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Marketing and Recession

a) Using the five forces framework, how would you characterize the competition in the
luxury goods industry?

Luxury goods are not the necessity goods that its demand easily shifts when the prices increases.
They are sensitive to the prices changes and therefore they are very elastic. Their elasticity is
responsive to prices because of their nature. Most of the homesteads are can leave these goods
when their prices are too high and buy them when prices drops. Let us consider their behavior in
the market.

Supplier power: The suppliers can easily drive prices of these goods when there is shortage in the
market. In this case the supplier is having the upper hand in determining the prices in the market.
The suppliers themselves normally compete to set prices that are acceptable to the customers.
Some of the suppliers of these goods may set prices that are countering the prices of their fellow
competitors. This will lead price wars between the suppliers. In such a scenario, the customer will
benefit.

Buyer power (customers): The buyers can easily switch to brand thereby bringing the prices of
these goods down. The powerful buyers can therefore compete against the wish of the supplier and
drive of these prices down. During recession, the consumers have a higher bargaining power. This
will make the suppliers to respond to their needs. Firms need to satisfy their customers in order
maintain their market share.

Competitive rivalry: Luxury goods are not necessities and therefore its demand can easily shift.
Competition in the market is high because they are several competitors are willing to cut prices in
order to respond to the customer behavior. Competitors who are dealing with luxury goods are
many and therefore the rivalry is so intense.

Threat of substitution: Since they are goods that are not necessities, they can be easily substituted
by other goods in the market. This means that the pricing of these goods are subject the behavior
of the customers. Most of the firms may do anything possible to in order to capture the customers.
This will finally make these firms to respond by lowering prices. Substitutes are essentially the
catalyst of price wars among the competitors and the suppliers. Where there is high level of
substitutes, there is high competition in the market.

Thereat of new entry: New competitors entering the market is one of the market increases the
competition among the firms. Some of these firms may be forced to set low prices in order to break
the market. Most of the markets that have less economies of scale can easily attract new entrants
in the market. Some of the firms may be forced to take exclusive rights in order to protect itself
against the new rivals entering the market.

b) How much bargaining power did consumers as buyers have during the Great Recession?

During recession most of the consumers are sensitive to prices of these goods. In the same line,
the suppliers of these goods will be forced to lower the prices due to tough economic conditions
that rocks the market. During recession, nearly all businesses must lower its prices in order to
maintain or attract more customers. Remember that during recession the consumers are also
affected. Therefore, they will either shift and use a substitute or cut off some of its expenditures in
order to reduce the level of daily expense and finally bring down the cost of living.

In this case, the suppliers must design strategies of holding to the disturbed consumers. The
consumer has a high bargaining power and leaves the supplier at the mercies of the consumers.
The advantage is that the supplier has to supplier the goods and services at the prices that the
consumer is willing to buy them. During tough economic times, suppliers are forced to sell at
lower prices so as to clear stock. In 2007, it is estimated that about 25,000 businesses were closed
because of the impact of recession.

c) Why was discounting looked down upon by industry peers, all of which were
differentiated or focus competitors?

This may be seen as a response mechanism to the down turn or an economy that is
in recession. The smaller firms are the most affected during recession. Therefore, when
there is down turn of an economy then some of the firms may panic in order to halt the
reducing demand in the market. Some of the firms may view this as the way to stimulate
the sales in the market. This may be some of the most straightforward questions that most
of the marketers and strategic analysts may want to find out. During the down turn of the
economy, it may be force firms to apply the lock down in order to avoid high competition
in the market.
The major question that needs to be asked is whether to I should or I should not
discount but the question should be “Must I or Not” discount. The major focus in such
scenario is as a result of the competitors in the market. Differentiation could be the
depending on the unique design of the products in the market. Discounting is seen as the
sales strategy that is done in order to respond to the current market conditions and not
positioning of the products and services on offer. Example, clearing old stock, sales cycles
of the distribution such as department stores which will require discounting in order to
penetrate the market.
However, sometimes the differentiation that is adopted by firm, may be as a result
of the failed differentiation of products. Low differentiation causes easy interchange of the
consumers or clients who could be driving sales in the organization. Discounting may be
long term solution to the down turn economy. It is always advisable that all the possible
options available in the market. Reducing prices at a point of recession would lead to
confusion in the customers. Generally, the discounting looked down upon by industry
peers, is as a result of response mechanism to the current conditions in the market and
therefore enables the firms to emerge out of the competition in the market. Note that, during
such moments, the consumers have a higher bargaining power.

d) What would be the likely challenges in emerging markets for luxury goods firms?

 The prices in such markets are not stable and therefore they keep changing over time. This
will reduce the profits that are made investors of the luxury goods. Therefore, the
consumers’ demands of these goods will easily shift. Unstable markets will affect the
investor since the risks will have increased as a result of the instability in the market.
 The growth of these markets are high and they may not keep with the same rate for long.
This makes them unpredictable and the investors will be faced with high market risks.
Whenever the customers of the luxury goods feel that there are more substitutes in the
emerging then they can easily change opt to use the new products in the market.
 There is a high labor costs because of high supply of resources in the market. The labor
costs will affect the net returns for the very individual firms.
 The rising markets leads to increased wages and increases not only in living standards but
also leads to inequality. This will lead to social unrest in the society. Pumping large
resources in the market is one of the risks in which it may also lead to loss due to rising
interest rates in the market.
 Investors who are trading in such will be exposed to currency risks in the market. Since the
year 2011, the US dollar have been strengthening as a result of emerging markets in China.
References

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Dobson, P. W., & Waterson, M. (1997). Countervailing power and consumer prices. The
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J. Gregory Sidak, Bargaining Power and Patent Damages, 19 STAN. TECH. L. REV. 1 (2015),

Michael Porter, Nicholas Argyres, Anita M. McGahan, "An Interview with Michael Porter", The
Academy of Management Executive 16:2:44

Porter, M.E. (2008) The Five Competitive Forces That Shape Strategy, Harvard business Review,
January 2008
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