Welcome to this first lecture in Week 4. So in this first lecture, we're going to look at the choice of market, and specifically at the attractiveness of a market. How does this all fit in to the overall process of entry? So planning entry starts with figuring out if your firm can even start thinking about entering a market. Do they have the resources? Do they have the financial resources? Do they have the managerial resources? Are they in any way unhappy with the current business? If that's the case, then thinking about entering a new market might be a good idea. In the second step, they have to choose which market they want to enter and we're going to look at that in more detail. If they've decided which market they enter, they have to choose an entry type, which we're going to get to later. And finally, they have to choose an entry strategy but for now, let's focus on the choice of market. The choice of a market means that we're going to look at the attractiveness of a particular market and see well, does it make sense for us to enter an industry, enter a geographical market that we've just analyzed. Secondly, when we do think of entering, are there any entry barriers that we have to think about, and we have to take into consideration. When we think about market attractiveness, the most commonly used tool is a framework called Porter's Five Forces, named by Michael Porter who is a professor at Harvard Business School. So Porter's Five Forces basically describes a set of five different characteristics of a market that determine the attractiveness of this particular market or industry. And the first, and probably the most important one, is how intensive, how intense competition within the single industry is. Right, so if you have harsh competition between lots of players, then that may mean that each of these players doesn't make a great deal of profits. And in that case, entering is not an attractive proposition for you yourself. Suppliers play a big role. And that may seem counter-intuitive, but for now suppliers exert bargaining power. So as someone who has to buy inputs day in day out from a particular group of suppliers or from one particular supplier, you're going to be concerned about the fact that he may have bargaining power over you, okay, so that's something that you need to worry about. The same with buyers. So if buyers hold large bargaining power, maybe because they buy up a large share of your output. So think of someone who sells mainly to governments or to large institutions. Then here, every single contract, every single sale, is going to make a big impact on your annual profits. So therefore, the customer, a buyer who's very important to you, who represents a large share of your overall revenue, is going to mean that he holds bargaining power over you, which might depress your profits, might lower your profits in the long run. Potential new entrants, so this is an interesting one because on the one hand a market becomes more attractive if it's hard for firms to come in. Okay, so this is not going to erode profit margins if other players cannot come in so if the entry barriers are significant. On the other hand if you put yourself in the shoes of a potential entrant then high entry barriers are of course a disadvantage that may be a problem in that case. Finally, substitutes, the role of substitutes is an important one. Because if you can replace whatever you're currently selling, whatever is currently being sold in the market, by something that's very close, something that's very similar, then the industry itself might not be an attractive one. Why is that? Well, if you try to raise prices, if you try to increase your profit margin, and most of your customers are going to go and buy a substitute, then, you're unlikely to be making huge profits from that particular market. So, the role of substitutes means that if there are close substitutes, that increases the price elasticity, the price sensitivity of consumers, which means that your consumers are going to start running away the moment you start trying to increase your profits. So all in all, we've got these five forces: competition within the industry, suppliers, buyers, potential new entrants, and substitutes. Finally, while not part of the formal five forces, we also have to consider government regulation and taxation. So of course if you're in a market that's highly regulated, then you might not be making the amount of profits that you would otherwise expect to make. So government regulation is going to be an important factor in some industries, all right? Some industries are just highly regulated which makes it more difficult for firms to act as they like which makes it more difficult to choose strategies basically unrestricted by any other rules and guidances. So, to sum up now, if we think about the process of entry, and if we think about choosing a particular market, market attractiveness is determined by Porter's Five Forces plus the role of the government. So, the Porter's Five Forces are competition within the industry, the role of suppliers, the role of buyers, the threat of entry and finally, the role of substitutes, okay? So these five forces plus government are going to determine how attractive a market is going to be. So thanks very much and I'll see you in the next lecture.
