1) Use the five forces model to illustrate competition in the newspaper industry
ID: 1228455 • Letter: 1
Question
1) Use the five forces model to illustrate competition in the newspaper industry. Are some competitors better positioned to withstand this environment than others? Why or why not? What role do technology and resources for competitive advantage play in shaping industry competition?2) Discuss the concepts of price transparency and information asymmetry and they apply to the diamond industry as a result of the entry of BlueNile. Name another industry where the Internet has had a similar impact.
3)Under what conditions can the Internet strengthen supplier bargaining power? Give an example.
Explanation / Answer
After studying this section you should be able to: Diagram the five forces of competitive advantage. Apply the framework to an industry, assessing the competitive landscape and relative power of buyers, suppliers, competitors, and alternatives. Professor and strategy consultant Gary Hamel wrote in a Fortune cover story that “The dirty little secret of the strategy industry is that it doesn’t have any theory of strategy creation.”Hamel, 1997. While there is no silver bullet for strategy creation, strategic frameworks help managers describe the competitive environment a firm is facing. Frameworks can also be used as a brainstorming tool to generate new ideas for responding to industry competition. If you have a model for thinking about competition, it’s easier to understand what’s happening and to think creatively about possible solutions. One of the most popular frameworks for examining a firm’s competitive environment is Porter’s Five Forces (also known as the Industry and Competitive Analysis).A framework considering the interplay between 1) the intensity of rivalry among existing competitors, 2) the threat of new entrants, 3) the threat of substitute goods or services, 4) the bargaining power of buyers, and 5) the bargaining power of suppliers. According to Porter, this framework “illuminates an industry’s fundamental attractiveness, exposes the underlying drivers of average industry profitability, and provides insight into how profitability will evolve in the future.”, also known as the Industry and Competitive Analysis. As Porter puts it, “analyzing [these] forces illuminates an industry’s fundamental attractiveness, exposes the underlying drivers of average industry profitability, and provides insight into how profitability will evolve in the future.” The five forces this framework considers are 1) the intensity of rivalry among existing competitors, 2) the threat of new entrants, 3) the threat of substitute goods or services, 4) the bargaining power of buyers, and 5) the bargaining power of suppliers (see Diagram 2). New technologies can create jarring shocks in an industry. Consider how the rise of the Internet has impacted the five forces for music retailers. Traditional music retailers like Tower and Virgin find that customers are seeking music online and are scrambling to invest in the new channel out of what is perceived to be a necessity. Their intensity of rivalry increases because they not only compete based on the geography of where brick-and-mortar stores are physically located, they now compete online as well. Investments online are expensive and uncertain, prompting some firms to partner with new entrants such as Amazon. Free from brick-and-mortar stores, Amazon, the dominant new entrant has a highly scaleable cost structure. And in many ways the online buying experience is superior to what customers saw in stores. Customers can hear samples of almost all tracks, selection is seemingly limitless (the “long tail” phenomenon—see this concept illuminated in the Netflix Case), and data is leveraged using collaborative filtering software to make product recommendations and assist in music discovery.For more info on The Long Tail and Collaborative Filtering, see the NetFlix Case. Tough competition, but it gets worse because CD sales aren’t the only way to consume music. The process of buying a plastic disc now faces substitutes as digital music files become available on commercial music sites. Who needs the physical atoms of a CD filled with ones and zeros when you can buy the bits one song at a time? Or don’t buy anything, subscribe to a limitless library. From a sound quality perspective, the substitute good of digital tracks purchased online is almost always inferior to their CD counterparts. To transfer songs quickly and hold more songs on an MP3 player, tracks are encoded in a smaller file size than what you’d get on a CD, and this smaller file contains lower playback fidelity. But the additional tech-based market shock brought on by MP3 players (particularly the iPod) has changed listening habits. The convenience of carrying thousands of songs trumps what most consider just a slight quality degradation. iTunes is now responsible for selling more music online or off than any other firm, online or off. Most alarming to the industry is the other widely adopted substitute for CD purchases—theft. Music is available illegally, but free. And while exact figures on real losses from online piracy are in dispute, the music industry has seen sales drop by roughly one-third since 2000.Brandle, 2007. All this choice gives consumers (buyers) bargaining power. They demand cheaper prices and greater convenience. The bargaining power of suppliers—the music labels—also increases. At the start of the Internet revolution, retailers could pressure labels to limit sales through competing channels. Now, with many of the major music retail chains in bankruptcy, labels have a freer hand to experiment. While it can be useful to look at changes in one industry as a model for potential change in another, it’s important to realize that the changes that impact one industry do not necessarily impact other industries in the same way. For example, it is often suggested that the Internet increases bargaining power of buyers and lowers the bargaining power of suppliers. This is true for some industries like auto sales and jewelry where the products are commodities and the price transparency of the Net counteracts a previous information asymmetry where customers often didn’t know enough information about a product to bargain effectively. But it’s not true across the board. In cases where network effects are strong or a seller’s goods are highly differentiated, the Internet can strengthen supplier bargaining power. The customer base of an antique dealer used to be limited by how many likely purchasers lived within driving distance of a store. Now with eBay, the dealer can take a rare good to a global audience and have a much larger customer base bid up the price. Switching costs also weaken buyer bargaining power.
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