Question

You are an analyst at the ABC Corp and have been asked to analyze factors affecting the likely profitability of ABC entering the market for “non-historical” stone arrowheads. Here is a list of facts that you have accumulated about the stone arrowhead industry.

• The main input, flint, is produced by about 250 local flint miners. Some of them offer bulk discounts on the amount of flint you order, some do not.

• You turn the flint into arrowheads using a special milling process. This allows you to achieve lower unit costs than are possible using conventional methods. You have a patent on this process.

• Your main customers are museums that have displays of stone age life. They tend to rely on government funding, which has been falling over the past 5 years.

• Some museums are thinking of changing their displays to make then more historically accurate, using only arrowheads discovered by archaeologists and made at least 200 years ago by indigenous tribes.

• Arrowheads are expensively to ship long distances, so you prefer to sell to nearby museums, if possible.

• Close ties with museum curators are commercially valuable to a seller of non-historical arrowheads.

a. Do a Five Forces analysis, assuming that ABC does not want to license the patented milling process.

b. ABC might decide not to enter the market, but would simply license its patented technology to any firm that wants to make non-historical arrowheads. What are the pros and cons?

Answer 1

a. Let's discuss the five forces with a perspective from ABC.

• Threat of new entrants: As the new entrants come into the market, profitability of existing firms decrease meaning the latter need to follow effective strategies. The entry barriers such as patents, rights, government sanctions, etc has a pronounced effect in the threats due to new entrant. As ABC have refrained from licensing their patent, the threat of new entrants in the arrowhead industry will be reduced considerably.
• Threats of substitutes: In this arrowhead industry, we can infer that the main customers are the museums who want to show case these historical antiques. So, there are very few substitutes to make up to a threat indeed. With the substitutes making relatively less profits, ABC can rest assure that there is no ceiling for maximum profit, thereby flourishing in the arrowhead industry.
• Bargaining power of customers: Basically a bargaining power implies buyer power, meaning the buyers influence the price of a product. When there are a lot of alternatives the buyer power is more. In order to curb this, firms introduce loyalty program and more. Also since the product differentiation is high in this industry, buyers are left with few to no choices as alternatives. Lastly the quality of product being utmost priority, these buyers are ready to pay any price so that there is no compromise on the quality aspect.
• Bargaining power of suppliers: In ABC's perspective, the main raw material is the flint and is produced by 250 local flint miners, meaning that the firm has a lot of alternatives to take bulk orders from. Bargaining power of suppliers can also be described as market of inputs, and when there are a lot of alternatives for the flint makers, the suppliers can no longer have a control over the firm. And ABC being their only buyer, flint makers can't take a chance with them due to a manifold of alternatives.
• Threats from existing firms: With very few existing firms, ABC is clear off this issue.

b. Some of the pros of licensing this patent are:

• No need of money to commericalize your product
• Revenue generation happens
• Of course your intellectual property has been protected. Not every firm can execute a milling process that efficient.

Cons :

• You lose the control over your invention
• As a patent is licensed, there might be a tendency to be more relied on the same for generating income.
• Issues of quality management might arise in the future, thereby damaging firm's reputation.

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