7L. Porter Five Forces Model
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Transcript of 7L. Porter Five Forces Model
“The secret of success in competition lies often not so much in the use of one's own strength but in the exploitation of the other side's weaknesses.”
3
LEARNING OBJECTIVES
Understand the importance of the external context for strategy and firm performance
1
2 Identify the major features of an industry and the forces that affect industry profitability
3 Understand the dynamic characteristics of the external context
Political/Legal
Economic
Technological
Global
DemographicSociocultural
CompetitiveEnvironment
Industry Environment
COMPONENTS OF THE GENERAL ENVIRONMENT
5
THE EXTERNAL ENVIRONMENT OF THE ORGANIZATION
Macro Environment Political, Economic, Sociocultural,
Technological, Environmental, Legal
Industry Environment
Strategic Group
The Organization
FORMS OF COMETITION
6
Generic Competition
Form Competition
Industry Competition
Brand Competition
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INDUSTRY FRAGMENTATION AND CONCENTRATION
Monopoly Duopoly Fragmented
8
KEY QUESTION TO ASK
What macro environmental conditions will have a material effect on our ability to implement our strategy successfully?
How stable are these characteristics?
What is our firm’s industry?
What are the characteristics of the industry?
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EXTERNAL CONTEXT OF STRATEGY
• An internal analysis is just half of what is needed to build strategy
• The SWOT and more complicated frameworks help us understand the full picture
Internal
• Strengths
• Weaknesses
• Capabilities
• Relationships
• Etc.
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THE COLA WARS (TIMELINE)
Coca-Cola
Coca-Cola invented
“Kick Pepsi's can” Diet CokeNew Coke
Repair Coke and restore Stock price Diversify product line
1886
1950
1960
1970
1980
1990
2000
Pepsi
“Beat Coke”
“Pepsi Generation”
“Pepsi Challenge”
Foster entrepreneurial spirit of Pepsi’s people
Diversify beyond soft-drinks
FIVE-FORCES ANALYSIS
1.The five forces are environmental forces that impact on a company’s ability to compete in a given market.
2.The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.
Threat of New
EntrantsThreat of New
Entrants
PORTER’S FIVE FORCES MODEL OF COMPETITION
THREAT OF NEW ENTRANTS
Barriers to Entry
Expected Retaliation
Government Policy
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Bargaining Power of Suppliers
Threat of New
Entrants
Threat of New Entrants
PORTER’S FIVE FORCES MODEL OF COMPETITION
BARGAINING POWER OF SUPPLIERS
Suppliers exert power in the industry by:* Threatening to raise
prices or to reduce quality
Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases
Suppliers are likely to be powerful if:
Supplier industry is dominated by a few firms
Suppliers’ products have few substitutes
Buyer is not an important customer to supplier
Suppliers’ product is an important input to buyers’ product
Suppliers’ products are differentiated
Suppliers’ products have high switching costs
Supplier poses credible threat of forward integration
18
SUPPLIER POWER
When firms in the supply industry can dictate terms, they can extract greater profits
Diamond supplyPercent
DeBeers
Others
50
Diamond Retailers
50
Bargaining Power of Buyers
Threat of New
EntrantsThreat of New
Entrants
Bargaining Power of Suppliers
PORTER’S FIVE FORCES MODEL OF COMPETITION
BARGAINING POWER OF BUYERS
Buyers compete with the supplying industry by:
* Bargaining down prices
* Forcing higher quality
* Playing firms off ofeach other
Buyer groups are likely to be powerful if:
Buyers are concentrated or purchases are large relative to seller’s sales
Purchase accounts for a significant fraction of supplier’s sales
Products are undifferentiated
Buyers face few switching costs
Buyers’ industry earns low profits
Buyer presents a credible threat of backward integration
Product unimportant to quality
Buyer has full information
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BUYER POWER
Suppliers Buyers
Profits
ILLUSTRATIVE
In industries characterized with many suppliers and few buyers, buyers often capture a greater share of profits
Industry A
Suppliers Buyers
Industry B
Profits
Threat of Substitute Products
Threat of New
EntrantsThreat of New
Entrants
Bargaining Power of Buyers
Bargaining Power of Suppliers
PORTER’S FIVE FORCES MODEL OF COMPETITION
THREAT OF SUBSTITUTE PRODUCTS
Products with similar function limit the prices
firms can charge
Keys to evaluate substitute products:Keys to evaluate substitute products:
Products with improving price/performance tradeoffs relative to present industry products
Example:
Electronic security systems in place of security guards
Fax machines in place of overnight mail delivery
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THREAT OF SUBSTITUTES
Soft drinks
Coke Pepsi
Movie rentals
Block buster
Hollywood videoB
ottle
d w
ater
Cab
le T
V
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CAUSES OF RIVARLY
Barriers to Entry
• Strong brands • Proprietary technology• Start-up costs • Etc.,
Barriers to Exit
• Few other opportunities • Sunk investments• Etc.,
In addition to entry and exit barriers,many factors drive rivalry • History of price wars
• Level of fixed costs
• Industry concentration
• Market growth
• Etc.
Threat of Substitute Products
Threat of New
EntrantsThreat of New
Entrants
Rivalry Among Competing Firms in
Industry
Bargaining Power of Buyers
Bargaining Power of Suppliers
PORTER’S FIVE FORCES MODEL OF COMPETITION
RIVALRY AMONG EXISTING COMPETITORS
Intense rivalry often plays out in the following ways:
Jockeying for strategic position
Using price competition
Staging advertising battles
Making new product introductions
Increasing consumer warranties or service
Occurs when a firm is pressured or sees an opportunityPrice competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, but may be costly to smaller competitors
Cutthroat competition is more likely to occur when:
RIVALRY AMONG EXISTING COMPETITORS
Numerous or equally balanced competitorsSlow growth industryHigh fixed costsLack of differentiation or switching costs
High strategic stakes
High exit barriers
Diverse competitors
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IMPACT OF COMPLEMENTOR
Any factor that makes it more attractive for suppliers to supply an industry on favorable terms or that makes it more attractive for buyers to purchase products or services from an industry at prices higher than it would pay on absence the complementor
Complementor:
Hot dogs
+
Buns
More sales
Three Examples
Music
+
MP3 player
More attractive offering
Delta plane
orders+
American Airlinesplane orders
Lower costs from Boeing