Case Statement:
Your client wants to enter the furniture industry. What factors should be considered while taking this decision? Make recommendations to the client on the basis of your analysis whether to go ahead with the market entry decision
C: I will first consider the Porter’s Five Forces model to get a holistic view of the whole scenario. So, the first thing I would like to know is how intense is the rivalry in the market, how many competitors exist and is there a disparity in the market competition? The rationale behind this is that if there is a large disparity (one firm’s quality is much better than others), in this case, if my product quality is good, even if I cannot be a leader in the market, my firm can still be a profitable one if I provide the market with better quality in comparison to other competitors.
I: There is not much disparity in the market competition and competitors are of similar size.
C: Since the competition is close, I need to make sure that the quality that I am offering is at least equal to or if possible, better than the leading competitor. The second thing I would consider is the supply power since I need a quality product, I need good quality suppliers. Also, I would like to know how many suppliers are there and what is the difference in the prices that they are charging?
I: There is little difference in the prices. However, the best quality supplier only supplies to the market leader and will not negotiate with any new entrant.
C: Okay. Then I will look for other suppliers who will provide the next best quality and for that I will benchmark all suppliers to see who has a good recent history and whose supplies are least defective. I can also look at a new supplier who is trying to enter the supplier market but is unable to do so because of the existing competition. I will benchmark his quality/product with other players in the supply market.
I: If you now have the quality product comparable to the market leader, what will be your next step?
C: Since the question talks about profitability and not about being the market leader, I will go to the third factor of the Porter’s Five Forces model i.e., bargaining power of the buyers because if the buyers are not in a financially stable condition in the geography I am dealing with, I will ultimately be in a loss-making scenario.
I: Why would you be in a loss-making scenario?
C: For a business to sustain for a long time, it is very important that in the initial stages, even if the busines is not making profits, then at least it should be in a break-even situation. To ensure this, the buyer power comes into play. For example, if I am dealing with a geography having 100 people of which only 10 can buy the furniture. Then those 10 people will not favor the new entrant and buy from the market leader. But, if there are all 100 people who can afford the product, even if they are not doing so in the current situation, then at least I have a chance to make them my customers through different marketing strategies.
I: Assuming people can afford the product, what will be your next step?
C: The most important factor to consider is the threat of substitutes in the market because whenever I am setting up a business, it takes a lot of capital. So, I do not want to end up in a situation where I enter a market, invest all my money but the product eventually goes out of practice 2-3 years down the line.
I: Because it is a furniture business, there is no proper substitute available for the product and there has been observed an increase in demand of the furniture according to the recent data. It will continue to increase for a few years. What will be your next step, if any?
C: Now, although I do not consider this as important as the other factors, I would still look at the 5th and the last factor, i.e. threat of new entrants which means how tough or how easy it is for a new entrant to enter the market. This is because if the entry into the market is either tough or easy, it does not predict that the new entrant will be successful or unsuccessful.
I: Can you give an example?
C: If I consider at a human level, the example of XLRI. If I would have thought that there is already existing stiff competition here and I will not be able to make it to the institution, then I would have quit in the initial stages without even trying. Even the case where I would have thought that it is easy to get into the institution, I would have slacked off and both the scenarios could have been detrimental for me because in both the situations, I would have been either over-confident or under confident. The reason for failure would not have been the belief but the lack of data to support that actual thought. Similarly, in this scenario, the data that would help me to figure out whether I should invest in the market or not would come from the other four factors and that would help me to make a wise decision.
I: If as a consultant I ask you whether to enter the market or not, what will be your response to the client?
C: I would ask the client to first, categorize all the data from the 4 factors given above in terms of their relative importance and I would ask the client if he wants to be a successful firm in a short period of time or is the client willing to stay in the market for a long run, even if the results are not favorable in the initial stages.
I: Why so?
C: With every other factor that we have evaluated, we have one ideal scenario (immediate success) and the other one is a practical scenario (failure in the initial stages) that could be possible. So, if the client wants immediate success, if not all, most of the factors need to be in the ideal scenario. But if the client is willing to stay in the market for a long time, then we can look at all the possible scenarios that could exist and categorize them according to their importance to the client and look at the profit-making scenario. And then, based on the data that we have obtained, we will suggest him the optimal solution.
Background Information:
Competitors: Similar size, similar pricing
Substitutes: No substitute available for the client’s product
Consumers: Can afford client’s product
Case recommendations:
Analyse each of the five forces in detail with respect to the given industry.
Highlight the positive/negative impacts on the business.
State the different scenarios that could take place by giving examples wherever possible.
