SI 422 C1
Class #4 – Understanding the Five Forces
1) For each of the Five Forces, the Porter article cites several factors that influence its "strength" (i.e., the amount of downward pressure it exerts on industry profits). For each Force, pick one of these factors, and bring a NEW example from the business world to share in our class discussion.
Buyers: In the oil industry, a few large companies control the supply of gasoline in the United States and have generate low buyer power within the industry. Companies like Exxon, BP, Shell, and Lukoil can limit supply and control prices without any complications because demand for their product is so high, there are no widely available substitutes, and their products are undifferentiated.
Suppliers: The upstream suppliers in the oil industry, being OPEC, also have a large amount of supplier power because they exert a lot of control on the prices and ...view middle of the document...
There are massive capital requirements and expenditures needed to enter into this industry making it nearly impossible for small companies to enter and achieve any sort of significant market share.
Competition: There is certainly a sense of competition in the industry as companies fight to achieve market share, and come out with new products; however this competition is not “intense” because it is an oligopolistic industry where the major companies have sought to maintain prices and supply throughout the market.
2) How can we draw industry boundaries?
Industry boundaries are certainly set by combining different aspects of the five forces as well as the additional factors that the Porter article references (government regulation, technology, etc). The breadth of the industry can be defined through the reach and power of its suppliers and buyers, and the drive for profitability can be seen through the competitive actions of industry players. On top of this, current government regulations and technological capabilities/limitations define the extent to which companies within the industry can operate.
3) In practice, how can we tell the difference between Rivals and Substitutes?
The difference between rivals and substitutes is that rivals compete within in the same industry, whereas substitutes are alternatives that come from an outside industry. Relating to the examples from the oil industry, Exxon and BP are major rivals because they both are producers of gasoline that is used by individual consumers. A substitute in this case would be electric cars that need to be charged in order for them to run.
4) What are the roles of government & technological innovation in Five Forces analysis?
Government and technology have a large role in five forces analysis because they can impact an industry’s structure by acting upon one of the five forces. Government regulation can implement a price ceiling on a certain product which would affect the supplier power of a firm if they could be charging a higher price. Technology can put limitations on firms trying to enter into an industry if they lack the certain technological needs of the industry or the incumbents in an industry have patents protecting the rights to certain technology.