New Entrants: entry barriers
High End Hifi has lower economies of scale of production then mass-Hifi, Rolls-Royce has lower economies of scale of production then Volkswagen Golf. The bigger the production scale, the cheaper products can be made. Price/quality maximizes for highest economies of scale products. Threath for new entrants is high when economies of scale are low.
Think of the drug-design market: Best antidepressant: Prozac (Lilly), has 5 equivalents on the market, but still nothing can beat Prozac. Best Local Antiallergicum Flixotide astma pump (Glaxo) stands and Bronchodilatant Serevent (Glaxo) stands without competition. Best Antiallergicum Zyrtec (UCB) now gets now 2 competitors after 10 year research. Best AntaAcids like Losec (Asta) has several equivalents on the market, but only after 10 years. Look for good proprietary product differences. Threath for new entrants is high when product differentiation is low.
Nearly everything in consumermarket is branded: Going from sigarets, coffees, coke,beers with the disvantage of difference in tastes and odours and colours. But what could be a more branded market then diapers, wash products, papers, where odour or taste could not play any difference. One need those marketing gurous as Faith Popcorn to put your product right on track of the big marketing trends. Threath for new entrants is high for white label-no brand products.
Good examples are to find in car production: Japanese carmaker switching cost typical in the 80ties is lower then European-American car maker switching costs. They could adapt faster their cars to new demand, they could faster enter market niches, they could amortize faster new designs. Fiat new plate-sub-chassis construction typical will lower switching cost for new models, as chassis can be the same for all different cars models and a typical expensive part of the car that demands a great deal of research can be amortized over exra cars. Mercedes-Benz A - Smart 'Eland-test-type problems' typical hard to resolve without throwing away the whole research, has been electronically 'solved' through EPS-stabilisation electronics. Threath for new entrants is high for the markets having low switching costs.
All automated and scaled productions require big capital investments. Preferrably big enoupgh to prohibit any competitor entering your market. At least not any small cap can enter the automobile market. Not any small cap can enter that pharmacy market except when Bio-Genetic companies where popping everywhere on the stockmarket to enter that so money intensive research area. What about those WEB-IPO attracting capital and searching their niche to pop-up in Yahoo style. Capital is no problem in new emerging markets, but not anyone will junk-finance a new diaper business, a new car constructor, a new petroleum company... They need capital, but extra risk needs extra profits, and they are no extra profits to reep in a satured market, so there is no capital to attract... So threath for new entrants are high for low capital requirements.
If one want's to sell a new product to a new consumer, you need to be on the shelff. If a distributor selects because of space limits, one needs to find alternative channels... Film Video-CD-multimedia on demand can ask a whole new infrastructure as will be broadband-internet, but offer a whole new opportunity. How to get a product to a consumer at lower cost and with higher margin !
Technology sector always gives plenty of examples of shifts through absolute cost advantage. CD is cheaper to produce and better quality then vinyl, it surpassed easily the old LP. DVD will be cheaper then plein old Video cassette, but guess if it's cheaper to download through internet who will reap that market... If chip market shifts from 0,25 micron to 0,18 micron (30/2/99) , this means that a 10cm square silicon can produce 400 CPU's, and now big trick with the same people , same upgraded machines, and the same infrastructure, the same foto one upgrades to 800 CPU's per wafer, Intel can double production, half the production cost, upgrade to 800Mhz. So the first to upgrade his productions has the lead... The lower the cost advantage you hold, the lower the entry barrier.
The learning curve, imagine you learning to bake pancakes, the first 10 maybe burned, twisted, but then you bake them better and better... So does industry, learning to make everything continiously better. Therefore industry need people who can transfer knowledge and learn to newbies how to make the product better. Even newbies will be open-minded or twisted-minded to change and still improve something more. AMD still tries to learn to get that +90% CPU production return, INTC always reaches that 99% CPU production yield. CPQ,IBM and HWP try to get on the direct-model wagon but still carry 1 month inventory, DELL leads that train and reached the point of less than 1 week order-supply idle time giving 2% cost-adavantage/week. Finding marketniches is also the marketing learning curve, a flavour, colour and taste that call's for the different niches gives the firm filling in those niches the lead. The higher you stand on the proprietary learning curve the higher the entry barrier.
The best examples are to find in mining industry, raw material production : Easy access to raw materials can be crucial for giving a competitive advantage. No one doubts that Arabia has better access to oil then Norway who does off-shore drilling, South Africa has probably the best and cheapest access to diamonds, coals, gold . Second best examples are in food, agriculture, wood production: think of latex production, banana, cacao, sugar, they are all bound to regions, and bound to necessary natural climate and soil conditions,or cheap labor availability. The one at the beginning of the supply curve, with the lowest production costs clearly has the lead and the least risk to take...
Technological progress provides again good examples of proprietary- patent protected lower-cost products, but usually with the technological shift if being smaller, cheaper, and better.
Government regulations can be decisive : typical monopoly situations given by government, with lack of creating competition: European economies are poised with monopoly situations within government structure. Russian 'communistic' economy was an even worser example. Deregulating trends tend to make competition level higher , and to give opportunities to new entrants... US and Europe FTC tend to track those monopolies. Deregulation went on electricity market, Telecom market,
That's the monopoly game: if you stay in your corner, i won't enter in your market: If you enter my market i will lower the price in your market. If you lower the oil price, i will double production and destabilize even more the market. If you go outside your dealer region, i will not supply you. If you don't meet quality standards you can not supply. And so on...
Differentiation of inputs
High differentiation of input, give high supplier power. If PEEK is a high density plastic that has strategic quality compared with other plastics : mechanical strength- self coating- long livity -noise friendly - reduced weight - acid tolerability it easily becomes a highly differentiated plastic, that gives extreme supplier power in case those plastics become crucial part of the product. 3M is genius in finding those highly differentiated products as films, coatings, lime.
Switching costs of suppliers and firms in the industry
High swithing cost of supplier, give low supplier power. Once launched a sattelite, you can't do anything else with it but transmitting those signals at the programmed speed. So once you provide services at certain speed and your sattelite get outdated through technology improvements, the only way to speed up is launching a new one...
Presence of substitute inputs
High Presence of substitute inputs, give low supplier power. Petroleum is a bulk market, it has different raw qualities, but actually after that quantisation it doesn't matter who supplies you...
Supplier concentration
Monopoly supplier gives high supplier power, typical for franchises. Free dealer, can select any supplier and has highest power.
Importance of volume to supplier
One important customer relation, give low supplier power. If you are the biggest customer of your supplier, be sure you have the best price, be sure you can squeeze your supplier... Automobile industry tend to have just-in time suppliers close to their production, this makes those suppliers very dependent and very vulnerable...
Cost relative to total purchases in the industry
Low cost relative to total purchases in the industry, give low supplier power.
Impact of inputs on cost or differentiation
Low inpact of input on cost or differentation, give low supplier power. I don't think the fresh water supplier of GM has big impact on the cost or differentation of the produced car's. The tires could be of better importance on cost or differentiation of produced car's. Common rail direct diesel injection system from Fiat, can be an key function to integrate in dieselengines as adopted by Mercedes, Fiat-Lancia-Alfa, Peugeot... EPS is a key development from Bosh that could correct 'design' problems from Mercedes A, but still at an important cost.
Threat of forward integration relative to threat of backward integration by firms in the industry
High threat of forward integration, give high supplier power. High threat to backward integration by firm gives supplier low power. Firm making the complete vertical integration from raw material to finished consumer product can have the lead.
Bargaining Leverage
High bargaining leverage, gives buyer more power. The bargaining leverage is the resume of the 7 following parameters
Buyer concentration versus firm concentration
High buyer concentration versus industry concentration, give high buyer power. You have two big stone-washing machine producers, you have plenty of stone-wash jeans producers. You have three jacquard-machinery constructors, you still have hundreds of jacquard-machine buyers. Those jacquard weavers still have even more buyers who resell. And those carpet resellers still have more consumers.
Buyer volume
High buyer volume , gives buyer extra power. Economies of scale and economies of conditions. The higher the volume the lower the price... The grocier grouping his buys, still has lower price then that one shop retailer. The 100-shop retailer grouping those commands could very well approach grocier conditions.
Buyer switching costs relative to firm switching costs
High buyer switching cost, gives buyer less power. Automobile sector actually outsources those productions with high switching costs, the leave themselves with a maximal flexible production !
Buyer information
High buyer information, gives buyer more power. That's the success of seminars, expositions, internet, books. Buyer with clear view on cost structure has perfect negotiating power. The buyer outsourcing excess demand to competitor, has perfect knowledge of production cost. So the firm becoming supplier of competitor is making worst move...
Ability to backward integrate
Ability to backward integrate, give high buyer power. Philips can easily integrate versus plastic molding supplier. So when Philips decides to transfer his production to Tsechoslovakije, the plastic molding supplier really stands nowhere.
Substitute products
A lot of substitute products, gives buyer power. The better you discern the substitutes, the more power you have. The buyer treating two supplier as substitute has perfect merchandising power.
Pull-through
In a pull-through system, buyer has no power. You let consumer decide, you pull your product through distribution channel with publicity on television. All consumer products are basically pull-through. Pharmacy is a pull-through with Generalists prescribing the products.
Price Sensitivity
High price sensitive buyer has low power.
Price/total purchases
When the percentage of total buyer's cost spent on the supplier's input is high, buyer power is high.
Product differences versus buyer
High product differences, gives buyer no power. Generalist will treat medicines as antibiotics equivalents, but his prescription will be carried out exactly as he can argue easily why he prefers for 'so called medical reasons' the Biclar or Augmentin, or Clamoxyl..
Brand identity versus buyer
High brand identity , makes buyer powerless.
Impact on quality/performance
When product has substantial impace on quality performance, buyer has no power.
Buyer profits
If buyer profits are high, buyer has less power. You can't skimm a rock, means if someone has no mony, you can't ask much. If your niche is the poor , you probably can't ask much. Selling computers to the poor illiterate american's is the last step to make... But if profitmargin of computer producent get squeezed through attacking that 500$ PC market, INTC and MSFT profit margin get squeezed too.
Decision makers incentives
High decision makers incentives, gives buyer no power.
Substitutes: determinants of Substitution Threat
Relative price performance of substitutes
Better price performance of substitute makes threat for substitution high. Better and cheaper always takes the lead on the long run. Taking in account scaling up price pressure, when scales can make a product even less expensive and the product is already competitive... CD was first extremly expensive, scales made it more affordable and a better alternative then LP. Now CD will get pushed away by DVD, better but not yet cheaper. But scales on PC market could drive down price at a never precedented pace...
Switching costs to substitutes
High switching cost, gives less prospensity to substitute. You have no switching costs swithing from telephone. Your switching costs are high switching to ISDN, you need new equipment. Costs become even higher switching to ADSL, you have to change all your printings.
Buyer propensity to substitute
High propensity to substitute, gives buyer more power, and gives augmented risk for substitution. You really don't care were you tank your car ? Or do you ? Certainly not for what you throw in your car.