Michael Porter 5 Forces

Michael PortersFive Forces Model

IDENTIFYING COMPETITIVE ADVANTAGESTo survive and thrive an organization must create a competitive advantageCompetitive advantage a product or service that an organizations customers place a greater value on than similar offerings from a competitorFirst-mover advantage occurs when an organization can significantly impact its market share by being first to market with a competitive advantage

IDENTIFYING COMPETITIVE ADVANTAGESOrganizations watch their competition through environmental scanningEnvironmental scanning the acquisition and analysis of events and trends in the environment external to an organization

Three common tools used in industry to analyze and develop competitive advantages include:Porters Five Forces ModelPorters three generic strategiesValue chains

Michael Porter

An industrys profit potential is largely determined by the intensity of competitive rivalry within that industry.

Porters Five Forces

Buyer PowerBuyer power assessed by analyzing the ability of buyers to directly impact the price they are willing to pay for an item

Ways to reduce buyer power includeSwitching costs costs that can make customers reluctant to switch to another product or serviceLoyalty program rewards customers based on the amount of business they do with a particular organization

Power of Buyers high when * Customers are concentrated, large or buy in volume .* The products being purchased are standard or undifferentiated making it easy to switch to other suppliers. * Customers purchases represent a major portion of the sellers total revenue.

Supplier PowerSupplier power assessed by the suppliers ability to directly impact the price they are charging for supplies (including materials, labor, and services)Supply chain consists of all parties involved in the procurement of a product or raw material

Power of Suppliers high when * A small number of dominant, highly concentrated suppliers exists.* Few good substitute raw materials or suppliers are available. * The cost of switching raw materials or suppliers is high.

Threat of Substitute Products or ServicesThreat of substitute products or services high when there are many alternatives to a product or service and low when there are few alternatives from which to choose

Substitute products competitive strength high when* The relative price of substitute products declines .* Consumers switching costs decline. * Competitors plan to increase market penetration or production capacity.

Threat of New EntrantsThreat of new entrants high when it is easy for new competitors to enter a market and low when there are significant entry barriers to entering a marketEntry barrier a product or service feature that customers have come to expect from organizations in a particular industry and must be offered by an entering organization to compete and survive

Barriers to Entry large capital requirements or the need to gain economies of scale quickly. strong customer loyalty or strong brand preferences. lack of adequate distribution channels or access to raw materials.

Rivalry Among Existing CompetitorsRivalry among existing competitors high when competition is fierce in a market and low when competition is more complacentProduct differentiation occurs when a company develops unique differences in its products with the intent to influence demandAlthough competition is always more intense in some industries than in others, the overall trend is toward increased competition in just about every industry

Rivalry among competitors intensity increases as* The number of competitors increases or they become equal in size.* Demand for the industrys products declines or industry growth slows.* Fixed costs or barriers to leaving the industry are high.

**Porters five force modelwww.azadsikander.blogspot.com

**Analysis www.azadsikander.blogspot.com

5 Forces Analysis Rivalry among the competitor Reliance Retail, Aditya Birla Group , Vishal Retails, Bharti and Walmart, etcThreat of entrants FDI policy not favorable for international players. Domestic conglomerates looking to start retail chains. International players looking to foray India.Bargaining power of supplier The bargaining power of suppliers varies depending upon the target segment.The unorganised sector has a dominant position. There are few players who have a slight edge over others on account of being established players and enjoying brand distinction. Bargaining power of buyers Consumers are price sensitive..Availability of more choice.Threat of substitutes Unorganized retail

Big Bazaar and 5 Forces:5 Forces Model for Big Bazaar

RIVALINTENSITYTHREAT OF ENTRANTSTHREATOF SUBSTITUTESPOWER OF BUYERSPOWER OF SUPPLIERSHIGHHIGHLOWHIGHLOW

High Threat of New EntryLow Bargaining Power of SupplierHigh Rivalry Amongst Competitors High Bargaining Power of Buyer Low Threat of Substitute

RIVALINTENSITYTHREAT OF ENTRANTSTHREATOF SUBSTITUTESPOWER OF BUYERSPOWER OF SUPPLIERSHIGHHIGHLOWHIGHLOW

High Threat of New EntryLow Bargaining Power of SupplierHigh Rivalry Amongst Competitors High Bargaining Power of Buyer Low Threat of Substitute

CompetitorIn the apparels segment in big bazaar faces competition from Shoppers Stop, Trent, pantaloon and Lifestyle.The Company face competition from the companies likes RPG (Spencers), Trent (Star India Bazaar), Reliance fresh and with Shoppers Stop too indicating their entry into the hypermarket segment.

Bargaining Power of BuyerCustomers are very sensitive to crises. In big bazaar prices are cheep as Consumers are price sensitive. Availability of more choice. Switching cost is nil.

Bargaining Power of Supplier

The bargaining power of suppliers varies depending upon the target segment.In Big Bazaar the target segment is the upper and the mediocre income group.

The unorganized i.e. the mom and pop stores sector has a dominant position.There are few players who have a slight edge over others on account of being established players and enjoying brand distinction.Big Bazaar has an advantage over the others on enjoying the economies of scale for bulk buying.

Threat of SubstituteThe threat of substitutes is when the customer has a choice to buy a product or a service which is not limited to the same industry or market. There are different ways to satisfy a particular need.This is both an opportunity and a threat.

Existence of substitutes helps big bazaar put in place the right defensive strategies to keep the current customers and follow offensive strategies to attract new customers to you.Substitutes for Big Bazaar are Star Bazaar, Spencers, Hyper city etc.

Mom and Pop Stores

RIVALINTENSITYTHREAT OF ENTRANTSTHREATOF SUBSTITUTESPOWER OF BUYERSPOWER OF SUPPLIERSHIGHHIGHHIGHHIGHHIGH

Portfolio Analysis Strategy at the time (1970s) was focused on two dimensions of the portfolio grids Industry Attractiveness Competitive Position

Structural reasons why some industries were profitable* Firm concentration * Established cost advantages* Product differentiation * Economies of scale

Structural reasons all represented barriers to entry in certain industries, thus allowing those industries to be more profitable than others.

THE THREE GENERIC STRATEGIES CREATING A BUSINESS FOCUSOrganizations typically follow one of Porters three generic strategies when entering a new market

Prof.Sushil\IITD\Session-VI*Generic Strategies

Prof.Sushil\IITD\Session-VI

Prof.Sushil\IITD\Session-VI*PORTERS GENERIC STRATEGIES

1. Cost Leadership2. Differentiation3 A. Cost Focus3 B. Differentiation FocusNarrow TargetBroad TargetDifferentiationLower Cost Competitive AdvantageCompetitive Score


Cost LeadershipParle G BiscuitsBig BazarMTNLs DolphinVichare CourierLIC

DifferentiationBMWFerrariMercedesAudi

FocusIndus Ind Bank NRI ClientsDeustsche Bank Corporate FinanceMaharashtra Co-op Bank Lower Middle Class CustomersCiti Bank Credit CardsAXIS Bank New Products like Prepaid Cards, Multi Currency Cards

Prof.Sushil\IITD\Session-VI*REQUIREMENTS FOR GENERIC COMPETITIVE STRATEGIESGeneric Commodity RequiredCommon OrganizationalStrategySkills and ResourcesRequirementsOverall cost Sustained capital investment Tight cost controlleadership access to capital Frequent, detailed control reports Process engineering skills Structured organization and responsibilities Intense supervision of labour Incentives based on Products designed for ease meeting strict quantitative Low-cost distribution system targets in manufactureDifferentiation Strong marketing abilities Strong coordination Product engineering among functions in R&D, Creative flare product development, and marketing


Prof.Sushil\IITD\Session-VI*REQUIREMENTS FOR GENERIC COMPETITIVE STRATEGIESCONTD Strong capability in basic Subjective measurement and research incentives instead of quantitative measures Corporate reputation for Amenities to attract highly quality or technological skilled labour, scientists, or leadership creative people Long tradition in the industry or unique combination of skills drawn from other businesses Strong cooperation from channelsFocus Combination of the above Combination of the above policies policies directed at the directed at the regular strategic particular strategic target target


Prof.Sushil\IITD\Session-VI*RISKS OF THE GENERIC STRATEGIESRisks of Cost LeadershipRisks of DifferentiationRisk of Focus

Cost of leadership is notDifferentiation is notThe focus strategy is sustainedinitiatedsustained: Competitors imitateThe target segment Competitors imitate: Bases for differentiationbecomes structurally unattractiveTechnology changesbecomes less imported to Structure erodesOther bases for costbuyers Demand disappearsleadership erodeProximity in differentiationCost proximity is lostBroadly targeted is lostcompetitors overwhelmthe segment: The segments differences from other segments narrow The advantages of a broad line increaseCost focusers achieve Differentiation focusers New Focusers sub-segmentseven lower cost in segmentsachieve even greaterthe industrydifferentiation in segments


Michael Porters Five Generic StrategiesCost leadership emphasizes producing standardized products at a very low per-unit cost for consumers who are price-sensitive5-*Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Michael Porters Five Generic StrategiesType 1 low-cost strategy that offers products or services to a wide range of customers at the lowest price available on the marketType 2 best-value strategy that offers products or services to a wide range of customers at the best price-value available on the market5-*Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall


Michael Porters Five Generic StrategiesDifferentiationstrategy aimed at producing products and services considered unique industry-wide and directed at consumers who are relatively price-insensitive5-*Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall


Michael Porters Five Generic StrategiesType 4 low-cost focus strategy that offers products or services to a niche group of customers at the lowest price available on the marketType 5 best-value focus strategy that offers products or services to a small range of customers at the best price-value available on the market5-*Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall


Cost Leadership StrategiesTo employ a cost leadership strategy successfully, a firm must ensure that its total costs across its overall value chain are lower than competitors total costs5-*Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall


Differentiation StrategiesDifferentiation strategy should be pursued only after a careful study of buyers needs and preferences to determine the feasibility of incorporating one or more differentiating features into a unique product that features the desired attributes5-*Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall


DifferentiationWhen there are many ways to differentiate the productWhen buyer needs and uses are diverseWhen few rival firms are following a similar differentiation approachWhen technological change is fast paced5-*Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall


Focus StrategiesSuccessful focus strategy depends on an industry segment that is of sufficient size, has good growth potential, and is not crucial to the success of other major competitorsMost effective when consumers have distinctive preferences5-*Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall


Focus Strategy GuidelinesWhen the target market niche is large, profitable, and growingWhen industry leaders do not consider the niche to be crucial to their own successWhen the industry has many different niches and segmentsWhen few, if any, other rivals are attempting to specialize in the same target segment5-*Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall


Value CreationOnce an organization chooses its strategy, it can use tools such as the value chain to determine the success or failure of its chosen strategyBusiness process a standardized set of activities that accomplish a specific task, such as processing a customers orderValue chain views an organization as a series of processes, each of which adds value to the product or service for each customer

Value CreationCombining Porters Five Forces and three generic strategies create business strategies for each segment

Value CreationValue Chain

Value CreationValue chains with Porters Five Forces

**Competitive advantages are important for an organizationIt is even more important to understand that competitive advantages are typically temporary since competitors are quick to copy competitive advantagesCan you list a few companies that achieved success through competitive advantages?United was the first airline to offer a competitive advantage with its frequent flyer mileage (this first-mover advantage was temporary)Sony had a competitive advantage with its portable stereo systems (this first-mover advantage was temporary)Microsoft had a competitive advantage with its unique Windows operating system Does Microsoft still has a competitive advantage with its Windows operating system?Perhaps primarily due to its first-mover advantage since it is difficult to switch operating systems and users face interoperability if they are using different operating systems at the same organization. How many students in your class are currently using Windows? What are the competitors to Windows? Linux and MacintoshWhy are there only three primary competitors in this large operating system market? What would happen if you had 50 different operating systems to choose from?Issues with interoperabilityHow many different types of Microsoft Office would be required to support all 50 different operating systems?50*Technology has the opportunity to play an important role in environmental scanningFor example, Frito-Lay, a premier provider of snack foods such as Cracker Jacks and Cheetos, does not just send its representatives into grocery stores to stock shelvesthey carry handheld computers and record the product offerings, inventory, and even product locations of competitors. Frito-Lay uses this information to gain business intelligence on everything from how well competing products are selling to the strategic placement of its own products. ***Buyer power can also be called customer powerCalling buyer power customer power sometimes helps students understand the difference between buyer power and supplier powerTo reduce buyer power (and create a competitive advantage), an organization must make it more attractive for customers to buy from them than from their competitionOne of the best IT-based examples is the loyalty programs that many organizations offerWhich kinds of loyalty programs are you currently using?Frequent-flyer milesGrocery store discounts Safeway CardRestaurant discounts such as Subways get your 12th sandwich freeCoffee clubs where you get your 10th cup of coffee free**The supplier wants to be able to set any price it wants for its goods, and if buyers (customers) have low power, then they do not have any choice but to pay the high price since there are only one or two suppliersWhat is an example of an organization with high supplier power?Microsoft, Government regulated products such as energy markets and telecommunication markets in some countriesHow an organization can be both a supplier and a buyer in a supply chain?Discuss how Dell computers is both a buyer and supplier in the supply chainDell is a buyer (customer) of parts, and a supplier to its customers who buy computers

**Ideally, an organization wants to be in a market in which there are few substitutes for its products or servicesThis is difficult to achieve, and most organizations create a competitive advantage through switching costs - the more painful it is for a customer to switch suppliers, the less likely they are to switchIf a customer has to experience pain when switching to a different service provider, then they are unlikely to switchFor example, switching doctors usually involves sending all medical records and explaining all past medical history to the new doctor. Insurance also has to be transferred, along with detailed forms that the customer will be required to complete (such as family history, personal history, HIPAA, etc.) For these reasons customers have to be extremely dissatisfied with a doctor before they will endure the pain of finding or switching to a new doctor**What is an industry that has a high entry barrier?Energy the organization has to have the infrastructure to support energyTelecommunications the organization has to invest in a telecommunications infrastructure prior to offering servicesBanking the bank must offer its customers an array of IT-enabled services including ATMs and online account servicesWhat is an industry that has a low entry barrier?Restaurants simply lease a space, obtain a license, and you can sell foodCatering simply offer food and deliverMovie rental simply buy the movies, pay the licensing fee, and offer the movies for rental (although if you want to be a Netflix the entry barrier is high because you have to have the facilities and systems to mimic their movie supply chain)

**What are a few industries where competition is high?Restaurants, products, telecommunications, bankingWhat are a few industries where competition is low?This is typically highly regulated industries such as energy markets and stock exchanges

CLASSROOM EXERCISEPorters Five ForcesPorters Five Forces is an easy framework to understand and offers students a quick way to analyze a business. Porters Five Forces is also reinforced throughout the text and it is important that your students have a solid understanding of each force. For this exercise, break your students into groups and ask them to choose two products to perform a Porters Five Forces analysis. The two products must compete in the same market.Potential ProductsLaptop Computer and Desktop ComputerPDA and Laptop ComputeriPod and WalkmanDVD Player and VCR PlayerDigital camera and Polaroid CameraCell Phone and Blackberry PDACoca-Cola Plastic Bottle and Coca-Cola Glass BottleGPS Device and a Road AtlasRoller skates and RollerbladesDigital Books to Printed BooksDigital Paper to Paper*www.azadsikander.blogspot.com*www.azadsikander.blogspot.com*****Broad cost leadership: Broad strategies reach a large market segmentBroad differentiation: Focused strategies target a niche marketFocused strategy: Focused strategies concentrate on either cost leadership or differentiation

1. When there are many ways to differentiate the product or service and many buyers perceivethese differences as having value.2. When buyer needs and uses are diverse.3. When few rival firms are following a similar differentiation approach.4. When technological change is fast paced and competition revolves around rapidly evolvingproduct features.*1. When the target market niche is large, profitable, and growing.2. When industry leaders do not consider the niche to be crucial to their own success.3. When industry leaders consider it too costly or difficult to meet the specialized needs of thetarget market niche while taking care of their mainstream customers.4. When the industry has many different niches and segments, thereby allowing a focuser topick a competitively attractive niche suited to its own resources.5. When few, if any, other rivals are attempting to specialize in the same target segment.**To create a competitive advantage, the value chain must enable the organization to provide unique value to its customersExamining the organization as a value chain determines which activities add value for customersThe organization can then focus specifically on those activitiesReview figure Generic Strategies and Industry Forces for an overview of the combination of Porters Five Forces and three generic strategies for each segmentThis figure is probably too much for a slide, please feel free to delete and have your students review the figure in the text or expand the figure to the full size of the slide**Primary value activities acquire raw materials and manufacture, deliver, market, sell, and provide after-sales servicesSupport value activities support the primary value activitiesCustomers determine the extent to which each activity adds value to the product or serviceThe competitive advantage is to:Target high value-adding activities to further enhance their valueTarget low value-adding activities to increase their valuePerform some combination of the two*If an organization wants to decrease its buyers or customers power, it can construct its value chain activity of service after the sale by offering high levels of quality customer serviceThis will increase the switching costs for its customers, thereby decreasing their power (buyer power)

Michael Porter 5 Forces

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