Industry Structure— Porter’s 5 forces Paul C. Godfrey Marriott School of Management Brigham Young University 24 April 2017

The Importance of Industry Structure Industry structure creates the context in which competition occurs Industry structure can be intrinsic—due to the nature of the product or process (e.g., commodities) Industry structure can be derived—by the competitive actions of industry players (e.g., branding power)

A Map of Industry Structure Barriers To Entry Supplier Power Competitive Rivalry Buyer Power Substitute Products

Barriers to Entry What are the economic drivers of barriers to entry? What are the practical sources of barriers to entry? What barriers to entry exist in the professional sports industry?

Barriers to Entry: The Economics P Q Q* Q** P* P** S D Monopolistic competition allows increased profitability Limit pricing precludes entry High barriers to entry create an attractive industry

Barriers to Entry: Sources Economies of Scale Proprietary Product Differences Brand Identity Switching Costs Capital Requirements Access to Distribution Absolute Cost Advantages Learning Curves Input Lock-up Product Design Government Policy Expected Retaliation

Supplier and Buyer Power What are the economic drivers of supplier and buyer power? What are the practical sources of supplier and buyer power? What types of supplier and buyer power exist in professional sports industries?

Supplier/Buyer Power: The Economics Q Di De Supplier power is determined by price elasticity of demand for the product Supplier power forces bargaining and hold-up The question: Who gets most of the value added? Strong supplier power makes an industry less attractive

Supplier Power: Sources Differentiation of inputs Switching costs of suppliers and firms Presence of substitutes Supplier concentration Importance of volume to buyer Cost relative to total purchases Impact of inputs on buyers cost or differentiation Threat of forward or backward integration

Buyer Power: Sources Buyer concentration vs. firm Buyer volume Buyer switching costs Buyer information Ability to backward integrate Substitutes Pull-through Price Sensitivity Price/ total purchases Product differences Brand identity Impact on quality/ performance Buyer profits Decision maker’s incentives

Substitute Products What are the economic drivers of the power of substitution? What are the practical sources of power for substitute products? What substitute products exist within the professional sports industry?

Substitute Products: The Economics Q2 Substitute Inelastic Complement Cross-elasticity of demand Competitors need to think broadly about substitutes Competitors need to link to complements where ever possible Threat of substitution dampens profitability in the industry

Substitute Products: Sources Relative price performance of substitutes Linking of intangibles to products and services Switching costs Buyer propensity to substitute

Competitive Rivalry What are the economic drivers of competitive rivalry? What are the practical sources of competitive rivalry? What factors create/ maintain competitive rivalry in professional sports industries?

Competitive Rivalry: The Economics Q Q* P* S D Classical competition drives the force The effect of rivalry is uncertain High degrees of rivalry turn into destructive price competition Moderate degrees of rivalry improve industry performance

Competitive Rivalry: Sources Industry growth Fixed costs/ value added Capacity utilization Product differences Switching costs Concentration and balance Informational complexity Diversity of competitors Corporate stakes Exit barriers

“Optimal” Industry Structure The 5 Forces: Summary “Optimal” Industry Structure Barriers to Entry High Supplier Power Low Buyer Power Competitive Rivalry Moderate Threat of Substitution “Optimal” industry structure varies An industry that is too attractive is often stagnant The five forces must be viewed in a dynamic context How are the forces changing?