2.12 YOUTH MARKET
3.6.2 Porter's Five Forces model
Porter (1980) came up with a new model of competitive industry analysis known as Porter's Five Forces. Porter classifies five forces or "rules of competition" as follows:
1. Threat of new entrants.
2. Bargaining power of suppliers.
3. Bargaining power of buyers.
4. Threat of substitute products and services.
5. Rivalry among existing competitors.
Attached is the cinema exhibitions industry analysis as per Porters five forces model.
Threat of new entrants:
• The barriers to entry are high in this industry. It requires huge capital invest- ments to open a cinema versus a retail operation such as a supermarket. On average it costs R l million per screen. It is also difficult to find suitable sites.
Cinemas need to be in big shopping centres as they take up a lot of space.
• With two big players in the industry (Nu Metro Theatres, and Ster Kinekor Cinemas), the new incumbents would face fierce responses should they en- croach on their markets. Ster Kinekor Cinemas and Nu Metro Theatres have
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the economies of scale and financial resources to make it difficult for a new entrant
• Cinema exhibition is a specialised industry, and the current operators have been in the industry for a long time. They have acquired a lot of experience and know how which would make it difficult for the new entrant to compete with
• The existing players have also managed to build brands for themselves that are easily recognisable by the consumers, and which results in customer loy- alty. The new entrant would have to compete with this
• The new entrant could also encounter hurdles in the distribution of products, particularly new release movies. This is made worse by the fact that two of the biggest distribution companies are owned by the same company that owns the two biggest exhibitors in the country (Nu Metro Distribution and Ster Kinekor Distribution). There are anti-competitive laws that monitor the relationships between distributors and exhibitors to ensure that the playing fields are level and that one exhibitor/distributor is not treated unfairly against the other. This is particularly important since the two exhibitors have distributors as part of their companies
• There are small switching costs for consumers to switch to the new entrant provided the offering is of the same standard as the existing operators
2. Bargaining Power of suppliers:
• The bargaining power of suppliers is concentrated in this industry. There are three distributors that service the cinema industry with films. These films cannot be procured from anybody else. They decide to whom and in what quantities they are going to supply the films to
• With the above in place, the exhibitors also have substantial influence on the business of the distributors. When a film is first released, the distributors rely solely on the exhibitors to show their product, and this is how they make
their revenues, therefore it is in the supplier's interest that the relationship with the buyers (exhibitors) is sound and stable
• There is strong competition between the different distributors, and buyers can use this competition to play one studio against the other. This tactic how- ever is available to the distributors too, and they can play one exhibitor against the other
• There are anti-competitive laws that monitor the relationships between dis- tributors and exhibitors to ensure that the playing fields are level and that one exhibitor/distributor is not treated unfairly against the other. This is particularly important since the two exhibitors have distributors as part of their companies 3. Bargaining power of buyers:
• Buyers in this industry have a multitude of available entertainment alterna- tives to choose from.
• The industry operates in an environment of stagnant cinema attendances, and in a mature market. The number of cinema patrons is not growing, and there- fore the current cinema patron has a lot of power. These current cinema pa- trons represent the bulk of the industries revenues
• Buyers in this industry do not have a thorough understanding of how the in- dustry works. This lack of information often results in unfair requests from the buyers. They do not understand that distribution and exhibition are two different businesses, and that there is a supplier/distributor relationship be- tween the distributors and the exhibitors.
4. Threat of substitute products or services:
• There is a high threat of substitute products and services in the form of alter- native entertainment options. These vary from dining out, clubbing, picnics, to watching DVDs at home
• There is little if any switching costs to these other entertainment alternatives
5. Rivalry amongst existing competitors:
• The cinema industry operates in a market with no market growth. Therefore market share growth at the expense of the competitors increases the intensity of rivalry amongst existing competitors. The exhibitors are also faced with escalating operating structures in an environment of stagnant attendances.
The pressure to service these escalating operating costs leads to fights for a bigger share of the market and effectively intensity of rivalry
• This is a specialised industry with specialised assets, which can't be sold to anybody else, but a cinema operator. This means that companies tend to stick it out longer than they would if they could exit the industry. There are high barriers to exit. Cinema operators also have to sign long leases with their landlords, and this means that it is extremely difficult and cosuy to exit non- profitable sites.
• There is little differentiation between the different exhibitor's offerings, therefore they tend to compete on price alone to gain market share.
• There rivalry between the two biggest exhibitors is worsened by competition from strong regional independent exhibitors in different markets and with different business models. Competing with all these independents and still look after the national business is a challenge and intensifies the rivalry be- tween the bigger exhibitors as having more competitors reduces their share of the market in those regions
There are a number of challenges that could confront a business in its business cycle, and these different challenges require different corporate strategic choices.