Schweser Assigned Reading #37: Five Competitive Forces - Challenge Problem #9

CEO of equipment and machinery rental company that rents household equipment to consumers. She wants to make industry more attractive. She is particularly concerned about ability of homeowners to get advice about renovation that would encourage them to rent home remodeling equipment. She is considering the purchase of a home remodeling consulting firm. Question from Schweser: Products such as home remodeling advice would best be characterized in a Porter Five Forces framework as: a. a factor that influences Porter’s five forces b. an outside industry characteristic not relevant to a Porter Five Forces analysis c. an example of threat of substitutes I don’t quite understand this one. My questions: 1. is this company supposed to be renting out to consumers equipment used in the construction process? or equipment used for the home (e.g. dishwashers?)? 2. If the answer to my question 1 above is the former, then is the idea that an acquisition of a home remodeling consulting firm would help this company drive more rentals of its equipment? If so, then why does the question say the CEO is “particularly concerned about the ability of homeowners to get advice about renovation…”? Do they mean she sees that ability as a critical determining factor in driving which renter of equipment the consumer chooses? Any input is appreciated. Many thanks

Question is not very clear. But when considering all the facts together, I think that company rents equipment and machinery related to renovation work. The home remodeling advice is complimentary business to the company’s core business and doesn’t fall under any of the following 5 Porter’s force: 1. Bargaining power of suppliers 2. Bargaining power of buyers 3. Threat of new entrants 4. Threat of substitute product or services 5. Rivalry among existing competitors Among the given choice, I would go for (b). Is that correct?

Your spouse is not happy with how your kitchen looks and works. But both of you dont know how to improve it, so the job just gets postponed indefinitely. This CEO can provide you a consultancy after which you will know all your options about remodelling your kitchen to make it better and more efficient. Once you and your spouse finalize on a particular model and then decide to do the remodelling yourself (without hiring a contractor to do the job), you will need all those fancy equipments to cut wood, floor tiles, drillers …etc…etc… CEO has just created a market for himself by offering to rent you all those equipments you will need. This probably would not have happened, had you not got that free consultancy. Hope this makes the question clearer. Edit: I have not done Equity yet, so I cannot help beyond this. But your question looks more like trying to understand the question itself. In that case i hope this helps.

Since the company is investing additionally in Advisory Services, it is raising the entry barrier by raising capital requirements for new entrants and hence reducing the threat of new entrants. So, answer to this should be A, according to me.