porter's model e- mba, final
TRANSCRIPT
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Porter's FiveForces Analysis
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Components of BusinessEnvironment/ Factors affecting
Business EnvironmentCOMPONENTS OF BUSINESS ENVIRONMENT
Internal Environment External Environment
Micro EnvironmentMacro Environment
Financial resourcesPhysical & human resources
Objectives of business
Managerial policies
Human resources
Work environment
Brand & Corporate image
Labor management relations
Suppliers
Customers
Market intermediaries
Competitors
Public
Economic
Political
Socio-cultural
Technological
Natural
Demographic
International
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Porter's five forces analysis:Meaning A framework for industry analysis and business
strategy development developed by Michael E. Porterof Harvard Business School in 1979
Five forces which determine the competitive intensity
and therefore attractiveness of a market Attractiveness in this context refers to the overallindustry profitability
An "unattractive" industry is one where thecombination of forces acts to drive down overall
profitability A very unattractive industry would be one approaching
"pure competition.
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Porter's five forcesanalysis.
Porter referred to these forces as the microenvironment, to contrast it with macro environment Forces close to a company that affect its ability to
serve its customers and make a profit A change in any of the forces requires a company to
re-assess the market The overall industry attractiveness does not imply
that every firm in the industry will have sameprofitability
Example :airline industry. As an industry, profitabilityis low and yet individual companies, get return inexcess of the industry average
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Porter's five forcesanalysis.
Porter's five forces include three forces from'horizontal' competition:
threat of substitute products
the threat of established rivals threat of new entrants
Two forces from 'vertical' competition:
bargaining power of suppliers bargaining power of customers
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Porter's five forcesanalysis. Five forces model should be used at the
industry level Industry is defined as one in which similar or
closely related products and/or services aresold to buyers
Firms that compete in a single industryshould develop, at a minimum, one five
forces analysis for its industry
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The Five Forces: The threat ofsubstitute products
The existence of close substitute products increases the propensity ofcustomers to switch to alternatives in response to price increases (high
elasticity of demand) buyer propensity to substitute
relative price performance of substitutes
buyer switching costs
perceived level of product differentiation
The ability of customers to find a different way of getting what you offer
If substitution is easy and substitution is viable, then this weakens your
power
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The Five Forces: The threat of theentry of new competitors
Profitable markets that yield high returns will
draw firms This results in many new entrants, which will
effectively decrease profitability
Unless the entry of new firms can be blocked by
incumbents, profit rate will fall towards acompetitive level (perfect competition)
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The Five Forces: The threat
of the entry of newcompetitors. Existence of barriers to entry (patents rights, etc.) Economies of scale Brand equity ( the marketing effects or outcomes that accrue to a
product with its brand name compared with those thatwould
accrue if the same product did not have the brand name) Switching costs or sunk costs ( that cannot be recovered once
they have been incurred ) Capital requirements Access to distribution Learning curve advantages Expected retaliation by incumbents Government policies
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Threat of New Entry.
New competitors can quickly enter your marketand weaken your position
If:
it costs little in time or money to enter yourmarket and compete effectively,
there are few economies of scale in place, you have little protection for your key
technologies, If you have strong and durable barriers to entry,
then you can preserve a favorable position
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The Five Forces: The intensity ofcompetitive rivalry/ the threat of
established rivals
The major determinant of the competitiveness ofthe industry.
Rivals compete: by price and in non-price dimensions such as innovation,
marketing, etc.
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The Five Forces: The intensity ofcompetitive rivalry/ the threat of
established rivals. Number of competitors Rate of industry growth Industry overcapacity
Diversity of competitors Fixed cost allocation per value added Advertising expense Economies of scale
Sustainable competitive advantage throughimprovisation
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Competitive Rivalry / the threat ofestablished rivals..
Number and capability of your competitors if you
have many competitors, and they offer equally
attractive products and services
If suppliers and buyers dont get a good deal from
you,
But if no-one can do what you do, then you can
have strength
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The Five Forces: Thebargaining power of
customers Also described as the market of outputs
The ability of customers to put the firm under pressure
buyer volume
buyer switching costs
buyer information availability
availability of existing substitute products: elasticity of
demand
buyer price sensitivity
differential advantage (uniqueness) of industry products
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Buyer Power.
How easy it is for buyers to drive prices down
Driven by number of buyers, importance of
each buyer to your business, cost to them ofswitching from your products and services to
those of someone else,
If you deal with few, powerful buyers, they
are often able to dictate terms to you
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The Five Forces: Thebargaining power of
suppliers
Also described as market of inputs Suppliers of raw materials, components, labor,
and services (such as expertise) to the firm canbe a source of power over the firm. Suppliers may refuse to work with the firm, or
e.g. charge excessively high prices
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The Five Forces: Thebargaining power of
suppliers. Supplier switching costs relative to firm switching
costs Degree of differentiation of inputs Presence of substitute inputs Cost of inputs relative to selling price of the
product
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Supplier Power.
Here you assess how easy it is for suppliers todrive up prices
This is driven by the number of suppliers of each
key input, the uniqueness of their product orservice, their strength and control over you, thecost of switching from one to another, and so on.
The fewer the supplier choices you have, and themore you need suppliers' help, the more powerfulyour suppliers are
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Industry competitors
Porter's Five Forces ModelPorter's Five Forces Model
Source: Michael E. PorterCompetitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)
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Industry competitors
Rivalry among
existing firms
Porter's Five Forces ModelPorter's Five Forces Model
Source: Michael E. PorterCompetitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)
P ' Fi F M d l
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Potential
entrants
Industry competitors
Rivalry among
existing firms
Threat of
new entrants
Porter's Five Forces ModelPorter's Five Forces Model
Source: Michael E. PorterCompetitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)
P t ' Fi F M d l
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Substitute
products
Potential
entrants
Industry competitors
Rivalry among
existing firms
Threat of
new entrants
Threat of
substitutes
Porter's Five Forces ModelPorter's Five Forces Model
Source: Michael E. PorterCompetitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)
P t ' Fi F M d lP t ' Fi F M d l
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Suppliers
Substitute
products
Potential
entrants
Industry competitors
Rivalry among
existing firms
Threat of
new entrants
Bargaining power
of suppliers
Threat of
substitutes
Porter's Five Forces ModelPorter's Five Forces Model
Source: Michael E. PorterCompetitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)
P t ' Fi F M d lP t ' Fi F M d l
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BuyersSuppliers
Substitute
products
Potential
entrants
Industry competitors
Rivalry among
existing firms
Threat of
new entrants
Bargaining power
of suppliers Bargaining powerof buyers
Threat of
substitutes
Porter's Five Forces ModelPorter's Five Forces Model
Source: Michael E. PorterCompetitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)
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Usefulness
Simple but powerful tool for understanding where power
lies in a business situation
It helps you understand both the strength of your current
competitive position, and the strength of a position you're
looking to move into
An important part of your planning toolkit
Conventionally, the tool is used to identify whether new
products, services or businesses have potential to be
profitable
Can be used to understand the balance of power