Power: the horizontal axis

Despite pious talk of partnerships, the buyer supplier relationships are power-based struggles focused on capturing as much long-term value for the organisation as possible while giving enough to the buyer or supplier firms to keep them connected to the organisation. There are many characteristics that interact to determine which party is the more powerful. These include relative size, switching costs and whether either party is able to backward/forward integrate.

The balance of power varies over time. For example, in the relatively recent past the major brand name suppliers such as Coca-Cola, Unilever and Procter & Gamble held pricing power over their supermarket customers. They were bigger, i.e. were more concentrated than their customers, and had more pull-through power with the brand-sensitive end consumer. Now, with the growing credibility of the supermarkets’ own label products and the increasing consolidation of the worldwide supermarket industry, the power has shifted. The pain that a Wal-Mart might feel from not stocking Coca-Cola is now potentially less than the pain that Coke would feel from being delisted.

Power is related to the degree of switching costs that is incurred in changing from one supplier or product to another. High switching costs promote lock-in wherein having made the initial choice, the customer has made an investment that now becomes costly to undo. Switching from one brand of toothpaste to another is a costless choice that can be made in the face of an opportunistic discount offer. However, switching from one MBA programme to another once you have taken the initial courses is more difficult. The search behaviour of customers and the marketing ploys of companies reflect this. Customers take far longer to evaluate high switching cost goods before making purchase commitments and companies design low-cost entry but high-cost exit pathways to lock customers into their phone contracts and house mortgages.

Power is one thing, but the inclination to use that power is quite another. This inclination is referred to as price sensitivity and indicates that customers are more sensitive to changes in prices of some products or services than of others. The factors that contribute to price sensitivity are mainly components of the extent to which a price rise from one firm takes value away from the other. Rich buyers who can easily pass on cost increases to their own customers tend to be relatively insensitive to price increases, particularly for a product/service that, while a low part of their overall costs, is important to their own product/service in terms of function or quality. However, buyers who are struggling to make money and/or whose own customers will not accept price rises, tend to be much more sensitive to the impact of a price increase. This is particularly so for purchased inputs that constitute a relatively large proportion of the buyer’s total costs and are not critical to the quality or performance of the final product.

Entry/substitution: the vertical axis

The vertical axis covers two areas: the entry of other organisations trying to get some of the industry value for themselves and the potential substitution by other products offering similar benefits. These both act to keep a cap on industry pricing.

If an industry is very profitable and earns well above its average cost of capital, then other organisations will be tempted to enter. The likelihood of them doing so will be affected by the nature of entry barriers to the industry. These can be various in nature but may include industry-specific regulations, political influences, socio-cultural differences, the need for high levels of capital investment and/or sustained commitment over time, lack of key resources and capabilities and distribution control. Some of these issues are relevant to the Carrefour case (see Live Case 3-2). Therefore, a firm’s willingness to attempt an entry will be lessened if:

1. New entry will reduce prices and hence profitability. This can be due to such factors as increased capacity or the aggressive responses of incumbents. There are many point-to-point travel connections in the airline industry that are profitable to the one airline that operates the connection, but would be loss-making for both if another airline entered that route.
2. The existing players have large advantages in such things as brand, locked-in distribution or scale-based low costs that are very expensive for a new player to match, i.e. there are high entry costs. Coke and Pepsi are protected from entry into their lucrative duopoly by over a century of brand investment.
3. There are very high exit barriers, e.g. very costly asset-specific investments which must be written off on leaving the industry. A semi-conductor fabrication plant costs billions of dollars to build but has no application for anything else if you decide to leave the industry.

Industries are defined in terms of products that are close substitutes for each other and so the boundary between what is regarded as a competitor product and a substitute product is blurred. Substitutes have positive cross-elasticities of demand: as the price of product A is increased, the demand for substitute product B increases. Competitive products demonstrate very direct and swift cross-elasticities whereas more distant substitutes show longer-term relationships. Hence if a cinema chain puts up the prices of its tickets it will quickly lose customers to cinema chains that have lower prices.

However, if cinema tickets in general increase in price, the demand for substitute forms of entertainment, such as bowling, football and live theatre may increase but at a slower rate. Despite this slower rate, the price of these substitutes still acts as a cap on cinema ticket prices even if rivalry does not exist between cinema chains. The main driver of the growth of the plastics industry was value-adding substitution. It replaced various packaging materials such as paper, cardboard, glass, metal and structural materials such as timber and steel. Nowadays in many packing and structural applications, plastic is a competitor product for other materials more than a substitute, and vice versa.

Rivalry

This middle force of the five, which is also engaged in both the horizontal power play and the vertical entry play, captures the impact of the ongoing direct competition between industry participants. The more that the industry reassembles perfect competition the fiercer the price competition and the more unattractive or unprofitable it becomes. Rivalry then is affected by industry growth rate, so that stages of the industry life cycle are variously a positive sum, zero sum or negative sum game. Rivalry is also driven by managers’ personalities and different local and international cultures, with different goals and different ways of dealing with competition. Some managers will be tenacious to the last, preferring an ongoing knock-down-drag-out fight, while others favour a more genteel way of doing business. Hence, while pharmaceutical oligopolies engage in marketing wars, French hypermarkets engage in price wars and the attractive returns of some are gained at the expense of others.

Industries are not necessarily homogeneous with respect to rivalry. In some cases, there are clear demarcations between sets of competitors adopting similar strategies aimed at similar customer segments. These sets of competitors are known as strategic groups.

Strategic groups

Even though organisations in the same industry may produce products and services that have similar basic characteristics, they are not direct competitors in the minds of CEOs and customers. For instance, Rolex and Swatch both produce time telling products with the same basic functionality, but would not be confused by their customer groups. Similarly, with cars, customers for Ferraris are not the same as those purchasing a Tata Nano – and those companies will be organised in quite different ways. Therefore, within an industry there can be different groups of organisations that compete with each other within the group but not so much with other competitors in other groups. These different strategic groups will consist of organisations that will have different emphases on competitive strategies and the key resources and capabilities necessary to win. For instance, in the pharmaceutical industry there are wide variations in the amount spent on Research and Development (R&D), marketing and logistics, depending upon whether the organisations are focusing on developing the next “blockbuster” drug or whether they are aggressively reducing the costs of manufacturing and distributing generic medicines.

In order to ascertain whether an industry has strategic groups, and their specific characteristics, key variables critical to that industry should be determined. The value of the strategic group analysis is greatest when variables are identified that are specific to that industry, rather than generic ones – in other words those that keep a CEO in that industry awake at night. For instance, in the hotel industry, room occupancy might be one such variable rather than simply price and cost. A check is also to ask whether that variable makes sense in another industry, i.e. room occupancy doesn’t really have meaning in the pharmaceutical industry. Having selected a range of variables, two should be selected that are “orthogonal” to each other, i.e. not correlated. These can then form the axes of a strategic group analysis and the coordinates of companies in the industry can then be plotted (see Figure 3.7). It is worth noting that this analysis can provide insights in general terms (such as impressions of the variables being used) as well as in strict quantified terms where everything is measured.

Once the companies are plotted, lines can be drawn around those that are close to each other – free-hand irregular shapes are far more useful here than beautifully drawn circles. These are strategic groups in the industry and should be labelled in evocative ways to encourage deeper thinking about the groups than just the axes of the chart would indicate on their own. It is always worthwhile repeating the exercise to see if the groups remain with different variables. This way the robustness of the groups can be determined. When the groups are identified there is a further check to make. If the groups line up on either diagonal axis, then the axes are correlated and the value of the analysis is diminished.

The power of strategic group analysis is that it allows useful interrogation of the graphic that is produced. Financial data can be added to the figure of organisations’ profitability in order to identify industry profit pools and areas where little profit is being made. It is then instructive to think about whether companies in one strategic group (a low profit area) might move to a high profit area. This will prompt discussion about whether there are “mobility barriers” (a concept that resonates with barriers to entry in the Five Forces analysis) to prevent new entrants (these are shown as solid curves in Figure 3.7). These might be technical, brand, reputation or financial barriers, for instance, that impede the movement of organisations between groups. Over time mobility barriers may be eroded or overcome and they may even be developed. Equally there may be barriers to exit that are preventing low profit organisations from leaving their area. This may help explain profit pools in an industry and whether they are durable or ephemeral.

The analysis is also useful in identifying “white spaces” – areas where there are currently no competitors. It may well be that new innovative possibilities have been identified and should be considered as new strategic opportunities (assuming that any mobility barriers can be overcome). Of course, there may also be good reason why these white spaces exist as they may be combinations that customers do not value and will never value. They simply provide ideas, or hypotheses, that may be tested further through market research.

Complementors

Complementors are companies from which customers buy, or to which suppliers sell, products that are complementary to the organisation’s products. A complementary product is one that makes customers more willing to buy it or suppliers more willing to supply it. Hence, manufacturers of games consoles and designers of games are in a complementary relationship in that increased success of PlayStation, for example, is of value to the designer of PlayStation games. Similarly, Microsoft would cooperate readily with a games designer who promised a “killer” Xbox game.

Complementary products have negative cross-elasticities of demand: as the price of Product A increases the demand for its complement, Product B, decreases. A recent example of this was the impact that sharply rising gasoline prices had on the demand for the complementary products of cars in the USA. As gasoline prices rose the demand for gas-guzzling SUVs declined to be replaced by demand for cheaper, more fuel-efficient, vehicles. For car companies like Toyota, which made the same profit margin from one SUV that they made from 10 small cars, the impact of complements was significant.

Functional necessities, such as games and consoles, CD/DVDs and players, pens and paper, etc., are obvious examples of complementary products/relationships. But so too is the relationship between roads and cars, yet initially the major car companies in the USA had to build seedling roads to encourage public pressure on government to develop highways – a lack of roads would have discouraged many from buying a car.¹¹ The Michelin restaurant guide, by encouraging gastronomically inclined car owners to drive to distant restaurants, also encouraged tyre wear and purchase – hence restaurants become complementors of tyre companies.

Competitors can also be complementors by increasing the market size for the product. Hence, although the low-cost airlines in the Western world have certainly caused major problems for the full-service flag carriers, they have also generated a significant increase in the number of people who are flying. In the long term this may prove to be very valuable to the major airlines once they have reduced their operating costs in line with the low-price industry in which they now operate.

Co-opetition

The competitive and cooperative tensions in a complementary relationship are captured by the term co-opetition, first used by Brandenburger and Nalebuff. As well as helping to increase the size of the value pie through complementarity, organisations become increasingly able to compete to grab more of it if they:

• Become substantially bigger than their complementor(s)
• Have a greater influence on pull-through of customers
• Have more credible threats of integration into their complementor’s functions than their complementor is able to muster
• Have customers who find it costlier to switch from the firm’s product than from the complementor’s offering.

For example, in the complementary relationship between PC manufacturers and software developers, Microsoft’s share of the bundled value of hardware and operating system has not diminished as prices of PCs have tumbled over the past two decades. A quick run through of the above factors will help to explain this.

Heightened awareness of complementors has been a factor in mergers between content and channel providers such as Sony with Columbia Pictures and AOL with Time Warner. In these examples, the complementarity was seemingly obvious but subsequent value was not, e.g. Sony wrote off 3.2 billion dollars at the end of its complement-driven acquisition and the AOL Time Warner deal has gone down as one of the worst in history.

We started this chapter by asking why it was that some industries are more profitable for companies and investors than others. As discussed in the sections above, some of the reasons for this lie in the interacting forces of the industry and the different stages of its evolution. While some industries have product–process–buyer interrelationships that lend themselves to multiple opportunities for advantage over other organisations, others have dynamics that constrain the ability of the organisation to outpace its rivals. The strategic hells of near perfect competition, augmented by overcapacity in some capital-intensive industries, can be contrasted with the strategic heavens of differentiated oligopolies or brute monopoly power.

Industry forces are demonstrably important, as are the other environmental forces covered in the discussion of the macro-environment in Chapter 2 and the description of the role of key stakeholders in Chapter 1. However, environmental considerations are neither the sole, nor necessarily the most important, determinants of the individual organisation’s strategic fate. Some organisations consistently outperform their industry rivals as well as other firms in more attractive industries. Levers of successful strategy are in the hands of the managers, and it is to these levers that we turn our attention in the next part of the book, which deals with strategic, resources-based, business model and corporate strategy advantages to strategy development.

3-1 Sportsbrand: Winners and Losers¹²

In the 1960s, a change took place in the sporting apparel and footwear markets. Until then, by far the most important consumer had been the amateur or professional athlete who wore the shorts, tops, tracksuits, specialist shoes and other paraphernalia necessary for his/her particular sport. Of this group, the largest segment comprised the millions of amateur sports enthusiasts throughout the world. Direct promotions to these consumers and promotion via endorsement by top athletes made a performance-enhancing proposition, i.e. “wear our kit and be a winner”. Then, in the “swinging sixties”, pop groups like “The Rolling Stones” began to wear “trainers” (i.e. running shoes) as a counter-cultural symbol of youthful rebellion; and so Reebok, Nike, Adidas, etc. became fashion as well as sports brands.

The wholesale global sportswear industry is worth more than $60bn per year and nearly $150bn at retail. The top two brand companies, Nike and Adidas/Reebok, share 40% of the branded market (29% of the total). While these firms retain the core competitive functions of marketing and design, manufacturing is outsourced to the lowest cost sources in a long global supply chain (Figure 3.9), e.g. market leader, Nike¹³ (20% of the branded market) has over 700 suppliers worldwide.

The targeted sportswear consumer, particularly the teenage and young adult segment, is fashion sensitive and relatively price insensitive. Wearing what is “in” is more important than wearing what you have until it is worn out. High-profile sports teams are aware of this dynamic and regularly change the design of their (branded) playing shirts (their “strip”) to profit from loyal fans who “must have” the latest shirt with the name and number of their favourite player added at extra cost. Sporting teams, however, pale into retailing insignificance compared with giant consumer distributors like US-based Wal-Mart or France’s Carrefour. While 80% of athletic footwear sales and 75% of sportswear are sold under brands, retailers understand that even fashion conscious, price-insensitive customers will, if given the choice, pay the lower of two prices for their chosen branded item. So being able to offer that lower price is a key competitive weapon. As they thrust and parry with price reductions the retailers constantly put pressure on their suppliers for compensating cost reductions to ensure that retail margins are maintained.

While retailers set the consumer price, the brand company infuses the product with its “value”. Creating image-based value means that marketing is the major cost as both saturation media coverage and celebrity endorsements are expensive. In making over $1bn profit in 2004, Nike expensed nearly as much on marketing. Yet, while nothing is spared on value-creation in design and marketing, things are entirely different at the production end. Here the watchwords are “efficiency” and “cost reduction”. These watchwords are passwords for the agents, trading companies and manufacturers seeking access to “manufacture and supply” orders.

Some of these intermediaries themselves are large multinationals but, like the myriad of smaller companies and the even smaller subcontractors that supply them, are dependent for their corporate lives on winning the orders of Reebok, Adidas, etc. As well as pressures on product cost, this level of the supply chain must manage complex forecasting, inventory and logistics algorithms as retailers respond to variable consumer demand by giving shorter lead times for more frequent but smaller orders. Hence these suppliers bear most of the risk and costs of inventory management as well as the challenge of continuous cost reduction.

Flexible low-cost manufacture in a labour-intensive product demands flexible, low-cost workers. Hence the supply chain ends in countries like China, Cambodia or Indonesia, the comparative advantage of which lies in an abundant supply of low-cost (i.e. poor) workers. On 1 April 2010, the official minimum wage for full-time workers in Shanghai, one of China’s most dynamic and modern cities, rose by RMB 160 to RMB 1,120 ($164) per month with the wages of hourly paid workers moving from RMB 8 to 9 ($1.31) per hour. On Nike’s official website the price of shoes ranged from a low of $45 for a sandal to $110 for the top of the range, customisable pair of runners.

Some suggestions

Price is the final manifestation of the ongoing power struggle for value between suppliers and buyers throughout the supply chain. In the “supply chain”, i.e. the horizontal dimension of the Five Forces diagram as it is represented in the text, it is price sensitivity that determines how keenly price gains and reductions will be sought and relative bargaining power that determines which “partner” bears more of the ensuing cost. “Winners and losers” should perhaps more accurately be denoted as “winning and losing” at the downstream (i.e. more toward the consumer) end of this industry because there tends to be an ebb and flow of who is “on top” as the big guys (large manufacturers, brand companies and retailers) arm wrestle each other. But, like all power hierarchies, the less power you have the more dependent you are on the largesse of others and the final upstream “supplier”, i.e. the worker, captures value consistent with his/her low power.¹⁴

3-2 Carrefour: The Price of Entry

As the takeover battle for Safeway PLC, Britain’s third largest supermarket chain, was being waged in 2003, there was widespread speculation that the French superstore giant, Carrefour, might enter the fray. For them the question was whether the UK supermarket industry was sufficiently attractive to enter.

The UK supermarket industry as a whole was worth some £100bn a year. The main activity of these supermarkets was food and drink retail, although most had also added petrol stations to their outlets and had also begun to branch into clothing retail with significant success. The primary activity, however, remained food and drink retail and UK consumers bought 80% of their food, 75% of fresh vegetables and fruit, 65% of fish and meat and 50% of milk from the five largest supermarkets. These supermarkets, in order of market share in 2003, were: Tesco (25.8%), Sainsbury’s (17.4%), Asda (15.9%), Safeway (10.0%) and Wm. Morrison (5.9%). Pre-tax profits for these companies mirrored their size, with Tesco generating £1.4bn, Sainsbury’s £0.57bn, Safeway £0.36bn and Morrisons £0.24bn. Asda’s figures are not known because it had been acquired in 1999 by the world’s largest grocer, Wal-Mart of the USA. Despite this profitability, the overall growth rate for the industry had slowed in recent years to 2.9%, which was equal to the growth of the economy as a whole.

The main suppliers to the industry were farmers and fast-moving consumer goods (FMCG) companies. Located around the world and supplying thousands of products, the number of farmers involved was huge. Colossal improvements in transportation in terms of both lower costs and refrigeration had opened massive sourcing opportunities for the supermarkets. With increasing levels of competition, farmers attempted to work together through cooperatives to improve their negotiating position vis-à-vis the supermarkets. However, unless the product was particularly valued by the supermarkets, these organisations had little effect on the terms of trade achieved by the farmers. The FMCG companies, however, such as Kelloggs and Heinz, operated on much larger scales than the farmers, but still faced a challenge in finding opportunities for large volume sales in the UK. While their brands protected their margins, the supermarkets had been investing in their own brands with mixed results. Some FMCG companies were willing to supply stores’ own brands alongside their own, despite some cannibalisation of their products, whereas others, such as Kelloggs, refused to manufacture anything other than their own branded product. At the time of writing, a very large merger was announced between Procter & Gamble and Gillette – two large FMCG companies.

The main customers of the supermarkets are ordinary people in the UK. Everyone is within around 15 minutes’ driving time from at least one supermarket. Many people use the supermarkets for large volumes of shopping and may go once a week or less frequently, but spend well over £100 each time. Most supermarkets operate a reward scheme so that consumers gain points on their store card relative to the amount spent. This can be redeemed against later in-store or petrol purchases. Most regard the supermarkets as an efficient way to buy a wide range of foods and essential household products. In an increasingly time-poor society, this efficiency is attractive to many shoppers. However, there are also good café facilities for those with more time to spend, such as older people or those with children. The supermarkets have also launched home shopping, where customers set up their order preferences on the internet and are then able to order whatever they want for a specific delivery time. Although it is time consuming to set up the initial order, home shopping is proving increasingly popular. Despite the heavy use of supermarkets, both in-store and home delivery, supermarket shopping is not really much of a topic for conversation among shoppers and it is fairly rare for them to compare these sorts of shopping experiences.

The prime competition for supermarkets is the corner shop, which has fared very badly in recent years. However, trade magazines suggest that the local shop is fighting back by focusing on more specialty products. Delicatessens, wine shops, butchers and cafés are all beginning to flourish again as consumers enjoy taking time choosing among high-quality produce. Another source of competition is from farmers’ markets. Mindful of the huge profit margin that supermarkets are making on products sourced from the UK, English farmers are setting up their own farm shops and also attending farmers’ markets where they can sell fresh produce at prices significantly below those of the supermarket. Interestingly, Sainsbury’s recently announced the opening of its own farmers’ market shop in central London, to much disapproval from consumer groups.

For Carrefour, the UK supermarket industry would be a significantly different environment than in France. There are strict planning regulations for the building of large out-of-town supermarkets, and very few stores of the appropriate size are now allowed anywhere. The best sites are also taken. Carrefour does not have a reputation in the UK and it was mindful that the French are not always well regarded in the UK. Carrefour was also aware of the frustrating tactics that the UK supermarkets used in their attempts to prevent discount operators Aldi, Netto and Lidl from setting up their own operations. Through lobbying Parliament, these low-cost retailers had to operate initially as clubs, requiring a membership fee from new customers. With all of these factors to consider, Carrefour needed to decide whether to try to enter the UK supermarket industry and whether a bid for Safeway was an appropriate step to take.

Notes

1. 1. We follow Michael Porter (1980) in defining an industry as “the group of firms producing products that are close substitutes for each other” (p. 5). There can be several markets (i.e. groups of customers with similar needs) in an industry and so, for example, the automotive industry has markets for sports cars, sports utility vehicles, saloon cars, trucks and so on.
2. 2. ROIC expresses Earnings before Interest and Tax (EBIT) as a percentage of Average Invested Capital (i.e. total capital minus cash and current liabilities). It is a measure of the return on the capital that is invested in the business as a means of creating value (and hence the subtraction of cash assets and current liabilities which are basically interest-free loans from suppliers) and correlates significantly with share price over an extended time. The Weighted Average Cost of Capital (WACC) measures how much the overall investment in the company is costing and so ROIC-WACC gives a measure of how much shareholder value is being created or destroyed over any period.
3. 3. Perfectly competitive industries, like “rational” people, are not found in their theoretically pure form in the real world. However, many markets exist where the final outcome of perfect competition, i.e. a lack of discretion in pricing, is evident, e.g. oil, wheat, coffee. A common mistake is the one of confusing commodity products where the market is perfectly competitive, with the commodity producing industry wherein large players with large unused capacity face high exit costs. The theoretical perfectly competitive industry earns normal returns, i.e. returns equal to the cost of capital. Sustained losses in capital-intensive industries such as the airline industry, much of the time, are an indicator of non-perfect competition. Empirical research indicates that if an industry is characterised by any two of (1) over-capacity, (2) many sellers and (3) undifferentiated products then prices tend to be forced down towards marginal cost and returns below the cost of capital. Besanko et al. (2009) make this point in the context of discussions on perfect competition, and the discussion in the chapter borrows heavily from their insights.
4. 4. Much of the discussion of the life cycle is standard. Robert Grant in Contemporary Strategic Analysis (2016) offers a detailed treatment.
5. 5. Information and communication technology has made imitation faster and more efficient across all domains of human endeavour. Hence comedians find their jokes have a very short life as original material, as they whizz around the internet in nanoseconds and young sports hopefuls can record and imitate the new tricks of the champions in the comfort of their lounge. It is no surprise to the thinking strategist that efficiency/cost focused methodologies such as Business Process Engineering (BPR) and Activity Based Management (ABM) have significant impacts on managers in mature industries. Similarly, it is no surprise that doom-mongering journal articles railing against the perils of such imitation-as-strategy also appear in regular cycles. Unfortunately, impassioned exhortations to “dare to be different!” or “invent the future!” or “innovate or die!” have as much credibility in many mature industries as the directive to “leap to the top of a large building in a single bound” has for most mature adults – no matter how many exclamation marks are used. Make no mistake, one adult may be able to leap to the top but, in the main, those that keep trying to do so lose out to those who use the elevator, just like everyone else. If someone does eventually leap to the top, his/her leaping methodology is quickly (and cheaply) copied and everybody goes a-leaping.
6. 6. Kathryn Harrigan (1980 and with Michael Porter in 1983) has written on decline.
7. 7. Oligopolies are industry structures where the dynamics of game theory most often emerge and, in particular, that part of game theory that deals with zero sum games or, as they are more popularly known, the Prisoners' Dilemma. For example, although no one company in the industry might want to reduce prices (as buyers demand) or increase industry capacity, the fear that the others will drop prices (and gain the business) or increase capacity (and hence reduce costs) drives all players to reduce prices and/or increase capacity due to the fear of being left out. After the decision, all competitors make less money because of the price reduction or, in the case of the capacity decision, because the industry is now plagued with chronic over-capacity and the associated increase in costs. Dixit et al. (2009) offer a comprehensive treatment of this complex area.
8. 8. Traditionally MES has meant Minimum Efficient Scale with the strategic emphasis being on scale-based cost reductions (i.e. increasing supply side returns to scale). We use “size” for two reasons. (1) There are other size-based cost dynamics such as scope and experience effects where the former is a version of scale but the latter is driven by cumulative volume (i.e. past “size”) rather than current production capacity (scale/scope). (2) On the demand side, size is important in those industries that demonstrate network effects, i.e. where the value of the product to the customer is a positive function of the number of other users (increasing demand side returns). Hence in the traditional areas of telephones and in the current industry of web-based auction companies (e.g. eBay) or social networking industries involving such companies as Facebook or Twitter, the value of the product is a positive function of the number of others currently in the “network” and/or the potential customer's expectations of the number of future users. As with many other areas of strategy, the potential for network gains has tended to be spectacularly hyped by some. Liebowitz (2002) counters the more extreme claims.
9. 9. Note that size per se does not automatically engender monopoly power; it is the degree of contestability of the market/industry that underpins pricing discretion. If impediments to entry and exit (low exit costs contestability) are low then some “monopolists” are forced to maintain prices at a level that would prevail under competition as the ever-present risk of entry prevents the large firm from engaging in predatory monopoly pricing. This is an argument that some have used in support of Microsoft during that firm's frequent battles with industry regulators in Europe and the US. Microsoft argues (among other things) that the nature of the software industry is such that costs of entry and exit are low (the start-up of now-monsters such as Google supports this view) and innovation such a constant threat to Microsoft's positional power that the firm is forced to continue to innovate and to keep its prices low – neither of which is consistent with monopoly power. Netscape might be forgiven for being somewhat credulous.
10. 10. Brandenburger and Nalebuff (1996: 17).
11. 11. Ibid.
12. 12. Source: adapted from the report “Fair Play at the Olympics” by Oxfam GB, available at www.fairolympics.org. See also www.cleanclothes.org.
13. 13. See Nike in Chapter 2 Macro Shocks.
14. 14. In the sports apparel and footwear industry the power is concentrated downstream but in others it can be upstream (concentrated) raw material suppliers that have the most power.