INSTRUCTIONS: Please RESPOND to this answer from the Point of view as a student. Use credible sources and respond as if you are a manager of a marketing agency. Tell this student what your marketing agency would think of each of these answers from a Management perspective:
In analyzing an industry, it is necessary to determine the subject industry’s boundaries. “…Industries are typically composed of
many segments with different structural characteristics” (Carpenter & Sanders, 2008, p. 103). For the sake of consistency, I will continue with my examples relative to real estate development. In hopes of analyzing the industry I must determine and specify the industry, or determine the industry boundaries. A funnel approach would be useful in determining this, going from a broad focus to a narrow determination. Am I interested in the American residential industry, or the commercial industry? Let’s assume I am interested in the commercial industry. I should not stop there, as this would be much too broad and there are many segments within the commerical industry with different characteristics (Carpenter & Sanders, 2008). An appropriate level of focus would be something along the lines of focusing on high-end hotels in Monterey. Now equipped with industry boundaries, I can evaluate the industry structure by employing Porter’s (1980) five forces model.
Porter’s (1980) five forces model allows one to gain an understanding of an industry. The forces within the analysis model include the degree of rivalry, supplier power, threat of new entrants, buyer power, and threat of substitutes. Let’s assume I want to use the model in hopes of better understanding the hotel industry in Monterey.
Degree of rivalry: It is within this section where competition is evaluated. Who are my competitors? What are the switching costs? How do firms compete? These are just some questions that must be answered. In the high-end hotel development industry in Monterey, rivalry is very high. There are many players within the industry, many of which are top-tier global firms providing world-class facilities, amenities, etc.
Threat of new entrants: This part of the analysis is aimed at gaining an understanding of the “degree to which new competitors can enter an industry and intensify rivalry” (Carpenter & Sanders, 2008, p. 106). The analysis also includes evaluating the barriers to entry, or “the condition under which it is more difficult to join or compete in an industry” (Carpenter & Sanders, 2008, p. 106). In Monterey’s high-end hotel industry, the threat of new entrants is relatively low. High capital requirements coupled with the importance of brand identity seem to deter entrants. Just as it is important to evaluate the barriers to entry, it is also important to evaluate the exit barriers. “Firms face high exit barriers when it is very costly to leave an industry or market…” (Carpenter & Sanders, 2008, p. 107). In this example, exit barriers are relatively high. Hotels are convertible to other uses such as apartments, condominiums, office space, etc., but not cheaply or easily.
Threat of substitutes: Important considerations within this force include switching costs, buyer inclination to substitute, variety of substitutes, necessity of product or service, among others. In the high-end hotel industry in Monterey, the threat of substitutes is low. There is only one Monterey, and the character and beauty of the city are not replicable, thus, difficult to substitute. In terms of high-end accommodations, however, short-term vacation rentals are becoming increasingly popular and are considered an increasing threat to the high-end hotel industry.
Bargaining power of buyers: “A buyers group hs greater power in the exchange relationship with its suppliers when the buyers are prestigious and when their purchases represent a significant portion of the sellers’ sales” (Carpenter & Sanders, 2008, p. 109). In the high-end hotel industry in Monterey, bargaining power of buyers is considered to be medium, as there are many high-end hotels (suppliers) that accommodate many travelers (buyers). Considering the high level of competition, consumers have many choices and thus have more power. In light of this, customer are also price conscious as they have the ability to easily compare.
Bargaining power of suppliers: In the competitive industry of high-end hotels in Monterey, the bargaining power of suppliers is low. Prices are competitive, and options are plentiful. Furthermore, switching costs are low. Evaluating the bargaining power of suppliers and buyers is important as “the relative power of each party affects both the pricing and profitability of each industry” (Carpenter & Sanders, 2008, p. 108).
Carpenter., & Sanders. (2008).
Strategic Management: A Dynamic Perspective. Upper Saddle River, NJ, USA: Pearson Education, Inc.