rajesh vaishnav
TRANSCRIPT
SEMINAR REPORT ON CONTEMPORARY
MANAGEMENT ISSUES
TOPIC- PORTER FIVE FORCES
Submitted to:
Rajasthan Technical University Kota in lieu of partial fulfillment of requirement
of Master of Business Administration (MBA)
By
Rajesh Vaishnav
MBA ll SEM
(2010-12)
From
BIYANI INSTITUTE OF SCIENCE & MANAGEMENT
(BISMA) Jaipur, (Rajasthan)
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ACKNOWLEDGEMENT
I express my sincere thanks to my project guide, Dr. ANUSHEEL K. SHARMA ,FACULTY
of BISMA for guiding me right from the inception till the successful competition of the
project. I sincerely acknowledge him for extending their valuable guidance support for literature
critical reviews of project throughout my project & all the moral support he had provided to me
in all stages of this project.
I am also thankful to BISMA staff for their cooperation in completing my project.
I am also thankful to My Parents for their support in completion of my project.
RAJESH VAISHNAV
MBA II Sem
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DECLARATION BY CANDIDATE
I hereby declare that this report is my original work and I have not copied it from anywhere or
earlier such report prepared by seniors. I further declare that I have not submitted this report
anywhere else except to R.T.U. Kota in partial fulfillment of my MBA Course.
Date: RAJESH VAISHNAV
(MBA-II SEM)
DECLARATION BY GUIDE
This is to certify that RAJESH VAISHNAV , the student of MBA of BIYANI INSTITUTE OF
SCEIENCE & MANAGEMENT has completed the project study titled “PORTER FIVE FORCES”.
Under my guidance .It is her own work to the best of my knowledge. I wish her all future
ventures.
Dr. ANUSHEEL K. SHARMA
Ass. Prof. BISMA
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Certificate
This is to certify that the report entitled “PORTER FIVE FORCES”. This is
being submitted here for the award of degree of MBA, of Rajasthan
Technical University, Kota is the result of research work completed by
Rajesh Vaishnav. Under the guidance & to the best of my knowledge and
belief, the work embodied in this project report has not form earlier the
basis for the award of any degree or similar title of this another examining
body.
Dr. Anusheel K. Sharma
Ass. Prof. BISMA
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TABLE OF CONTENTS
S.NO. TITLE PAGE NO.
1. Introduction
2. Porter’s Five Force
3. Porter Five Forces Analysis
4. Strategy
5. Understanding the Tool
6. Use of the Information Form Five Forces
Analysis
7. Application of Five Forces in International
Markets
8. Business Decision Framework
9. SWOT Analysis of Five Forces
10. Limitation
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BIBLIOGRAPHY
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1. INTRODUCTION
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Introduction
The model of the Five Competitive Forces was developed by Michael E. Porter in his book
“Competitive Strategy: Techniques for Analyzing Industries and Competitors” in 1980. Since
that time it has become an important tool for analyzing an organizations industry structure in
strategic processes.
Porter’s model is based on the insight that a corporate strategy should meet the opportunities and
threats in the organizations external environment. Especially, competitive strategy should base
on and understanding of industry structures and the way they change.
Porter has identified five competitive forces that shape every industry and every market. These
forces determine the intensity of competition and hence the profitability and attractiveness of an
industry. The objective of corporate strategy should be to modify these competitive forces in a
way that improves the position of the organization. Porters model supports analysis of the
driving forces in an industry. Based on the information derived from the Five Forces Analysis,
management can decide how to influence or to exploit particular characteristics of their industry.
Michael Porter
Born May 23, 1947 (age 63)
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Ann Arbor, Michigan
Michael Eugene Porter (born May 23, 1947) is the Bishop William Lawrence University
Professor at Harvard Business School. He is a leading authority on company strategy and the
competitiveness of nations and regions. Michael Porter’s work is recognized in many
governments, corporations and academic circles globally. He chairs Harvard Business School's
program dedicated for newly appointed CEOs of very large corporations.
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2. PORTER’S 5 FORCES
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Diagram of Porter's 5 Forces
SUPPLIER POWER Supplier concentration
Importance of volume to supplier Differentiation of inputs
Impact of inputs on cost or differentiation Switching costs of firms in the industry
Presence of substitute inputs Threat of forward integration
Cost relative to total purchases in industry
THREAT OFNEW ENTRANTS
Barriers to Entry Absolute cost advantages Proprietary learning curve
Access to inputs Government policy
Economies of scale Capital requirements
Brand identity Switching costs
Access to distribution Expected retaliation Proprietary products
THREAT OFSUBSTITUTES -Switching costs -Buyer inclination to substitute -Price-performance trade-off of substitutes
BUYER POWER Bargaining leverage
Buyer volume Buyer information
Brand identity Price sensitivity
Threat of backward integration Product differentiation
Buyer concentration vs. industry Substitutes available
Buyers' incentives
DEGREE OF RIVALRY -Exit barriers -Industry concentration -Fixed costs/Value added -Industry growth -Intermittent overcapacity -Product differences -Switching costs -Brand identity -Diversity of rivals -Corporate stakes
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I. Rivalry
In the traditional economic model, competition among rival firms drives profits to zero. But
competition is not perfect and firms are not unsophisticated passive price takers. Rather, firms
strive for a competitive advantage over their rivals. The intensity of rivalry among firms varies
across industries, and strategic analysts are interested in these differences. Firms strive to secure
a competitive advantage over their rivals. The intensity of rivalry varies within each industry and these
differences can be important in the development of strategy.
Industries that are “concentrated,” versus “fragmented,” often display the highest level of rivalry.
Many, including The US Bureau of Census, recognize industry concentration and measure it by
the “concentration ratio” (CR). The Census Bureau reports the CR by Standard Industrial
Classification (SIC) Code and it indicates the percent of market share held by the four largest
firms. A high concentration ratio indicates that a majority of market share is controlled by the
largest firms. If a few firms hold a large market share, the competitive landscape is le
competitive as it nears that of a monopoly. A low CR indicates that the industry has many rivals,
none with significant market share. These fragmented markets are said to be competitive.
The intensity of rivalry is influenced by the following industry characteristics:
A larger number of firms increase rivalry because more firms must compete for the same
customers and resources. The rivalry intensifies if the firms have similar market
1. share, leading to a struggle for market leadership.
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2. Slow market growth causes firms to fight for market share. In a growing market, firms
are able to improve revenues simply because of the expanding market.
3. High fixed costs result in an economy of scale effect that increases rivalry. When total
costs are mostly fixed costs, the firm must produce near capacity to attain the lowest unit
costs. Since the firm must sell this large quantity of product, high levels of production
lead to a fight for market share and results in increased rivalry.
4. High storage costs or highly perishable products cause a producer to sell goods as
soon as possible. If other producers are attempting to unload at the same time,
competition for customers intensifies.
5. Low switching costs increases rivalry. When a customer can freely switch from one
product to another there is a greater struggle to capture customers.
6. A low level of product differentiation is associated with higher levels of rivalry. rand
identification, on the other hand, tends to constrain rivalry.
7. Strategic stakes are high when a firm is losing market position or has potential for
great gains. This intensifies rivalry.
8. A diversity of rivals with different cultures, histories, and philosophies make an industry
unstable. There is greater possibility for mavericks and for misjudging rival's moves.
Rivalry is volatile and can be intense
9. Industry Shakeout. A growing market and the potential for high profits induces new
firms to enter a market and incumbent firms to increase production. A point is reached
where the industry becomes crowded with competitors, and demand cannot support the
new entrants and the resulting increased supply
II. Threat of Substitutes
In Porter's model, substitute products refer to products in other industries. To the economist, a
threat of substitutes exists when a product's demand is affected by the price change of a
substitute product. A product's price elasticity is affected by substitute products - as more
substitutes become available, the demand becomes more elastic since customers have more
alternatives. A close substitute product constrains the ability of firms in an industry to raise
prices.
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III. Buyer Power
The power of buyers is the impact that customers have on a producing industry. In general,
when buyer power is strong, the relationship to the producing industry is near to what an
economist terms a monophony - a market in which there are many suppliers and one buyer.
Under such market conditions, the buyer sets the price. In reality few pure monopolies exist, but
frequently there is some asymmetry between a producing industry and buyers.
The following tables outline some factors that determine buyer power.
Buyers are Powerful if: Example
Buyers are concentrated - there are a few
buyers with significant market shareDOD purchases from defense contractors
Buyers purchase a significant proportion of
output - distribution of purchases or if the
product is standardized
Circuit City and Sears' large retail market
provides power over appliance manufacturers
Buyers possess a credible backward
integration threat - can threaten to buy
producing firm or rival
Large auto manufacturers' purchases of tires
Buyers are Weak if: Example
Producers threaten forward integration - Movie-producing companies have integrated
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producer can take over own
distribution/retailingforward to acquire theaters
Significant buyer switching costs - products
not standardized and buyer cannot easily
switch to another product
IBM's 360 system strategy in the 1960's
Buyers are fragmented (many, different) - no
buyer has any particular influence on product
or price
Most consumer products
Producers supply critical portions of buyers'
input - distribution of purchasesIntel's relationship with PC manufacturers
IV. Supplier Power
A producing industry requires raw materials - labor, components, and other supplies. This requirement
leads to buyer-supplier relationships between the industry and the firms that provide it the raw
materials used to create products. Suppliers, if powerful, can exert an influence on the producing
industry, such as selling raw materials at a high price to capture some of the industry's profits. The
following tables outline some factors that determine supplier power.
Suppliers are Powerful if: Example
Credible forward integration threat by suppliers
Baxter International, manufacturer of hospital
supplies, acquired American Hospital Supply, a
distributor
Suppliers concentrated Drug industry's relationship to hospitals
Significant cost to switch suppliers Microsoft's relationship with PC manufacturers
Customers Powerful Boycott of grocery stores selling non-union
picked grapes
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Suppliers are Weak if: Example
Many competitive suppliers - product is
standardized
Tire industry relationship to automobile
manufacturers
Purchase commodity products Grocery store brand label products
Credible backward integration threat by
purchasers
Timber producers relationship to paper
companies
Concentrated purchasersGarment industry relationship to major
department stores
Customers Weak Travel agents' relationship to airlines
V. Threat of New Entrants and Entry Barriers
It is not only incumbent rivals that pose a threat to firms in an industry; the possibility that new
firms may enter the industry also affects competition. In theory, any firm should be able to enter
and exit a market, and if free entry and exit exists, then profits always should be nominal. In
reality, however, industries possess characteristics that protect the high profit levels of firms in
the market and inhibit additional rivals from entering the market. These are barriers to entry.
Barriers to entry arise from several sources:
1. Government creates barriers. Although the principal role of the government in a market
is to preserve competition through anti-trust actions, government also restricts competition
through the granting of monopolies and through regulation. Industries such as utilities are
considered natural monopolies because it has been more efficient to have one electric company
provide power to a locality than to permit many electric companies to compete in a local market.
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2. Patents and proprietary knowledge serve to restrict entry into an industry. Ideas
and knowledge that provide competitive advantages are treated as private property when
patented, preventing others from using the knowledge and thus creating a barrier to entry.
Edwin Land introduced the Polaroid camera in 1947 and held a monopoly in the instant
photography industry. In 1975, Kodak attempted to enter the instant camera market and sold a
comparable camera. Polaroid sued for patent infringement and won, keeping Kodak out of the
instant camera industry.
3. Asset specificity inhibits entry into an industry. Asset specificity is the extent to
which the firm's assets can be utilized to produce a different product. When an industry requires
highly specialized technology or plants and equipment, potential entrants are reluctant to
commit to acquiring specialized assets that cannot be sold or converted into other uses if the
venture fails. Asset specificity provides a barrier to entry for two reasons: First, when firms
already hold specialized assets they fiercely resist efforts by others from taking their market
share. New entrants can anticipate aggressive rivalry. For example, Kodak had much capital
invested in its.
4. Organizational (Internal) Economies of Scale. The most cost efficient level of
production is termed Minimum Efficient Scale (MES). This is the point at which unit costs for
production are at minimum - i.e., 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 or cost parity with rivals. For example, in long distance communications roughly 10% of
the market is necessary for MES. If sales for a long distance operator fail to reach 10% of the
market, the firm is not competitive.
Some of an industry's entry and exit barriers can be summarized as follows:
Easy to Enter if there is:
Common technology
Little brand franchise
Access to distribution channels
Difficult to Enter if there is:
Patented or proprietary know-how
Difficulty in brand switching
Restricted distribution channels
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Low scale threshold High scale threshold
Easy to Exit if there are:
Salable assets
Low exit costs
Independent businesses
Difficult to Exit if there are:
Specialized assets
High exit costs
Interrelated businesses
DYNAMIC NATURE OF INDUSTRY RIVALRY
Our descriptive and analytic models of industry tend to examine the industry at a given state.
The nature and fascination of business is that it is not static. While we are prone to generalize,
for example, list GM, Ford, and Chrysler as the "Big 3" and assume their dominance, we also
have seen the automobile industry change. Currently, the entertainment and communications
industries are in flux. Phone companies, computer firms, and entertainment are merging and
forming strategic alliances that re-map the information terrain. Schumpeter and, more recently,
Porter have attempted to move the understanding of industry competition from a static
economic or industry organization model to an emphasis on the interdependence of forces as
dynamic, or punctuated equilibrium, as Porter terms it. In Schumpeter's and Porter's view the
dynamism of markets is driven by innovation. We can envision these forces at work as we
examine the following chart.
Top 10 US Industrial Firms by Sales 1917 - 1988
1917 1945 1966 1983 1988
1 US Steel General Motors General Motors Exxon General
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Motors
2 Swift US Steel Ford General Motors Ford
3 AmourStandard Oil -
NJ
Standard Oil -NJ
(Exxon)Mobil Exxon
4American
SmeltingUS Steel General Electric Texaco IBM
5 Standard Oil –NJBethlehem
SteelChrysler Ford
General
Electric
6 Bethlehem Steel Swift Mobil IBM Mobil
7 Ford Amour Texaco Social (Oil) Chrysler
8 DuPont Curtiss-Wright US Steel DuPont Texaco
9 American Sugar Chrysler IBM Gulf Oil DuPont
10 General Electric Ford Gulf OilStandard Oil of
IndianaPhilip Morris
10 Largest US Firms by Assets, 1909 and 1987
1909 1987
1 US STEEL GM (Not listed in 1909)
2 STANDARD OIL, NJ (Now, EXXON #3) SEARS (1909 = 45)
3 AMERICAN TOBACCO (Now, American Brands #52)EXXON (Standard Oil
trust broken up in 1911)
4 AMERICAN MERCANTILE MARINE (Renamed US Lines;
acquired by Kidde, Inc., 1969; sold to McLean Industries, 1978;
IBM (Ranked 68, 1948)
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bankruptcy, 1986
5INTERNATIONAL HARVESTER (Renamed Navistar #182);
divested farm equipmentFORD (Listed in 1919)
6 ANACONDA COPPER (acquired by ARCO in 1977) MOBIL OIL
7 US LEATHER (Liquidated in 1935)GENERAL ELECTRIC
(1909= 16)
8
ARMOUR (Merged in 1968 with General Host; in 1969 by
Greyhound; 1983 sold to Co
nAgra)
CHEVRON (Not listed in
1909)
9
AMERICAN SUGAR REFINING (Renamed AMSTAR. In 1967
=320)
Leveraged buyout and sold in pieces)
TEXACO (1909= 91)
10PULLMAN, INC (Acquired by Wheelabrator Frye, 1980; spun-off
as Pullman-Peabody, 1981; 1984 sold to Trinity Industries)DU PONT (1909= 29)
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3. PORTER FIVE FORCES
ANALYSIS
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Porter five forces analysis
A graphical representation of Porter's Five Forces
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Porter's Five Forces is a framework for industry analysis and business strategy development
formed by Michael E. Porter of Harvard Business School in 1979. It draws upon Industrial
Organization (IO) economics to derive five forces that determine the competitive intensity and
therefore attractiveness of a market. Attractiveness in this context refers to the overall industry
profitability. An "unattractive" industry is one in which the combination of these five forces acts
to drive down overall profitability. A very unattractive industry would be one approaching "pure
competition", in which available profits for all firms are driven down to zero.
Three of Porter's five forces refer to competition from external sources. The remainders are
internal threats.
Porter referred to these forces as the micro environment, to contrast it with the more general term
macro environment. They consist of those forces close to a company that affect its ability to
serve its customers and make a profit. A change in any of the forces normally, requires a
business unit to re-assess the marketplace given the overall change in industry information. The
overall industry attractiveness does not imply that every firm in the industry will return the same
profitability. Firms are able to apply their core competencies, business model or network to
achieve a profit above the industry average. A clear example of this is the airline industry. As an
industry, profitability is low and yet individual companies, by applying unique business models,
have been able to make a return in excess of the industry average.
Porter's five forces include - three forces from 'horizontal' competition: threat of substitute
products, the threat of established rivals, and the threat of new entrants; and two forces from
'vertical' competition: the bargaining power of suppliers and the bargaining power of customers.
This five forces analysis is just one part of the complete Porter strategic models. The other
elements are the value chain and the generic strategies. Porter developed his Five Forces analysis
in reaction to the then-popular SWOT analysis, which he found unrigorous and ad hoc.
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Purposes
To identify relationships and dynamics of an industry.
To help making strategic decisions on an advantage position in a market.
To make a better understanding on how business operates under an industry.
When
The model can be used when a company want to identify the attractiveness of a new industry
to determine the profitability of new product/service. It can also be used in an existing
industry to determine the organisation’s strategic position as it takes account of competition
analysis.
Tips
Five forces model only focus on external business environment but limit on
organization’s intrinsic strengths.
The model can be classified as reactive rather than proactive.
The model should be used in combination with inside-out approach.
It should be used with Resource-Based View which focuses more on company intrinsic
strengths and competent ices.
How
The model is a dimensional theory that highlights key fundamental forces within industrial
environment.
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4. STRATEGY
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Strategy - analyzing competitive industry structure
Defining an industry
An industry is a group of firms that market products which are close substitutes for each other
(e.g. the car industry, the travel industry).
Some industries are more profitable than others. Why? The answer lies in understanding the
dynamics of competitive structure in an industry.
The most influential analytical model for assessing the nature of competition in an industry is
Michael Porter's Five Forces Model, which is described below:
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Porter explains that there are five forces that determine industry attractiveness and long-run
industry profitability. These five "competitive forces" are
- The threat of entry of new competitors (new entrants)
- The threat of substitutes
- The bargaining power of buyers
- The bargaining power of suppliers
- The degree of rivalry between existing competitors
Threat of New Entrants
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New entrants to an industry can raise the level of competition, thereby reducing its attractiveness.
The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in
some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate
agency, restaurants). Key barriers to entry include
- Economies of scale
- Capital / investment requirements
- Customer switching costs
- Access to industry distribution channels
- The likelihood of retaliation from existing industry players.
Threat of Substitutes
The presence of substitute products can lower industry attractiveness and profitability because
they limit price levels. The threat of substitute products depends on:
- Buyers' willingness to substitute
- The relative price and performance of substitutes
- The costs of switching to substitutes
Bargaining Power of Suppliers
Suppliers are the businesses that supply materials & other products into the industry.
The cost of items bought from suppliers (e.g. raw materials, components) can have a significant
impact on a company's profitability. If suppliers have high bargaining power over a company,
then in theory the company's industry is less attractive. The bargaining power of suppliers will be
high when:
-There are many buyers and few dominant suppliers
-There are undifferentiated, highly valued products
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- Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening
to set up their own retail outlets)
- Buyers do not threaten to integrate backwards into supply
- The industry is not a key customer group to the suppliers
Bargaining Power of Buyers
Buyers are the people / organizations who create demand in an industry
The bargaining power of buyers is greater when
- There are few dominant buyers and many sellers in the industry
-Products are standardized
-Buyers threaten to integrate backward into the industry
- Suppliers do not threaten to integrate forward into the buyer's industry
- The industry is not a key supplying group for buyers
Intensity of Rivalry
The intensity of rivalry between competitors in an industry will depend on:
- The structure of competition - for example, rivalry is more intense where there are many
small or equally sized competitors; rivalry is less when an industry has a clear market leader
- The structure of industry costs - for example, industries with high fixed costs encourage
competitors to fill unused capacity by price cutting
- Degree of differentiation - industries where products are commodities (e.g. steel, coal) have
greater rivalry; industries where competitors can differentiate their products have less rivalry
- Switching costs - rivalry is reduced where buyers have high switching costs - i.e. there is a
significant cost associated with the decision to buy a product from an alternative supplier
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- Strategic objectives - when competitors are pursuing aggressive growth strategies, rivalry is
more intense. Where competitors are "milking" profits in a mature industry, the degree of rivalry
is less
- Exit barriers - when barriers to leaving an industry are high (e.g. the cost of closing down
factories) - then competitors tend to exhibit greater rivalry
Assessing the Balance of Power in a Business Situation
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Who has the upper hand, and why?
The Porter's 5 Forces tool is a simple but powerful tool for understanding where power lies in a
business situation. This is useful, because it helps you understand both the strength of your
current competitive position, and the strength of a position you're considering moving into.
With a clear understanding of where power lies, you can take fair advantage of a situation of
strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an
important part of your planning toolkit.
Conventionally, the tool is used to identify whether new products, services or businesses have
the potential to be profitable. However it can be very illuminating when used to understand the
balance of power in other situations.
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5. Understanding the Tool
Understanding the Tool:
Five Forces Analysis assumes that there are five important forces that determine competitive
power in a business situation. These are:
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1. Supplier Power: Here you assess how easy it is for suppliers to drive up prices. This is
driven by the number of suppliers of each key input, the uniqueness of their product or
service, their strength and control over you, the cost of switching from one to another,
and so on. The fewer the supplier choices you have, and the more you need suppliers'
help, the more powerful your suppliers are.
2. Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down.
Again, this is driven by the number of buyers, the importance of each individual buyer to
your business, the cost to them of switching from your products and services to those of
someone else, and so on. If you deal with few, powerful buyers, then they are often able
to dictate terms to you.
3. Competitive Rivalry: What is important here is the number and capability of your
competitors. If you have many competitors, and they offer equally attractive products and
services, then you'll most likely have little power in the situation, because suppliers and
buyers will go elsewhere if they don't get a good deal from you. On the other hand, if no-
one else can do what you do, then you can often have tremendous strength.
4. Threat of Substitution: This is affected by the ability of your customers to find a
different way of doing what you do – for example, if you supply a unique software
product that automates an important process, people may substitute by doing the process
manually or by outsourcing it. If substitution is easy and substitution is viable, then this
weakens your power.
5. Threat of New Entry: Power is also affected by the ability of people to enter your
market. If it costs little in time or money to enter your market and compete effectively, if
there are few economies of scale in place, or if you have little protection for your key
technologies, then new competitors can quickly enter your market and weaken your
position. If you have strong and durable barriers to entry, then you can preserve a
favorable position and take fair advantage of it.
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Using the Tool:
To use the tool to understand your situation, look at each of these forces one-by-one and write
your observations on our free worksheet which you can download here.
Brainstorm the relevant factors for your market or situation, and then check against the factors
listed for the force in the diagram above.
Then, mark the key factors on the diagram, and summarize the size and scale of the force on the
diagram. An easy way of doing this is to use, for example, a single "+" sign for a force
moderately in your favor, or "--" for a force strongly against you (you can see this in the example
below).
Then look at the situation you find using this analysis and think through how it affects you. Bear
in mind that few situations are perfect; however looking at things in this way helps you think
through what you could change to increase your power with respect to each force. What’s more,
if you find yourself in a structurally weak position, this tool helps you think about what you can
do to move into a stronger one.
This tool was created by Harvard Business School professor, Michael Porter, to analyze the
attractiveness and likely-profitability of an industry. Since publication, it has become one of the
most important business strategy tools.
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6. Use of the Information form Five
Forces Analysis
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Use of the Information from Five Forces Analysis
Five Forces Analysis can provide valuable information for three aspects of corporate planning:
Stoical Analysis:
The Five Forces Analysis allows determining the attractiveness of an industry. It provides
insights on profitability. Thus, it supports decisions about entry to or exit from and industry or a
market segment. Moreover, the model can be used to compare the impact of competitive
forces on the own organization with their impact on competitors. Competitors may have
different options to react to changes in competitive forces from their different resources and
competences. This may influence the structure of the whole industry.
Dynamical Analysis:
In combination with a PEST-Analysis, which reveals drivers for change in an industry, Five Forces
Analysis can reveal insights about the potential future attractiveness of the industry. Expected
political, economical, socio-demographical and technological changes can influence the five
competitive forces and thus have impact on industry structures.
Analysis of Options:
With the knowledge about intensity and power of competitive forces, organizations can
develop options to influence them in a way that improves their own competitive position. The
result could be a new strategic direction, e.g. a new positioning, differentiation for competitive
products of strategic partnerships.
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Thus, Porters model of Five Competitive Forces allows a systematic and structured analysis of
market structure and competitive situation. The model can be applied to particular companies,
market segments, industries or regions. Therefore, it is necessary to determine the scope of the
market to be analyzed in a first step. Following, all relevant forces for this market are identified
and analyzed. Hence, it is not necessary to analyze all elements of all competitive forces with
the same depth.
The Five Forces Model is based on microeconomics. It takes into account supply and demand,
complementary products and substitutes, the relationship between volume of production and
cost of production, and market structures like monopoly, oligopoly or perfect competition.
Influencing the Power of Five Forces
After the analysis of current and potential future state of the five competitive forces, managers
can search for options to influence these forces in their organization’s interest. The objective is
to reduce the power of competitive forces. They are of general nature. Hence, they have to be
adjusted to each organization’s specific situation. The options of an organization are
determined not only by the external market environment, but also by its own internal
resources, competences and objectives.
4.1 Reducing the
Bargaining Power of
Suppliers
4.2 Reducing the
Bargaining Power of
Customers
· Partnering
· Supply chain management
· Supply chain training
· Increase dependency
· Build knowledge of supplier costs and
· Partnering
· Supply chain management
· Increase loyalty
· Increase incentives and value
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methods
· Take over a supplier
added
· Move purchase decision away from price
· Cut put powerful intermediaries (go directly to customer)
4.3 Reducing the
Treat of New Entrants
4.4 Reducing the
Threat of Substitutes
· Increase minimum efficient scales of operations
. Patents, protection of intellectual property
· Alliances with linked products / services
· Tie up with suppliers
· Tie up with distributors
· Retaliation tactics
· Legal actions
· Increase switching costs
· Alliances
· Customer surveys to learn about their
preferences
· Enter substitute market and influence
from within
· Accentuate differences (real or
perceived)
4.5 Reducing the Competitive Rivalry between Existing Players· Avoid price competition
· Differentiate your product
· Buy out competition
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· Reduce industry over-capacity
· Focus on different segments
· Communicate with competitors
7. Application of Five Forces in International Markets
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Application of Five Forces in International Markets
Around the world, companies that have achieved international leadership employ strategies that
differ from each other in every respect. But while every successful company will employ its own
particular strategy, the underlying mode of operation the character and trajectory of all successful
companies is fundamentally the same.
Companies achieve competitive advantage through acts of innovation. They approach innovation
in its broadest sense, including both new technologies and new ways of doing things. They
perceive a new basis for competing or find better means for competing in old ways. Innovation
can be manifested in a new product design, a new production process, a new marketing
approach, or a new way of conducting training. Much innovation is mundane and incremental,
depending more on accumulation of small insights and advances than on a single, major
technological breakthrough. It often involves ideas that are not even “new” ideas that have been
around, but never vigorously pursued. It always involves investments in skill and knowledge, as
well as in physical assets and brand reputations.
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Using Porter’s Five Forces when creating
your marketing plan
Understanding the dynamics of competitors within an industry is critical for several reasons.
First, it can help to assess the potential opportunities for your venture, particularly important if
you are entering this industry as a new player. It can also be a critical step to better differentiate
your self from others that offer similar products and services.
One of the most respected models to assist with this analysis is Porter’s Five Forces Model. This
model, created by Michael E. Porter and described in the book “Competitive Strategy:
Techniques for Analyzing Industries and Competitors,” has proven to be a useful tool for both
business and marketing-based planning.
Background
The pure competition model does not present a viable tool to assess an industry. Porter’s Five
Forces attempts to realistically assess potential levels of profitability, opportunity and risk based
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on five key factors within an industry. This model may be used as a tool to better develop a
strategic advantage over competing firms within an industry in a competitive and healthy
environment. It identifies five forces that determine the long-run profitability of a market or
market segment.
Substitute productsPorter’s Five Forces model refers to “substitute products” as those products that are available in
other industries that meet an identical or similar need for the end user. As more substitutes
become available and affordable, the demand becomes more elastic since customers have more
alternatives. Substitute products may limit the ability of firms within an industry to raise prices
and improve margins.
For example, the price of aluminum cans is constrained by the price of glass bottles, steel cans,
and plastic containers. These containers are substitutes, yet they are not rivals in the same
industries. A substitute product to the services offered by a CPA firm is accounting or tax-based
software – two very different industries that offer some of the same consumer benefits.
The treat of substitutes often impacts price-based competition. There are other concerns in
assessing the threat of substitutes relating to technology. New technologies contribute to
competition though substitute products and services. Think of the impact wireless technologies
have had on traditional telephone service. Except in remote areas it is unlikely that cable TV
could compete with free broadcast TV from an antenna without the greater diversity of
entertainment that it affords the customer.
The competitive strategy
Understanding the dynamics of competitors within an industry is critical for several reasons.
First, it can help to assess the potential opportunities for your venture, particularly important if
you are entering this industry as a new player. It can also be a critical step to better differentiate
your self from others that offer similar products and services. One of the most respected models
to assist with this analysis is Porter’s Five Forces Model. This model, created by Michael E.
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Porter and described in the book “Competitive Strategy: Techniques for Analyzing Industries and
Competitors”, has proven to be a useful tool for both business and marketing-based planning.
Service
Service can also play a part in the industry’s dynamics. Those competitors that provide superior
service may bring an advantage to their competitive position if the industry/customer places
value on this attribute. This is another point of differentiation and can be a key strategic element
to consider. If a competitor has a service component that is difficult to replicate, it will prove to
offer a strategic advantage.
The result
We can look at several industries and see how Porter’s Five Forces would depict them; the
entertainment industry is in flux, telecommunications companies are volatile, computer firms are
merging, utility industries are down, the housing market is up. Porter’s Five Forces can assist us
to better understand these dynamics in a more objective manner and hopefully make better
strategic decisions as a result.
Porter's Five Forces Examples; Reports on Different Companies
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There is continuing interest in the study of the forces that impact on an organization, particularly
those that can be harnessed to provide competitive advantage. The ideas and models which
emerged during the period from 1979 to the mid-1980s were based on the idea that competitive
advantage came from the ability to earn a return on investment that was better than the average
for the industry sector.
As Porter's 5 Forces analysis deals with factors outside an industry that influence the nature of
competition within it, the forces inside the industry (microenvironment) that influence the way in
which firms compete, and so the industry’s likely profitability is conducted in Porter’s five
forces model. A business has to understand the dynamics of its industries and markets in order to
compete effectively in the marketplace. Porter defined the forces which drive competition,
contending that the competitive environment is created by the interaction of five different forces
acting on a business. In addition to rivalry among existing firms and the threat of new entrants
into the market, there are also the forces of supplier power, the power of the buyers, and the
threat of substitute products or services. Porter suggested that the intensity of competition is
determined by the relative strengths of these forces.
Main Aspects of Porter’s Five Forces AnalysisThe original competitive forces model, as proposed by Porter, identified five forces which would
impact on an organization’s behavior in a competitive market. These include the following:
The rivalry between existing sellers in the market.
The power exerted by the customers in the market.
The impact of the suppliers on the sellers.
The potential threat of new sellers entering the market.
The threat of substitute products becoming available in the market.
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Understanding the nature of each of these forces gives organizations the necessary insights to
enable them to formulate the appropriate strategies to be successful in their market.
Force 1: The Degree of Rivalry
The intensity of rivalry, which is the most obvious of the five forces in an industry; helps
determine the extent to which the value created by an industry will be dissipated through head-
to-head competition. The most valuable contribution of Porter's “five forces” framework in this
issue may be its suggestion that rivalry, while important, is only one of several forces that
determine industry attractiveness.
This force is located at the centre of the diagram;
Is most likely to be high in those industries where there is a threat of substitute products; and
existing power of suppliers and buyers in the market.
Force 2: The Threat of Entry Both potential and existing competitors influence average industry profitability. The threat of new
entrants is usually based on the market entry barriers. They can take diverse forms and are used to
prevent an influx of firms into an industry whenever profits, adjusted for the cost of capital, rise
above zero. In contrast, entry barriers exist whenever it is difficult or not economically feasible for
an outsider to replicate the incumbents’ position. The most common forms of entry barriers, except
intrinsic physical or legal obstacles, are as follows:
Economies of scale: for example, benefits associated with bulk purchasing;
Cost of entry: for example, investment into technology;
Distribution channels: for example, ease of access for competitors;
Cost advantages not related to the size of the company: for example, contacts and expertise;
Government legislations: for example, introduction of new laws might weaken company’s
competitive position;
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Differentiation: for example, a certain brand that cannot be copied (The Champagne)
Force 3: The Threat of Substitutes The threat that substitute products pose to an industry's profitability depends on the relative price-to-
performance ratios of the different types of products or services to which customers can turn to satisfy
the same basic need. The threat of substitution is also affected by switching costs – that is, the costs in
areas such as retraining, retooling and redesigning that are incurred when a customer switches to a
different type of product or service. It also involves:
Product-for-product substitution; is based on the substitution of need;
Generic substitution (Video suppliers compete with travel companies);
Substitution that relates to something that people can do without (cigarettes, alcohol).
Force 4: Buyer Power
Buyer power is one of the two horizontal forces that influence the appropriation of the value
created by an industry. The most important determinants of buyer power are the size and the
concentration of customers. Other factors are the extent to which the buyers are informed and the
concentration or differentiation of the competitors. Kippenberger states that it is often useful to
distinguish potential buyer power from the buyer's willingness or incentive to use that power,
willingness that derives mainly from the “risk of failure” associated with a product's use.
This force is relatively high where there a few, large players in the market, as it is the case with
retailers an grocery stores;
Present where there is a large number of undifferentiated, small suppliers, such as small farming
businesses supplying large grocery companies;
Low cost of switching between suppliers, such as from one fleet supplier of trucks to another.
Force 5: Supplier Power Supplier power is a mirror image of the buyer power. As a result, the analysis of supplier power typically
focuses first on the relative size and concentration of suppliers relative to industry participants and
second on the degree of differentiation in the inputs supplied. The ability to charge customers different
prices in line with differences in the value created for each of those buyers usually indicates that the
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market is characterized by high supplier power and at the same time by low buyer power. Bargaining
power of suppliers exists in the following situations:
Where the switching costs are high (switching from one Internet provider to another);
High power of brands (McDonalds, British Airways, Tesco);
Possibility of forward integration of suppliers (Brewers buying bars);
Fragmentation of customers (not in clusters) with a limited bargaining power (Gas/Petrol
stations in remote places).
The nature of competition in an industry is strongly affected by the suggested five forces. The
stronger the power of buyers and suppliers, and the stronger the threats of entry and substitution,
the more intense competition is likely to be within the industry. However, these five factors are
not the only ones that determine how firms in an industry will compete – the structure of the
industry itself may play an important role. Indeed, the whole five-forces framework is based on
an economic theory know as the “Structure-Conduct-Performance” (SCP) model: the structure of
an industry determines organizations’ competitive behavior (conduct), which in turn determines
their profitability (performance). In concentrated industries, according to this model,
organizations would be expected to compete less fiercely, and make higher profits, than in
fragmented ones. However, as Haber berg and Ripple (2001) state, the histories and cultures of
the firms in the industry also play a very important role in shaping competitive behavior, and the
predictions of the SCP model need to be modified accordingly.
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Good Porter's 5 Forces analysis The Porter’s Five Forces model is a simple tool that supports strategic understanding where
power lies in a business situation. It also helps to understand both the strength of a firm’s current
competitive position, and the strength of a position a company is looking to move into. Despite
the fact that the Five Force framework focuses on business concerns rather than public policy, it
also emphasizes extended competition for value rather than just competition among existing
rivals, and the simplicity of its application inspired numerous companies as well as business
schools to adopt its use.
With a clear understanding of where power lies, it will enable a company to take fair advantage
of its strengths, improve weaknesses, and avoid taking wrong steps. Therefore, to apply this
planning tool effectively, it is important to understand the situation and to look at each of the
forces individually.
In conducting an analysis of Porter’s Five Forces, it is required to brainstorm all relevant factors
for the company’s market situation, and then check against the factors presented for each force in
the diagram above. The next step is to highlight the key factors on a diagram, and summarize the
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size and the scale of the force on the diagram. It is suggested to use relevant signs, for instance,
“+” and “-" to represent the forces moderately in company’s favor, or for a force strongly
against.
After identifying favorable and unfavorable forces for the company’s performance and industry’s
attractiveness, it is important to analyze the situation and examine the impacts of the forces. One
of the critical comments made of the Five Forces framework is its static nature, whereas the
competitive environment is changing turbulently. Are the five forces able to foresee industry
expansion? Is it the corporate strategist's goal to find a position in the industry where his or her
company can best defend itself against these forces or can influence them in its favor, or is the
goal to become part of the ongoing commerce with the intention to produce innovative ideas that
will expand the size of the industry? Is it true that the environment poses a threat to the
organization, leading to the consideration of suppliers and buyers as threats that need to be
tackled, or does it offer the ground for a constitutive industry player co-operation?
Theory The JNCT employs various tools for evaluating competitiveness. Those developed by
Professor. Michael Porter of Harvard Business School are the most central to our work.
There are four basic tools developed by Porter as follows:
The 'Diamond'
The 'Diamond' below is used to analyze the business environment of the selected cluster. The
determinants, taken individually and as a system, create a context in which a nation's firm is
born and competes. Weakness in any one of those determinants constrains the industry's
potential for upgrading and gaining competitive advantages.
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Five Competitive Forces
The five competitive forces determine industry profitability and attractiveness. These forces are
important in shaping the prices that firms can charge, the costs they have to bear, and the
required investments to compete in the industry.
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Cluster Map
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Clusters are geographic concentrations of interconnected firms and institutions in a particular
field. Clusters encompass an array of linked industries and other entities that are important to
competition. They include, for example, suppliers of specialized inputs such as components,
machinery, services, and providers of specialized infrastructure. Quite often, clusters also
extend downstream to channels and customers and laterally to manufacturers of
complementary products and to firms in industries related by skills, technologies, or common
inputs. Finally, many clusters include governmental and other institutions such as; universities,
standards-setting agencies, think tanks, vocational training providers, and trades associations,
which provide specialized training, education, information, research, and technical support.
The cluster map specifies all related and supporting elements of major industries. In addition, it
illustrates the linkages between such elements, whether strong or weak, and indicates absent
industries. The cluster analysis provides a pattern for understanding how major industries
conduct their business and the way they compete, whilst simultaneously complementing and
supporting one another.
Clusters encompass one facet of the diamond, but are best seen as a manifestation of the
interactions between all four facets. Clusters affect competition in three broad ways: (1) by
increasing the productivity of constituent firms or industries; (2) by increasing their capacity for
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innovation and thus the growth of productivity; and (3) by stimulating new business formation
that supports innovation and expands the cluster. Many cluster advantages rest on external
economies or spillovers across firms and industries of various sorts. A cluster is thus a system
of interconnected firms and institutions whose entirety is more than the sum of its parts.
Value Chain Analysis
The value chain, also known as value chain analysis. The value chain provides a tool for
understanding the sources of cost advantage. A firm’s cost position represents the sum of all
costs incurred for performing all the required activities relative to competitors. Cost advantage
can occur in any activity. Nevertheless, many managers reveal shortsightedness in viewing
costs, and concentrate mostly on manufacturing. Successful cost leaders, however, are often
low-cost product developers, low-cost marketers, and low-cost service providers. They draw
cost advantage from the entire value chain. Gaining cost advantage usually requires optimizing
the linkages among activities, as well as close coordination with suppliers and distribution
channels. The value chain also exposes sources of differentiation.
Firm Level
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A value chain is a chain of activities for a firm operating in a specific industry. The business unit
is the appropriate level for construction of a value chain, not the divisional level or corporate
level. Products pass through all activities of the chain in order, and at each activity the product
gains some value. The chain of activities gives the products more added value than the sum of
the independent activity's value. It is important not to mix the concept of the value chain with the
costs occurring throughout the activities. A diamond cutter, as a profession, can be used to
illustrate the difference of cost and the value chain. The cutting activity may have a low cost, but
the activity adds much of the value to the end product, since a rough diamond is significantly less
valuable than a cut diamond. Typically, the described value chain and the documentation of
processes, assessment and auditing of adherence to the process routines are at the core of the
quality certification of the business, e.g. ISO 9001.
Activities
The value chain categorizes the generic value-adding activities of an organization. The "primary
activities" include: inbound logistics, operations (production), outbound logistics, marketing and
sales (demand), and services (maintenance). The "support activities" include: administrative
infrastructure management, human resource management, technology (R&D), and procurement.
The costs and value drivers are identified for each value activity.
Industry Level
An industry value chain is a physical representation of the various processes that are involved in
producing goods (and services), starting with raw materials and ending with the delivered
product (also known as the supply chain). It is based on the notion of value-added at the link
(read: stage of production) level. The sum total of link-level value-added yields total value. The
French Physiocrat's Tableau économique is one of the earliest examples of a value chain. Warily
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Leontief's Input-Output tables, published in the 1950s, provide estimates of the relative
importance of each individual link in industry-level value-chains for the U.S. economy.
Significance
The value chain framework quickly made its way to the forefront of management thought as a
powerful analysis tool for strategic planning. The simpler concept of value streams, a cross-
functional process which was developed over the next decade, had some success in the early
1990s.
The value-chain concept has been extended beyond individual firms. It can apply to whole
supply chains and distribution networks. The delivery of a mix of products and services to the
end customer will mobilize different economic factors, each managing its own value chain. The
industry wide synchronized interactions of those local value chains create an extended value
chain, sometimes global in extent. Porter terms this larger interconnected system of value chains
the "value system." A value system includes the value chains of a firm's supplier (and their
suppliers all the way back), the firm itself, the firm distribution channels, and the firm's buyers
(and presumably extended to the buyers of their products, and so on).
Capturing the value generated along the chain is the new approach taken by many management
strategists. For example, a manufacturer might require its parts suppliers to be located nearby its
assembly plant to minimize the cost of transportation. Value chain analysis has also been
successfully used in large Petrochemical Plant Maintenance Organizations to show how Work
Selection, Work Planning, Work Scheduling and finally Work Execution can (when considered
as elements of chains) help drive Lean approaches to Maintenance. Value chain analysis has also
been employed in the development sector as a means of identifying poverty reduction strategies
by upgrading along the value chain.
Value Reference Model
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A Value Reference Model (VRM) developed by the trade consortia Value Chain Group offers an
open source semantic dictionary for value chain management encompassing one unified
reference framework representing the process domains of product development, customer
relations and supply networks.
The integrated process framework guides the modeling, design, and measurement of business
performance by uniquely encompassing the plan, govern and execute requirements for the
design, product, and customer aspects of business.
The Value Chain Group claims VRM to be next generation Business Process Management that
enables value reference modeling of all business processes and provides product excellence,
operations excellence, and customer excellence.
Six business functions of the Value Chain:
Research and Development
Design of Products, Services, or Processes
Production
Marketing & Sales
Distribution
Customer Service
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8. Business Decision Framework
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Business Decision Frameworks
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Good Business Decisions - What it takes?
Good business decisions, for sure require require a great deal of insight into
the gathered data, extensive experience with the context and the skill to see
through an exhaustive set of alternatives and outcomes. But, as Peter
Drucker said business management is a practice. It is more of a science than
an art; there are always specific issues and scenarios that you will need to
consider while making any particular type of business decision. Making good
business decisions is not a skill that is magically at birth, but is a skill that
you can acquire and be good at through concentrating on issues that matter
most for making a particular decision and practicing to hone that skill
Why, When, How
I started making these frameworks during business school. There is a lot of
data given to you in cases and you will be challenged with a particular
problem. Students usually analyze each data point given and then relate it
back to the problem given. That worked for me until I was taking five forces
with a full time job. I followed a reverse approach - after skimming through
the case, I just took out and analyzed data which is relevant to the given
problem. I started developing these frameworks for exactly the same
purpose - what are the issues that you need to look at, given a particular
business problem? I started adding on to the frameworks as I discovered
new/missed issues; they mostly came from 'aha' moments during case
discussions and books.
Surprisingly, students found these frameworks useful in consulting
interviews. Consulting interviews work the same way, you would be told a 2
minute story, you would be given a business problem and then you have to
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ask the interviewer the issues that you would be interested in learning about.
You would be given relevant data as you requests for it.
. The Competitive Advantage of Nations
National prosperity is created, not inherited. It does not grow out of a country’s natural
endowments, its labor pool, its interest rates, or its currency’s value, as classical economics
insists.
A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade.
Companies gain advantage against the world’s best competitors because of pressure and
challenge. They benefit from having strong domestic rivals, aggressive home-based suppliers,
and demanding local customers.
In a world of increasingly global competition, nations have become more, not less, important. As
the basis of competition has shifted more and more to the creation and assimilation of
knowledge, the role of the nation has grown. Competitive advantage is created and sustained
through a highly localized process. Differences in national values, culture, economic structures,
institutions, and histories all contribute to competitive success. There are striking differences in
the patterns of competitiveness in every country; no nation can or will be competitive in every or
even most industries. Ultimately, nations succeed in particular industries because their home
environment is the most forward-looking, dynamic, and challenging.
These conclusions, the product of a four-year study of the patterns of competitive success in ten
leading trading nations, contradict the conventional wisdom that guides the thinking of many
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companies and national governments—and that is pervasive today in the United States.
According to prevailing thinking, labor costs, interest rates, exchange rates, and economies of
scale are the most potent determinants of competitiveness. In companies, the words of the day
are merger, alliance, strategic partnerships, collaboration, and supranational globalization.
Managers are pressing for more government support for particular industries. Among
governments, there is a growing tendency to experiment with various policies intended to
promote national competitiveness—from efforts to manage exchange rates to new measures to
manage trade to policies to relax antitrust—which usually end up only under mining it.
What Is National Competitiveness?
These approaches, now much in favor in both companies and governments, are flawed. They
fundamentally misperceive the true sources of competitive advantage. Pursuing them, with all
their short-term appeal, will virtually guarantee that the United States or any other advanced
nation never achieves real and sustainable competitive advantage.
We need a new perspective and new tools an approach to competitiveness that grows directly out
of an analysis of internationally successful industries, without regard for traditional ideology or
current intellectual fashion. We need to know, very simply, what works and why. Then we need
to apply it.
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9. SWOT Analysis of Five Forces
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SWOT Analysis
In a SWOT analysis you identify strengths, weaknesses, market opportunities for your company,
and threats to your business. One way to use the analysis it to then develop marketing strategies
that will minimize the affect of weaknesses on your business while maximizing your strengths.
Ideally, you will match your strengths against market opportunities that result from your
competitors’ weaknesses or voids.
When completing a SWOT analysis, you may find it helpful to create a table identifying
observations relative to each SWOT component for both your company’s site and your
competitors’ sites.
In the table, note Internet related activities such as trade organization participation, search engine
inclusion, and outside links to the sites. This way, you are better able to spot your company’s
strengths and weaknesses as well as opportunities and threats to your business.
Often, marketing strategy opportunities arise as a result of a changing business environment. As
you study your competitors, be on the lookout for these opportunities. Some situations that could
represent opportunities for a company include, but are certainly not limited to:
New technology is created, but the competition has been unable to deliver acceptable
customer service.
A customer segment is becoming more predominant, but their specific needs are not
being fully met by your competitors.
A customer, competitor, or supplier goes out of business or merges with another
company.
Once you develop your marketing strategies, you are more able to complete a strategy based
marketing plan that takes into account the overall business environment.
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10. Limitations of Porter’s Five Force Model
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Limitations of Porter’s Five Force Model
Porter’s model is a strategic tool used to identify whether new products, services or businesses
have the potential to be profitable. However it can also be very illuminating when used to
understand the balance of power in other situations.
Porter argues that five forces determine the profitability of an industry. At the heart of industry
are rivals and their competitive strategies linked to, for example, pricing or advertising; but, he
contends, it is important to look beyond one’s immediate competitors as there are other
determinates of profitability. Specifically, there might be competition from substitute products or
services. These alternatives may be perceived as substitutes by buyers even though they are part
of a different industry. An example would be plastic bottles, glass bottles, and cans for packaging
soft drinks. There may also be the potential threat of new entrants, although some competitors
will see this as an opportunity to strengthen their position in the market by ensuring, as far as
they can, customer loyalty. Finally, it is important to appreciate that companies purchase from
suppliers and sell to buyers. If they are powerful they are in a position to bargain profits away
through reduced margins, by forcing either cost increases or price decreases. This relates to the
strategic option of vertical integration, when the company acquires, or merges with, a supplier or
customer and thereby gains greater control over the chain of activities which leads from basic
materials through to final consumption.
It is important to be aware that this model has further limitations in today's market environment;
as it assumes relatively static market structures.
Porter's Six Forces model and its relationship to the standard Five Forces model
Porter’s Five Forces model actually has an extension referred to as Porter’s Six Forces model. It
is considerably less popular than the Five Forces model as its acceptance has been less positive
than the Five Forces model. The Six Forces model though is very similar to the Five Forces
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model with the only difference being the addition of the sixth force in the framework. This sixth
force in the model is termed as the relative power of other stakeholders, and can refer to a
number of other groups or entities, depending on the factor which has the greatest influence
including:
Complementary – One school of thought looks at the sixth force to be complementary, which
are businesses offering complementary products to the sector in focus and being analyzed. The
author states that these complementary businesses, as a sixth factor, affect the industry as
changes in these businesses (such as new techniques, approaches or technologies) can impact on
the dynamics between the industry and the complementary.
The government – The sixth force in the framework can also be considered to be the
government, and is included in the framework if it has potential to impact on all the other five
forces. Thus, the government can have direct impact on the industry as the sixth force, but can
also have indirect impact or influence by affecting the other five forces, whether favorably or
unfavorably.
The public – Yet other viewpoints look at the public as the sixth force in the model, particularly
if the public has a strong influence in the dynamics of the sector resulting in changes to the other
forces or in the sector as a whole.
Shareholders – This group can also be considered potentially as the sixth force. This is more
important in recent years where shareholder activity has increased significantly in the
boardroom, and management of firms has been scrutinized much more and even given ‘threats’
if certain actions favored by the shareholders were not pursued.
Employees – Employees could also be considered as the sixth force if they wielded
extraordinarily strong influence on the firm in a particular sector. The status of employees seems
to follow similar rules in certain sectors, and thus could be considered a strong influence in these
sectors. For example, in the automobile sector in the US, a large part of the work force are
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unionized, and thus could be considered the sixth force instead of the government or
complementary.
While a sixth force has been added to Porter’s original Five Forces model, the acceptance of this
framework has been somewhat limited. This could be for two reasons. First, is that there is no
definite and specific sixth force in all sectors, as it is different for each sector. Second, while a
sixth force could be defined for all sectors, the influence of this factor can also be captured in the
other five forces and thus the necessity of having it in the framework is less compelling.
Where to find information for Porter's 5 Forces analysis
in conducting the analysis it is crucial to examine the existing literature:
Periodicals, business articles on the industry performance, etc;
Analyst reports and trade organizations;
Company annual reports and its publications on the main suppliers and distribution network;
Anything that will give the exposure to the market situation, competitors present in the market,
new emerging companies in the industry.
It is important to make sure that the sources are reliable and relevant to the current condition of
the industry. It has to be viable, reliable and valid, in order to conduct a good analysis of the
model. For this purpose, the gathered data and information has to be checked and be applied to
the current business conditions. Further limitations could be present in the nature of market
forces that reduce the applicability of the information sources to present situations; and the
amount of detailed information required. This can be prohibitive to its practical use.
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Conclusion - Porter's five forces
According to the model of Porter’s five forces it is worthwhile entering web design industry.
Most of the forces are weak and even the strong ones are not impossible hurdles see an
overview of Porter’s five forces in the web design industry and the changes that occur if the
complexity of the web site increases.
Porter’s five forces in relation to the web design industry
Max Adler Salzhemmendorf Webdesign
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There is a great competition between the web designers, but there is also a growth which is
enough to enter the industry. But within the last five years the rivalry situation has been stronger
and the market growth lower. With technological advancements the entry barriers and the
knowledge have grown. For a professional web site today you need more than informatics
knowledge, but also a good marketing knowledge and the ability to negotiate with your -
customers. With the right strategy it is still possible to make a lot of money online.
Any company must seek to understand the nature of its competitive environment if it is to be
successful in achieving its objectives and in establishing appropriate strategies. If a company
fully understands the nature of the Porter’s five forces, and particularly appreciates which one is
the most important, it will be in a stronger position to defend itself against any threats and to
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influence the forces with its strategy. The situation is fluid, and the nature and relative power of
the forces will change. Consequently, the need to monitor and stay aware is continuous.
Issues during the implementation of these Five Forces are crucially important for organizations
to build long-term business strategy and sustaining competitive advantages rather than simply
list the forces. Successful use of the Porter Model Analysis includes identifying the sources of
competition, the strength and likelihood of that competition existing, and strategic
recommendations for the action a company should take to in order to develop barriers to
competition.
BIBLIOGRAPHY
www.businessballs.com
www.ask.com
www.wikipedia.com
Books
Strategic Management & Competitive Advantage – BERNEY JAY B.
(Edition 2008)
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Strategic Management & Business Policy – Wheelen Thomas L.
(Ninth Edition), 2007
Business Policy Strategic Management-Prasad L.M.
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