3. Fixed CostsVariable Costs - Rent - Raw ingredients - Permanent staff - Temporary workers - Maintenance - Parts for machinery - Insurance - Workers comp insurance FIXED COSTS VARIABLE COSTS

4. Fixed Costs Variable Costs Revenue Break Even LOSSES PROFIT

5. 1: Large number of firms - Increases rivalry - Firms must compete for same customers and resources Similar market share = struggle for market leadership 2: Slow Market Growth vs. Growing Market - Causes firms to fight for market share - The opposite is true in a growing market - Firms are able to grow revenue in a growing market 3: High Fixed Costs - Results in economies of scale - This increases rivalry - If total costs are mostly Fixed costs, produce at or near capacity - High production leads to fight for market share - High production means firms must sell large quantities - Results are increased rivalry 4: High storage costs of highly perishable products - Causes producer to sell as soon as possible - If others are unloading simultaneously, competition intensifies

6. 5: Low switching costs - Increases rivalry - Free switching due to cost = high capture costs - Cost switching = difficult customer retention 6: Low levels of Product Differentiation - Higher levels of rivalry - Brand identity tends to constrain the rivalry 7: Strategic Stakes are High - When a firm is losing market share - When a firm has the potential for great gains - Rivalry intensifies 8: High Exit barriers - Places high cost on product abandonment - Firm must now compete - Firms tend to remain even if unprofitable - Typical example – high plant and equipment - Highly specialized equipment and plant - Forced to stay in a declining market

7. 9: Diversity of rivals - Unstable industry due to culture, history, philosophy - Rivalry is volatile and intense as mavericks enter market - Hospitals can be (i) for Profit (ii) Charitable (iii) Religious )iv) Universities - This mix of philosophies leads to struggle for Brand identity (City of Hope, Cancer Centers of America, Cedars-Sinai, Johns, Hopkins) 10: Industry Shakeout - As market grows, new entrants emerge and incumbents increase production - At some point industry becomes overcrowded - Demand cannot support all player and the increase in supply of products - Market creates too many goods for too few buyers - Commoditization occurs and prices decline - Shakeout occurs, competitions intensifies, companies fail - The Rule of 3 - A stable market will have no more than 3 significant competitors - The Rule of 4 – Largest firm has no more than 4x the market share of smallest

8. - Substitutes are products in other markets - They exist when demand is affected by Price of a substitute product - The more substitutes, the more alternatives, the more elastic - Close substitutes stop firms from raising prices - The price of aluminum cans is constrained by the price of glass bottles - They are alternatives but not rivals in the industry - Tire retreads ARE a rival to new tire sales - In the car industry most people will buy now - In the Trucking industry retreads take the place of new $$$ tires - Disposable diapers are a substitute for cloth diapers - Cable TV competition both price and offerings - Increased technologies – TiVo versus DVR box put TiVo out

9. - Buyer power is the impact of consumers on an industry - When buyer power is strong we have Monopsony (many suppliers one buyer) - In this situation, the buyer sets the price Buyers are Powerful if:Example: - They are concentrated - DOD purchases from defense contractors - They purchase huge portion of output - Sears, Best Buy power over appliance mnfrs – - Credible backwards integration threat- Auto manufacturers purchase of tires Buyers are Weak if:Example: - Producers threat forward integration - Movie companies forward integration -acquire theaters - Buyer switching costs. Non-std products - IBM mainframes in the 1960’s - Buyers fragmented – no influence on - Most consumer products in the market today product or price - Supply huge portions of buyer’s input - Intel’s chip sales to PC makers

10. - Producers need raw materials, labor and other supplies - Leads to buyer-supplier relationships in industry and firms who provide them - Supplier power can result in selling raw materials at a high price - High price can leads to profit capture Suppliers are Powerful if:Example: - Credible forward integration by suppliers- Baxter (hospital supplies) buys A.H.S. – a distributor - Suppliers are concentrated - Drug industry’s relationship to hospitals - Significant cost to switch supplier- Microsoft relationship with PC makers - Customers are powerful - Boycott of stores selling non-union picked grapes Suppliers are Weak if: Example: - Many competitive suppliers – std. product - Tire industry’s relationship with auto makers - Purchase commodity products - Grocery store brand label products - Credible backwards integration threat - Timber producers relationship to paper companies -Concentrated purchasers - Garment industry’s relationship to major Dept. stores - Customers are weak - Online travel’s relationship to airlines

11. - New firms entering the industry affect competition - In theory anyone can enter and exit a market with nominal profits - Some industries have characteristics to protect profits and stop rivals (Oil Companies) - Normal equilibrium does not work anymore - Collusion (illegal) can be a barrier to stop new entrants by holding prices artificially low - For example the American Medical Association? - this enhances the firm's competitive advantage 1: Government barriers - Government’s job is to preserve competition through anti-trust actions - But gov’t also grants monopolies through regulation (Major league baseball, Utilities) - To stop exploitation, government regulates the industry (P.U.C.) - Look at the Cable companies who seldom compete with each other in certain areas - Until 1970’s Bank could only enter a market with State approval - Then came deregulation and banks went everywhere 2: Patents and proprietary knowledge serve to restrict entry - Once patented, ideas and knowledge are private property (Apple, Google, etc) - These become significant barriers to entry – Polaroid camera from 1947 to today - In 1975 Kodak enters the instant camera market and is sued and is kept out

12. 3: Asset specificity inhibits entry into an Industry - If your firm’s assets can be used to produce a different product - If the firm needs specialized single use plant and equipment – barrier to entry (Oil refinery) - 3.1 When firms own specialized assets they resist effort by others to enter (Kodak’s huge capital investment resisted Fuji’s entrance) - 3.2 Potential entrants are reluctant to make huge investments in special assets 4: Organizational Economies of Scale - Most cost efficient level of production is called M.E.S.) Minimum Efficient Scale - Unit cost of production is at a minimum - If the M.E.S. is know, we can then determine the amount of market share needed parity - Long distance communication you need 10% market share for MES - These economies of scale are barriers to entry East to Enter if there is:Difficult to enter if there is: - Common technology - Patented or proprietary know-how - Little or no Brand franchise - Difficulty in Brand switching - Access to distribution channels - Restricted distribution channels - Low scale threshold - High scale threshold Easy to Exit if there are:Difficult to Exit of there are: - Saleable Assets - Specialized assets - Low Exit Costs - High exit costs - Independent businesses - Interrelated businesses

13. 1917 - U.S. Steel - Swift - Armour meat - American smelting - Std Oil of N.J. - Bethlehem Stee l 1917 - U.S. Steel - Swift - Armour meat - American smelting - Std Oil of N.J. - Bethlehem Stee l 1945 - General Motors - U.S. Steel - Std Oil N.J. - U.S. Steel - Bethlehem Steel - Swift 1945 - General Motors - U.S. Steel - Std Oil N.J. - U.S. Steel - Bethlehem Steel - Swift 1966 - General Motors - Ford - Std Oil N.J. - General Electric - Chrysler - Mobil Oil 1966 - General Motors - Ford - Std Oil N.J. - General Electric - Chrysler - Mobil Oil 1983 - Exxon - Gen. Motors - Mobil Oil - Texaco - Ford - IBM 1983 - Exxon - Gen. Motors - Mobil Oil - Texaco - Ford - IBM 1988 - General Motors - Ford - Exxon - IBM - Gen. Electric - Mobil Oil 1988 - General Motors - Ford - Exxon - IBM - Gen. Electric - Mobil Oil 2012 1: Exxon/Mobil 2: Chevron 3 : Conoco-Phillips 4: General Motors 5: General Electric 6 : Ford 1: 2: 3: 4: 5: 6:

14. Strategies can be formulated at Three levels: - Corporate Level - Business unit level - Functional of Departmental level Business Unit Level is the primary context of Industry rivalry – use these 3 strategies Cost Leadership strategies Differentiation Focus Proper generic strategy will leverage strengths and defend against the Five Forces