Industry Analysis - Porter's Five Forces Dr Bryan Mills

Industry Analysis - Porter's Five Forces

Industry Analysis - Porter's Five Forces

Dr Bryan MillsDr Bryan Mills

Components of the General EnvironmentComponents of the General Environment

macro

industry

competitors

you!

PESTEL

Don’t knock SWOT!It’s the starting point

• an overview of the strategic situation.

• raw material for more extensive internal and external analysis.

Opportunities

• Possible Opportunities:– Emerging customer needs ANSOFF– Quality Improvements PLC?

• Vertical differentiation

– Expanding global markets ANSOFF– Vertical Integration M&A

Threats

• Possible Threats:– New entry by competitors 5 forces– Changing demographics/shifting

demand market research– Emergence of cheaper technologies 5

forces– Regulatory requirements

The purpose of Five-Forces Analysis

• The five forces are environmental forces that impact on a company’s ability to compete in a given market.

• 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

Entrants

Threat of New

Entrants

Porter’s Five Forces Porter’s Five Forces

Bring new capacity, the desire to gain market share, and often substantial resources.

Companies diversifying through acquisition into the industry from other markets often leverage their resources to cause a shakeup

Michael E. Porter, “How Competitive Forces Shape Strategy,” Harvard Business Review 1979 (pp. 32-41)

Threat of New EntrantsThreat of New Entrants

Barriers to Entry

Barriers to Entry

Government PolicyGovernment Policy

Economies of ScaleEconomies of Scale

Product DifferentiationProduct Differentiation

Capital RequirementsCapital Requirements

Switching CostsSwitching Costs

Access to Distribution ChannelsAccess to Distribution Channels

Cost Disadvantages Cost Disadvantages Independent of ScaleIndependent of Scale

Threat of New Entrant

s


Bargaining Power of SuppliersBargaining Power of Suppliers

Suppliers exert power in the industry by:

Suppliers exert power in the industry by:

* Threatening to raise* Threatening to raiseprices or to reduce qualityprices or to reduce quality

Supplier industry is dominated by a few firmsSupplier industry is dominated by a few firms

Suppliers’ products have few substitutesSuppliers’ products have few substitutes

Buyer is not an important customer to supplierBuyer is not an important customer to supplier

Suppliers’ product is an important input to Suppliers’ product is an important input to buyers’ productbuyers’ product

Suppliers’ products are differentiatedSuppliers’ products are differentiated

Suppliers’ products have high switching costsSuppliers’ products have high switching costs

Supplier poses credible threat of forward Supplier poses credible threat of forward integrationintegration

Bargaining Power of Buyers



Threat of New Entrant

s

Bargaining Power of BuyersBargaining Power of Buyers

Bargaining down prices Bargaining down prices

Forcing higher qualityForcing higher quality

Playing firms off ofPlaying firms off ofeach othereach other

Buyer groups are likely to be powerful if:Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases are large Buyers are concentrated or purchases are large relative to seller’s salesrelative to seller’s sales

Purchase accounts for a significant fraction of Purchase accounts for a significant fraction of supplier’s salessupplier’s sales

Products are undifferentiatedProducts are undifferentiated

Buyers face few switching costsBuyers face few switching costs

Buyers’ industry earns low profitsBuyers’ industry earns low profits

Buyer presents a credible threat of backward Buyer presents a credible threat of backward integrationintegration

Product unimportant to qualityProduct unimportant to quality

Buyer has full informationBuyer has full information

Threat of Substitute Products


Threat of New

Entrants

Threat of New

Entrants

Threat of New

Entrants



Bargaining Power of Suppliers


Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition

Threat of Substitute ProductsThreat of Substitute Products

Products with similar function limit the prices firms can charge

Products with similar function limit the prices firms can charge

By placing a ceiling on prices it can charge, substitute products or services limit the potential of an industry. Unless it can upgrade the quality of the product or differentiate it somehow (as via marketing), the industry will suffer in earnings and possibly in growth



Threat of New

Entrants

Threat of New

Entrants

Threat of New

Entrants

Rivalry Among Competing Firms

in Industry

Rivalry Among Competing Firms

in Industry





Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition

Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:Intense rivalry often plays out in the following ways:

Jockeying for strategic positionJockeying for strategic position

Using price competitionUsing price competition

Staging advertising battlesStaging advertising battles

Making new product introductionsMaking new product introductions

Increasing consumer warranties or serviceIncreasing consumer warranties or service

Occurs when a firm is pressured or sees an opportunityOccurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse offPrice competition often leaves the entire industry worse off

Advertising battles may increase total industry demand, but Advertising battles may increase total industry demand, but may be costly to smaller competitorsmay be costly to smaller competitors

CutthroatCutthroat competitioncompetition is more likely to occur when: is more likely to occur when:

Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

Numerous or equally balanced competitorsNumerous or equally balanced competitors

Slow growth industrySlow growth industry

High fixed costsHigh fixed costs

Lack of differentiation or switching costsLack of differentiation or switching costs

High storage costsHigh storage costs

Capacity added in large incrementsCapacity added in large increments

High strategic stakesHigh strategic stakes

High exit barriersHigh exit barriers

Diverse competitorsDiverse competitors

The Five Forces are Unique to the Industry

• Five-Forces Analysis is a framework for analyzing a particular industry.

Competitor AnalysisCompetitor Analysis

After industry analysis we need analysis of After industry analysis we need analysis of a firm’s a firm’s CompetitorsCompetitors

CompetitiveCompetitiveEnvironmentEnvironment

Industry Environment

Industry Environment


AssumptionsAssumptionsWhat assumptions do our competitors hold about the future of industry and themselves?

Current StrategyCurrent StrategyDoes our current strategy support changes in the competitive environment?

Future ObjectivesFuture ObjectivesHow do our goals compare to our competitors’ goals?

CapabilitiesCapabilitiesHow do our capabilities compare to our competitors?

ResponseResponseWhat will our competitors do in the future?

What will our competitors do in the future?

Where do we have a competitive advantage?

Where do we have a competitive advantage?

How will this change our relationship with our competition?



How do our goals compare to our competitors’ goals?Where will emphasis be placed in the future?Where will emphasis be placed in the future?

What is the attitude toward risk?What is the attitude toward risk?

What Drives the competitor?


What is the competitor doing?

What can the competitor do?




Current StrategyCurrent StrategyHow are we currently competing?How are we currently competing?

Does this strategy support changes in the competitive structure?

Does this strategy support changes in the competitive structure?


What does the competitor believe about itself and the industry?





Does this strategy support changes in the competition structure?


Do we assume the future will be volatile?Do we assume the future will be volatile?

Are we assuming stable competitive conditions?Are we assuming stable competitive conditions?

What assumptions do our competitors hold about the industry and themselves?


AssumptionsAssumptions


What are the competitor’s capabilities?








Are we operating under a status quo?Are we operating under a status quo?




What are my competitors’ strengths and weaknesses?What are my competitors’ strengths and weaknesses?

How do our capabilities compare to our competitors?


CapabilitiesCapabilities









Are we operating under a status quo?Are we operating under a status quo?




ResponseResponseWhat will our competitors do in the future?What will our competitors do in the future?

Where do we have a competitive advantage?Where do we have a competitive advantage?



CapabilitiesCapabilities

What are my competitors’ strengths and weaknesses?What are my competitors’ strengths and weaknesses?




Documents

Industry Analysis - Porter's Five Forces Dr Bryan Mills