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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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Strategic alternatives

Growth and expansion Acquisition Integration Divestment

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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?

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Summary

Five forces model Porter’s generic strategies

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Further reading

The Cambridge University view – follow the link!

More explanation – follow the link!

Bennett chapter 3 Johnson and Scholes chapters

3 and 6