers the more bargaining power suppliers have.
§ Presence
[and availability] of substitute inputs means the extent to which it is
possible to switch to another supplier for an input (or a close
substitute). The greater the number and
closeness of substitute inputs the lower the bargaining power of suppliers.
§ Supplier
concentration is the degree of competition among suppliers. Usually the more concentrated the industry,
the fewer suppliers and the more control suppliers have over the prices they
charge. Greater supplier concentration
often means greater supplier bargaining power.
§ Cost
relative to total purchases in the industry refers to the amount your
firm spends on inputs from a particular supplier compared to the total revenue
of all firms in the supplier’s industry.
Lower expenditure usually implies more bargaining power for the
supplier. The buyer’s bargaining power
falls as spending with a particular firm falls simply because the buyer’s
business isn’t as important to the supplier.
3. Threat of Substitute Products:
§ Relative
price performance of substitutes is the price of substitutes for your
output compared to the price you are charging.
If the price of substitutes is lower, the competitive threat increases
as the price differential increases.
§ Switching
costs refers to the cost to the buyer of switching from one seller to
another. The greater the switching costs the lower the threat of substitutes
because buyers have a stronger incentive to stick with a single supplier.
§ Buyer
propensity to substitute is the extent to which buyers are willing to
consider other suppliers.
4. Bargaining Power of Buyers:
§ Buyer
concentration versus firm concentration refers to the extent of
concentration in the buyer’s industry compared to the extent of concentration
in your industry. The more concentrated
the buyer’s industry relative to your industry the greater the bargaining power
of buyers.
§ Buyer
volume is the number of units of your product the buyer purchases from
all sources. The greater buyer volume
compared to the quantity purchased from you, the greater the bargaining power
of buyers.
§ Buyer
information is the state of information buyers have about your
industry. The more information buyers
have about your industry the more bargaining power buyers have.
§ Substitute
products mean the number and closeness of substitutes available for
your product. The greater the number of
available substitutes the more bargaining power buyers has.
§ Price
of your product relative to total expenditures on all products. This is the fraction of total expenditure
buyers spend on your products. The
greater the fraction of total expenditure the greater the price elasticity of
demand and the more bargaining power buyers has.
§ Product
differences refer to the degree of differentiation between your product
and other products in the market. The
greater the differentiation of your product, the lower its price elasticity of
demand and the less bargaining power buyers have.
§ Brand
identity is the extent to which your brand name is recognized and
sought out by buyers. The stronger your
brand identity the less bargaining power buyers have.
5. Competitive Rivalry:
§ Industry
growth is the speed at which the market is growing. Rapidly growing markets provide less
incentive for firms to aggressively compete with each other.
§ Intermittent
overcapacity is the amount demand fluctuates during a year (or over a business
cycle) and the impact lower demand has on how efficiently the firm is able to
use its plant and equipment. In some
industries a decrease in demand leads to significant idle productive capacity,
while other industries are not as susceptible to this factor. More intense rivalry is likely to be fostered
in an industry in which firms face either large amounts of unused plant
capacity or face frequent idle capacity.
§ Concentration
and balance is the number of firms in the industry and their relative
size. An industry in which a few firms supply most of the output is likely to
not be very competitive because the large firms will control the market.
