Porters 5 Forces And Mapping

What you will learn in this Section ?

• Envisioning Strategy– Definition– Framework– Visual Models

• External Analysis– PEST– PEST Impact Analysis

• Industry and Competitive Analysis– Industry Structure– Evolution of Industries– Industry Supply Chain– Potential Industry Earnings– Porter’s 5 Forces Analysis– Competitive Intensity– Strategies for minimizing competitive

forces– Perceptual Map– Barriers to Entry/Incumbency advantages– DSIR effect

• Company Resources and Capabilities– ARC Analysis/HR– SWOT Analysis– Value Creating Processes/Core

Competencies– Strategic Gameboard– Balanced Scorecard– Change Management

© Sunil Mehrotra

Fortune's ranking of Industries by profits

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Heavy

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0

10

20

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Industry Ranking

% ROE

Industry

% R

OE

Industry AnalysisWhy are some industries more

profitable than others?

Industry Analysis:Porter's Insight

© Sunil Mehrotra

Suppliers

Customers

The incumbentfirms

New entrant

Substitutes

• Porter’s insight recognizes that the following characteristics are important to profitability of the incumbent:

The intensity of competition

The ability of suppliers or buyers of industry products to restrain industry profits

The behavior of firms producing closely related goods not included in the industry

Potential for entry into the market by new firms

Porter's 5 Forces impact on profitability

Suppliers

Bargaining power of Suppliers

Customers

Bargaining power of

New entrant

Threat of New Entrants

Substitutes Threat fromSubstitutes

The incumbentfirms

Competitive rivalry

Root causes that put pressure onindustry profitability

Few large suppliersNo substitutesCustomers are fragmentedSwitching costs to another supplier are highSupplier integrating forward

Economies of scaleDownstream more profitableLow barriers to entry downstream

Concentration of buyersIncumbents are fragmentedProduct is undifferentiatedSwitching to another supplier is simpleProduct is not strategic to the customerCustomers can produce the product themselvesCustomer knows the production costsCustomers can integrate back-words

Better pricesBetter performanceSimilar functionality

Many small playersHigh cost to exitUndifferentiated products compete on priceLow brand loyaltyLow switching costsSlow/no growth market

www.themanager.org

© Sunil Mehrotra

Low barriers to entry

Suppliers


The incumbentfirms

Competitive rivalry


Customers

Bargaining power of

New entrant


Impact on Profitability

Competitive Intensity


Bargaining power of Customers


Threat from Substitutes

High LowModerate

Profits © Sunil Mehrotra

Threat/Power

Discount Stores Tobacco Industry


Suppliers


Customers

Bargaining power of

New entrant



The incumbentfirms

Competitive rivalry

Competitive Intensity impactsIndustry profitability

MonopolySingle Firm

Dominant Firm•Few large firms•More small firms•Pricing leadership•Protected Niches

Oligopoly•Few Firms•Strategic Interdependence•Profitability determined by behavior

Niche Market•Product Differentiation•Localized competition

Perfect Competition•Many firms•No product differentiation•Price based competition

HighLow

Industry Profitability

© Sunil MehrotraAdapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001

UtilitiesComputer OS

AutomobilesCommercial Aircrafts

Clothing StoresGas Stations

Commodities

1000-1800

http://www.usdoj.gov/atr/public/testimony/hhi.htmHHI

New entrant


Strategies for minimizing the power of competitive forces

Adapted from: www.themanager.org

Reducing competitive rivalry withinDifferentiate your productAvoid price competitionReduce industry over capacityFocus on different customer segments

Suppliers


The incumbentfirms

Competitive rivalry


Customers

Bargaining power of

Product Differentiation minimizes competitive intensity

• Perceptual Maps are a visual display (usually on two dimensions) of how brands are perceived by customers.

• The closer the brands are positioned in this space the more competitive they are to each other.

• Perceptual Maps identify “open spaces” or unmet customer needs.

• Perceptual Maps identify salient attributes of the products on which consumers differentiate brands.

Adapted from: http://en.wikipedia.org/wiki/Perceptual_mapping

Perceptual Map for Travel Agency Industry

Online self-service

In person, concierge service

Extreme AdventureGuided tours

Perceptual Map of the Auto Industry

Prestige

Basic

SportyConservative

Perceptual Map Example:Contemporary

Classic

ExpensiveDiscount

Zara

Nina Tooley, April 2008 MBA, Graziadio School of Business and Management Pepperdine University

Contemporary

Classic

Perceptual Map Example:

MatureYoung

Zara

Nina Tooley, April 2008 MBA, Graziadio School of Business and Management Pepperdine University

Perceptual Map of the Beer Market

Premium

Popular with MenHeavy

Special Occasions

Dining Out

Popular with

Women

Light

Pale Color

On a Budget

Good Value Blue Collar

Full Bodied

PremiumBudget

Light

Heavy

•

Meister Brau

Stroh’s

•

•

•

Beck’s

• Heineken

Old Milwaukee

•

Miller •

Coors•

Michelob•

Miller Lite

• Coors Light•

OldMilwaukee Light

•

Budweiser

Less Filling

Adapted from: Prof. Ganesh Iyer, UC Berkeley

Perceptual Map of 2000 Presidential Candidates

Colin PowellJohn McCain

George W. Bush

Alan Keyes

Pat Buchanan

Steve Forbes

Donald Trump

Elizabeth Dole

Jesse Jackson

Bill Bradley

Al Gore

Leader

Opportunistic

ReligiousConservative

Source: 12Americans.com, 2000www.populus.com

TraditionalLiberal

Republican

Democrat

Independent

Porter’s 5 Forces Differentiation as a strategy

Competitive Intensity


Bargaining power of Customers


Threat from Substitutes

Differentiation

Brand loyalty to keep customers from switching

Better able to pass on supplier price increases to customers

Fewer alternatives available to switch to

Customer loyalty can deter new entrants

Customers less willing to accept substitutes

www.studymarketing.org

Example:

Differentiation is occupying a unique space in the customer's

mind

New entrant


Strategies for minimizing the power of competitive forces

Adapted from: www.themanager.org

Reducing the threat of New Entrants

Increasing minimum efficient scales of operations

Creating brand image/loyalty

Protection of intellectual property

Alliances with linked products/services

Tie up with suppliers

Tie up with distributors

Retaliation tactics

Cut out intermediaries

Reducing threat of substitutesIncrease switching costsForm alliancesEnter substitute market Accentuate differences

Reducing competitive rivalry withinDifferentiate your productAvoid price competitionReduce industry over capacityFocus on different customer segments

Reducing the Bargaining Power of SuppliersPartneringSupply Chain ManagementIncrease mutual dependencyBuild knowledge of supplier costs/methodsTake-over supplier

Reducing the Bargaining Power of CustomersPartneringIncrease loyaltyIncrease incentives and value addedIncrease switching costsCut out intermediaries

Suppliers


The incumbentfirms

Competitive rivalry


Customers

Bargaining power of


Suppliers


Customers

Bargaining power of

New entrant



The incumbentfirms

Competitive rivalry

Nappies 14-16?

Porter's 5 forces insight-Intensity of competition amongst incumbents-Bargaining power of suppliers and buyers- Threat from substitutes and new entrants

Spectrum of competition-monopoly to perfect competition-Herfindahl-Hirschman index measure of intensity-strategies for minimizing intensity of competition

Product and brand differentiation is a key strategy-Perceptual mapping technique-Using perceptual maps for positioning products and brands

Mnemonic 6

Mnemonic 7

Adapted from: http://en.wikipedia.org/wiki/Perceptual_mapping