Example of using 5 force model analyzing an

Document Sample
Example of using 5 force  model analyzing an Powered By Docstoc
					                           Example of using 5 force model analyzing an industry


TWO CASES: BREAKFAST CEREAL AND PERSONAL COMPUTERS

First, consider cereal. Do you always have a choice of which Raisin Bran to
buy? Is the end consumer of cereal necessarily concerned about household
savings? So much for buyer bargaining power. But even if you are shopping
alone, how much would you save by pinching pennies of cereal each week? 20
cents? 30 cents? So even if cereal costs a lot of money on an annual basis, the
incentive to pinch pennies is weak on a weekly basis: it’s the principle of small
vs. large purchases. Similarly, barriers to entry in this industry are higher
than you might think. Anyone can make cereal, that is true. But supermarket
shelf space is hard to obtain. The big cereal makers not only provide all kinds of
shipping and stocking services to the big supermarket chains, they also bargain
hard over whose products are stocked where. And no matter how good the
cereal, advertising to kids is expensive. Meanwhile, rivalry is gentleman-like.
The big companies – Post, General Mills, Quaker Oats, Kellogg – do have
specials, but rarely engage in emotional price wars. There are no Michael Dells
to drive down costs in cereal. With an industry this concentrated, competition is
orderly, behavior is predictable, and profits are good – for incumbents. All inputs
are commodities - supplier bargaining power is weak. Yet the industry does
have an Achilles’ Heel: substitutes. Plenty of substitutes exist, and if ever
croissants or instant pancakes became the everyday breakfast of choice for
youngsters, the cereal industry could decline. So: what must the cereal industry
do to ensure that breakfast substitutes never gain the upper hand?

Below is one way of depicting industry structure in breakfast cereal. It uses the
following recommended coding system: “+” for favorable forces, “-“ for
unfavorable forces, and “0” for neutral forces.


                   Breakfast              Potential          Entry difficult: limited
                   Cereal                 Entrants           shelf space



                       +                                + 0
                 Suppliers              Industry
                                       Competitors                      Customers

               Generic inputs:
               low bargaining
               power             +   Rivalry low: small stable
                                     group of incumbents
                                                                    Small purchases;
                                                                    kids = low price
                                                                    sensitivity; BUT


                                 –
                                                                    supermarket chains
                                         Substitutes             Many substitutes:
                                                                 muffins, bread, etc.




                                                                                         1
Now consider the inverse case of personal computers. The term Wintelism
designates the fact that two key suppliers – Microsoft and Intel – extract most of
the value in this industry. They have near monopolies in their respective
components, and because of this they can set prices that effectively suck the
profits out of computer makers. Entry barriers are low in the actual
manufacturing of computers, which are made simply by putting together
various components. PCs have become a “screwdriver industry.” The fact that a
Texas teenager could enter and eventually domi nate an industry formerly
dominated by the likes of IBM and Hewlett-Packard reveals that this is an
industry where incumbents are not safe. This in turn motivates industry leaders
like Dell to seek profits from volume rather than margin, relentlessly cutting prices
with the view that if they do not keep prices and margins low, then some current
or future competitor will do it for them. Finally, customers like you keep profits
low for PC makers. You may spend less money on PCs than you do on cereal,
but you make infrequent large purchases of PCs that motivate you to bargain
over every percentage point of the price. Furthermore, you can easily do
comparison-shopping because you know the major components you want and
you are more interested in the components than the name of the manufacturer
(unless you are an Apple fanatic). So you can easily shop online and find the
lowest price, depriving PC manufacturers of bargaining power.



                 Personal               Potential           Entry easy: any
                                        Entrants            teenager with a
                 Computers

                        0                              -    screwdriver




               Suppliers              Industry
                                     Competitors
                                                                      -
                                                                   Customers

             Generic inputs
             except for OS,
             certain chips
                               -   Rivalry high: mainly
                                   substitutable products
                                                                Large purchases;
                                                                easy price
                                                                comparisons


                              +        Substitutes          Few substitutes




                                                                                   2