Porters 5 Forces Explained

Five forces analysis looks at five key areas namely the threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry.

The threat of entry.

• Economies of scale e.g. the benefits associated with bulk purchasing.
• The high or low cost of entry e.g. how much will it cost for the latest technology?
• Ease of access to distribution channels e.g. Do our competitors have the distribution channels sewn up?
• Cost advantages not related to the size of the company e.g. personal contacts or knowledge that larger companies do not own or learning curve effects.
• Will competitors retaliate?
• Government action e.g. will new laws be introduced that will weaken our competitive position?
• How important is differentiation? e.g. The Champagne brand cannot be copied. This desensitises the influence of the environment.

The power of buyers.

• This is high where there a few, large players in a market e.g. the large grocery chains.
• If there are a large number of undifferentiated, small suppliers e.g. small farming businesses supplying the large grocery chains.
• The cost of switching between suppliers is low e.g. from one fleet supplier of trucks to another.

The power of suppliers.

The power of suppliers tends to be a reversal of the power of buyers.

• Where the switching costs are high e.g. Switching from one software supplier to another.
• Power is high where the brand is powerful e.g. Cadillac, Pizza Hut, Microsoft.
• There is a possibility of the supplier integrating forward e.g. Brewers buying bars.
• Customers are fragmented (not in clusters) so that they have little bargaining power e.g. Gas/Petrol stations in remote places.

The threat of substitutes

• Where there is product-for-product substitution e.g. email for fax Where there is substitution of need e.g. better toothpaste reduces the need for dentists.
• Where there is generic substitution (competing for the currency in your pocket) e.g. Video suppliers compete with travel companies.
• We could always do without e.g. cigarettes.

Competitive Rivalry

• This is most likely to be high where entry is likely; there is the threat of substitute products, and suppliers and buyers in the market attempt to control. This is why it is always seen in the center of the diagram.

Cycle of Family Wealth

The Chinese have an expression: 富不过三代 (fu bu guo san dai) Literally: Wealth does not pass three generations.

Meaning: It's rare the wealth of a family can last for three generations (the 2nd may see the value of hard work, the 3rd, forget it).

Year zero: First generation: Wealth creation

Starting capital: Zero. The family income generators (2 parents) are hard-working and manage to invest 10% of their after-tax income equating to RMB150/month into the Chinese stock market.

Year 45: Second generation: Wealth preservation

The parents ensured that their three children didn't have to experience hard times. The children attended decent enough schools and were fortunate enough to mix with similarly privileged friends. There is general unease in the family however, as the second generation gain independence.

The pressures of wanting to keep up with the lifestyles of their wealthier friends, coupled with an unfortunate down-turn in the economy, results in a halt in savings and as a result the RMB 50.5m family wealth no longer enjoys any debit order increases. In addition, the capital base is required to maintain an income for the folks who have now retired.

Year 75: Third generation: Wealth destruction

The second generation finally inherit the family wealth and it is split three ways. By this time the RMB 45,000/month comfortable family living has ballooned to RMB 600,000/month as a result of inflation. Each family now only enjoys income from a capital base of RMB 110m and, because they themselves are approaching retirement they opt to de-risk their portfolios, which results in the capital invested unfortunately realising a more sedate 3% real rate of return.

After a torturous revelation later on in life, one of the 3rd generation children decided to carve out a career as a financial advisor. She made the following insightful observations:

1. Her grandparents did a fantastic job of consistently placing 10% of their monthly income into an equity investment over a 45 year period.

2. As they had generated sufficient capital to live off the dividend income there from, her grandparents had stuck with their equity investment throughout their retirement.

3. Unfortunately, her parents had failed to adopt a savings ethic and they had relied optimistically on their inheritances to generate their own retirement income.

4. The 3rd generation children (herself included) failed to comprehend the importance of generating an income and as a result were unable to adopt a savings plan or meet their own costs.

Time to start again.

How About We Just Let The Economy Go Completely Down The Tubes?

After a Congressman recently said on C-SPAN that the TARP was only passed after warnings of national collapse and martial law, a blogger at DailyKos came to the conclusion that this is just what the dr. ordered. That what we really need is for everything to be wiped out:

REALLY? I believe 'em, and I get why Dodd & Co. weren't about to let it happen. But... REALLY... wouldn't that have been the best thing for everyone? ight now, we have a Republican party devoid of credibility playing politics with what tiny percentage of the GDP can actually be spent to help people. What would have happened if the system simply, fully collapsed?

I seriously doubt they would institute "martial law"- maybe an "economic martial law" as in freezing all assets valued over x amount. Most companies in the U.S. and the world would be, on paper, insolvent. And, suddenly, all this wealth that has been transferred to the top 1 percent, is completely meaningless. You and I, with our sub-$100,000 accounts, would be fine. But the massively wealthy, it would all come crashing down. It would be yet another in a series of illustrations beginning with the robber-barons of the late 19th century, that this kind of greed-based-crony-capitalism DOES NOT WORK.

It would also have been the END of the unelected Fed presiding over the U.S. monetary system. Remove monetary policy from the Fed, and place it back in the hands of the people (through the House and Senate), and suddenly when main street suffers, politicians suffer. It changes everything.

It would also be the end of the IMF, etc. as there would be no money left to help deploy crony capitalism to the third world.

We wonder. Are there a lot of folks out there who feel this way? That we'd be better if everything went to all-out crap?

(via Nate Silver)

On Sale? Really? Prove it.

Fantastic article I found, On Sale? Really? Prove it, discussing the pricing inequities found in the world today.

With major companies now trading on the Market for the price of a hamburger, you’ve got to wonder what a SALE! sign means when you see it in every retailer’s window. I don’t think their idea of a SALE! is my idea of a sale. Like, before this whole depression works its way through the system, I think the idea of pricing is going to need a good hard look.

I’ll give you a few examples.

I eat a restaurant that business people frequent in order to a) have lunch and b) feel they’re important. It’s been a hot spot for quite a while, and its prices never really mattered because everyone there conducted their lives on plastic. That of course is changing. The big dudes who are doing all right still go, but the mid-level and borderline players no longer throng. I want you to guess the price of their cheeseburger. Give up? $35. That’s right. I asked the maitre d’ the other day whether they were planning a Recession Special to keep the seats somewhat more filled. He got very offended and went off on a screed about how expensive it is to maintain a restaurant in midtown Manhattan. Of course it is. But unless they moderate the prices, I’m guessing the grand institution will be out of business soon. Which is better? Selling five cheeseburgers for $35 or fifteen cheeseburgers for $20? You do the math.

In my little California town, there is a furniture store. It’s always had ridiculous prices, but their stuff is nice. There was, in particular, a bedroom dresser that we had our eye on. It was, I think, worth about $400 in real American dollars, so naturally, throughout the Fall, they had it in their window for $2500. No, I’m not kidding you. The store catered to people with too much money, and people with too much money don’t want to pay a little bit for the things they like, they want to pay a lot. Except there aren’t so many of those people around anymore. So last weekend there was a big SALE! sign in their window, as there is right now in virtually every window of every store in the United States, from Madison Avenue to Wilshire Boulevard. And we went in to look at the dresser and indeed, yes, it was ON SALE! For $2000. Come on, man. Give me a break. That is not a SALE. That is not even a recognition of reality. I’m positive that, just as my restaurant paid $1.29 for the meat with which they make their $35 cheeseburger, this place paid $300 at some yard sale for that dresser. When it’s ON SALE for $400 or $500, let me know. Because I like it.

I’ll tell you two places that know what a SALE means. The first is Wal-Mart (WMT). Today I heard an ad on the radio promoting greeting cards that start at 44-cents. Okay. That’s an amount I haven’t heard mentioned in a while. Their numbers beat analysts’ expectations last week. The other is McDonald’s (MCD), where sales were recently up 7.1%. I can assure you that a very good Big Mac in that establishment tops out at well under $35, and is probably a better buy at that price than most bank stocks that come to mind.

Two Cows Go to Wall Street

Best explanation that I have seen describing the economic fiasco in the US, from Clusterstock:

You have two cows.

John Paulson borrows one cow so he can sell it for $100. He gives you $10 as collateral.

You buy your neighbors cow for $100, which you finance by taking out a $90 loan from the bank and use John's $10 to make up the rest.

You brag to everyone about your financial health. You have assets--two cows you own, plus one Paulson owes you--worth $300, and liabilities of just $100.

A third of the country goes vegetarian.

You thought your two cows were worth $200 and now they are worth $140.

You express confidence in your financial health. Your assets are now worth only $200--your two cows plus the one John owes you--but your liabilities are still only $100. If necessary, you could sell the assets at this distressed price and pay off all your loans.

You hold onto your cows because you are sure the market is "dislocated." Some day someone will want to eat beef again.

The rest of the country goes vegetarian. Your two cows are now worth $2 each to guys who want to make dog food.

John Paulson buys a cow in the market for $2 and he gives it to you as repayment of the loan. You now have three cows worth six bucks.

John wants his $10 back.

The bank calls. It wants its $90 back.

You call the Federal Reserve and ask for a bailout.

If States Were Countries (By GDP)

Link to Map: Tinypic

Wisdom from Zataki

Image via Wikipedia
Here are some of my favorite Economic/Financial web sites:

China Financial Markets - this website gives an in-depth viewpoint of the Chinese economy that is a must read if you have an interest in China

Naked Capitalism - my favorite financial website as Yves Smith does a tremendous job of explaining the latest, most difficult economic problems in an understandable manner

ClusterStock - Interesting takes on current financial events

The Business Sheet - Sister site of ClusterStock, that gives further insight into current financial events

24/7 Wall St. - Opinions on diverse financial news