Environmental Analysis

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Environmental Analysis

1 Question one
Using the five forces framework, how would you characterize the competition in theluxury goods industry?
Many turn to Porter's Five Forces model while trying to analyze or examine an industry or in a bid to determine how a new business would fit in a given industry given its competitors. The model is a tool used by businesses and companies to figure out how effective they can compete in the current market.Having a good understanding of the underlying causes of each of the competitive forces helps those in the luxury goods market to reveal the main source of the current profitability while at the same time providing a framework for influencing competition in the future. Competition in the luxury goods market is very high and each competitor is using all means available to remain relevant in the marketCITATION Jon13 p 24 l 1033 (Hoffmann and Coste-Manière 24). According to Porter, competition is driven by the structure of the industry and not necessarily whether an industry produces goods or services, mature or emerging, highly regulated or not. In order to maintain market share in the luxury goods market, companies create brand loyalties, strive to benefit from economies of scale and try to create exclusive access to suppliers and distributors. Luxury goods are not basic goods to households and thus consumer will always buy from the most famous brand which reduces the level of competition in the industry. There is also high capital requirement to venture into the industry which further limits new entrants who also face high retaliation from existing companies. Many brands in this industry have acquired suppliers in order to protect competitive advantage and protect themselves from future unexpected rise in supply costs. Small luxury brands have little barriers of distribution, however, the face pressure from powerful groups who prevent them from accessing the multi-brand retailersCITATION Jon13 p 17 l 1033 (Hoffmann and Coste-Manière 17). The threat of substitutes also shapes this market. This is mainly in relation to the price of substitutes, availability, quality and the level of switching costs to customers. High availability of middle price brands and shipping of counterfeit brands is increasing the level of competition in the industry. There is less bargaining power of the buyers; buyers are relatively more compared to sellers and considering consumers buy luxury goods for direct consumption, their bargaining power is reduced. The industry is also dominated by few brands.
2 Question two
How much bargaining power did customer as buyer have during the Great Recession?
In models where prices are determined by the relative bargaining power, the buyer may be willing to do a deal but wants a lower price, the seller on the other end wants a higher price. The more alternative opportunities relative to this deal each has, and the easier it would be to walk away from this deal, the stronger the bargaining power. A recession is a reduction in the volume of sales which is associated with an increase in the bargaining power of sellers of money and a relative fall in the bargaining power of buyers of moneyCITATION Chr09 p 8 l 1033 (Korth 8). Recession reduces the bargaining power of buyers which may trigger them to shift to lower priced alternatives, low quality products or reduce their consumption altogether. Reduction in the bargaining power of consumers makes it hard for them to walk away from a deal. There might be need for other factors such as unemployment to adjust to restore equilibrium back to its original positi...