Prospective firms - Essay Example

Adrenaline Air Sports is a fairly new business and has attempted to grow from a new start-up company a few years ago. The company has many different internal and external environment issues that they need to overcome if they wish to continue to grow. Sky Diving is a sport that is growing by about 2% per year. . First time students and those that continue to get license are the biggest moneymakers for the company.

Only 3 percent of first time skydivers return and those that do tend to stay in the sport, so it is key to get more to return since they have the highest profit margin. The problems and challenges are varied. Capitalizing on the strengths and improving the weaknesses will be most beneficial to Billy. The company’s growth rate in its first few years shows that the demand is there. In order for the profit to continue to increase next year and over the next 5 years, however, Adrenaline Air Sports needs to continue to seek ways to market this sport and to improve the number of jumpers that return time and time again. How long before the company breaks even? The company is already profitable according to the financial data furnished in the case. Implementing some of the recommendations which we mentioned below will increase Adrenaline’s profitability and improve the organizational skills and business know-how of its owner.

EXTERNAL ANALYSIS

Degree of Rivalry The degree of rivalry is assessed as strong. Exit Barriers Exiting the industry can prove to be very difficult due to high initial investment capital and extensive capital requirements to maintain the business. Indeed, the equipment and buildings purchased by these firms can be sold to similar firms or independent retailers, but it can pose many problems for the seller and can be very difficult to find buyers due to the specificity of the product.

Industry Concentration This industry is highly concentrated because there are only five firms competing within the industry in the State of Virginia. The industry is also assessed as fragmented because these firms are all independent of each other and neither of them operates through a larger chain corporation, thereby making the industry more attractive for prospective firms. Product Differences Adrenaline Air Sports has similar qualities to their rivalries; however the firm does not possess any qualities that give the firm a competitive advantage through product differentiation, which in turn does not make them a stand out company. Their rivalries offer better equipment options for their customers, such that some aircraft can hold up to twenty skydivers, and that can reach a higher altitude in a matter of minutes. In this industry, all rivalries have access to a drop zone; Billy’s Adrenaline Air Sports offers a drop zone in a popular scenic location which gives the company a competitive advantage.

Switching Costs

Insignificant switching costs for customers mean that they are free to transfer their preferences among a variety of different skydiving services. Within the industry, switching costs are low because the prices of the services offered by each competitor differ only marginally. Substitutes In this industry, substitutes are assessed as moderate. A substitute product is referred to as a product or service in the industry that can be easily substituted by another product or service being offered by another industry. Typically, the threat of substitutes impacts an industry through price competition, where a close substitute can hinder the ability of the firms in that industry from raising their prices. The skydiving industry in Virginia is fairly inelastic due to the fact that there are not many substitutes in terms of the extreme sports or outdoor sports industries that customers may choose to explore should they decide to.

Buyer’s Inclination to Substitute Buyers are typically inclined to purchase a substitute product or service if the substitute offers a price that is comparable or lower than that of the firms in the skydiving industry advertise. In this case, buyers are more likely to substitute for another service such as boating, sailing, water skiing, or parasailing, to name only a few. These services do not require the customer to pay a large fee, and therefore are more attractive to the customers who do not have as much expendable income.

Power of Suppliers Overall, the power of the suppliers is assessed as very strong. Generally, suppliers are powerful if they exert a credible forward integration in the industry, if they are highly concentrated and therefore have power over the price of their products, and if there are significant switching costs for the buying firms. The customers also play a large role in determining supplier power, especially in this industry, because certain brands are preferred due to the safety standards incurred with the product.

Supplier Concentration It is known that the fewer number of suppliers there are for a given product, the more power they will have over the company or industry. In this industry, suppliers are concentrated because there are very few options for the buyers in terms of purchasing the necessary aircraft for running the business, the hangar to house the aircraft, and the equipment needed for the divers. The buyers’ only choices in terms of aircraft and buildings are to purchase new or used from specialized retailers. However, the buyers may resort to other retailers such as wholesalers or online auctions to purchase the chutes and other necessary equipment for divers, provided that all safety standards are met.

Threat of Forward Integration If suppliers such as those who sell wholesale or through internet auction services come forward and enter into the distribution channel of the industry, the power of the suppliers is weakened. The threat of forward integration in this industry is higher than normal because of the easy access to internet resources. Power of Buyers The power of buyers in this industry is assessed as strong. When assessing buyer power it is easy to see that although there is little price negotiations at the point sale, the buyer still has a lot of power because of the marginal switching costs incurred by the buyer if they were to choose a competitor in the industry, and the extremely low switching costs by choosing a substitute service instead.

Price Sensitivity Since the target market for this industry is mainly comprised of college and university students, the prices must adhere to what this market is able to pay, as many college and university students do not have a lot of expendable income. In order to combat this, Adrenaline Air Sports offers repeat customer incentives. Bargaining Leverage Because many see this sport as one that is dangerous, and possibly fatal to the inexperienced divers, the firms in the industry must develop marketing techniques to attract customers to dive for the first time, and then keep those customers coming back. Currently, incentives such as discounts for repeat divers and highly experienced divers give customers a reason to come for another dive in the future.

Barriers to Entry The barriers to new entrants in this industry are assessed as moderate. There are many barriers to any new entrants into this industry, mainly due to high start-up costs and large capital requirements. However, because there are very few competitors in the industry, the likelihood of new entrants is high because they are able to capitalize on a growing industry. Sunk Costs Sunk costs are costs that cannot be recovered once they have been incurred. Sunk costs vary, and when entering the industry, one must consider factors such as land, buildings, and necessary equipment costs. In this industry, sunk costs are very high because of the high capital requirements of new competitors.

Capital Requirements Due to the nature of this industry, capital requirements pose one of the biggest threats to the entrant of a new competitor into the market. Both initial start-up costs and monthly expenses after start-up are high and can prove to be too expensive for prospective entrants. In addition, other investments are required for maintenance and upkeep of the facilities and aircraft, as well as training programs for new divers.

Government Policies Regulations require all skydiving firms to obtain rights to take off and land on an unlimited basis from the airport. If such rights are not obtained, the business simply cannot operate, causing one of the biggest barriers for a new entrant. DRIVING FORCES Economies of scale Change in the economy has drastic effects on this industry because of the high cost incurred by buyers when purchasing services. Effects such as the rise in the price of fuel needed to operate the aircraft, maintenance fees also have a direct effect on the industry.

Changes in cost & efficiencies Widening differences in the costs among key competitors tends to dramatically alter the state of competition. Some companies in this industry have incurred airplanes that are efficient for them to create profit. For Example, some rivalry planes hold more than twenty or more customers; therefore, profits are more likely to be achieved with efficient equipment. Change in lifestyles, societal concerns and attitudes Emerging social issues and changing attitudes and lifestyles can be powerful instigators of industry change. For example, Billy Cockrell, owner of Adrenaline Air Sports, never thought that he would ever jump out of an airplane. It was after his first experienced that he became captivated with the sport, and he continued skydiving to the point where it became his life when he opened Adrenaline Air Sports in November 1999.

KEY SUCCESS FACTORS

Manufacturing High utilization of fixed assets is important in a capital intensive industry, such as the skydiving industry. Many requirements are needed in order to begin starting up a business in this industry that relates to high fixed costs and a large amount of capital in order to be able to survive in the skydiving industry. Access to attractive supplies is an essential necessity to compete in this industry. To incur airplanes that have the ability to obtain high altitudes in and matter of minutes makes loyal customers fascinated about the service in this industry. The ability to secure storage and space for these supplies are essential, such as a hanger in order to store skydiving equipment and planes.

Marketing This industry is very concentrated, and customers are difficult to find due to the fact that the sport is very extreme. However, many loyal customers that were first-time jumpers always had a positive comment to others that haven’t experienced this sport. Strong word of mouth is by far the best advertising for any company because it requires no advertising costs and gets the company free exposure.

Another great form of marketing is to create posters and distribute them where likely first-time parachuters are accessible to view. For example, colleges are a great place to distribute advertisements because students are interested in new and exciting experiences that will thrill them. Another places where posters were put up were around local grocery stores, bulletin boards, strip shopping centers.