porter 5 forces model
TRANSCRIPT
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
Porter’s Five Forces Model of Competition
Ch2-5
Bargaining Power of Suppliers
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
Bargaining Power of Suppliers
Porter’s Five Forces Model of Competition
Ch2-7
Bargaining Power of Buyers
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
Bargaining Power of Buyers
Bargaining Power of Suppliers
Porter’s Five Forces Model of Competition
Ch2-9
Threat of Substitute Products
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 Substitute Products
Threat of New
Entrants
Threat of New
Entrants
Rivalry Among Competing Firms
in Industry
Bargaining Power of Buyers
Bargaining Power of Suppliers
Porter’s Five Forces Model of Competition
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)