People seem to believe the reason the firm created value was Barriers to Entry (which were moderate). However, the firm engaged in successfull investments to hedge the price of inputs. Wouldn’t this be gaining an advantage over their Suppliers (i.e. Theat of Suppliers)?
the vignette explicitly said that there were only a few metal suppliers to this company which is easily a detriment as the suppliers would have power.
honestly, this thread makes me think. it was indeed a manufacturing firm and the flexibility of production operations/ access to raw materials are key factors, which is power to suppliers. was there any mention of a large learning curve in the production methods? i wish i could remember the question. i’m still leaning towards entry barriers but you bring about a great point
you can hedge all you want, the suppliers still have you over a barel in terms of price
agree jpm… anyone remeber all 6 question sin this vignette? there was, this one, the one about primary risk, the hhi index, the question about classifying their strategy, the one about classifying their industry and??___
and barriers to entry was the only legit choice as all other answers it specifically referenced in the vignette as problems (lots of competition, power of buyers, power of sellers)
The vignette did explicitly say that there were large economies of scale… still, could go either way. I took barriers to entry.
I took the suppliers because they mentioned the hedging aspect on fuel and also mentioned fuel as their biggest expense by far…new entrants didn’t make sense to me cause they mentioned a lot of firms in the industry…awful question in my opinion, Porters five forces is one of my moneymakers
I remember pondering over enrty to barriers vs the hedging effect on the suppliers and concluded for some reason (I think it also alluded to soemthing like despite the high cost of fuel, the suppliers have a hold over the companies in the firm)…And something to mention that despite that costs are a big hindrance - I took to mena that the entries to barriers are due to HIGH COSTS…does this make sense…
but wasn’t the actual question “what characteristics of the industry allowed the metal company to reap profits from its customers?” The reason it was able to be profitable at all was due to the large economies of scale that prevented other firms from piling in. The fact that suppliers had significant influence over the industries structure was not a reason the metal company was able to create profit. If anything, their influence took profit from the metal company rather than allowing it to create value. At least, that’s how I read it… in the end, right or wrong, Porter can gargle my b@lls.
Looks like I’m alone on this one, but I went with bargaining power of buyers. Here’s the reason. The question asked how the firm delivered value to its customers. Clearly it was in the way they were able to cut their own costs and increase their gross margin. I didn’t go with barriers to entry, simply because there were already hundreds of competitors in the industry. Typically barriers to entry refers to something like the airline industry where there are a few competitors with high capital investments to get started in the industry. I didn’t go with bargaining power of suppliers because they really had no way to create value with their sellers. The level of competition within the industry prohibited any negotiation, as any other competitor would easily take their place. The only way for a company to gain an advantage in a highly competitive industry is to adjust matters they control. They were able to reduce operating costs, but wouldn’t have had to without pressures from buyers. If the bargaining power of buyers wasn’t there, with the ability to negotiate a lower price due to competition and availability of the product, the producer would not feel any pressure to improve their margins. I’m clearly in the minority here, but that was my thinking.
Thanks for the feedback. I thought about it some more. Porter’s Five is specific to industry factors and Barrier to Entry is the correct answer. It seemed too simple on the exam, and I overthought it. The hedging activity relates to the firms generic cost leadership strategy and doesn’t diminish the control of the suppliers (so threat of suppliers is not the correct answer).
bosjcm Wrote: ------------------------------------------------------- > People seem to believe the reason the firm created > value was Barriers to Entry (which were moderate). > However, the firm engaged in successfull > investments to hedge the price of inputs. Wouldn’t > this be gaining an advantage over their Suppliers > (i.e. Theat of Suppliers)? This isn’t even debatable. It said right in the vignette, suppliers are STRONG, buyers are STRONG, rivalry is INTENSE. Those are all big fat negatives in terms of industry profitability. Barriers to entry is the only possible answer. This was one of the few true gimme answer on the test.
Barriers…I comforted myself for two reasons during the exam. 1) Nothing else fit. 2) Seems like a fairly capital intensive industry.
How can you have barriers to entry with 100 plus firms? Clearly the barriers haven’t been effective to this point? If barriers to entry reduces competition, it clearly didn’t work in this industry.
It was a capital intensive industry which means high barriers. 100 firms means that it’s competitive, but not that there are no barriers. Barriers isn’t an excellent answer, but it’s the only one that is possible.
the firm cannot CREATE value because of large barriers. large barriers help the firm to run INefficiently, which destroys value. the firm can CREATE value only when it is pressured to perform better, such as by strong customers with high bargaining power.
milkpump Wrote: ------------------------------------------------------- > the firm cannot CREATE value because of large > barriers. large barriers help the firm to run > INefficiently, which destroys value. the firm can > CREATE value only when it is pressured to perform > better, such as by strong customers with high > bargaining power. Have you read the book at all? You are so far off it’s just scary.