Threat of New Entrants (Porter’s 5 Forces)

August 11, 2014 Leave a comment

Five Forces - Entrants

Lucrative markets attract new entrants unless the existing organisations have a strong barrier to entry. If it is easy to make and sell what the organisation is selling then every other organisation would love to jump in and produce the same product and market it to the consumer. The organisation should have barriers to its share of the market to stop the new entrants from taking a slice out of it.

One of the best barriers is the economy of scale. Economy of scale is achieved when more products or services are obtained with the same fixed cost. A good example would be the neighbourhood bakery. The fixed cost for the bakery is the skilled bakers, the oven, and the store rent. The bakery would be losing money if they produce and sell a few items every day, but the bakery will have excellent economy of scale if the bakers work all of the time and the oven is always full of white dough turning to golden cakes and bread. The fixed cost will be distributed over multiple products and the production cost of each unit will be low. New entrant has to achieve this production and selling scale to be profitable otherwise they will not be able to enter and compete with the existing organisation.

Another example of the economy of scale is the Microsoft Excel. Competitors of Excel have to be widely distributed and adopted to be able to compete. The cost of switching to Excel to another spreadsheet software has to be very low, or maybe free to attract new users. Google offered Google Spreadsheets free online and offline for all users and it is making a good gain in the spreadsheet market share. Brand name can be a useful entry barrier when new organisation try to muscle in its way into the market. In the case of spreadsheet market, both Microsoft and Google are excellent brands and will have a fair chance to compete.

Product differentiation and location are strong entry barriers. Using the bakery example above would be a good illustration for these entry barriers. The bakery should have a good location and access to the costumers to make it more attractive for the customers. New competing bakery will have difficulty attacking the costumers if store is located in the back of a shopping mall or in a remote area. The customer will not go to the new bakery unless it has products the other bakery does not offer. The new bakery can specialize in birthday, wedding, and special occasion cakes which will make the costumer reach for it for that special social event.

The pharmaceutical industry illustrates three major entry barriers. Initial capital investment, government policy, and technology propriety (patent). The pharmaceutical industry invents heavily in research and development to generate a promising medicine that they can patent and sell in the market for many years in the future. The pharmaceutical life cycle from an idea to introduction to the market is averaging around 8 years. The FDA takes at least one year to approve the drug and only three out of twenty drugs turn out profitable. The patent may prevent other pharmaceutical organizations from copying the formula, but the customer will find generic products, which have the same effect, in the market within one year after launching the drug in the market.

Read also The Suppliers Bargaining Power, Bargaining Power of Customers

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The Suppliers Bargaining Power (Porter’s 5 Forces)

August 9, 2014 1 Comment

Supplier power is an evaluation of how easy it is for providers to drive costs up. The supplier power is driven by the singularity of the product or service; the number of suppliers; relative size and strength of the supplier; and price of changing from one supplier to another.

Located in London and South Africa, DeBeers controls 58 percent of all rough, uncut diamonds sold worldwide until 2004. DeBeers had to pay a $10 million to settle a 10-year-old indictment. The settlement was huge but gives DeBeers a bigger marketing presence and greater legitimacy with U.S. consumers. However, DeBeers market share eroded as new profitable mines were discovered in Russia, Australia, and Canada and those miners started selling to the market directly without the help of DeBeers.

TheFive Forces - Suppliers suppliers power increase if there are fewer suppliers in the market who can form a monopoly or duopoly on the buyers. The same power will decrease if there are alternatives to what the suppliers are selling to the buyer. For example, if natural rubber farmers form coalitions and start raising their prices, then the buyers may switch to synthetic rubber as a suitable alternative. However, if both producers of natural and synthetic rubber form a consortium and start raising their prices then the buyers are forced to accept the higher prices (or pass the additional cost to their customers) until the buyers can find a good and reliable alternative for rubber.

Sometime the alternative is available, but the switching cost from one supplier to another is higher than accepting the original supplier’s prices. Professional video editors are on the look for the latest tools and gadgets to improve their skills and performance. However, the cost of abandoning Final Cut Pro and switching to Adobe Premier Pro maybe too much because of the price they paid to buy the editing software. Another cost to consider is the skill and experience they build up by using one system and they have to re-learn again for the new software. Similar situation is faced by international organisations when they consider switching from Oracle to SAP or for the airline companies to switch from Airbus to Boeing.

The supplier may not decide to raise the price but forward integrate its business. A fishing company that has boats to catch fish in the sea is a supplier to the fish market and the local distributors. The same fish supplier may decide to integrate its business to catch the fish then open stores in the same neighbourhood to sell the fish directly to the customers. The supplier will disrupt the market by taking the distributor’s business and competing with the local fish stores. The same example may apply to Airbus or Boeing if they chose to build the plane and then set up their own airline company.

Read also Threat of New Entrants (Porter’s 5 Forces), Bargaining Power of Customers

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Is NAFTA Working Well?

September 7, 2010 2 Comments

North American Free Trade Agreement (NAFTA) is an agreement signed by Canada, Mexico and the United States in 1994. Good argument was against NAFTA which suggested  that low wages in Mexico would reduce the wages in the U.S. and that the capital would flow from the U.S. to Mexico (Hymson, Blakenship, & Daboub, 2009). Another argument state that the free trade would not increase Mexico’s wages, and as result, high skill jobs would migrate to the U.S. (Hymson, et al., 2009).  Hymson et al. (2009) research found out that NAFTA agreement increased trade between Canada, U.S. and Mexico and the agreement was able to reduce processes and did not affect employment as feared by both countries. Alvarado (2008) confirm the same findings and state that the reason for Mexico’s poverty is because of the concentration of land and the distribution of small and unprofitable agriculture land to the farmers.

References:

Alvarado, E. (2008). Poverty and Inequality in Mexico after NAFTA: Challenges, Setbacks and Implications. Estudios Fronterizos, 9(17), 73-105.

Hymson, E., Blakenship, D., & Daboub, A. (2009). Increasing benefits and reducing harm caused by the north american free trade agreement. Southern Law Journal, 19, 219-243.

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Is Anti-dumping Misused?

August 30, 2010 1 Comment

Listen to this postDumping refer to the act of exporting goods by a country to another at a price below its cost of production. Anti-dumping is the penalty imposed on low-priced imported goods to give local products fair chance to compete against the suspiciously low-priced imports (Kochher, 2009). Theoretically, dumping was set to give fair chance to the local product and local producers, however, an anti-dumping started between China and India and affected many other countries. Each country is imposing the anti-dumping penalties as a retaliation to the same act done by the other. Anti-dumping spread from 35 to 96 countries between 1980 and 2003 (Vandenbussche & Zanardi, 2008). World Trade Organization (WTO) should revise its anti-dumping rules to prevent some countries for misusing the anti-dumping rules. The Foreign Direct Investment (FDI) was affected by anti-dumping misused in China but Dang, Feng, & Lv (2010) stated that multinational corporations’ FDI will not be affected if China select to impose fair anti-dumping measures.

References:

Dang, J., Feng, Z., & Lv, H. (2010). The effects of antidumping measures on the FDI: A pre-marketing behavior aspect analysis in China. [Article]. International Journal of Organizational Innovation, 2(3), 206-224.

Kochher, P. (2009). India and china antidumping wars: Who is the winner? Globsyn Management Journal, 3(2), 61-64.

Vandenbussche, H., & Zanardi, M. (2008). What explains the proliferation of antidumping laws? Economic Policy, 23(53), 93-138. doi: 10.1111/j.1468-0327.2007.00196.x

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International Trade Policy

August 28, 2010 3 Comments

Listen to this postTrade policy is a set of standards, rules and regulations that govern the country’s trade. A good trade policy would maintain or improve the country’s trade by regulating the tax, tariffs and  inspections regulations. Countries would look for a set of trading standard or regulations to smooth out the trading between both of them. A strategic trade policy would affect the firms strategic interactions in international oligopoly (Sen, 2005). A business can push for a trade policy that give it more advantage of over the international competitors. For example, if two producers of the same product are competing in the local market but one of them is national producer, the national producers should ask for tax or tariff put on the international producer to give it the price advantage in the local market. The U.S. entered in three free trade agreements. The second agreement was with Canada and the third was the North American Free Trade Agreement which is known as NAPTA (Taylor, 2009). The three agreements were set as a result of the U.S. experience in the globalization and multilateral system. Free trade agreement would be the best agreement the business may bush for because it lefts taxes, tariffs and quotas. Globalization would be faster and more effective between countries who agree on the free trade because the products can have fair opportunities in participating countries and the best product would be available to the consumer at the lowest price.

References:
Sen, S. (2005). International trade theory and policy: What is left of the free trade paradigm? Development & Change, 36(6), 1011-1029. doi: 10.1111/j.0012-155X.2005.00447.x

Taylor, C. O. N. (2009). Of free trade agreements and models. Indiana International & Comparative Law Review, 19(3), 569-609.

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