Guy’s this a question from Schweser… An industry that manufactures and sells a commodity-like product will face increased competition primarily because of greater: A) bargaining power of suppliers. B) bargaining power of buyers. C) threat of new entrants. D) threat of substitute products. There anwswer is D), however surely there’s no substitute for gold, silver ect. So why would this be correct?
Silver is a substitute for gold and vice versa. You can also substitute other metals. Also, think of coke and pepsi. If the price of coke goes up, then people are more likely to buy pepsi.
commodity-like just means there’s very little to distinguish one product from another; not necessarily a commodity like minerals, metals, etc… a manufacturer of commodities has very little competitive adv if any so the threat of substitute products (maybe similar product, cheaper price?) looms largest for this manufacturer
for example. if apples are expensive then you will eat oranges which may be cheaper.
Even with minerals, a lot of gold is used in high end electronic components, but they can be replaced with platinum / palladium. So the market for gold in this space can be nearly totally replaced by another commodity. This isn’t the best question and my strategy prof would probably rip this one apart but when you look at the problem with your CFA glasses on there is only one answer.
I’m with gtg’s answer and not these others. A commodity-like product is one differentiated from other products only by price. Manufacturers work hard at making their products not be commodities but lots of products like similar types of food, alcohol, tires, clothing, etc. are commodities. For instance, I want a 205/70 R16 tire and I couldn’t give a darn rather it was a goodyear, pirelli, etc… I don’t know how to tell the difference and I will just buy the cheapest.
WWMPD? (Michael Porter)
I don’t like any of these answers. gtg, for example, assumes “commodity” means “no competitive advantage” for any supplier – that’s just not true. For example, scale is a competitive advantage for many commodity suppliers. Back to joey’s tire. Say Goodyear and Michelin both make his tire. Those two tires aren’t an example of a “substitute product”. A substitute is a *different* product that still satisfies the user’s need. E.g. as the price of coffee goes up, some consumers will start to substitute tea instead. (They want hot caffeine; for those who want coffee taste however, tea is no substitute.) Or they might substitute cola soda. (However: coke is no substitute for pepsi – that’s the same product.) With basic definitions out of the way, let’s get back to the question… Answers a) and b) impact profitability; but the question asks about competition, so we get to ignore those. Both c) and d) are reasonable threats, but there’s nothing peculiar to commodities for either one. c) might not even apply in some commodity situations; here’s a counter example: If you’re a bond issuer, you need a credit rating. Ratings (s&p, moodys, fitch) are a commodity – just go get the cheapest one. However this is a highly regulated industry and there is zero threat of new entrants. Likewise, there’s no special relationship between substitutability and and commodity status. (Continuing the example above: some consumers will not accept a coffee substitute; others will.) One line of reasoning might lead one away from c) however. Many commodities are mass produced and admit economies of scale; assuming a mature industry (say, concrete production), the incombent producers might be very large, so new entrants would need large amounts of capital to compete. Or there might be a natural monopoly (such as with telephone service), similarly reducing the new-entrant threat. But really I don’t see a strong reason to prefer d) or c). So, final answer: e) - crap question, move on
Good post. This is a poorly thought out question
There is higher probability of firms already in business coming up with new product (substitute products) then new firms that are about to enter an industry. Threat is higher from existing firms; they have already incurred all the cost, a new firm entering into an industry have to incur all the costs and then come up with a product that will be a threat (which will take a long time). Ans C, which although correct, is not best ans So, ans is D