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One industry with an impact on both undergraduate and MBA students is textbook publishing. Traditional printed textbooks are being challenged on one hand by self-publishing firms offering very low prices for specific instructor materials, and on the other hand by a need to offer digital resources that substitute for printed materials. Large textbook publishers are increasingly investing in adaptive learning systems such as Wiley-PLUS, Cengage MindTap, and McGraw-Hill Connect. Complicating factors for the publishers is the changing business model of renting textbooks (printed and electronic). U.S. university book rental was about 25 percent of student purchasing volume in 2015.
Use the five forces model (with complements) to think through the various impacts such technology shifts may have on the textbook industry. Include in your response answers to the following questions.

(a) Identify the threat of new entrants. Choose one of the concepts (Economies of scale, Network effects, Customer switching costs, Capital requirements, Advantages independent of size, Government policy, Credible threat of retaliation) to discuss the intensity of threat of new entrants. And discuss whether the intensity of threat of new entrants is high or low.

(b) Identify the power of supplies. Discuss whether the power of supplies is high or low (1-e) Identify the power of buyers. Discuss whether the power of buyer is high or low (1-g) Identify the threat of substitutes.

(c) Discuss whether the threat of substitutes is high or low

(d) Identify the rivalry among competitors. Choose one of the concepts (Competitive industry structure, Industry growth, Strategic commitments, Exit barriers) to discuss the intensity of rivalry among competitors. And discuss whether the intensity of rivalry among competitors is high or low.

Answer 1

Porter's five forces model helps to identify five competitive forces that determine a firm's strengths and weaknesses. These forces help to analyse the profitability of the firm and the industry. The five forces that affect the competitiveness and profitability of a firm included in this model are:

Impact of new entrants into the industry

Competition in the Industry

Power of suppliers

Power of buyers

Threat of substitutes

Impact of technology shifts on the textbook industry can also be analysed using these five forces of the Porter's five forces model.

a) Threat of new entrants

The easier it is for new entrants to enter into the market, the more is the risk for existing firms of losing their market power. If an industry has huge barriers to entry like their are huge capital costs involved in entering an industry or the existing firm enjoys economies of scale, then it will be difficult for the new firm to enter the industry and hence the existing firm will retain it's market power.

In the textbook publishing firms, there is huge capital cost involved in establishing the firm and the firms usually enjoy economies of scale as producing first few units is very costly while the average costs keep on falling as more and more textbooks are published. Also, these large existing textbook publishers are increasingly investing in adaptive learning systems. If a new entrant enters into the textbook publishing market, then it will have to incur huge entry costs in the form of required capital and it will not be able to take benefit of economies of scale as economies of scale arise only when output is produced at a very large scale. In order to thrive, it will have to enter into other aspects like book renting or providing material online. But in the existing textbook publishing industry, there are lesser chances for it to survive since already large firms exist taking benefit of economies of scale. So, the intensity of threat of new entrants is low. But if the new entrant tries to establish in the new areas like book rentals or is able to provide more digital resources at cheap rates than the existing firms, then the new entrants might pose as a high intensity threat for the existing firms.

b) The power of suppliers depend on how easily the suppliers can increase the costs of inputs required by the firm. It depends on how easily the inputs are available and what is the number of suppliers supplying those inputs. If there would be large number of suppliers, then they will not be able to drive the prices of inputs very high up as competition amongst them will reduce the prices. Here, the inputs required are the machines and the paper used for publishing as well as the royalty or copyright fees that needs to be paid to the authors of textbooks. In this case, the power of suppliers is not very high as there would be large number of suppliers supplying these inputs, so they do not enjoy large power. Also, since the demand for printed materials is going down while demand for rental books and digital resources is going up, so there would be even less requirement of traditional inputs by textbook publishers which will further reduce the power of supplies.

Power of buyers lies in the number of buyers there are in a market and how significant each buyer is. If there are very few buyers and each buyer buys a significant portion, then they can negotiate and buy the good at lower prices. While if there are many small independent buyers in the market, then they do not have much power to influence the prices and hence the firm can charge higher prices.

In the textbook publishing market, there will be many small independent buyers, so none of the buyers will be able to influence the prices as each will buy only a small number of books. So the power of buyers is low and they cannot individually affect the prices or the supply of the industry.

c) When there are close substitutes available in the market, then the consumers can easily shift from one good to the other and in this case the firm enjoys less market power and it cannot charge very high price for it's product due to the availability of close substitutes. But when there are less or no close substitutes then the firm enjoys greater market power and can charge higher price for it's product from the consumers.

In the textbook publishing industry, there is increased threat of substitutes as there is rising demand for rented books and digital resources. Also, traditional printed textbooks are being challenged by self publishing firms offering very low prices for specific instructor materials. So, there are very close substitutes available to printed textbooks in the market and hence the publishers cannot charge very high price for their product. Hence, the threat of substitutes is high.

d) The number of competitors in an industry affects the market power of each individual firm. The larger the number of competitors, the less is the market power enjoyed by each firm to charge a higher price and earn higher profits or to affect supply. Whereas if there is less intense rivalry, then the firms have higher market power to charge higher price and take their supply decisions to maximize their profits.

Due to the competitive industry structure, there is intense rivalry among competitors in the textbook publishing industry. The firms are competing by offering reading materials at lower prices or by renting the material or providing digital resources whose demand is growing rapidly. Due to this kind of intense competition, each firm has lesser market power and therefore cannot charge high prices. Increased investment in adaptive learning systems by large firms is also increasing the competition thus decreasing market power and profitability of any individual firm. The intensity of rivalry among competitors is high in the textbook publishing industry.

So, these technology shifts will have large impacts on the textbook publishing industry and these impacts need to be studied carefully by firms to take their further business decisions.