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The Information Age in Which You Live: Changing the Face of Business
Assignments & Exercises: Question 1
The movie rental sector is extremely competitive due to the presence of numerous avenues that enable many people to rent motion pictures. The analysis of the sector will comprise Porter’s Five Forces, which will assess the relative appeal of entrance into the respective business sector. The respective assessment evaluates specific factors such as the purchasing power of buyers, supplier power, threat of new entrants, threat of substitute products, and rivalry between current competitors.
Buyer Power
The level of the bargaining power among buyers is very high. This is due to the presence of many alternatives that are available to interested clients. Customers possess numerous yet different options for the sole aim of renting movies. On one hand, there are conventional movie leasing stores such as Blockbuster, mail rental firms such as Netflix, shops such as Redbox, and pay-per-view alternatives that are derived from cable organizations such as Home Box Office (HBO). On the other hand, the Internet has entered the market by introducing online download rental resources and subscription services such as iTunes and Hulu Plus respectively. This abundance in movie rental approaches enhances the competitive environment of the movie rental sector. In this respect, the available rental enterprises must possess a superior competitive advantage in order to attract and retain their respective consumers.
Supplier Power
The bargaining power of suppliers is low in contrast to the buyer’s power within the movie rental sector. This is due to the presence of several different rental alternatives for customers. This makes it rather difficult for the rental enterprises within the respective sector to avoid processes such as brand switching, which occur recurrently. Furthermore, the expenses that are incurred in respect to movie rentals facilitate the transition between enterprises in the movie rental sector due to the low costs of switching as well. Nevertheless, the environment is significantly competitive as shown by the transition of many consumers from traditional rental services such as Blockbuster to mail-in rental services such as Netflix.
Threat of Substitute Products or Services
The threat of substitute services or products is high in the movie rental sector. The decrease in the price of digital content ownership, the popularity of file sharing sites, and the entrance of film studios into the movie rental sector has undeniably imposed a significant threat on enterprises involved in the provision of the services in question. This further increases process such as switching in terms of costs, due to the presence of alternatives that literally require little to null expenses such as content ownership and the use of file sharing sites via piracy.
Threat of New Entrants
The threat of novel entrants is not particularly high as expected despite it being a considerable possibility. This is due to the presence of barriers of entry that restrict new service providers from entering the market and gaining dominance. Such barriers comprise content contracts and website ability, which limit entrants from entering the market. On the other hand, established Information Technology (IT) firms such as Google and Amazon are capable of penetrating the market despite evidence of the respective barriers by engaging in processes such as the creation or financing of numerous television series at low production costs.
Rivalry between Existing Competitors
Rivalry between existing competitors is very high in the movie rental sector. The level of competition is fierce as identified by the inclination towards different forms of competitive advantage among the involved parties. Presently, most of the involved parties are focused on the development or support of movies or series in order to establish and retain a consumer base hence reducing switching costs to other enterprises. To this end, it is evident that the movie rental industry is rife with competition. Despite this, it is not a bad industry to enter due to the presence of novel technological advancements such as streaming services and the inclination towards portable devices such as smartphones, which provide a competitive advantage for new entrants as well.
Question 3
Fixed costs = $12000
Variable Costs (Manufacturing and Shipping of Widgets Costs) = $7 for every widget
Selling price for each widget = $22
- Break-even point = Fixed Costs / [Unit Selling Price – Variable Costs]
= 12000 / (22-7)
= 12000/15
= $800
Interestingly, it is imperative to note that each additional unit of a product sold above the breakeven point actually leads to an increase in profit by the quantity of the unit contribution margin, which is the difference between the sales amount and the variable costs. In this respect, realizing a net profit of $15000 illustrates an increase in the sale of widgets above the breakeven point. In addition to this, it is notable that the variable costs identified above, such as the shipping and manufacturing costs, are not subject to any change, specifically in the event that the sales price is increased. This is because the sales price does not impose any effect on the amount of variable expenses. Alternatively, variable costs are solely affected when the amount of the units that are manufactured is changed.