The 5 Competitive Forces That Shape Strategy
Transcript of The 5 Competitive Forces That Shape Strategy
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The Five CompetitiveForces That Shape Strategy
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The 5 Forces that Shape Strategy
Michael Porter is a leading authority on strategy and
competition in business. His five forces analysis has been
one of his largest contributions to his field. Porter defines
them as:
The threat of the entry of new competitors
The intensity of competitive rivalry
The threat of substitute products or servicesThe bargaining power of customers
The bargaining power of suppliers
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The 5 Forces that Shape Strategy
Competitive
rivalry
within an
industry
Bargaining
power of
suppliers
Bargaining power
of customers
Threat of
New
Entrants
Threat of
SubstituteProducts
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The Threat of the Entry of NewCompetitors
Danilyn A. Flores
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The Threat of the Entry of NewCompetitors
A new entrant - a brand new competitor or maybe a
new brand from on old competitor.
Why does competitive rivalry increase when a newcompetitor enters your industry?
A new competitor to an industry has no existing customers
As they start to poach customers the existingcompetitors respond to protect their business.
The exception to this is when an industry is
in rapid growth
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The Threat of the Entry of NewCompetitors
Analyze the threat of new entrants - this seeks to
identify the barriers to entry
the things about your industry
that will make it harder for a new
entrant to shift into your industry
What to do?
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Consider the following:
The Threat of the Entry of NewCompetitors
Economies of Scale
Proprietary Product Differences
Brand Identity
Switching Costs
Capital Requirements
Access to Distribution
Absolute Cost Advantage
Government Policy
Expected Retaliation
Industry Profitability
Stage in Industry Life Cycle
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Analysis CriteriaRisk Rating
High Medium Low
Economies of scale
Proprietary product differences
Brand identity
Switching costs
Capital requirements
Access to distribution
Absolute cost advantageGovernment policy
Expected retaliation
Industry Profitability
Stage in industry life cycle
Overall Risk Rating
The Threat of the Entry of NewCompetitors
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The Rivalry among ExistingCompetitors
Cheryl O. Tayo
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Rivalry Among Existing Competitor
Rivalry is intensified if:
Competitors are roughly equal in size
Industry growth is slow
Exit barrier is high
Aspiration for leadership
Cannot read each others signal well
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Price competition occur if:
Product are nearly identical & less switching cost
Fixed cost is high
To improve efficiency of production
Product is perishable
Rivalry Among Existing Competitor
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Basis of competition:
Price
Product features Support service
Delivery time
Brand image
Rivalry Among Existing Competitor
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Rivalry Among Existing Competitor
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The Threat of SubstituteProducts or Services
Kahlille O. Clerigo
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The existence of products outside of the realm of the
common product boundaries increases the propensity of
customers to switch to alternatives. Note that this should notbe confused with competitors' similar products but entirely
different ones instead. For example, Pepsi is not considered a
substitute for Coke but water, tea, and coffee are.
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Companies in one industry come under
competitive pressure from the actions of companies in aclosely adjoining industry whenever buyers view the
products of the two industries as good substitutes.
Just how strong the competitive pressures are from sellers of
substitute products depends on three factors:
a. Whether substitutes are readily available and attractively
priced
b. Whether buyers view the substitutes as being
comparable or better in terms of quality,
performance, and other relevant attributes
c. How much it costs end-users to switch to substitutes
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The Bargaining Power of Customers
Khaskie O. Clerigo
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The bargaining power of customers is also
described as the market of outputs: the ability of customers to put the firm under pressure, which also
affects the customer's sensitivity to price changes.
The Bargaining Power of Customers
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Buyer Power is High/Strong if:
Buyers are more concentrated than sellers
Buyer switching costs are low
Threat of backward integration is high
Buyer is price sensitive
Buyer is well-educated regarding the product
Buyer purchases product in high volume
Buyer purchases comprise large portion of seller sales
Product is undifferentiated
Substitutes are available
The Bargaining Power of Customers
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Buyer Power is Low/Weak if:
Buyers are less concentrated than sellers
Buyer switching costs are high
Threat of backward integration is low
Buyer is not price sensitive
Buyer is uneducated regarding the product
Buyer purchases product in low volume
Buyer purchases comprise small portion of seller sales
Product is highly differentiated
Substitutes are unavailable
The Bargaining Power of Customers
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Power of Buyers
Emmer P. Ruaya
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Power of Buyers
The flip side of Powerful Suppliers
Capture more value by forcing down pricesdemanding better quality or more service ad
playing industry participants.
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groups of customers who differ in
bargaining power.
has negotiating leverage
price sensitive
Power of Buyers
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Group of Buyers has Negotiating
leverage
Buyers purchased volume that areBuyers purchased volume that are
large relative to the size of singlelarge relative to the size of single
vendor.vendor.
Example:Telecommunications Industries
Electronic Industries
Chemical Industries
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Buyers face few switching costs in
changing vendors
buyers believe they can always find an equivalentbuyers believe they can always find an equivalent
product, they tend to play one vendor against anotherproduct, they tend to play one vendor against another.
Because the industrys products areBecause the industrys products are
standardized or undifferentiatedstandardized or undifferentiated
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Price Sensitive
Buyers are likely to shop around
and bargain hard, as consumers
do for home mortgages.
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Price Sensitive cont
buyer group earns low profits, is strapped forcash, or is otherwise under pressure to trim
its purchasing costs.
buyers products or services is little affected
by the industrys product.
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buyers are usually more interested in quality
than in price.
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Power Buyer
Buyer power is the ability of a buyer to
reduce price profitably below a suppliers
normal selling price, or more generally the
ability to obtain terms of supply more
favorable than a suppliers normal terms.
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Bargaining Power of the Supplier
Elizabeth M. Reveche
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Supplier
- refer to the firms that provide inputs
to the industry.
Bargaining Power of the Supplier
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Bargaining power is the ability to influence the
setting of prices.
Refer to the potential of the suppliers to
increase the prices of inputs (labor, raw
materials, services, etc) or the costs of industry
in other ways.
Bargaining Power of the Supplier
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Bargaining power of supplier depends on:
- Concentration of suppliers.- Differentiation of inputs
- Presence of substitute inputs
- role of quality and service.- The industry is not a key customer group to
the suppliers.
- Switching costs.- vertical integration of the
suppliers
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vertical integration
- degree to which a firm owns its
upstream suppliers and its
downstream buyers.
Forward integration- Expansion of activities downstream
Backward integration- Expansion of activities upstream
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Vertical integration
RAWMATERIALS
RAWMATERIALS
RAWMATERIALS
INTERMEDIATE
MANUFACTURING
ASSEMBLY
DISTRIBUTION
INTERMEDIATE
MANUFACTURING
ASSEMBLY
DISTRIBUTION
INTERMEDIATE
MANUFACTURING
ASSEMBLY
DISTRIBUTION
END CUSTOMER END CUSTOMER END CUSTOMER
NO INTEGRATION BACKWARD INTEGRATION FORWARD INTEGRATION
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The End