Day 113 The forces of competition

The forces of competition

  

Today, the China Securities Depository and Clearing Corporation Limited announced their new policy, which allowing individual investors to open multiple accounts on the stock market with different brokerage firms. It represents the rivalry in this industry will be intensified. Since it is going to be more options for individual investors to choose their broker, and the commission charge will significantly reduce. That is the golden rule of the competition, so investors can expect a more diversified brokerage market in the future. In my perspective, there are three major factors that affect our capital gain in the share market: the movement of majority of funds, the customer’s confidence and the company performance. Obviously, the company has the competitive advantage will penetrate the market deeply and obtain better operating outcome. Therefore, we should consider the competition environment in the industry and the company’s competitive power before investment. 

According to the Michael Porter’s model of competition, there are five forces that affect the intensiveness of rivalry inside the market. To illustrate, the treat of new entrants, the bargain power of supplier/customers, the substitution products and the competitors within the industry. The difficulty of fresh participants to join the market determines numbers of competitors. Sometimes it would be hard for new companies to share the cake, due to certain barriers or regulations exist. These impediments on entry of the market could be set by the current participants or the governments. For instance, it is quite hard to start a new brokerage company, because the entity will need to be granted a license from China Securities Regulatory Commission. Thus the limited quantity of security trading companies led to a minor pressure on competition. In addition, the bargain powers of supplier or customers are other two forces over rivalry. These powers are normally oppositely related to the numbers of suppliers and customers. The new allowance of multiple securities trading accounts dramatically increases the bargain power of customers. Instead of having the customers secured once they started an account with the brokerage institution. The new policy grants more options for investors, hence brings to pierce rivalry pressure in the industry, and force these broker firms to adjust their marketing strategy such as decrease their brokerage fee. Moreover, the substitution effect needs to be taken into account, since people tend to use acceptable alternatives if the product is above their reservation price. Still interpreting our broker case, there were no reasonable substitutes if the investor wants to trade in the stock market, thereby little competition pressure. 

At last, the previous four forces I explained would contribute directly on the arena of competitors. The company must have a superior strategy than the competitors in order to take the leading position and thereby increase the value of the enterprise. When we are making relevant investing decisions on a company, the competitiveness is a valuable indicator to predict the business performance.