OIG General Board Meeting (03/19/2014)

Market Update this week includes:

  • Fed announced that tapering is most likely to end in October or November. After six months, which is as early as April of next year, interest rates will be raised. After Janet Yellen, new leader of Fed, announced this possibility of increase in interest rates, stock and bond prices tumbled down.
  • In bond market, shorter dated bonds suffered the most in Wednesday’s sell off.
  • US $, however, increased against both euro and yen after the announcement of Fed
  • China’s economy weakened sharply during the first two months of the year. The slowdown was across the board , including retail, manufacturing, housing and investment
  • Alibaba announced last Sunday that it has begun the process of Initial Public Offering in the U.S. Yahoo has around 24% stake in Alibaba. Due to this announcement, Yahoo was 3.6% up pre-market.

A short presentation on Michael Porter’s Five Forces Model:

Michael Porter is is the Bishop William Lawrence University Professor at Harvard University, based at Harvard Business School in Boston (hbd.org). The Five Forces Model is a simple tool to understand where power lies in business situation.The five forces are:

1)Threat of New Entrants

Business Power is affected by new entrants as they can enter a profitable market and take away the profits. So industries make use of certain barriers to entry such as:

-Economies of scale                    -Brand identity

-Proprietary product differences  -Being early to market

-Capital requirements                  -Benefit driven vs image driven products

2)Bargaining Power of Suppliers

This talks about the relative power suppliers have to increase prices. Higher differentiation in input characteristics leads to higher bargaining power ,while presence of substitutes lead to lower bargaining power. Supplier concentration, which is the ratio of total output of products to total number of firms supplying the product, is also an important concept. Higher supplier concentration means the bargaining power of supplier increases.

3)Threat of Substitutes

If substitutes are available then buyers will have more bargaining power. Factors which affect threat of substitutes are: Cost of switching, price of substitutes and buyer’s likelihood to substitute.

4)Bargaining Power of Buyers

This talks about how easy it is for buyers to influence prices. This depends upon the number of buyers and the importance of buyer to the supplier. Often, the powerful buyers have enough power to dictate prices.

5)Rivalry Determinants

If there are many rivals in the industry producing equally attractive goods, then the bargaining power of suppliers decreases and vice versa.

Also, it is very important to compare the revenue of individual firm with its industry. Even if it has enough revenue it might still be underperforming when compared to industry’s performance.

Question related to Five Forces model: A telecommunication company is not earning enough profits. How can Michael Porter’s Five Forces Model be applied here to increase its profits?