Potential Industry Earnings(PIE) the final value a company can expect, which is the value to the customer, less the value of the resources used to make the goods/services which the customers value. To examine this value more, it is essential to understand the determinants of it. First, competition is a major factor in determining PIE. The level of the competition within the industry determines the price of the products/services a company sells, as well as the resources it purchases to manufacture or sell its services.
If competition is high in an industry, companies will turn to price competition to try to leverage themselves within the industry, therefore driving price down amongst all competitors which forces competitors to try to compete on other levels such as selling more, and to do that, it puts a demand in the market for the resources it uses and thus subcontractors have the power to can raise prices. Thus, the level of competition within the industry, plays a major part of PIE, as the value of the resources is essential subtracted from the value customers get out of the company’s product or service.
The buyer and supplier power within the industry also plays a large role in determining PIE. As already determined, the power of suppliers; subcontractors, drives up the price of resources, which has a negative effect on the equation that is PIE. Additionally, when buyers have power within the industry, this also means price of goods and services are extremely competitive, when this is the case, as we already discussed, this also cyclically drives up the price of resources, which again has a negative effect on PIE as the value of resources is subtracted from the value the customers receive from the product/service.
This has even more of a negative effect as this also drives down the value that customers place on a company’s specific product or services because the buyer holds the value as they can get value in the same product/service in many other companies as the quality and price of substitutes is so similar. Lastly, the entry into the market is also a large determinant of PIE.
If the entry into the market is easy and the barriers are low, it allows for more competition, as previously stated, more competition prevents companies within the industry from capturing the value they create. Thus, it is important to note that even though customer may place a large value on the products or services a company creates, it does not mean the company creates the most PIE. PIE, is in fact the takeaway value, such that is the value it creates for customers less the value of its resources. This equation is incredibly important in the analysis of PIE.