Porter 5 forces model

Ch2-1

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.

Ch2-2

Threat of New

Entrants

Threat of New

Entrants

Porter’s Five Forces Model of Competition

Ch2-3

Threat of New Entrants

Barriers to Entry

Expected RetaliationExpected Retaliation

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 Independent Cost Disadvantages Independent of Scaleof Scale

Ch2-4

Bargaining Power of Suppliers

Threat of New

Entrants

Threat of New

Entrants


Ch2-5


Suppliers exert power in the industry by:

* Threatening to raiseprices 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:Suppliers are likely to be powerful if:

Supplier industry is dominated by a Supplier industry is dominated by a few firmsfew firmsSuppliers’ products have few substitutesSuppliers’ products have few substitutes

Buyer is not an important customer to Buyer is not an important customer to suppliersupplierSuppliers’ product is an important Suppliers’ product is an important input to buyers’ productinput to buyers’ product

Suppliers’ products are differentiatedSuppliers’ products are differentiated

Suppliers’ products have high Suppliers’ products have high switching costsswitching costs

Supplier poses credible threat of Supplier poses credible threat of forward integrationforward integration

Ch2-6

Bargaining Power of Buyers

Threat of New

Entrants

Threat of New

Entrants



Ch2-7


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:Buyer groups are likely to be powerful if:

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

Purchase accounts for a significant Purchase accounts for a significant fraction of supplier’s salesfraction of supplier’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 Buyer presents a credible threat of backward integrationbackward integration

Product unimportant to qualityProduct unimportant to quality

Buyer has full informationBuyer has full information

Ch2-8

Threat of Substitute Products

Threat of New

Entrants

Threat of New

Entrants




Ch2-9


Products with similar function limit the prices firms can charge

Keys to evaluate substitute products:Keys to evaluate substitute products:

Products with improving Products with improving price/performance tradeoffs price/performance tradeoffs relative to present industry relative to present industry productsproducts

Example:Example:

Electronic security systems in Electronic security systems in place of security guardsplace of security guards

Fax machines in place of Fax machines in place of overnight mail deliveryovernight mail delivery

Ch2-10


Threat of New

Entrants

Threat of New

Entrants

Rivalry Among Competing Firms

in Industry




Ch2-11

Rivalry 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 positionUsing price competitionUsing price competitionStaging advertising battlesStaging advertising battles

Making new product introductionsMaking new product introductionsIncreasing 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 opportunityPrice 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

Ch2-12

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

Rivalry Among Existing Competitors

Numerous or equally balanced competitorsNumerous or equally balanced competitorsSlow growth industrySlow growth industryHigh 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 stakesHigh exit barriersHigh exit barriers

Diverse competitorsDiverse competitors

Ch2-13

Coca-cola• Suppliers:

Price and availability of ingredients on world market Quality speed safety, traceability, flexibility of supply

chain

• Buyers/consumers: High as a result of intense competition both

among branded and unbranded products. Combined purchase power of shops, bars,

supermarkets

Ch2-14

Competitive Advantage• The Competitive Advantage model of Porter learns

that competitive strategy is about taking offensive or defensive action to create a defendable position in an industry, in order to cope successfully with competitive forces.

• Companies can combat the pressure of the five forces and create competitive advantages.

• There are 2 basics types of Competitive Advantage : Cost leadership (low cost) Differentiation

Ch2-15

Strengths of five forces model:

The model is strong tool for competitive analysis at industry level.

It provides useful input for performing a SWOT analysis.

Ch2-16

Limitations • Inside-out strategy is ignored (core competence)

• It does not cope with synergies and interdependencies within the portfolio of large corporations (parenting advantage)

• The environments which are characterized by rapid, systemic and radical change require more flexible, dynamic or emergent approaches to strategy formulation (disruptive innovation)

• Sometimes it may be possible to create completely new markets instead of selecting from existing ones (blue ocean strategy)

Education

Porter 5 forces model