Question

The Case of the Mystery Investor: PORTER’S 5 FORCES Madame X is known in Vancouver as the “mystery investor”; in real life she goes by Mia and jokes with her assistant (Miss Robin) of the past 2 years that it stands for “missing in action”. Miss Robin handles virtually all of Madame X’s business/investment communications. Indeed, Madame X is a wealthy angel investor: once each year she provides funding for a local business wishing to expand based on two key motives: (a) doing social and/or environmental good; (b) securing extra profits (or at least breaking even financially). She provides $50,000 with no strings attached beyond seeing and signing off on a proposal that provides $20,000 for a “Phase One” commencement (lasting six months) and $20,000 for “Phase Two” commencement (lasting another six months). $10,000 is then provided at the end of one year to the business if they have completed the two phases. Madame X is particularly busy this year with locating a second residence in a “tony” neighbourhood in Paris, France. Because of these and other international travels, she does not have the time to do in depth reviews of interested financial suitors. Madame X has decided to retain the consulting firm of “Here4You Consultants” to “suggest options” on how to organize decision making given that her time is limited this year. She wants to be kept up to date on the process of decision making and the progress of the awarded business but is also worried about how to stay in touch given her busy schedule and travels. She would like to expand her angel investing into another country- but not France since “this would disturb my privacy”. She is in her fifth year of angel investing- her experience is that two of the first four annual investments have continued successfully. The one business (funded 2 years ago) that was not successful had to close owing to a family owned business dispute; the angel investor did not become involved in the matter but had heard all about it. Madame X has vowed to not fund family businesses in the future because of this incident. A second business (funded 1 year ago) has struggled with creating environmentally friendly packaging and she has learned they are seeking another $50,000 just “to stay in business”. Madame X doubts she would fund again another such venture. To date Madame X has not had to be particularly concerned about legal aspects as she has Canadian lawyers who have reviewed all aspects of the past financial exchanges and any other ethical matters as no issues have come to the forefront. Madame X also has a secret idea and desire. She is considering “coming out of hiding” and making her angel investment public information in order to build and enhance a reputation as a benefactor, and ultimately leverage this into a for-profit brand for a “to-be-determined” international business (preferably in the fashion or perfume business). “Here4You Consultant” of North Vancouver have been contacted by Madame X’s assistant in order to “provide thoughts/review for” Madame X regarding her present situation and future business thinking. Madame X heard from Miss Robin that there was something called a PORTER’S 5 FORCES analysis that could be helpful. She is interested in what she will hear from the consultants….but she will remain incognito as usual during the presentation… You are management consultants from Here4You Consultant(s). Answer to these questions based on Porter’s forces

What should she know about the threat of new entrants?

What should she know about the bargaining power of buyers?

Answer 1

> Threats of new entrants

The Porter's five force model is useful when we starts a new business. Competition will arise in every industries. When starting new industries, new competitiors arise in the market. The prices, costs and investments are the components that is necessary to compete with other industries. When the barrier of new entrants is low, high threat will occur there., also when high barriers is high, the threats will be low. The barriers to entry are the following :-

• Capital Requirements

Large capital requirements is needed for a new business starting. Large investments in marketting is an example.

• Brand loyalty

High customer loyalty for the old existing brands is essential.

• Government policies

There will be many government rules and regulations that should be followed in an industry. Licenses is very much required one for a new entry.

• Access to distribution channels

Only limited access to the distribution channels

• Economies of scale

When the entry of the industries, they will produces more in quantity than the benefit.

• Differentiated product

The products sold by the existing industries is differentiated, then it is a barrier to the entry.

• Switching costs

Switching costs is the costs related with when a supplier moves from a product or an industry to other one.

An example for threats of new entrants - airline industries. When starting an industry, they firstly purchases aircrafts, for these requirements they takes investments. In the beginning of any industry, license is necessary. The license is not very much easy to obtain. Many levels to be passed on to start an industry. The south west airlines have successfully started their industry many years before as they brought many innovative methods.

> Bargaining power of buyers

The determinants of bargaining power of buyers are products features, buyers characteristics, etc. The buyers can bargain with the company about the following:-

• To lower the prices of the products

The buyers bargains to the industries to reduce the prices of the products.

• To increase the quality of the products

They also bargains to increase the quality and the quantity of the products they buy.

• To provide more services

Many additional services should be provided by the company. This is a bargain by the buyers.

Buyers bargains the industries when they are more powerful. They are more powerful when they are highly concentrated., when they have the ability to produce the products by themselves., and also when they purchases products in large volume.

By product differentiation or implementation of loyalty programs, we can reduce the buyer power. Example for bargaining power of buyers- airline industry. In this industry, the bargaining power is high.