1. It has been said that Porter’s five forces analysis turns antitrust law on its head. What do you think this means in terms of US commercial airlines?
Supposing Delta is an example of a very large US commercial airline, how does the magnitude of scale economies affect the intensity of each of the five forces?
3. (2 points; 1 point each):
a. How does capacity utilization affect the intensity of internal rivalry in the commercial airline industry?
b. How does capacity utilization affect the extent of entry barriers in this industry?
3. (2 points; 1 point each)
a. In the US, how does the magnitude of consumer switching costs affect the intensity of internal rivalry in the US commercial airline
industry?
b. How does the magnitude of consumer switching costs affect the intensity of entry into this industry?
4. (2 points; 1 point each)
a. How do exit barriers affect internal rivalry in theUS commercial airline
industry? [Hint: Think of your project.]
b. How do exit barriers affect entry into this industry?
10. (2 points; 1 point each):
a. Coopetition often requires firms to communicate openly. How is this different from collusion?
b. How can antitrust enforcers distinguish between coopetition and collusion in the US commercial airline
industry?
Chapter 2 Economics of Strategy Sixth Edition Copyright 2013 John Wiley Sons, Inc. Chapter 8 Industry Analysis Besanko, Dranove, Shanley, and Schaefer Industry Analysis Industry analysis facilitates assessment of industry and firm performance identification of factors that affect performance determination of the effect of changes in the business environment on performance and identification of opportunities and threats (SWOT analysis) Industry Analysis Industry analysis helps with assessing generic business strategies Porter’s five forces framework is rooted in microeconomics Value net (Brandenburger and Nalebuff) supplements the five forces framework to analyze strategy The Five-Forces Framework Michael Porter’s Five-Forces framework identifies the economic forces that affect industry profits The five forces are Internal rivalry Entry Substitutes and complements Supplier power Buyer power The Five-Forces Framework Internal Rivalry Internal rivalry is the competition for market share among the firms in the industry Competition could be on price or some non- price dimension Price Competition erodes the price cost margin and profitability Internal Rivalry Price competition heats up when There are many sellers Some firms have cost advantage over others There is excess capacity in the industry Products are undifferentiated and switching costs are low Prices and sale terms are easily observable Entry Entry hurts the incumbents by by cutting into the incumbents’ market share and by intensifying internal rivalry and leads to a decline in price cost margin Barriers to entry can be exogenous (nature of the industry) or endogenous (incumbents’ strategic choices) Factors that Affect the Threat of Entry Minimum efficient scale relative to the size of the market Government policies that favor the incumbents Brand loyalty of consumers and value placed by consumers on reputation Entrants’ access to critical resources such as raw material, technical know how and distribution network Factors that Affect the Threat of Entry Steepness of the learning curve Network externalities that give the incumbents the benefit of a large installed base Incumbents’ reputation regarding post- entry competitive behavior Substitutes and Complements Availability of substitutes erode the demand for the industry’s output Complements boost industry demand When the price elasticity of demand is large, pressure from substitutes will be significant Changes in demand can in turn affect internal rivalry and entry/exit Supplier Power The factors that determine supplier power are Competitiveness of the input market Relative concentration the industry Relative concentration of upstream and downstream firms Purchase volume by downstream firms Availability of substitute inputs Extent of relationship specific investments Threat of forward integration by suppliers Suppliers’ ability to price discriminate Buyer Power Buyer power is analogous to supplier power Buyers have indirect power in competitive markets Buyer concentration or relationship specific assets can lead to direct power Buyer power relative to upstream is analogous to supplier power relative to downstream Some Strategies to Cope with the Five Forces To outperform its rivals firms can develop a cost advantage or a differentiation advantage Firms can seek an industry segment where the five forces are less severe Firms can try to change the forces Some Strategies to Cope with the Five Forces Facilitating strategies to reduce internal rivalries Moves that increase switching costs for the customers Pursuing entry deterring strategies Tapered integration to reduce buyer/supplier power Five Forces and Value Net The Five-Forces Framework tends to view other firms - competitors, suppliers or buyers - as threats to profitability In the value net model (Coopetition) interactions between firms can be positive or negative The Value Net Concept The value net consists of Suppliers Customers Competitors and Complementors (producers of complementary goods and services) The value net complements the five forces approach by considering opportunities posed by each force. Five Forces Analysis of Chicago Hospitals Product market is the market for acute medical services Competition among hospitals is local The geographic market for a hospital is the entire metropolitan area or a particular submarket. Competitive dynamics could vary across submarkets Chicago Hospitals: Internal Rivalry In 1980 most hospitals were independent. Today many of them belong to systems. Herfindahl index has gone up from 0.05 to 0.20 over this period. Herfindahl index is slightly higher in submarkets. Chicago Hospitals: Internal Rivalry With the arrival of managed care organizations (MCOs), price elasticity of demand increased Insurers were less brand loyal than patients Price negotiations were secret Contracting was lumpy and price rivalry intensified Chicago Hospitals: Entry Structural barrier to entry State regulatory restrictions on new hospital construction Capital intensive nature of hospitals Difficulties is making brand loyal customers switch Difficulties in establishing a base of medical staff that admit patients Chicago Hospitals: Entry As the market grows suburbs could attract entrants Technological changes could lower entry barriers Small specialized hospitals may become feasible reducing the capital requirement and the size of medical staff needed Chicago Hospitals: Substitutes/Complements Due to technological changes, substitutes for hospital services have emerged. Surgeries performed outside hospitals Home healthcare for recuperating patients and the chronically ill Economies of scope have allowed hospitals to expand into outpatient services. Chicago Hospitals: Supplier Power The suppliers to an hospital are specialized medical personnel (nurses, technicians and doctors) Firms that supply equipment and supplies and drugs Relationship specific investments are rare Suppliers protected by patents can have direct power Chicago Hospitals: Buyer Power The buyers are patients admitting physicians and insurance companies. Patients and doctors did not wield buyer power in the 80s. Insurers including Medicaid and Medicare were largely passive in the 80s. Buyer power was low in the 80s. Chicago Hospitals: Buyer Power Current trends point to rising buyer power Selective contracting has increased insurers’ buyer power Government providers have lowered their rates Employers are asking employees to bear a greater share of costs which increases price elasticity of demand Five-Forces Analysis of the Chicago Hospital Market Commercial Airframe Manufacturing Boeing and Airbus compete globally. Fringe players in aircraft with capacity less than 125 seats are excluded from the analysis. The market share (by revenue) of the fringe players is small. There are no meaningful submarkets. Commercial Airframe Manufacturing: Internal Rivalry Boeing delivered its first commercial aircraft in 1958. Airbus is younger. Boeing enjoys economies of scope due to its defense business. Airbus gets government subsidies. Stable market shares and reduced incentive for price wars Historically there has been little product differentiation Commercial Airframe Manufacturing: Internal Rivalry Airbus developed the double-decker mega plane. Boeing abandoned competing with its Sonic Cruiser. Airliners exhibit loyalty to suppliers Economic slowdown has reduced the demand for aircraft. Commercial Airframe Manufacturing: Entry Major barriers to entry are: Huge development costs Experience-based advantages Buyer reluctance to buy from startups Customer loyalty to current suppliers Commercial Airframe Manufacturing: Substitutes Small plane manufacturers cut into demand for Boeing and Airbus planes in regional routes. As demand for air travel increases airlines switching back to larger planes in regional routes. Other forms of transportation could be substitutes (High speed rail) for “regional jets.” Commercial Airframe Manufacturing: Supplier Power Parts market is competitive Part suppliers deal directly with airlines. But Boeing’s Global Airlines Inventory Network (GAIN) gains leverage over suppliers. Jet engine suppliers are not numerous and enjoy direct power. Unionized labor has significant supplier power. Commercial Airframe Manufacturing: Buyer Power Buyers for aircraft are either airlines or leasing companies. Neither have buyer power. Each order could be of the order of 15% of annual sales revenue for the manufacturer. Buyers may cancel orders during economic downturns. Five-Forces Analysis of the Commercial Aviation Industry Professional Sports: Market Definition Major sports leagues in the U. S. MLB NBA NFL NHL Five force analysis is also applicable to major sports leagues elsewhere Professional Sports: Internal Rivalry Sports leagues require competitive balance to keep the contests interesting Athletic competition does not imply business competition Internal rivalry is low within leagues as teams follow rules and share revenue Teams do not compete in the labor market Professional Sports: Entry Each league has rules for admitting new teams. Current owners need to be compensated when new teams are added. Incumbent owners can veto new franchises in their geographic market. Starting an entire new league is risky. Professional Sports: Substitutes and Complements Teams compete in the local markets with other forms of entertainment Elasticity of substitution is quite low Important complements Television Sports betting Professional Sports: Supplier Power Unionized players For new players NCAA has been a benign supplier Cities spend tax dollars to build facilities to attract sports teams. As municipal finances get tighter, subsidizing teams becomes more difficult. Professional Sports: Buyer Power Television networks and sports cable systems compete with each other for broadcasting rights In negotiations regarding broadcast rights leagues have the upper hand against television networks local television and radio. Five-Forces Analysis of Professional Sports Leagues Professional Search Firms: Market Definition Most production of search firms is done by search consultants Knowledge based business: Who is working where? What are the industry compensation standards? What will it take to encourage employer switching by candidates? Strong sales ability required of consultants Professional Search Firms: Internal Rivalry Top ten firms have 11% of search market out of 4,000 firms. Firms are diferentiated by: Geography Industry Price is linked to quality, little competition on price Professional Search Firms: Entry Low barriers to entry: A cell phone and a list of contacts Success requires demonstrated ability to to match managers to employers Typical time from start-up to establishment is 18 months Professional Search Firms: Substitutes and Complements Internal HR departments could perform searches External firms can provide: Discretion from internal discovery Insulation from internal challenges Professional Search Firms: Supplier Power Ease of entry and exit Star search consultants take clients to competing firms Specialized industry knowledge is transportable between firms Non-compete clauses exist, but are unenforceable in many jurisdictions Professional Search Firms: Buyer Power Large firms fill 85% of executive positions through search firms In negotiations regarding search fees, firms have the upper hand Demand incentives for quality Demand timeliness Lowers fees with bonuses for successful hires Five-Forces Analysis of Professional Search Firms Leagues Moderate Moderate Low Low Medium to High Copyright © 2013 John Wiley & Sons, Inc. 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