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Lecture 8

COMM101 Lecture Notes - Lecture 8: Switching Barriers, Capital Intensity, Perfect Competition

Course Code
Ingrid L.Stefanovic

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Natasha Park, BUS111
Porter’s Five Forces
Each business operates in a specic
industry, and each industry has
dierent characteristics
Helps managers analyze 5 important
sources of competitive pressure
competitive environment of industry
Helps managers decide what their
competitive strategy should be to
exploit opportunities
Competition aects price  aects
bottom line (prots)
The bargaining power (BP) suppliers have over buyers helps determine how
competitive an industry is.
fewer suppliers or high switching costs (less substitutes) = more bargaining
power for suppliers
-high switching costs: how much it costs you to switch from one product to
another substitute
Bargaining power increases costs of inputs
Use strategic alliance with other buyers, or internal supply to reduce
dependence on outside suppliers  increase BP; ex: buying shares, controlling
interests or creating their own suppliers
Potential entrants
New entrants are usually not the same industry as other business
they enter with new ideas, models, better technologies change the rules of the
ease of entry = more intense competition  less attractive industry
Some industries (automobile manufacturing) are capital-intensive and are thus
di0cult to enter
Businesses should try to make it di0cult for new entrants by using barriers:
capital intensity, technology, know-how, regulatory approval, brand loyalty, etc.
- Secure technology or create new one that outsources others , or protect it
with patents
- Create new drug and patent it  does not allow other companies to use same
formula  if you use the formula, you have to pay royalties to the company
- Government can be your friend if they can regulate/restrict who can come in
and who cannot. If you are already in, you’re good  ex: not everyone can be
a doctor; there are regulations
Many substitutes = increased competition
Ex: glasses vs. contact lenses vs. laser eye surgery
Puts ceiling on price that can be charged  lid on how big a price you can charge
Pressure increases as price of substitutes and switching costs decline
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