Essay Instructions: Current Event Papers:
Find current events from New York Times, Washington Post, Wall Street Journal, Roanoke Times, USA Today, trade publications, etc. the aricle should not be more than 8 weeks old and should be business specific. The current articles should relate to the reading I have attached. the article should exemplify a concept, rather than just state the concept. Press releases, Q&A columns, one paragraph synopsis are NOT acceptable articles for this assignment. Scientific journal articles are also NOT acceptable articles for this assignment. It is a 2-page analysis explaining, in your own words, what course concept the readings relates and what insight the author intended to convey. Finally use your judgment to evaluate the article.
Send me a copy of the article that you use.
Basically connect the article to Michael Porter has five forces that are widely used to
assess the structure of any industry. Porter’s five forces are the:
• Bargaining power of suppliers,
• Bargaining power of buyers,
• Threat of new entrants,
• Threat of substitutes, and
• Rivalry among competitors
ARTICLE:
Industry Analysis: The Five Forces
Cole Ehmke, Joan Fulton, and Jay Akridge
Department of Agricultural Economics
Kathleen Erickson, Erickson Communications
Sally Linton
Department of Food Science
Overview
Assessing Your Marketplace
The economic structure of an industry is not an accident.
Its complexities are the result of long-term social trends and
economic forces. But its effects on you as a business manager
are immediate because it determines the competitive rules
and strategies you are likely to use. Learning about that
structure will provide essential insight for your business
strategy.
Michael Porter has identified five forces that are widely used to
assess the structure of any industry. Porter’s five forces are the:
• Bargaining power of suppliers,
• Bargaining power of buyers,
• Threat of new entrants,
• Threat of substitutes, and
• Rivalry among competitors.
Together, the strength of the five forces determines the profit
potential in an industry by influencing the prices, costs, and
required investments of businesses??"the elements of return
on investment. Stronger forces are associated with a more
challenging business environment. To identify the important
structural features of your industry via the five forces, you
conduct an industry analysis that answers the question,
“What are the key factors for competitive success?”
Using This Publication
This publication describes five forces that influence an
industry. The publication includes a set of application
questions that will help you evaluate the structure of the
industry you are in or are considering entering. The more you
understand about the strength of each force, the better able
you will be to respond.
The forces affecting profitability are often beyond your
control, so you must choose tactics to respond to the forces
rather than try to change the business environment. This
publication offers insight on specific tactics you need for
success when facing competitive situations. While you may
assess any one force individually, you will gain the most value
by assessing all five of the forces
With each force, a “Perspective” feature illustrates the force
for an Indiana wine entrepreneur by evaluating that marketplace.
To avoid repetition, we use the word “product” to mean
either a product or a service. Read more about the five forces
in Porter’s book, Competitive Strategy.
Audience: Business managers seeking to assess
the nature of their marketplace
Content: Presents five forces that influence the
profitability of an industry
Outcome: Reader should understand the forces
and be able to counter them with appropriate
tactics
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Bargaining Power of Suppliers
How Much Power Do Your
Suppliers Have Over You?
Any business requires inputs??"labor, parts, raw materials,
and services. The cost of your inputs can have a significant
effect on your company’s profitability. Whether the strength of
suppliers represents a weak or a strong force hinges on the
amount of bargaining power they can exert and, ultimately,
on how they can influence the terms and conditions of
transactions in their favor. Suppliers would prefer to sell to
you at the highest price possible or provide you with no more
services than necessary. If the force is weak, then you may be
able to negotiate a favorable business deal for yourself.
Conversely, if the force is strong, then you are in a weak
position and may have to pay a higher price or accept a lower
level of quality or service.
Factors Affecting the
Bargaining Power of Suppliers
Suppliers have the most power when:
• The input(s) you require are available only from a
small number of suppliers. For instance, if you are
making computers and need microprocessors, you will
have little or no bargaining power with Intel, the
world’s dominant supplier.
• The inputs you require are unique, making it costly to
switch suppliers. If you use a certain enzyme in a food
manufacturing process, changing to another supplier
may require you to change your entire manufacturing
process. This may be very costly to you, thus you will
have less bargaining power with your supplier.
• Your input purchases don’t represent a significant
portion of the supplier’s business. If the supplier does
not depend on your business, you will have less power
to negotiate. Of course the opposite is true as well.
Wal-Mart has significant negotiating power over its
suppliers because it is such a large percentage of
suppliers’ business.
• Suppliers can sell directly to your customers,
bypassing the need for your business. For example, a
manufacturer could open its own retail outlet and
compete against you.
• It is difficult for you to switch to another supplier. For
example, if you recently invested in a unique
inventory and information management system to
work effectively with your supplier, it would be
expensive for you to switch suppliers.
• You do not have a full understanding of your
supplier’s market. You are less able to negotiate if you
have little information about market demand, prices,
and supplier’s costs.
Reducing the Bargaining Power of
Suppliers
Most businesses don’t have the resources to produce their own
inputs. If you are in this position, then you might consider
forming a partnership with your supplier. This can result in a
more even distribution of power. For instance, Dell Computer
uses partnering with its components suppliers as a key
strategy to be the low-cost/high-quality leader in the market.
This can be mutually beneficial for both supplier and buyer if
they can:
• Reduce inventory costs by providing just-in-time
deliveries,
• Enhance the value of goods and services supplied by
making effective use of information about customer
needs and preferences, and
• Speed the adoption of new technologies.
Another option may be to increase your power by forming a
buying group of small producers to buy as one large-volume
customer. If you have the resources, you may choose to
integrate back and produce your own inputs by purchasing
one of your key suppliers or doing the production yourself.
Perspective on Bargaining Power of Suppliers
For an Indiana winery, one of the main supply decisions lies
with the key product ingredients??"winegrapes and juice.
Wineries have several options, including owning the
vineyard, purchasing grapes, or purchasing juice. An
overabundance of winegrapes and juice from the West Coast
of the U.S., for instance, enhances Indiana wineries’
negotiating power with grape and juice suppliers. However,
the bargaining power of Indiana wineries is generally
weakened due to lack of winegrape growing experience.
If the winery needs a specific grape variety for a particular
wine, then the manager needs to be concerned about the
supply and demand for the product. As supply becomes
short, the manager will find that suppliers have increasing
bargaining power.
Raw materials for wine production are commodity items that
are very cyclical in price, quality, and availability. There are
times when high-quality grapes can be bought for low prices
(over supply) and other times when particular grape varieties
or juice are almost non-existent. This can have a
significant effect on a winery. And it is something the
manager has no control over. For example, if a late spring
frost hits the New York vineyards, the tender varieties will
not produce enough grapes to satisfy demand for the year.
Small wineries are particularly challenged because they
do not have the leverage associated with volume that the
larger wineries have. As a result, the force of suppliers on
a small winery can be viewed as relatively strong.
However, a manager of an Indiana winery could decrease
the effect by cooperating with other small players to
make collective purchases.
Contracts and positive relationships with suppliers and
producers are another way a small winery can manage
the uncertainty and power of suppliers. Recognizing the
power of suppliers and the influence of outside factors
(e.g., knowledge and weather) is an important
consideration as a small winery finds a place in the market.
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Many small customers acting as a group can create a strong
force. For instance, because of their size, health maintenance
organizations (HMOs) can purchase health care from
hospitals and doctors at much lower cost than can individual
patients.
Note that not all buyers will have the same degree of bargaining
power with you or be as sensitive to price, quantity, or
service. For example, apparel makers face significant buyer
power when selling to large retailers like Wal-Mart or
department stores, but face a much more favorable situation
when selling to smaller specialty shops.
Factors Influencing the
Bargaining Power of Buyers
Buyers have more power when:
• Your industry has many small companies supplying
the product and buyers are few and large. For
example, you may have little negotiating power if you
and several competing companies are trying to sell
similar products to one large buyer.
• The products represent a relatively large expense for
your customers. Customers may not price shop for a
quart of oil, but they will price shop if purchasing a
new vehicle.
Bargaining Power of Buyers
How Much Negotiating Power Do
Your Buyers Have?
The power of buyers describes the effect that your customers
have on the profitability of your business. The transaction
between the seller and the buyer creates value for both parties.
But if buyers (who may be distributors, consumers, or other
manufacturers) have more economic power, your ability to
capture a high proportion of the value created will decrease,
and you will earn lower profits.
How Much Power Do Your Buyers
Have Over You?
Buyers have the most power when they are large and purchase
much of your output. If your business sells to a few large
buyers, they will have significant leverage to negotiate lower
prices and other favorable terms because the threat of losing
an important buyer puts you in a weak position. Buyers also
have power if they can play suppliers against each other. In
the automotive supply industry, the large car manufacturers
have significant power. There are only a few large buyers, and
they buy in large quantities. But, when there are many
smaller buyers, you will have greater control because each
buyer is a small portion of your sales.
List the major inputs
needed for your business.
Reducing the Bargaining Power of
Buyers
You can reduce the bargaining power of your customers by
increasing their loyalty to your business through partnerships
or loyalty programs, selling directly to consumers, or increasing
the inherent or perceived value of a product by adding
features or branding. In addition, if you can select the
customers who have little knowledge of the market and have
less power, you can enhance your profitability.
Perspective on Bargaining Power of Buyers
Indiana wineries have three types of buyers??"direct
consumers, wholesalers, and retail outlets. Direct
consumers are mostly tourists out for the day, weekend, or
even a weeklong vacation. In this situation, competition for
those buyers is actually any travel destination in the area
competing for their leisure time. Would the buyers rather
visit a state park or a museum than a winery? A winery
can reduce the bargaining power of these customers by
offering unique products and events that offer high value.
Wholesalers have a significant amount of bargaining power
because they are few in number and have a considerable
influence over the wines that are sold on the retail shelf.
Thus, the bargaining power of small wineries is weak
compared to that of the wholesalers. In Indiana,
counteracting legislation allows small wineries to sell
directly to retail outlets without using a wholesaler.
While the bargaining power of one of these wineries
with retail outlets is still weak, the winery has the
benefit of offering a local Indiana product that is in
demand with consumers.
Overall for Indiana wineries, buyers have more power
than the entrepreneurs. This is due to the fact that direct
consumers have multiple options for entertainment, and
wholesalers and retail outlets have thousands of wine
brands to choose from. Therefore, a small winery owner
must be creative in dealings with consumers, usually by
offering loyalty programs and increasing perceived value.
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List the types of customers that
you have or expect to have.
What alternatives might these
customers have for your product?
How can you build loyalty for your product
or service to reduce customer bargaining power?
1.
2.
3.
4.
5.
Further Assessment
Using a pencil and sheet of paper, examine in greater detail how the bargaining power of buyers will affect your business.
Self Assessment??"Bargaining Power of Buyers
Thi
respond with “Yes” or “No” in the space provided. “Yes” indicates a favorable competitive environment for your business. “No” indicates
a negative situation. Use the insight you gain to develop effective tactics for countering or taking advantage of the situation.
How Easy Is It for Businesses to
Enter Your Market?
You may have the market cornered with your product, but
your success may inspire others to enter the business and
challenge your position. The threat of new entrants is the
possibility that new firms will enter the industry. New entrants
bring a desire to gain market share and often have significant
resources. Their presence may force prices down and put
pressure on profits.
Analyzing the threat of new entrants involves examining the
barriers to entry and the expected reactions of existing firms
to a new competitor. Barriers to entry are the costs and/or
legal requirements needed to enter a market. These barriers
protect the companies already in business by being a hurdle
to those trying to enter the market. In addition to up-front
barriers, a new competitor may inspire established companies
to react with tactics to deter entry, such as lowering prices or
forming partnerships. The chance of reaction is high in
markets where firms have a history of retaliation, excess cash,
are committed to the industry (see Rivalry Among Competitors),
or the industry has slow growth.
Unique Barriers
Entry barriers are unique for each industry and situation,
and can change over time. Most barriers stem from irreversible
resource commitments you must make in order to enter
a market. For example, if the existing businesses have wellestablished
brand names and fully differentiated products,
as a potential market entrant you will need to undertake an
expensive marketing campaign to introduce your products.
Barriers to entry are usually higher for companies involved
in manufacturing than for companies that provide a service
because there is often a significant expense in setting up a
production facility.
Another type of entry barrier is regulatory. To produce organic
food there is a three-year wait before land may be certified.
During the waiting period, producers must raise the crop as
organic, but may not market it as organic until the three-year
“cleansing process” of the land is completed.
Overcoming barriers to entry may involve expending significant
resources over an extended period of time. Industries
based on patentable technology may require an especially
long-term commitment, with years of research and testing,
before products can be introduced and compete.
Factors Affecting the Threat of
New Entrants
The threat of new entrants is greatest when:
• Processes are not protected by regulations or patents.
In contrast, when licenses and permits are required to
do business, such as with the liquor industry, existing
firms enjoy some protection from new entrants.
• Customers have little brand loyalty. Without strong
brand loyalty, a potential competitor has to spend
little to overcome the advertising and service
programs of existing firms and is more likely to enter
the industry.
• Start-up costs are low for new businesses entering the
industry. The less commitment needed in advertising,
research and development, and capital assets, the
greater the chance of new entrants to the industry.
• The products provided are not unique. When the
products are commodities and the assets used to
produce them are common, firms are more willing to
enter an industry because they know they can easily
liquidate their inventory and assets if the venture fails.
• Switching costs are low. In situations where customers
do not face significant one-time costs from switching
suppliers, it is more attractive for new firms to enter
the industry and lure the customers away from their
previous suppliers.
• The production process is easily learned. Just as
competitors may be scared away when the learning
curve is steep, competitors will be attracted to an
industry where the production process is easily
learned.
• Access to inputs is easy. Entry by new firms is easier
when established firms do not have favorable access to
raw materials, locations, or government subsidies.
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• Access to customers is easy. For instance, it may be
easy to rent space to sell produce at a farmer’s market,
but nearly impossible to get shelf space in a grocery store.
You are more likely to find new entrants in the food
business using the farmer’s market distribution system
over grocery stores.
• Economies of scale are minimal. If there is little
improvement in efficiency as scale (or size) increases,
a firm entering a market won’t be at a disadvantage if
it doesn’t produce the large volume that an existing
firm produces.
Reducing the Threat of
New Entrants
Enhancing your marketing/brand image, utilizing patents,
and creating alliances with associated products can minimize
the threat of new entrants. Important tactics you can follow
include demonstrating your ability and desire to retaliate to
potential entrants and setting a product price that deters entry.
Because competitors may enter the industry if there are excess
profits, setting a price that earns positive but not excessive
profits could lessen the threat of new entry in your industry.
Perspective on Threat of New Entrants
The threat of new entrants has a unique twist in the
winery business. A winery is not an easy business to start
because it is capital intensive and market entry can take
multiple years due to licensing requirements and initial
production time for vineyards and wine. A strong
knowledge base is also required in order to make highquality
wine and understand the complexities of the
industry. Thus, there are significant barriers to entry.
However, in at least one respect, competitors are
complementary for Indiana wineries. When several
wineries exist in close proximity, it becomes beneficial
for all wineries involved. People may not travel an hour
from home to visit only one winery, but they would view
the trip as worthwhile if they had the opportunity to visit
four wineries. This clustering effect enhances the
attractiveness and profitability of all wineries involved.
Barriers to entry in the local wine market are high due to
capital investments, licensing, and knowledge
requirements. However, having competition close to a
business does not necessarily have a negative effect on
the bottom line. Therefore, some industries may actually
encourage and support new entrants up to a point.
What Products Could Your
Customers Buy Instead of Yours?
Products from one business can be replaced by products from
another. If you produce a commodity product that is undifferentiated,
customers can easily switch away from your product
to a competitor’s product with few consequences. In contrast,
there may be a distinct penalty for switching if your product is
unique or essential for your customer’s business. Substitute
products are those that can fulfill a similar need to the one
your product fills.
As an example, a family restaurant may prefer to buy the
packaged poultry produced at your plant, but if given a better
deal, they may go to another poultry supplier. If you grow
free-range organically grown chickens, though, and you are
selling to upscale restaurants, they may have few substitutes
for the product that you are providing.
Substitutes Can Come in
Many Forms
Be aware that substitute products can come in many shapes
and sizes, and do not always come from traditional competitors.
Pork and chicken can substitute in consumer diets for
beef or lamb. Aluminum beverage cans battle in the market
against glass bottles and plastic containers. Cotton competes
with polyester from the petroleum industry. Barnes and Noble
retail bookstores compete with Internet retailer Amazon.
Postal services compete with e-mail and fax machines.
When developing a business plan, it is critical to assess the
other options your customers have to satisfy their needs. To do
this, look for products that serve the same function as yours. A
threat exists if there are alternative products with lower prices
or better performance or both.
How Substitutes Affect the
Marketplace
Substitutes essentially place a price ceiling on products.
Market analysts often talk about “wheat capping corn.” This
occurs because wheat and corn are substitutes in animal feed.
If wheat prices are low, corn prices will also be low, because,
as corn prices rise, livestock feeders will quickly shift to wheat
to keep ration costs low. This reduces the demand and
ultimately the price of corn.
It’s more difficult for a firm to try to raise prices and make
greater profits if there are close substitutes and switching costs
are low. But, in some cases, customers may be reluctant to
switch to another product even if it offers an advantage.
Customers may consider it inconvenient or even risky to change
if they are accustomed to using a certain product in a certain
way, or they are used to the way certain services are delivered.
Factors Affecting the Threat of
Substitution
Substitutes are a greater threat when:
• Your product doesn’t offer any real benefit
compared to other products. What will hold your
customers if they can get an identical product from
your competitor?
• It is easy for customers to switch. A grocer can easily
switch from paper to plastic bags for its customers,
but a bottler may have to reconfigure its equipment
and retrain its workers if it switches from aluminum
cans to plastic bottles.
• Customers have little loyalty. When price is the
customer’s primary motivator, the threat of substitutes
is greater.
Reducing the Threat of Substitutes
You can reduce the threat of substitutes by using tactics such
as staying closely in tune with customer preferences and
differentiating your product by branding. In some cases, the
advertising required to differentiate is more than one firm can
bear. In that case, collective advertising for an industry may
be more effective.
11 Purdue Extension • Knowledge to Go
Perspective on Threat of Substitutes
In the wine business, there’s a common misconception.
When considering substitutes, many would make the easy
assumption that the substitute for wine is beer. There are
many other options that need to be considered, however.
In addition to selling an alcoholic beverage, a winery is a
destination, an entertainment and educational source,
and a part of world history and culture.
There’s a saying in the wine-making business, “Taste the
experience of Indiana wine”??"taste the wine, taste the
events, taste the education, etc.
Due to the diversification of offerings in addition to wine,
substitutes must be carefully considered and evaluated.
Competing against the other travel destinations for
limited customer leisure time is one of the biggest
challenges.
In order to decrease the threat of substitutes in the
market and encourage customers, managers of Indiana
wineries must carefully consider these alternatives and
strategically address all the other options facing a
prospective buyer.
Self Assessment??"Threat of Substitutes
This is a short scorecard to help you assess your business’ position in your marketplace. Read each of the following questions and
respond with “Yes” or “No” in the space provided. “Yes” indicates a favorable competitive environment for your business. “No” indicates
a negative situation. Use the insight you gain to develop effective tactics for countering or taking advantage of the situation.
