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1.Link Porter’s Five Forces to microeconomic theory 2.A closer look at the five forces… plus government 3.Practice! Apply the Five Forces to Your Cases.

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Presentation on theme: "1.Link Porter’s Five Forces to microeconomic theory 2.A closer look at the five forces… plus government 3.Practice! Apply the Five Forces to Your Cases."— Presentation transcript:

1 1.Link Porter’s Five Forces to microeconomic theory 2.A closer look at the five forces… plus government 3.Practice! Apply the Five Forces to Your Cases

2 The Birds & The Bees of Micro Theory Where do supply curves come from? Where do demand curves come from? How do supply and demand get together to make markets?

3 So Where DO Demand Curves Come From? composite good Indifference Curves Budget Constraints Price-consumption curve quantity Price KEY: Pay attention to what is on the X and Y axes! What is the price of shelter at this budget constraint?

4 Short-run Individual firm supply curve Why not here?? Shutdown! P

5 Test yourself: What happens to consumer and producer surplus in the long-run perfectly competitive market? “The strategists goal here is to reduce the share of profits that leak to suppliers, buyers, and substitutes or are sacrificed to deter entrants.” (p.38) Producer Surplus!

6 “The strategists goal here is to reduce the share of profits that leak to suppliers, buyers, and substitutes or are sacrificed to deter entrants.” (p.38)

7 Test yourself: Why is marginal revenue less than price (demand) in an imperfectly competitive market? “The strategists goal here is to reduce the share of profits that leak to suppliers, buyers, and substitutes or are sacrificed to deter entrants.” (p.38)

8 “…an improved industry structure is a public good because it benefits every firm in the industry, not just the company that initiated the improvement.” (p. 38)

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10 1. Rivalry Intensity + Numerous competitors of equal size & power + Slow growth + High barriers to EXIT + High commitment to the industry + Information asymmetry PRICE + Similar products (commodities) + High fixed costs, low marginal costs + Large capacity increments + Perishable goods

11 NOT ALL COMPETITION IS BAD!! “Competition on dimensions other than price – on product features, support services, delivery time, or brand image…is less likely to erode profitability because it improves customer value and can support higher prices…can improve value relative to substitutes or raise the barriers facing new entrants…”(p. 32).

12 Barriers to Entry + Economies of scale + Network externalities + Switching costs + Capital costs + Established supply and distribution channels + Government policy 2. Threat of New Entrants Expected Retaliation + Reputation + Cash on hand + High fixed costs + Slow growth

13 3. Suppliers… Drive UP the price YOU have to pay when: + There are few suppliers + Suppliers have many customers + Differentiated (unique) products with no substitutes + You face high switching costs + They can forward integrate

14 4. Customers Buyers drive DOWN price and UP costs: + There are few buyers who buy in large volume + Standardized products + Low switching costs + Buyers spend a lot on your product + Quality/price of buyers product does not depend on yours + Buyers earn low profits/are under financial pressure + Buyers can backward integrate (make it themselves) + Buyers have “channel clout”

15 5. Substitutes Keep a cap on pricing power when: + Comparable price/performance + Low switching costs

16 What about GOVERNMENT? “Government is not best understood as a sixth force because government involvement is neither inherently good nor bad for industry profitability. The best way to understand the influence of government on competition is to analyze how specific government policies affect the five competitive forces.” (p. 33).

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18 What You Need To Do For Your Industry Analysis Step #1: What Industry? “…many strategy errors emanate from mistaking the relevant industry, defining it too broadly or too narrowly” (p. 37) Step #2: What Time Frame? What is the planning cycle for YOUR industry? Step #3: Five Forces Analysis Use PRIMARILY your judgment and intuition You can do SOME research (Google is a beautiful thing) but don’t go crazy. Step #4: Draw Conclusions “…The point…is not to declare the industry attractive or unattractive but to understand the… root causes of profitability.” (p.29) Step #5: Write a clear, concise paper with a GRAPH! Yes, writing counts! Please follow electronic formatting (names, double space)


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