Recently reported in the press is the news that SMEs in Singapore are complaining about the restrictions on foreign workers and want the government to loosen the restrictions that limit the hiring of foreign workers. A recent business survey indicates that these SMEs are quoting the same excuses that they have using all along - locals shun labour-intensive jobs, and the turnover rate for foreigners is lower. These business also want to hire foreigners because this reduces business costs, or, in other words, because foreign labour is cheap.
These latest results show that Singaporean businesses are heavily dependent on lowering the cost of factor inputs in order to compete in the market, rather than improving factor productivity. The difference between the two is illustrated as follows.
Company A hires Singaporean worker Mr Chan at $15 an hour to produce 10 widgets per hour. Mr Chan manufactures the widgets using equipment Y, which depreciates at $25 per hour. The cost of production per widget is hence $4 per widget: ($15+$25)/10 = $4. Company A can lower the cost of production by either lowering the cost of the factor inputs (labour or capital equipment), or by improving the productivity of these inputs.
Company A chooses to lower the cost of production by reducing the cost of factor inputs. Company A fires Mr Chan and hires Mr Balakrishnan from India who is willing to work for $5 per hour. However, Mr Balakrishnan was previously a farmer and he has only started to learn how to operate the manufacturing equipment, and so he can only produce 8 widgets per hour. Company A's strategy lowers the cost of production from $4 per widget, to $3.75 per widget: ($5 + $25)/8 = $3.75. However the the productivity of Company A has declined. Its production per worker has fallen to 8 widgets per hour, compared to its previous output of 10 widgets per hour.
Company B chooses a different strategy. Company B starts out with the same equipment as Company A, and employs Mr Wong at the same wage as Mr Chan. Company B also invests in research & development to improve the technology of its manufacturing equipment. Because Company B has been investing in research & development, it has a new piece of equipment. This equipment costs more, and has a depreciation rate of $43 an hour,compared to $25 previously. Company B also trains Mr Wong to use this new piece of equipment. The result of this improved manufacturing process is that Mr Wong is now able to produce 16 widgets per hour, compared to 10 widgets previously. At the same time, because of Mr Wong's improved skillset, Company B increases Mr Wong's salary to $17 per hour.
The net result of this is that Company B's cost of production is now $3.75 per widget = ($17+$43)/16. This is the same as Company A's result. However, unlike Mr Chan, Mr Wong not only keeps his job, but also has received a pay raise. Mr Wong is also able to afford another child because of his higher income, and help improve to Singapore's poor fertility rate. Furthermore, the longer term impact of this strategy is that Company B is able to continue lowering the cost of production, because it can continue to invest in R&D. Company A, however, is unable to bring down its costs further, because it is unable to find workers who are willing to work for much less than $5 per hour. Furthermore, Company B is able to expand its production and hire the experienced Mr Chan, who was previously fired by Company A.
The difference between Company A and B is the difference between night and day. Company A has chosen the strategy of lowering the cost of factor inputs, but this strategy rarely results in sustainable competitive advantage. In most cases, this strategy results in price wars and intense competitive rivalry that ultimately kills profitability when such price wars are not accompanied with increases in productivity.
Company B, however, has a sustainable competitive advantage. Its R&D program will continue to produce better equipment and labour productivity gains, and will allow it to lower its cost of production even further. In contrast, Company A cannot reduce its factor costs much further and will soon be put out of business.
Two fundamentally different strategies, two fundamentally different results.
Singaporean businesses are thinking like company A. Instead of focusing on improving productivity, they have chosen to pursue lower factor input costs. They repeatedly complain that Singaporean workers are too expensive and want to hire cheap foreign labour instead. Eventually, like company A, these businesses will be outcompeted by their more innovative counterparts.
In view of these SMEs' mentality, is it surprising at all that Singapore's productivity growth has remained stagnant relative to the US since 1995, as the recent Singapore Competitiveness Report shows? Is it surprising at all that the standard of living for the average working Singaporean has hardly improved in recent years?
No.
Singaporean businesses need to buck up and start innovating. The government also needs to stop feeding this quick-fix mentality with its liberal immigration program.
Quick-fix is ultimately no-fix, and Singaporean businesses must innovate or die.
Showing posts with label competitive strategy. Show all posts
Showing posts with label competitive strategy. Show all posts
Wednesday, December 09, 2009
Tuesday, May 29, 2007
MaxiTrans: Competitive Strategy & Risk Analysis
STRATEGIC OVERVIEW
MaxiTrans’ main business activity is the manufacture of many kinds of freight trailers, such as the T-liners, flat tops, container skeletons, dry freight, and temperature controlled trailers. They also engage in the sales, rental, and finance (lease or purchase) of new and used trailers. Other business activities include the supply and distribution of parts, service and repair, appraisals (for insurance, trade-ins, and repairs valuations), and the manufacture of urethane foam and body panels. Truck-trailer is an important component of various industries, such as infrastructure, food and agriculture, transport and distribution, and resources (mining).
Industry Life Cycle
The trailer manufacturing industry is currently in the mature growth stage. Analysts predict that road freight activity will continue to grow at 3% annually1 up to the year 2020, so we would expect the trailer industry to grow in the same direction. This represents a slow but steady growth characteristic of mature industries. The mature characteristics of MaxiTrans’ business will be clearer in the analysis of its cash flow statement [See Part D]. Industry growth is also cyclical and its cycles are closely related to the economy as a whole.
Industry Competitive Structure
There are very few major players in the freight trailer industry, including MaxiTrans. Economies of scale dictate that competitive power is concentrated in the hands of a few large manufacturers, and the industry structure can be said to be oligopoly. Other smaller manufacturers concentrate on niche markets and are not a threat to MaxiTrans’ main line of business.
Trailer Industry: Five Forces Analysis
The customers of MaxiTrans are generally price takers. Since each customer only constitutes a small fraction of MaxiTrans’ customer portfolio, they have a relatively low bargaining power. The bargaining power of suppliers is also low. MaxiTrans is such a major player in the industry that it can pressure the suppliers to lower price of supplies and raw materials. The threat of entry to the industry is low. This is caused by high barriers to entry, such as economies of scale leading to cost advantage, a well-established distribution network, and established customer relationships. The intensity of rivalry is moderately low, because there are only few players in the freight industry. There are, however, some incentives to gain market share. Threat of substitutes from other means of transportation is also low, because freight trailer is an indispensable component of the land transport industry. [For an in depth full Five Forces Analysis see below]
MaxiTrans: Competitive Challenges
With the slow pace of growth of the market, MaxiTrans has turned to concentric diversification in order to grow market share and drive revenue growth in the domestic mraket. The company has acquired of several companies within the past four years [see Appendix B]. A key strategic challenge for MaxiTrans will be its ability to find suitable acquisition targets and to integrate these companies into the operations of the group as a whole. The recent underperformances of some acquisitions (e.g. Hamelex White and Colrain) suggest that all is not running smoothly. The challenge facing MaxiTrans will become clearer in the analysis of the income statement and profitability [see Part B, E].
In the short run, MaxiTrans may find its industry in a cyclical downswing being adversely affected by the macroeconomic conditions such as higher fuel prices and the drought, as well as a slowdown in economic growth as the Australian economy reaches full productive capacity.
FIVE FORCES STRATEGIC ANALYSIS OF TRAILER INDUSTRY
Threat of Entry
The threat of entry into the trailer industry depends on the existing barriers to entry. Maxitrans is a dominant player in the industry. Economies of scale is present in manufacture, research, marketing, distribution, and service network, leading to a cost-advantage. Maxitrans also has a well-established distribution network, while possessing a large capital. There is some research and development, though it not substantial relative to the total of other operating expenses ($763,000 of $18 million). This implies the newcomer must enter the market big to be competitive. Moreover, Maxitrans has established relationships with major customers, such as Safeway, Reflex Papers, etc. Altogether, the entry barriers to the trailer industry are quite high, thus reducing the threat of entry.
Intensity of Rivalry among Existing Firms
The intensity of rivalry is moderately low. The only other notable player in the freight trailer industry is Barker Trailers. Increasing GDP figures3 ($873,197m in 2003-04, $896,568m in 2004-05, and $922,637m in 2005-06) indicates Australia’s economy is still performing well. Along with Australia’s strong economic performance the industry may be experiencing some growth. Thus, firms theoretically can produce better results by just keeping up with the market. However, the industry is already in maturity stage in terms of the industry life cycle. So there are some incentives to gain market share, especially if the firm possesses the amount of capital needed to acquire another firms.
The two main driving forces behind MaxiTrans’ strong performance are its reputation and distribution network. MaxiTrans attempts to differentiate its trailers than its competitors through brand recognition and research and development. Its distribution network supports this strategy by somewhat selling the trailers as differentiated products. With respect to distribution, MaxiTrans is targeting the domestic market with the exception being China. The Chinese market was penetrated in 1996 through a joint venture with Chinese THT, called MTC.
Threat of Substitutes
There are only three ways to transport commercial goods, by air, by water, or by land. Air-freight is expensive even though it is so much quicker. However this can only be done from airport to airport and still requires truck-trailers to transport the goods to the final destination. Likewise ferry and railway transports can only be done from port to port and station to station respectively. Hence the threat of substitutes is relatively low because an alternative land transport is less feasible. Truck-trailer is an indispensable component of the transportation industry.
Bargaining Power of Buyers
There are only few players in the freight trailer industry. Moreover, Maxitrans have many customers and they do not pose a credible threat of backward integration. Hence, they have a relatively low bargaining power.
Bargaining Power of Suppliers
Suppliers to MaxiTrans include parts manufacturer, equipment manufacturer, raw materials (paint, aluminium, steel, etc.). The bargaining power of these suppliers is relatively low because there are many suppliers and MaxiTrans is such a major player that they can pressure them to lower the price of supplies and raw materials.
SOURCES OF RISK
International Risk - MaxiTrans operates mainly in Australia and New Zealand. Its operations abroad are confined mainly to its joint venture in China, Yangzhou Maxi-Cube Tong Composites Co., Ltd. The operation has been running since 1996, for more than 10 years, and operates in a non-politically-sensitive industry. Even though there tends to be a lack of systematic legal framework for the business environment and that local policy is often subject to change, we feel that the long track record of joint business and the nature of the industry expose MaxiTrans to relatively low international risk with regards to their operations in China. With regards to exchange rate risk, the Chinese Renminbi is a relatively stable currency that is managed by the Chinese government and we expect a gradual appreciation in this currency with little major fluctuations. Overall, international risk is assessed as low.
Domestic Risk - Domestic risks that MaxiTrans is exposed to mainly refer to the risks in Australia’s economy. Australia has a stable and robust economy that has experienced consistent economic growth for the last 15 years. Because of the global resources boom, we expect this economic growth to continue at a stable pace. Inflation is relatively stable, although lately the economy is seen to be approaching full capacity and this may place an upward pressure on wage inflation and thus labour costs for the company. Interest rates are also relatively stable; the Reserve Bank of Australia does not expect more major upward hikes in the future. We do not expect any major interest rate fluctuations to have a significant impact on MaxiTrans’ debt payments. This is discussed in more detail when discussing credit risk below.
Industry Risk - As mentioned in the analysis of profitability, the trailer manufacturing industry is mature and stable, with relatively low rate of structural change. There are high barriers to entry and a few dominant players, of which MaxiTrans is one. The trailer manufacturing industry is cyclical; this will be factored into the analysis of financial risk later. Other risks related to the industry are that raw material prices may rise materially, and regulation, especially surrounding mergers and acquisitions, may change unfavourably. However, on balance, industry risk is assessed as low.
Firm Specific Risk – The trailer manufacturing industry is currently in a state of consolidation; MaxiTrans has been acquiring related companies in the last few years. The key risk of this corporate strategy is that acquisitions will be unable to integrate smoothly into the company. Furthermore, MaxiTrans has to take on significant amount of debt to finance these acquisitions. This has an impact on the long-term solvency and credit risk of the company, since leverage will increase and interest payments will rise as well. This is discussed more thoroughly below. Management’s ability to manage the acquisitions will play an important role in the success of the company.
Overall, firm specific risk is assessed as medium.
MaxiTrans’ main business activity is the manufacture of many kinds of freight trailers, such as the T-liners, flat tops, container skeletons, dry freight, and temperature controlled trailers. They also engage in the sales, rental, and finance (lease or purchase) of new and used trailers. Other business activities include the supply and distribution of parts, service and repair, appraisals (for insurance, trade-ins, and repairs valuations), and the manufacture of urethane foam and body panels. Truck-trailer is an important component of various industries, such as infrastructure, food and agriculture, transport and distribution, and resources (mining).
Industry Life Cycle
The trailer manufacturing industry is currently in the mature growth stage. Analysts predict that road freight activity will continue to grow at 3% annually1 up to the year 2020, so we would expect the trailer industry to grow in the same direction. This represents a slow but steady growth characteristic of mature industries. The mature characteristics of MaxiTrans’ business will be clearer in the analysis of its cash flow statement [See Part D]. Industry growth is also cyclical and its cycles are closely related to the economy as a whole.
Industry Competitive Structure
There are very few major players in the freight trailer industry, including MaxiTrans. Economies of scale dictate that competitive power is concentrated in the hands of a few large manufacturers, and the industry structure can be said to be oligopoly. Other smaller manufacturers concentrate on niche markets and are not a threat to MaxiTrans’ main line of business.
Trailer Industry: Five Forces Analysis
The customers of MaxiTrans are generally price takers. Since each customer only constitutes a small fraction of MaxiTrans’ customer portfolio, they have a relatively low bargaining power. The bargaining power of suppliers is also low. MaxiTrans is such a major player in the industry that it can pressure the suppliers to lower price of supplies and raw materials. The threat of entry to the industry is low. This is caused by high barriers to entry, such as economies of scale leading to cost advantage, a well-established distribution network, and established customer relationships. The intensity of rivalry is moderately low, because there are only few players in the freight industry. There are, however, some incentives to gain market share. Threat of substitutes from other means of transportation is also low, because freight trailer is an indispensable component of the land transport industry. [For an in depth full Five Forces Analysis see below]
MaxiTrans: Competitive Challenges
With the slow pace of growth of the market, MaxiTrans has turned to concentric diversification in order to grow market share and drive revenue growth in the domestic mraket. The company has acquired of several companies within the past four years [see Appendix B]. A key strategic challenge for MaxiTrans will be its ability to find suitable acquisition targets and to integrate these companies into the operations of the group as a whole. The recent underperformances of some acquisitions (e.g. Hamelex White and Colrain) suggest that all is not running smoothly. The challenge facing MaxiTrans will become clearer in the analysis of the income statement and profitability [see Part B, E].
In the short run, MaxiTrans may find its industry in a cyclical downswing being adversely affected by the macroeconomic conditions such as higher fuel prices and the drought, as well as a slowdown in economic growth as the Australian economy reaches full productive capacity.
FIVE FORCES STRATEGIC ANALYSIS OF TRAILER INDUSTRY
Threat of Entry
The threat of entry into the trailer industry depends on the existing barriers to entry. Maxitrans is a dominant player in the industry. Economies of scale is present in manufacture, research, marketing, distribution, and service network, leading to a cost-advantage. Maxitrans also has a well-established distribution network, while possessing a large capital. There is some research and development, though it not substantial relative to the total of other operating expenses ($763,000 of $18 million). This implies the newcomer must enter the market big to be competitive. Moreover, Maxitrans has established relationships with major customers, such as Safeway, Reflex Papers, etc. Altogether, the entry barriers to the trailer industry are quite high, thus reducing the threat of entry.
Intensity of Rivalry among Existing Firms
The intensity of rivalry is moderately low. The only other notable player in the freight trailer industry is Barker Trailers. Increasing GDP figures3 ($873,197m in 2003-04, $896,568m in 2004-05, and $922,637m in 2005-06) indicates Australia’s economy is still performing well. Along with Australia’s strong economic performance the industry may be experiencing some growth. Thus, firms theoretically can produce better results by just keeping up with the market. However, the industry is already in maturity stage in terms of the industry life cycle. So there are some incentives to gain market share, especially if the firm possesses the amount of capital needed to acquire another firms.
The two main driving forces behind MaxiTrans’ strong performance are its reputation and distribution network. MaxiTrans attempts to differentiate its trailers than its competitors through brand recognition and research and development. Its distribution network supports this strategy by somewhat selling the trailers as differentiated products. With respect to distribution, MaxiTrans is targeting the domestic market with the exception being China. The Chinese market was penetrated in 1996 through a joint venture with Chinese THT, called MTC.
Threat of Substitutes
There are only three ways to transport commercial goods, by air, by water, or by land. Air-freight is expensive even though it is so much quicker. However this can only be done from airport to airport and still requires truck-trailers to transport the goods to the final destination. Likewise ferry and railway transports can only be done from port to port and station to station respectively. Hence the threat of substitutes is relatively low because an alternative land transport is less feasible. Truck-trailer is an indispensable component of the transportation industry.
Bargaining Power of Buyers
There are only few players in the freight trailer industry. Moreover, Maxitrans have many customers and they do not pose a credible threat of backward integration. Hence, they have a relatively low bargaining power.
Bargaining Power of Suppliers
Suppliers to MaxiTrans include parts manufacturer, equipment manufacturer, raw materials (paint, aluminium, steel, etc.). The bargaining power of these suppliers is relatively low because there are many suppliers and MaxiTrans is such a major player that they can pressure them to lower the price of supplies and raw materials.
SOURCES OF RISK
International Risk - MaxiTrans operates mainly in Australia and New Zealand. Its operations abroad are confined mainly to its joint venture in China, Yangzhou Maxi-Cube Tong Composites Co., Ltd. The operation has been running since 1996, for more than 10 years, and operates in a non-politically-sensitive industry. Even though there tends to be a lack of systematic legal framework for the business environment and that local policy is often subject to change, we feel that the long track record of joint business and the nature of the industry expose MaxiTrans to relatively low international risk with regards to their operations in China. With regards to exchange rate risk, the Chinese Renminbi is a relatively stable currency that is managed by the Chinese government and we expect a gradual appreciation in this currency with little major fluctuations. Overall, international risk is assessed as low.
Domestic Risk - Domestic risks that MaxiTrans is exposed to mainly refer to the risks in Australia’s economy. Australia has a stable and robust economy that has experienced consistent economic growth for the last 15 years. Because of the global resources boom, we expect this economic growth to continue at a stable pace. Inflation is relatively stable, although lately the economy is seen to be approaching full capacity and this may place an upward pressure on wage inflation and thus labour costs for the company. Interest rates are also relatively stable; the Reserve Bank of Australia does not expect more major upward hikes in the future. We do not expect any major interest rate fluctuations to have a significant impact on MaxiTrans’ debt payments. This is discussed in more detail when discussing credit risk below.
Industry Risk - As mentioned in the analysis of profitability, the trailer manufacturing industry is mature and stable, with relatively low rate of structural change. There are high barriers to entry and a few dominant players, of which MaxiTrans is one. The trailer manufacturing industry is cyclical; this will be factored into the analysis of financial risk later. Other risks related to the industry are that raw material prices may rise materially, and regulation, especially surrounding mergers and acquisitions, may change unfavourably. However, on balance, industry risk is assessed as low.
Firm Specific Risk – The trailer manufacturing industry is currently in a state of consolidation; MaxiTrans has been acquiring related companies in the last few years. The key risk of this corporate strategy is that acquisitions will be unable to integrate smoothly into the company. Furthermore, MaxiTrans has to take on significant amount of debt to finance these acquisitions. This has an impact on the long-term solvency and credit risk of the company, since leverage will increase and interest payments will rise as well. This is discussed more thoroughly below. Management’s ability to manage the acquisitions will play an important role in the success of the company.
Overall, firm specific risk is assessed as medium.
Coates Hire - Powering Ahead
1.1 Company Overview
Coates Hire supplies a large number of industries: building construction, engineering and maintenance, mining and resources, manufacturing, government and events. The majority of its revenues (80%+) come from operations in Australia.
Coates also operates overseas in the United Kingdom, with Coates Offshore providing specialised equipment to offshore oil and gas operations, and in Indonesia, operating on the mining and resource sector. Today, Coates Hire corners about 20% of the equipment hire market. It is clear and away the market leader in what is a highly fragmented industry that consists mainly of small companies.
1.2 Industry Overview
Equipment hire industry involves the business of purchasing and leasing out of equipment to industries such as building and construction, engineering, civil construction, building construction and maintenance, mining and resources, manufacturing, government, industrial maintenance shutdowns, and events.
Because the construction industry is highly cyclical (DITR, 2006), and accounts for a large percentage (6 per cent) of GDP, the equipment hire industry tends to follow the peaks and troughs of the construction industry and be cyclical as well. The equipment hire industry also tends to expand according to the growth in construction activity, which tends to follow economic activity.
For industry revenue forecasts, see Appendix A1.
1.3 Key Competitive Forces
Barriers to Entry: Barriers to entry for the equipment hire industry are relatively low. This is because anyone can purchase equipment and start leasing it out to customers with a relatively modest amount of capital, as long as the equipment meets basic standards of quality and safety. As a result, there are a large number of players in a highly fragmented industry. A key emphasis is thus placed on a company’s ability to differentiate itself from other competitors via economies of scale, customer relationships, range of services, and asset management.
Buyers’ Bargaining Power: The construction and resources industries are highly fragmented. This puts a cap on buyers’ negotiating power, which is generally weak. Equipment hire companies which are able to differentiate themselves and provide quality services can increase customers’ willingness to pay. The key threat is for construction companies to purchase their own equipment, rather than rent it. However, except for the largest construction companies, it is generally cheaper to lease equipment from equipment hire specialists.
Suppliers’ Bargaining Power: the industry presents an important number of suppliers, which means that the power is diluted between them. The competition in this industry for suppliers is important, so they have to be efficient.
Internal Rivalry: The industry is highly fragmented, with multiple small companies. Coates is the largest with about 20% market share. Other main competitors include Tutt Bryant Group, Boral, and Boom Logistics (check revenues). The most competitive firms tend to be large. This enables them to achieve economies of scale and provide a larger range of services. It also enables them to supply larger, more expensive pieces of equipment that earn higher margins.
Coates vis-à-vis the Broader Industry: Coates hire is the market leader, and with its size, scale, strong customer relationships and established business practices, it has been able to create sustainable competitive advantages in what is a highly competitive industry.
1.4 Coates’ Strategy
Coates purpose is to provide the best hire solutions on the market. The management defined its vision as “to become a $1 billion company by 2010 of first choice for customers, employees, shareholders and suppliers” (2005-2006 Full Year Results, p.3).
Coates’ strategy focuses on four dimensions:
Superior Customer Value Coates is committed to deliver the best value to its customers. The management believes that apart from delivering reliable equipment Coates should also provide customers with efficient support services and solutions options. The strategy is supported by consolidation of qualified HR and effective IT infrastructure - Coates Hire Enterprise Resource Planning (CHERP) and sales system “Coates@Work.”
The company also provides diverse range of services for its customers, via its multiple subsidiaries (Coates Hire, Coates Prestige, Coates Shorco, Coates Conrent, Coates Offshore). This allows the firm to provide value that other firms are unable to replicate.
This superior customer support service allows Coates to differentiate itself by providing value-added services in an otherwise undifferentiated market. By continuously innovating and upgrading its solutions options, Coates is able to sustain this competitive advantage.
Personnel and Human Resource Development Coates aims to attract and retain the best employees. It offers attractive salary and annual leave packages, provides a range of educational opportunities. In order to strengthen the skills of its management Coates launched two training programs for the management staff, Leadership Development and Frontline Management. Another area of primary focus is safety of employees. By hiring the best talent and giving them superior training, Coates is able to develop a sustainable competitive advantage in its human capital vis-a-vis its competitors.
Fleet management Coates claims (2006) that as a market leader it achieved significant ‘economies of scale’ in fleet management. The quality control is supported by a program “Silver Service”. As a part of financing activities, Coates heavily conducts reinvestments into its fleet. Coates has also developed superior fleet management technology in maintenance and storage. This allows it to depreciate equipment less quickly than its competitors and allows it to achieve lower costs and higher quality.
Business Growth via Acquisitions Coates plans further business expansion. It aims to achieve a sustainable growth by diversification and acquisition. Coates has executed this strategy successfully over the past decade by making multiple acquisitions and integrating them well. For example, (add example) This strategy of acquisition allows the company to consolidate a fragmented industry and build further its economies of scale, as well as derive other synergies from the diversification strategy.
In view of the above, diversity of business and revenue streams, both geographical, market and product, is the main strength of Coates Hire. The main weakness Coates identifies in limited capacity (2005-2006 Full Year Results, 2006).
Strategic Summary
Friday, November 03, 2006
The Economics of Online Publishing
A.Blogging
Fragmented Industry
The blogging landscape is highly fragmented. The exceptionally low barriers to entry allow many individual bloggers to set up their own websites and start publishing straight away - this acts as a major deterrant against 'industry domination' or 'monopolisation of talent' that may be attempted by any individual website.
Furthermore, the multitude of topics that are available for blogging make it extremely difficult for any individual blogger or group of bloggers to be all things to all people. Instead, individual bloggers are given the opportunity to specialise in what they know best for their own tailored audience.
Blogging Strategy
With this in mind, the best thing bloggers can do is to try to specialise in specific topics and create their own niche. They have to differentiate themselves from others and have a unique blogging proposition (UBP). Those who are able to do so create a unique brand and following of readers which are able to tell the difference between a certain blog and other different blogs.
Successful blogs differentiate by
Strategic Traps
Trying to dominate the blogging landscape is a sure recipe for failure. This is because the underlying structure of a fragmented industry makes seeking dominance futile, unless the structure can be fundamentally changed. The low (virtually non-existent) barriers to entry into blogging make this an unlikely proposition. Trying to be all things to all people maximises the vulnerability of a website to the competitive forces of other bloggers who are able to specialise and focus and produce content in specific niches, much better than a website which tries to dominate, can.
Hence, blogs or other websites which try to create a 'one-stop shop' or to be all things to all people are almost doomed for disaster. Take for example this website which is trying to be a centre for opinion and commentary - it is fighting a steep uphill battle against the fragmented nature of online publishing and looks set to struggle unless it changes its strategy to address the fragmented nature of online publishing.
B. News Operations
Unlike blogging, news operations are not highly fragmented. This is because it takes massive investments and a large managerial effort to produce a coordinated news production operation. Websites like the newyorktimes.com and iht.com build off the platform which consists of a global staff of journalists and news production crew. The large economies of scale make news production operations a naturally consolidated industry - it is important to distinguish this feature from the blogging industry.
C. Online Magazines
Online magazines are somewhere in between the large scale news operations and the small scale fragmented blogging landscape. And because they are somewhere in the middle, the face both competitive forces from individual bloggers and the large scale news operations - online magazines have to clearly differentiate themselves in order to survive.
This can be accomplished when a group of writers with a common goal, and unified editorial style - band together. This can form operations like 'group blogs' which are clearly centered around particular topics, like this website. A set of common minds with a clear niche can succeed, without falling into the trap of trying to 'dominate' or to be a 'one-stop shop.' Successful group blogs can continue the evolution into online magazines where they can start to derive the benefits of scale economies, learning curves, and managerial efficiencies.
D. Conclusion
So, which category does your website fall into? Take heed of the strategic landscape and pitfalls, and take the write strategy to online publishing. And if you do so, you should find your hits rising rapidly, along with all the benefits that entails.
This essay is also published at SGE
Fragmented Industry
The blogging landscape is highly fragmented. The exceptionally low barriers to entry allow many individual bloggers to set up their own websites and start publishing straight away - this acts as a major deterrant against 'industry domination' or 'monopolisation of talent' that may be attempted by any individual website.
Furthermore, the multitude of topics that are available for blogging make it extremely difficult for any individual blogger or group of bloggers to be all things to all people. Instead, individual bloggers are given the opportunity to specialise in what they know best for their own tailored audience.
Blogging Strategy
With this in mind, the best thing bloggers can do is to try to specialise in specific topics and create their own niche. They have to differentiate themselves from others and have a unique blogging proposition (UBP). Those who are able to do so create a unique brand and following of readers which are able to tell the difference between a certain blog and other different blogs.
Successful blogs differentiate by
- tone of writing
- specialising in topic
- specialising in writing for a particular audience
- have a unique way of differentiating their content from other blogs
Strategic Traps
Trying to dominate the blogging landscape is a sure recipe for failure. This is because the underlying structure of a fragmented industry makes seeking dominance futile, unless the structure can be fundamentally changed. The low (virtually non-existent) barriers to entry into blogging make this an unlikely proposition. Trying to be all things to all people maximises the vulnerability of a website to the competitive forces of other bloggers who are able to specialise and focus and produce content in specific niches, much better than a website which tries to dominate, can.
Hence, blogs or other websites which try to create a 'one-stop shop' or to be all things to all people are almost doomed for disaster. Take for example this website which is trying to be a centre for opinion and commentary - it is fighting a steep uphill battle against the fragmented nature of online publishing and looks set to struggle unless it changes its strategy to address the fragmented nature of online publishing.
B. News Operations
Unlike blogging, news operations are not highly fragmented. This is because it takes massive investments and a large managerial effort to produce a coordinated news production operation. Websites like the newyorktimes.com and iht.com build off the platform which consists of a global staff of journalists and news production crew. The large economies of scale make news production operations a naturally consolidated industry - it is important to distinguish this feature from the blogging industry.
C. Online Magazines
Online magazines are somewhere in between the large scale news operations and the small scale fragmented blogging landscape. And because they are somewhere in the middle, the face both competitive forces from individual bloggers and the large scale news operations - online magazines have to clearly differentiate themselves in order to survive.
This can be accomplished when a group of writers with a common goal, and unified editorial style - band together. This can form operations like 'group blogs' which are clearly centered around particular topics, like this website. A set of common minds with a clear niche can succeed, without falling into the trap of trying to 'dominate' or to be a 'one-stop shop.' Successful group blogs can continue the evolution into online magazines where they can start to derive the benefits of scale economies, learning curves, and managerial efficiencies.
D. Conclusion
So, which category does your website fall into? Take heed of the strategic landscape and pitfalls, and take the write strategy to online publishing. And if you do so, you should find your hits rising rapidly, along with all the benefits that entails.
This essay is also published at SGE
Tuesday, October 17, 2006
Virgin's Corporate Strategy
1. Richard Branson and the Virgin Group
Virgin’s first and most obvious distinctive resource is Richard Branson and the ‘Virgin People’ that make up the organisation. Richard Branson’s charismatic style and entrepreneurial flair is an asset that other organisations are unable to replicate, and it is his personality that is synonymous with the Virgin Brand and that makes the company unique. Similarly, the Virgin group attracts ‘Virgin People,’ who are ‘only a certain type.’ Together with Branson, the Virgin People form the human capital that is distinctive to Virgin that is impossible for other firms to copy.
Related to the people who make up the firm, is the ‘Virgin culture’ that has been built over decades and that distinguishes the work environment within Virgin Group from other organisations. It is a culture that is ‘not looking for clones,’ that is ‘like a family’ and is one that requires employees to have the ‘Virgin Flair.’ These unique attributes present in Virgin employees meld together to create a distinctive corporate culture that only the Virgin Group can claim to have.
Richard Branson’s personality is synonymous with Virgin’s strong branding & reputation. The brand was ‘recognised by 96 percent of UK consumers’ and is associated amongst consumers with ‘fun, innovation, success and trust.’ Virgin has been able to sustain the Virgin identity across multiple businesses in a way that that very few other corporations have, and the pervasiveness of the Virgin brand creates unique brand equity that is difficult for competitors to replicate.
2. Corporate Synergies
The corporate strategy of the Virgin Group is to operate like ‘a venture capital firm based on the Virgin brand.’ This strategy involves non-related diversification at the individual business unit level. Meanwhile, synergies are created from hierarchical relationships and the interaction of the corporate head office with individual business units. By leveraging the Virgin Brand which has established prominence in the minds of consumers, Virgin is able to enter new business areas with a bang and shake up existing orders. The unique Virgin culture also allows Virgin to break into new markets and execute its ventures very effectively.
Virgin’s corporate strategy is best described in the Virgin Charter – the individual businesses are focused and develop as autonomous enterprises under a single unified brand name. This decentralization of organizational structure and decision making allows an entrepreneurial environment for managers to pursue their businesses effectively, while avoiding the bureaucracy associated with large centralised corporations. At the same time, the individual businesses benefit from the world-wide, inter-industrial reputation of the parent corporation’s Virgin brand and are able utilize this brand recognition in their marketing efforts. This benefit of corporate parenting would not be available to them if they were operating under their own subsidiary brands, and is perhaps the greatest source of synergy within the Virgin Group. In this manner, Virgin is able to enjoy the benefits of both smaller entrepreneurial organisations and large conglomerates without the associated problems of bureaucracy and brand conflict that can often feature in diversified corporations.
Furthermore, Virgin has been able to deal with the potential downsides of autonomy and decentralization. To prevent the breakdown of communication links and individual business units pursuing their own strategies in an uncoordinated fashion (that could potentially be detrimental to the umbrella Virgin brand), the Virgin Charter sets out a management system and internet business strategy that takes advantage of information technology and the digital age to further establish the Virgin brand. A single web address, Virgin.com, is where consumers can go to have access to all the Virgin services under a single portal. This strategy helps to reinforce the corporate parenting strategy and enhance the synergies already derived from the corporate branding of the Virgin Group. By aggregating all the services into a single Virgin portal, the customer is able to access multiple services through a single distribution channel, and is enticed to turn into a ‘Virgin Customer’ where he comes to Virgin for his telecommunications, banking, terrestrial and extra-terrestrial transportation (Virgin Galactic), entertainment and internet service needs. In this way, the disparate Virgin businesses are able to gain from the successes from their corporate siblings – Virgin Rail gains customers referred from Virgin Mobile visiting the Virgin.com portal, while Virgin Money gains customers referred from Virgin Records, and so on. In comparison, competitor banking companies would hardly dream of marketing their services to a music crowd, while competitor railway companies would be hard pressed to market to mobile customers of an unrelated company. Even though the individual business units are in unrelated fields, the unified corporate strategy allows them to contribute to each other in a synergistic manner.
3. Threats to Virgin’s corporate strategy
The success of Virgin Group hinges upon the corporate parenting strategy which is led by founder Richard Branson. The sustainability of Virgin Group’s competitive advantage depends on how well it continues to retain the Virgin culture and execute the strategy of decentralization under a unified branding. At least in the short run, with Branson continuing to lead the company, the strategy looks very strong and almost ‘unstoppable.’
In the longer run, however, Branson will have to put in place a strong succession plan and fill the corporate head office with executives who are able to understand and execute the Virgin Charter. While Branson himself might be irreplaceable, he can leave his legacy by ensuring that his vision is sustained through the Virgin Culture and Virgin People.
Virgin also has to ensure that it selects the industries it wants to enter very carefully. A single misstep could tarnish the Virgin Brand, and this could be disastrous for the group as a whole – unification under a single brand is a double-edged sword that can cut both ways. In addition, Virgin needs to continue to ensure that the individual business units perform in line with the greater Virgin brand, and not branch off in an unrelated manner. Doing so could dilute the Virgin brand if business units perform their operations in a way that lacks the fun, trust and quality that is associated with Virgin.
If Virgin is able to build a strong leadership engine, carefully evaluate future business opportunities, and retain the branding coordination between its diverse businesses, then its corporate strategy is well positioned to deliver a bright future for the company.
------------------------
References:
Dess, G., (2007) “Strategic Management: Creating Competitive Advantages,” McGraw-Hill Australia
Dick, deVries and d’Avaucourt (2000) “The house that Branson built: Virgin’s entry into the new millennium,” INSEAD, Fontainebleau, France
This essay was also published at SGE
Tuesday, September 19, 2006
Blackmores - A Strategic Analysis (Part 1)
INTRODUCTION
Company Background
Industry Definition
EXTERNAL ANALYSIS
The Macro-Environment
Demographic and Sociocultural Trends
The ageing population of baby boomers in Australia is perhaps the most significant trend driving growth in the complementary pharmaceutical industry. These baby boomers form a large section of the population, and have had the highest median household incomes of any generation. They are increasingly leaning towards non-prescribed medicine to be the greatest form of treatment for their various physical ailments, as well as natural healthcare supplements to be a source of health and wellbeing. This demographic trend will continue to set the consumer agenda for the years ahead, and especially so in the healthcare industry.
Changing health environments on a national level has meant that people are tending to accept over-the-counter (OTC) products more regularly compared to prescribed medicine. Not only is it sometimes cheaper to purchase OTC products but the feedback from several complementary pharmaceutical companies has demonstrated consumers are more than happy with their results.
Growing acceptance of alternative medicine has dominated mainly the muscle/joint segment of the products produced by Blackmores. More and more people are seeking alternative medicines to combat their muscle/joint soreness, and Joint Formula with Glucosamine and Chondroitin (60 Tabs) continues to be one of their best sellers.
Global Economic Trends
In terms of the global arena there is no doubt that Blackmores is looking to further establish itself in the rapidly growing economies of Asia, which present many growth markets and opportunities for the company. In particular, Blackmores has found the Malaysian and Thai markets to be two of the greatest assets to the company. It has already been in Thailand since 1997, and Blackmores’ products are located in over 1,000 stores throughout Thailand.
Blackmores’ greatest form of overseas expansion lies in Thailand. The company has also made in-roads into Singapore, Hong Kong, Malaysia, Indonesia and New Zealand. However Thailand continues to be the best of the international entities. “The Blackmores business in Thailand has experienced an average growth rate of 20% over the past six years whilst the growth rate in the comparable sub-category is 10%” Further welcome news for Blackmores is that overseas it is not only the expatriates that are purchasing their products but also locals. It is this segment that the company is looking to pursue.
Regulatory Climate & Technological Environment
Regulators were previously quite adversarial towards the complementary healthcare industry. Marcus Blackmore has been actively lobbying for better regulatory conditions. The company also engages in extensive research and development activities. These regulatory and technological factors are discussed in more detail in the analysis of the firm’s internal environment.
Company Background
- Founded in the 1930s by Australia’s pioneering naturopath, Maurice Blackmores.
- Goal of the company is to shift the focus of the health system away from treating diseases to one that encourages people to accept responsibility for their own wellbeing
- It is a customer-focused company inspiring people to take control of, and invest in, their health and wellbeing. They are “leaders in developing and marketing products and services that deliver a more natural approach to health, based on our expertise in vitamins, minerals, herbs and other nutrients.”
- Blackmores’ industry is defined as the complementary pharmaceutical industry.
- This includes complementary pharmaceutical products, nutritional and health supplements.
- Companies in this industry are mainly involved with the purchase of raw materials and the conversion of these raw materials into natural medication products which are then distributed through retail stores, pharmacies and chemists.
- More established companies like Blackmores also have a strong sales service where qualified naturopaths and health experts provide advice to customers, in addition to established research & development capabilities to develop newer and better complementary healthcare products.
EXTERNAL ANALYSIS
The Macro-Environment
Demographic and Sociocultural Trends
The ageing population of baby boomers in Australia is perhaps the most significant trend driving growth in the complementary pharmaceutical industry. These baby boomers form a large section of the population, and have had the highest median household incomes of any generation. They are increasingly leaning towards non-prescribed medicine to be the greatest form of treatment for their various physical ailments, as well as natural healthcare supplements to be a source of health and wellbeing. This demographic trend will continue to set the consumer agenda for the years ahead, and especially so in the healthcare industry.
Changing health environments on a national level has meant that people are tending to accept over-the-counter (OTC) products more regularly compared to prescribed medicine. Not only is it sometimes cheaper to purchase OTC products but the feedback from several complementary pharmaceutical companies has demonstrated consumers are more than happy with their results.
Growing acceptance of alternative medicine has dominated mainly the muscle/joint segment of the products produced by Blackmores. More and more people are seeking alternative medicines to combat their muscle/joint soreness, and Joint Formula with Glucosamine and Chondroitin (60 Tabs) continues to be one of their best sellers.
Global Economic Trends
In terms of the global arena there is no doubt that Blackmores is looking to further establish itself in the rapidly growing economies of Asia, which present many growth markets and opportunities for the company. In particular, Blackmores has found the Malaysian and Thai markets to be two of the greatest assets to the company. It has already been in Thailand since 1997, and Blackmores’ products are located in over 1,000 stores throughout Thailand.
Blackmores’ greatest form of overseas expansion lies in Thailand. The company has also made in-roads into Singapore, Hong Kong, Malaysia, Indonesia and New Zealand. However Thailand continues to be the best of the international entities. “The Blackmores business in Thailand has experienced an average growth rate of 20% over the past six years whilst the growth rate in the comparable sub-category is 10%” Further welcome news for Blackmores is that overseas it is not only the expatriates that are purchasing their products but also locals. It is this segment that the company is looking to pursue.
Regulatory Climate & Technological Environment
Regulators were previously quite adversarial towards the complementary healthcare industry. Marcus Blackmore has been actively lobbying for better regulatory conditions. The company also engages in extensive research and development activities. These regulatory and technological factors are discussed in more detail in the analysis of the firm’s internal environment.
Saturday, September 09, 2006
Competitive Strategy: The Five Forces (Part 1)
When pursuing a qualitative analysis of a business, one of the key components of an analysis is the competitive dynamics of the industry the business is in. Michael Porter, in his book, competitive strategy, outlined the five key forces that determine the profitability of an industry. And while these five forces are not exhaustive, they form a useful guide to analysing a firm's competitive environment.
Force 1: Internal Rivalry Within the Industry
Internal rivalry refers to the state of competition between companies in the industry itself. A company in an industry characterised by low competition is likely to exhibit high amounts of abnormal profits. For example, Microsoft competes in the operating system industry, and has very little competition in this area. For all practical purposes, the company has a monopoly in the desktop operating system market, and faces very little competition. This enables it to raise prices and maximise profit, without having to worry about competitors undercutting its prices to compete away market share. A company such as Microsoft is said to be a price maker, since it has much power to set the prices of its Windows products.
Conversely, a business that is in an industry with a highly competitive market structure is likely to be a price taker. This means that it is forced to take the price that is set by the market. For example, the average soybean farmer's produce, with his few acres of farmland, only constitutes a drop in the ocean amongst the global soybean market. As an individual producer, the farmer has no say on the price of soybeans, since any attempt to sell his produce above the market rate will fail (nobody will buy his soybeans since they can get the same product at a cheaper price), and besides, he has no incentive to sell below the market rate when he can clear his barns at the going rate.
It therefore follows that companies that are within a competitive industry should seek to shape the competitive landscape so as to minimise competition, and derive competitive advantage. This, however, is the subject of another essay.
It therefore follows that companies that are within a competitive industry should seek to shape the competitive landscape so as to minimise competition, and derive competitive advantage. This, however, is the subject of another essay.
Even though a company might be in an industry with little competition, the competitive landscape of the industry can change rapidly once new competitors enter the industry. Thus, industries are attractive to the extent that there exist barriers to entry into the industry. For instance regional newspapers often operate with high barriers to entry. The large amount of fixed costs involved with purchasing and setting up printing equipment, coupled with the high editorial and administrative costs that are necessary to maintain a newspaper, prevent competitors from entering small regional markets. Customer brand loyalty can also create large barriers to entry, since there is little incentive for a reader to switch newspapers when he or she has been reading it for the last 20 years. High barriers to entry deter competition, and in turn help to maintain abnormal profits associated with lesser amounts of competition.
Conversely, an industry with low barriers to entry will invite competition, and companies in the industry will see any abnormal profits competed away rather quickly. For example, it is easy to set up a lemonade stall along the beach to sell drinks to passers by. Any abnormal profits, however, will quickly attract competitors who will rapidly compete away these profits. The lack of barriers to entry allows other enterprising individuals to quickly enter the lemonade market, and the lemonade stall owner can do little to keep them out.
Competitive Strategy: The Five Forces (Part 2)
Force 3: Threat from Substitute Products
The availability of multiple substitute products can decrease the profitability of an industry. This is because customers have more choice available to them and can switch to other products easily if the products of an industry are priced too highly. However, when a product is very unique in the market and there are few, if any, substitutes, this will mean that there are high switching costs involved for customers and that the company or industry producing the product can raise prices to earn abnormal profits.
One example of an industry with no substitutes is the water industry. There is no substitute for water, and utilities companies, if operating in a monopoly, have the potential to raise prices upwards. The lack of substitutes means that people do not have the choice to switch to other products, and water companies often exhibit strong pricing power. However, because there is a need for the provision of this basic resource to society at large, governments often regulate that water companies are not allowed to raise prices above a certain point, to prevent an abuse of industry power at the expense of society.
On the other hand, the t-shirt industry faces many substitutes. If a customer is looking to buy a new t-shirt, he will be very much spoilt for choice. He has at his disposal the option to purchase collared tees, short sleeved shirts, tank tops, or basically any other garment that clothes his upper body. This availability of multiple substitutes greatly diminishes the pricing power of any t-shirt producer, who often has to provide value in other ways, in the form of designs or brands.
In general, an industry that has few substitutes or potential substitutes is an attractive industry to operate in.
Force 4: Bargaining Power of Suppliers
The third force that determines the profitability of an industry is the bargaining power of the suppliers of inputs into the industry. The more consolidated the suppliers are, the more bargaining power they will have, and the higher the prices the suppliers will be able to charge to companies in the industry. The higher the prices of inputs, the higher the costs for the industry, and the less profitable the industry will be.
An example where a supplier has very strong bargaining power is the personal computer industry. Two of the key suppliers, Intel and Microsoft, dominate their industry and are able to exert strong bargaining power on their customers to push up the prices of their inputs: computer chips and operating system software. Because the PC assemblers are relatively fragmented, they do not collude to exert as much counter-bargaining power as they possibly could.
On the other hand, a global giant like Wal-Mart faces fragmented suppliers and thus is able to exert strong bargaining power on the products it needs to stock its shelves. This allows it to keep costs low and pass these savings on to its customers.
It should thus be apparent that, all other things equal, a favourable industry to be in is one which has suppliers that have relatively weak bargaining power.
Force 5: Bargaining Power of Customers
Just as strong suppliers can eat into an industry’s profits, so can strong customers. Conversely, an industry can exert pricing power against the weak bargaining power of numerous small customers. In this way, the bargaining power of customers relative to suppliers helps to determine the level of profitability of an industry.
A regional newspaper with a monopoly will be able to raise prices relatively easily because its customers are many and fragmented. It will also be able to charge a premium for advertising because it is the only platform available to advertisers to disseminate their messages. The customers of the newspaper have weak bargaining power, and the newspaper is able to profit accordingly.
On the other hand, a regional broadcast station with a monopoly will also be a strong buyer when it comes to negotiating for programming airtime. If the television producers are a fragmented bunch, their industry will have to suffer a loss of profits due to the fact that the customer of their products is in a very strong negotiating position because it is the only customer for the product.
Once again, the weaker the bargaining power of an industry’s customers, the more attractive the industry is.
Summary
Before investing in a company, it is necessary to understand the competitive environment it is operating in. A company in an industry that scores poorly on the five forces is likely to be vulnerable to competition and have its profits competed away. Such a company is likely to make an unattractive investment.
The astute investor is always on the look out for a company that is operating in a favourable competitive environment, or which has the ability to shape and mould the competitive dynamics of its industry so that the competitive forces are relatively benign. Such companies stand a much higher chance of not only maintaining their profits, but growing them far into the future.
For an example of an in-depth Five Forces Analysis of a company, peruse Blackmores - A Strategic Analysis (Part 2)
The availability of multiple substitute products can decrease the profitability of an industry. This is because customers have more choice available to them and can switch to other products easily if the products of an industry are priced too highly. However, when a product is very unique in the market and there are few, if any, substitutes, this will mean that there are high switching costs involved for customers and that the company or industry producing the product can raise prices to earn abnormal profits.
One example of an industry with no substitutes is the water industry. There is no substitute for water, and utilities companies, if operating in a monopoly, have the potential to raise prices upwards. The lack of substitutes means that people do not have the choice to switch to other products, and water companies often exhibit strong pricing power. However, because there is a need for the provision of this basic resource to society at large, governments often regulate that water companies are not allowed to raise prices above a certain point, to prevent an abuse of industry power at the expense of society.
On the other hand, the t-shirt industry faces many substitutes. If a customer is looking to buy a new t-shirt, he will be very much spoilt for choice. He has at his disposal the option to purchase collared tees, short sleeved shirts, tank tops, or basically any other garment that clothes his upper body. This availability of multiple substitutes greatly diminishes the pricing power of any t-shirt producer, who often has to provide value in other ways, in the form of designs or brands.
In general, an industry that has few substitutes or potential substitutes is an attractive industry to operate in.
Force 4: Bargaining Power of Suppliers
The third force that determines the profitability of an industry is the bargaining power of the suppliers of inputs into the industry. The more consolidated the suppliers are, the more bargaining power they will have, and the higher the prices the suppliers will be able to charge to companies in the industry. The higher the prices of inputs, the higher the costs for the industry, and the less profitable the industry will be.
An example where a supplier has very strong bargaining power is the personal computer industry. Two of the key suppliers, Intel and Microsoft, dominate their industry and are able to exert strong bargaining power on their customers to push up the prices of their inputs: computer chips and operating system software. Because the PC assemblers are relatively fragmented, they do not collude to exert as much counter-bargaining power as they possibly could.
On the other hand, a global giant like Wal-Mart faces fragmented suppliers and thus is able to exert strong bargaining power on the products it needs to stock its shelves. This allows it to keep costs low and pass these savings on to its customers.
It should thus be apparent that, all other things equal, a favourable industry to be in is one which has suppliers that have relatively weak bargaining power.
Force 5: Bargaining Power of Customers
Just as strong suppliers can eat into an industry’s profits, so can strong customers. Conversely, an industry can exert pricing power against the weak bargaining power of numerous small customers. In this way, the bargaining power of customers relative to suppliers helps to determine the level of profitability of an industry.
A regional newspaper with a monopoly will be able to raise prices relatively easily because its customers are many and fragmented. It will also be able to charge a premium for advertising because it is the only platform available to advertisers to disseminate their messages. The customers of the newspaper have weak bargaining power, and the newspaper is able to profit accordingly.
On the other hand, a regional broadcast station with a monopoly will also be a strong buyer when it comes to negotiating for programming airtime. If the television producers are a fragmented bunch, their industry will have to suffer a loss of profits due to the fact that the customer of their products is in a very strong negotiating position because it is the only customer for the product.
Once again, the weaker the bargaining power of an industry’s customers, the more attractive the industry is.
Summary
Before investing in a company, it is necessary to understand the competitive environment it is operating in. A company in an industry that scores poorly on the five forces is likely to be vulnerable to competition and have its profits competed away. Such a company is likely to make an unattractive investment.
The astute investor is always on the look out for a company that is operating in a favourable competitive environment, or which has the ability to shape and mould the competitive dynamics of its industry so that the competitive forces are relatively benign. Such companies stand a much higher chance of not only maintaining their profits, but growing them far into the future.
For an example of an in-depth Five Forces Analysis of a company, peruse Blackmores - A Strategic Analysis (Part 2)
Subscribe to:
Posts (Atom)