five forces explanation

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The Five Competitive Forces

• the threat of new entrants,• the bargaining power of customers,

• the bargaining power of suppliers,• the threat of substitute products or

services, and

• the jockeying among currentcontestants.

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Establishing a Strategic Agenda

• To establish a strategic agenda for dealingwith these contending currents and togrow despite them, a company must

understand how they work in it’s ownindustry and particular situation.

• The essence of strategy formulation iscoping with competition.

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Establishing a Strategic Agenda

. Different forces take on prominence, of course, in shaping competition in eachindustry.

• Every industry has an underlying structure,or a set of fundamental economic andtechnical characteristics, whether anindustry is dealing in services or sellingproducts.

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Threat of Entry

• New entrants to an industry bring newcapacity, the desire to gain market share,and often substantial resources.

• There are six major sources of barriers to entry:

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Barriers to Entry

• Economies of scale - - These economiesdeter entry by forcing the aspirant either tocome in on a large scale or to accept acost disadvantage.

• Product differentiation -- Brandidentification creates a barrier by forcingentrants to spend heavily on marketing

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Barriers to Entry

• Cost disadvantages independent of size -- Entrenched companies may have

cost advantages not available to potentialrivals, no matter what their size andattainable economies of scale.

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Barriers to Entry

• Access to distribution channels -- Thenewcomer must, of course, securedistribution of its product or service.

• Government policy -- Governments canlimit or even foreclose entry to industrieswith such controls as license requirements

and limits on access to raw materials.

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Why Barriers to Entry

Without barriers to entry, new firms tend toerode profits within the industry.

They discuss the “degree of rivalry,” thethreat of substitutes, buyer and supplier power, and market power and strategy.

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Powerful Suppliers and Buyers

• The power of each important supplier or buyer group depends on a number of characteristics of its market situation andon the relative importance of its sales or purchases to the industry compared withits overall business.

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Powerful Suppliers and Buyers

• A company's choice of suppliers to buyfrom or buyer groups to sell to should beviewed as a crucial strategic decision.Most common is the situation of acompany being able to choose whom it willsell to, in other words, buyer selection.

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Substitute Products

• Substitute products place a ceiling onprices a competing firm can charge,limiting the potential of an industry.Substitutes not only limit profits in normaltimes; they also reduce the bonanza anindustry can reap in boom times.

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Substitute Products

• Substitutes often come rapidly into play if

some development increases competitionin their industries and causes pricereduction or performance improvement.

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Jockeying for Position

Intense rivalry is related to thepresence of a number of factors:

• Competitors are numerous or areroughly equal in size and power.

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Jockeying for Position

Industry growth is slow, precipitatingfights for market share that involveexpansion-minded members.

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Jockeying for Position

The product or service lacksdifferentiation or switchingcosts, which lock in buyers andprotect one combatant from raidson its customers, by another.

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Jockeying for Position

• Fixed costs are high or theproduct is perishable, creating

strong temptation to cut prices.• Capacity is normally augmented in

large increments .

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Formulation of Strategy

1. Positioning the companyPositioning the company so that itscapabilities provide the best defenseagainst the competitive force.

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Formulation of Strategy

2. Influencing the balanceInfluencing the balance of the forcesthrough strategic moves, therebyimproving the company's position.

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Formulation of Strategy

• 3. Exploiting industry change

Anticipating shifts in the factors underlyingthe forces and responding to them, withthe hope of exploiting change by choosinga strategy appropriate for the newcompetitive balance before opponentsrecognize it.

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Formulation of Strategy

• 4. Recognizing Multifaceted Rivalry Porter and numerous other authoritieshave stressed the need to look beyondproduct to function in defining a business,beyond national boundaries to potentialinternational competition, and beyond theranks of one's competitors tomorrow.

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Formulation of Strategy

• To formulate strategy we must• understand our resources and capabilities

• understand the environment, and• combine knowledge of strategy and

organizational architecture.

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Conclusions

• The key to growth -- even survival -- is tostake out a position that is – less vulnerable to attack from head-to-head

opponents, whether established or new, and – less vulnerable to erosion from the direction of

buyers, suppliers, and substitute goods.

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Conclusions

• Establishing such a position can takemany forms – solidifying relationships with favorable

customers, – differentiating the product either substantively

or psychologically through marketing,

integrating forward or backward, or – establishing technological leadership.