Equity Section – Porters affects on Industry profits
Page 13 point ii. talks about New Entrants - Relatively high costs to enter an industry(Higher Barriers of entry) result in fewer new participants and ENHANCING inherent industry profitability.
Later on Page 108 it talks about Barriers to entry and lists them - one of which is Customer Switching Costs. Customer switching costs are FC’s that buyers face when they change suppliers. So the higher this is — this higher the industry profitabiltiy.
Page 109 it talks about The Power Of suppliers — The greater the supplier power — the lower the industry profits One of the items mentioned that gives suppliers power is Switching costs again. So the higher the switching cost --> the more powerful the supplier and therefor the lower the Industry profits.
Im confused as to what switching costs does to industry profits. If high switching costs increases barriers to entry which increases industry profits and again high switching costs, increases supplier power which decreases industry profitability what’s happening?
My logic is wrong somewhere but I dont know where.
I think it has to do with that Barriers to Entry has to do with CUSTOMER switching costs and The Power of Suppliers has to do with INDUSTRIES having switching costs when changing suppliers.
Pretty positive that’s what it is now. But not a 100%
I think of it like this (please correct me if I’m wrong):
Customer switching costs: For example, Oracle’s software is pretty specific and clients and users are already used to its functioning, procedures, systems, etc., which increases profitability because clients would not be willing to change this product so easy. They need to learn how to use the other software, etc. THIS IS BETTER FOR THE COMPANY UNDER ANALYSIS, because if you know that clients will stick to your product, you will increase price, and profitability rises (all else equal).
Supplier switching costs: I think in this case, the company is the customer. If you are a manufacturer but for some reason there are huge switching costs for changing supplier, the supplier knows this and will puts pressure on the price you pay. THIS IS WORSE FOR THE COMPANY UNDER ANALYSIS.
It is obvious that if you’re studying a supplier company, 2. becomes 1. and 2. would be the supplier of the supplier, though.
Yup, that sounds good. Little tricky reading it in the text for the first time. What you wrote is exactly how I interpret it.
Under Power of suppliers there is also Suppliers that may have switching costs which would limit their power (Last sentence in the paragraph talking about switching costs)
So there’s customer switching costs, industry participant switching costs, supplier switching costs and buyer switching costs.