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