1 the five forces model and competitive strategies geoff leese september 2005 revised september...
TRANSCRIPT
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The Five Forces model and competitive strategies
Geoff Leese September 2005 revised September 2006, July
2007, August 2008, August 2009
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Porter’s five forces model
Rivalry with competitors
Potential Entrants to market
Substitutes
BuyersSuppliers
Bargaining Power Bargaining Power
Threat of substitutes
Threat of entry
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Threat of entry More likely when
Economies of scale are possible Capital requirements of entry are low Easy access to distribution channels No dominant “player” Little expected retaliation Little government/legislative intervention Low levels of differentiation
Important issues What barriers exist? What is our position?
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Buyer power
More likely when High concentration of buyers Large number of small suppliers Little risk/low cost of switching Alternative sources of supply
– Low differentiation– High levels of competition
High risk of backward integration
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Supplier power
More likely when High concentration of suppliers Cost of switching suppliers is
high Risk of switching suppliers is high Supplier has powerful brand Supplier dominates market High risk of forward integration
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Threat of substitutes
Product for Product Post replaced by fax replaced by
email Substitution of need
Better quality castings reduces need for machine tools
Generic substitution Holiday or a new TV?
Do without!
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Competitive rivalry (1)
Rivalry between competing organisations
Issues – What is it based on? Increasing or decreasing? How is it affecting us? What can we do about it?
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Competitive Rivalry(2) Balance of rivalry
Lots of small, balanced competitors? Market domination?
Market growth rates Product life cycle?
Global markets? High fixed costs High cost of extra capacity Level of differentiation High exit barriers Easy acquisition
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Collaboration and competition
Collaboration between buyer and seller Input and output!
Collaboration to increase buying power NISA, SPAR, SURF?
Collaboration to avoid substitution or prevent entry Collaborative R&D, marketing boards
Collaboration to gain entry Honda/Rover?
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Key issues
What are the key forces at work in our competitive environment?
Are there underlying forces (SLEPT analysis?) contributing to this?
Is it likely that these forces will change? If so how and why?
How do our competitors stand? How do WE stand? What can be done to influence these
forces?
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Critical (Key) Success Factors
CSFs are aspects of strategy where you must provide better value and beat the competition
Competences needed in activities which underpin each critical success factor
Performance standards for these determine how competitive advantage will be achieved
Advantage lost by competitor performance & CSFs changing
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Identifying Critical Success Factors
These are for an Industry Ohmae gives 3 areas to
consider, the 3 Cs
Customer issues The competition The business (or Corporation)
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Customers
Who are they now & potentially Segments in the market Why do they buy from whoever General issues
price service reliability + quality tech spec brands
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Competition
Who & who has market dominance & why
Market factors and intensity Resource comparisons General issues
Cost and price comparisons Quality and service Logistics
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The Business
What do our competitors actually deliver to customers
What is our biggest cost area General issues
Low cost, labour costs, economy of scale
Output and quality People - skills, relationships Innovation and technology
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Competitor Analysis
Who are your competitors Where are they How many What do they compete on What market share do they have Is the market segmented How strongly do they compete Are there any alliances
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Competitive strategies
Porter’s generic strategies Cost leadership Broad-market differentiation Focus Cost Focus differentiation
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Cost leadership (1)
Low level of differentiation Aim for average customer Introduce improvements only when
customers demands them Pricing strategies
Sell at industry average, improve profits
Sell at below average, improve market share
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Cost leadership(2)
Needs these strengths Access to capital required for
significant investment in process technology
Ability to design products/services that have low production costs
Exclusive access to low cost materials/components
Efficient distribution channels
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Cost leadership(3)
Advantages Cost advantage can protect from
new entrants Pricing at industry average allows
price-cutting if necessary Risks
Technology may be leapfrogged or copied
Risk from a number of focussed cost leading enterprises
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Differentiation(1) Perceived quality is the key!
Whether real or not. Intrinsic qualities of the product Pre/post sales service
Allows premium pricing
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Differentiation(2)
Typical strengths required Access to leading edge R&D Highly skilled and creative
product development Strong sales team Corporate reputation for quality
and innovation
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Differentiation(3) Advantages
Price increases from powerful suppliers can be passed on to buyers
Brand loyalty protects from substitution Brand loyalty protects against market entry Buyers’ cost of switching may be high
Risks Imitation is a possible threat “Novelty” value short-lived Limits to price elasticity Customer tastes may change
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Focused strategies (1)
Focuses on a narrow market segment (niche market) and attempts to obtain competitive advantage on a cost or differentiation basis.
Often generates fierce customer loyalty
Concentrate on core competences
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Focused strategies(2)
Advantages Power of buyers – often sole
source of supply Brand loyalty helps protect
against substitution or market entry
Easier to stay close to customer and respond quickly to changes in need
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Focused Strategy (3)
Risks Low purchasing quantities hands
power to suppliers Low production volume brings high
unit costs Change in consumer taste means that
niche markets disappear May be easy for cost leaders/big
differentiators to adapt their products to compete
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Stuck in the middle?
Porter argues long term interests are best served by picking a strategy and sticking to it.
How does one then cope with mixed consumer needs, quality and price for example?