by: kavita, chris, and jake porter’s generic strategies and five forces
TRANSCRIPT
By: Kavita, Chris, and Jake
PORTER’S GENERIC STRATEGIES AND FIVE FORCES
• Michael Porter
• Is this profitable?
• Where is the power?
• What is my current competitive position?
WHAT IS IT?
FIVE FORCES
• Is this an attractive market or industry for us to compete in?
GENERIC STRATEGIES
• How can we best compete for customers in this market/industry?
GENERIC STRATEGIES
• Market Scope asksHow broad or narrow is our target market?
• Source For Competitive Advantage asksWill you compete for competitive advantage by lower price or product uniqueness?
GENERIC STRATEGIES
GENERIC STRATEGIES
• Differentiation StrategyOrganization’s resources and attention are directed toward making its products appear different from those of the competition (ex: Coke,
Pepsi)
• Market scope = Broad
• Source of competitive advantage = Unique product
GENERIC STRATEGIES
• Cost LeadershipOrganization’s resources and attention are directed toward minimizing costs to operate more efficiently than the competition (ex: Wal-Mart)
• Market scope = Broad
• Source of competitive advantage = Low price
GENERIC STRATEGIES
• Focused Differentiation
Concentrates on a particular market segment and tries to offer the most unique product in that segment
• Market scope = Narrow
• Source for competitive advantage = Unique product
• Focused Cost Leadership
Concentrates on a particular market segment and tries to be the provider with the lowest costs in that segment
• Market scope = Narrow
• Source for competitive advantage = Low price
GENERIC STRATEGIES
• Differentiation Strategy (in depth)
• Seeks advantage though uniqueness
Done by:
• Certain look (ex: Polo Ralph Lauren, American Apparel, Roots)
• Lifestyle advertising (ex: Coca Cola, Pepsi, Much Music)
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• Goal is to attract consumers who will be loyal and ignore the competitions’ products
• This strategy requires organizational strengths in marketing, research and development, and creativity. Differentiation’s success is dependent upon the consumers’ continuing perceptions of quality and uniqueness.
GENERIC STRATEGIES
• Cost Leadership Strategy (in depth)
• Your goal is to have the lowest prices available to receive the largest profit
Done by:
• Continually improving operating efficiencies of production, distribution, and other organizational systems.
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• Requires tight cost and managerial controls as well as products that are easy to manufacture and distribute
• Perfect example is Wal-Mart
GENERIC STRATEGIES
• Focus Strategies (in depth)
• Concentrate on a special market segment with the objective to serve it better than anyone else
• Focus organizational resources and attention on a particular customer , geographical region, or product/service line
• Seek the competitive advantage in that singular segment through product differentiation or cost leadership
• Example = WestJet
• Number of competitors
• Quality differences
• Other (product) differences
• Switching costs
• Customer loyalty
• Costs of leaving the market
• Fixed costs/value added
• Brand identity
• Diversity of rivals
• Industry growth
• Corporate stakes
• Can other companies offer equally attractive products?
• Who holds the power?
• Can other companies do what you do?
• Will your customers stay or go?
COMPETITIVE RIVALRY
• Rivalry drives profits to zero
• Varies across industries
• Industry concentration
• Companies can choose from various rival strategies to win a competitive advantage
• There are many characteristics to determine the intensity of rivalry
COMPETITIVE RIVALRY
Buyer Power depends on the following:
• Number of customers
• Size of each order
• Differences between competitors
• Price sensitivity
• Ability to substitute
• Cost of changing
• Monopsony: multiple suppliers and one buyer
BUYER POWER
• How easy it is for suppliers to drive up prices
• Less suppliers = more power for the suppliers
SUPPLIER POWER
THREAT OF NEW ENTRY
• Time and cost of entry
• Investment cost
• Technology protection
• Barriers to entry
• Specialized Assets
• Experience is needed
• Training is available
• Economies of scale
• Brand identity
• Access to distribution
• Profitable markets that yield high returns will attract new firms
• New companies= decrease profits
Types:
HIGH VS. LOW INDUSTRY PROFITSHigh industry profits associated with: • Weak suppliers• High entry barriers• Few substitutes• Little rivalry
Low industry profits associated with: • Strong suppliers• Low entry barriers• Many substitutes• Intense rivalry
BARRIERS TO ENTRY
• Examples of Barriers to Entry:
-Patents
-Copy Rights
• Most attractive market segment is one in which entry barriers are high and exit barriers are low
• Governments creates barriers too –permits, grants, restrictions ..etc.
ENTERING AND EXITING A MARKET
Easy to enter if: • Access to distribution channels• Little Brand Identity • Common technology
Difficult to Enter if there is: • Patents • Difficulty in brand switching• Restricted distribution channels
Easy to Exit if there are: • Low exit cost• Independent businesses • Assets are easy to sell
Difficult to Exit if there are: • Hard to sell assets• High exit costs• Interrelated Businesses
BRAND IDENTITY• Consumers will believe that a product with a well-known name is better than products with a
less well-known name
• New firms won’t join if there is a big name brand
ECONOMICS OF SCALE• This has to do with the MES which is the Minimum Efficient Scale
• Unit cost for production are at a minimum ex. the most cost efficient level of production
• If MES for firms in an industry is known, then we can determine the amount of market share necessary for low cost entry
• Creates a barrier:
The greater the difference between industry MES and entry unit cost, the greater the barrier to entry.
SPECIALIZED ASSETS • Extent to which the firms assets can be utilized to produce a different product
• Expensive assets/ equipment
• Provides a barrier for two reason:
1. when a firm already holds specialized assets, new companies don’t bother in joining the market segment because it would be intense rivalry (not a lot of profit)
2. Potential entrants do not want to make huge investments in highly specialized assets
-hard to sell if venture fails
OTHERS….• Time and cost of entry:
-is it expensive to enter the market? Does it require a lot of time to enter?
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• Access to distribution:
-is there a company that already has the distribution rights?
-A lack of access will make it difficult for newcomers to enter the market
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• Training is available:
-do your employees need to be specially trained? Can they get the training somewhere?
Ex- CPR training
OTHERS…• Experience is needed:
-do you already have to have experience in the field to join the market?
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• Investment Cost:
-High cost will deter entry
-High capital requirements might mean that only large businesses can compete
THREAT OF SUBSTITUTES • Refers to products in other industries
• Substitution is easy=weakens your power
• Ex:
Instead of
THREAT OF SUBSTITUTES
• Threat of Substitute exists when a products demand is affected by the price change of
substitute products
• Price elasticity: as more substitutes become available, demand becomes more elastic since
buyers have more options
• A close substitute product constrains the ability of firms in an industry to raise prices
• Substitute performance: price and performance of the substitute can match the industry’s
product
• Cost of Change: if it is low cost to switch then you is in serious trouble