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Chapter 11 Dealing with Competition

Competitive Forces
- Michael Porter has identified five forces that determine the intrinsic long-run attractiveness of a market segment

A. Threat of intense segment rivalry
- a segment is unattractive if it already contains numerous, strong, or aggressive competitors
- frequent price wars, advertising battles, new-product introductions
- example: cellular phone industry

B. Threat of new entrants
- a segment’s attractiveness varies with the height of its entry and exit barriers
- high entry barriers and low exit barriers – most attractive segment
- both entry and exit barriers are high – high profit potential but firms face more risk because poorer-performing firms fight it out
- both entry and exit barriers are low – the returns are stable and low
- low entry barriers and high exit barriers – worst case; chronic overcapacity and depressed earnings for all
- example: airline industry

C. Threat of substitute products
- substitutes place a limit on prices and on profits
- if technology advances or competition increases in substitute industries, prices and profits are likely to fall

D. Threat of buyers’ growing bargaining power
- buyers’ bargaining power grows when they become more concentrated, when the product represents a significant fraction of the buyers’ costs, when the product is undifferentiated, when the buyers’ switching costs are low, when buyers are price sensitive because of low profits, or when buyers can integrate upstream

E. Threat of suppliers’ growing bargaining power
- suppliers tend to be powerful when they are concentrated, when there are few substitutes, when the supplied product is an important input, when the costs of switching suppliers are high, and when the suppliers can integrate