Sunday, March 14, 2010

Porter's Five Forces and ESPN

The below assignment is for Managerial Economics from my first semester in my MBA program. The assignment was to evaluate the company or department you worked in, using Porter's Five Forces Model.


My professor's comments are in bold.

Enjoy, and let me know what you think in the comments.

Evaluation Form: Managerial Economics: Swann—Social Networking

    Excellent  Good Adequate Weak
                                                                                    (5)              (4)              (3)              (2)

Effective Use of Concepts                                          5                                                                                                                                                                                                                 
Explanation of Company Applications                                     4.5                                                                     

Appropriate Use of Examples                                          5                                                                                                                             
Thoughtful Evaluation of Strategy                                   4.5                                             
             
Point total for the SECA:     _19____    (See comments below—in the Final Showing Markup mode.  Note the questions are rhetorical or indicate where the memo would have benefited from a little elaboration).

ESPN competes in a number of industries. My specific group is in the Social networking industry within Digital Media, which is a broader industry, so I will focus on online Social networking.
Rivalry
Right now, MySpace, which is owned by News Corp., and Facebook lead the industry in sheer user numbers with MySpace being no. 1 and Facebook a rather distant second. Beebo also commands a huge number of users, primarily in the UK. These three compete among themselves.
Interestingly, we do not view any of these properties as competitors in the Social networking space. In fact, my group has built applications that improve their products for free.
Our rivals belong in the next tier of social networks. Here, companies build networks around certain subjects. Whereas Facebook and MySpace try to provide a little something for everyone, my group creates a network for sports fans. Several other companies stake claim here too, including FanNation.com(owned by Time Warner), ArmchairGM.com, YardBarker.com and other smaller sites.  Any sense of the relative market shares?  Is this really a profitable area yet? Or is ESPN’s justification more to avoid cannibalization and to insulate your material from that provided by rivals (eg. Could a part of Wikipedia focus on “newsy” sports stuff—linking to athletets, photos, etc.)
Rivals fight for users, page views and time spent on site, so really we’re just fighting for eyeballs. The higher those metrics, the more advertising dollars a firm can attract. Well expressed.
Pressure from Substitute Products
The Social networking industry does not face too much pressure from substitute products. That depends on how broadly you cast your net.  However, the industry often battles with user generated content vs. editorially controlled content.
For example, my group gives every user who signs up with us a blog. Other users can then use these blogs for sports opinion or read “professional” columnists from ESPN, NY Times, LA Times and many more.  ahhh
However, this is a very small component of the industry and only affects social networks trying to compete against traditional media properties with UGC.
Some in our industry feel that reality networking such as sports, clubs and going out with friends are substitute products, but the research is contradictory.  Hmmm, that’s interesting.  These kinds olf observations should be included in the Unit postings.  You have been appropriately active there, but the topic is of great interest to the class, I would suppose.  I assume that you’ve read “Information Rules” Varian) since that book is one of the first to really dig into the industries associated with the internet.
Bargaining Power of Buyers
Although, our industry doesn’t bargain with users in a traditional sense, this affects profitability in our industry more than anything else.
All relevant social networks are free to users, so charging a fee for use or anything like that would end a firm. Beyond that, however, firms in our industry must respond quickly to user demands and desires. 
For example, if users want the ability to add photos to a photo gallery, we better provide it and quickly or risk losing users to another social network. The same goes for performance (if the site is too slow, users will leave) or too confusing (if users find it hard to use, they will leave).  Yes again
Bargaining Power of Suppliers
Suppliers hold very little bargaining power in our industry and come from two sources: hosting and work for hire.
Hosting refers to the selling, maintenance and cost required to build computers, service computers and power computers. This industry must deal with hordes of competition and firms have little opportunity to differentiate themselves. Additionally, Amazon built a must cheaper alternative to traditional hosting, which is starting to gain traction among industries like ours. What platform do you use?
Our industry also relies on partners and outsourcing as suppliers. This is collectively known as work for hire. Again, this industry has lots of competition, but more opportunities for firms to differentiate themselves, such as technology specialization, level and type of service provided, pricing structure and size.
Firms in our industry that find a reliable partner for both hosting and work for hire maximize profitability in this area.
Threat of Entry
Threat of Entry presents unique challenges to our industry. Anyone with even the slightest Web development knowledge can build and run an online social network, yet barriers to sustained entry are still present.  Is GatorZone a rival or a complementary product?
As mentioned above, performance, usability and reliability all are necessary to attract and maintain a user base. And while creating a social network is easy, creating a social network has all that with a large user base is very difficult.  And is it sustainable past the initial hype?
Brand provides another barrier to entry. When my group formed, we benefited from belonging to one of the most recognizable names in sports. We had loyal users of the ESPN brand who provided us a solid foundation on which to grow our product.  yes
Most firms don’t have that and struggle to build a foundation. Without that foundation, a firm can’t last. So, while initial entry is virtually free, the threat of entry to firms in our industry is relatively low because most firms won’t last a year.

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