Porters generic strategies and Five forces

By: Kavita, Chris, and JakePorters generic strategies and Five forcesMichael Porter Is this profitable? Where is the power?What is my current competitive position?

What Is it? Five ForcesIs this an attractive market or industry for us to compete in?Generic StrategiesHow can we best compete for customers in this market/industry?Generic StrategiesMarket Scope asksHow broad or narrow is our target market?

Source For Competitive Advantage asksWill you compete for competitive advantage by lower price or product uniqueness?Generic strategies

Generic strategiesDifferentiation StrategyOrganizations resources and attention are directed toward making its products appear different from those of the competition (ex: Coke, Pepsi)

Market scope = BroadSource of competitive advantage = Unique productGeneric strategiesCost LeadershipOrganizations resources and attention are directed toward minimizing costs to operate more efficiently than the competition (ex: Wal-Mart)

Market scope = BroadSource of competitive advantage = Low priceGeneric strategiesFocused DifferentiationConcentrates on a particular market segment and tries to offer the most unique product in that segmentMarket scope = NarrowSource for competitive advantage = Unique productFocused Cost LeadershipConcentrates on a particular market segment and tries to be the provider with the lowest costs in that segmentMarket scope = NarrowSource for competitive advantage = Low priceGeneric strategiesDifferentiation Strategy (in depth)Seeks advantage though uniquenessDone by:Certain look (ex: Polo Ralph Lauren, American Apparel, Roots)Lifestyle advertising (ex: Coca Cola, Pepsi, Much Music)____________________________________________________________Goal is to attract consumers who will be loyal and ignore the competitions productsThis strategy requires organizational strengths in marketing, research and development, and creativity. Differentiations success is dependent upon the consumers continuing perceptions of quality and uniqueness.9Generic StrategiesCost Leadership Strategy (in depth)Your goal is to have the lowest prices available to receive the largest profitDone by:Continually improving operating efficiencies of production, distribution, and other organizational systems._________________________________________________Requires tight cost and managerial controls as well as products that are easy to manufacture and distributePerfect example is Wal-MartGeneric StrategiesFocus Strategies (in depth)Concentrate on a special market segment with the objective to serve it better than anyone elseFocus organizational resources and attention on a particular customer , geographical region, or product/service lineSeek the competitive advantage in that singular segment through product differentiation or cost leadershipExample = WestJetNumber of competitors Quality differencesOther (product) differencesSwitching costsCustomer loyaltyCosts of leaving the marketFixed costs/value addedBrand identityDiversity of rivalsIndustry growth Corporate stakes

Can other companies offer equally attractive products?Who holds the power? Can other companies do what you do?Will your customers stay or go?

Competitive Rivalry Rivalry drives profits to zeroVaries across industriesIndustry concentration Companies can choose from various rival strategies to win a competitive advantage There are many characteristics to determine the intensity of rivalry

Competitive Rivalry Buyer Power depends on the following:Number of customers Size of each order Differences between competitors Price sensitivity Ability to substitute Cost of changing

Monopsony: multiple suppliers and one buyer Buyer PowerHow easy it is for suppliers to drive up prices Less suppliers = more power for the suppliers

Supplier Power Threat of New EntryTime and cost of entryInvestment costTechnology protectionBarriers to entry Specialized Assets Experience is needed Training is availableEconomies of scaleBrand identityAccess to distributionProfitable markets that yield high returns will attract new firmsNew companies= decrease profitsTypes:High vs. Low Industry ProfitsHigh industry profits associated with: Weak suppliersHigh entry barriersFew substitutesLittle rivalry Low industry profits associated with: Strong suppliersLow entry barriersMany substitutesIntense rivalryBarriers to Entry

Examples of Barriers to Entry: -Patents-Copy RightsMost attractive market segment is one in which entry barriers are high and exit barriers are lowGovernments creates barriers too permits, grants, restrictions ..etc.Entering and Exiting a Market Easy to enter if: Access to distribution channelsLittle Brand Identity Common technologyDifficult to Enter if there is: Patents Difficulty in brand switchingRestricted distribution channels Easy to Exit if there are: Low exit costIndependent businesses Assets are easy to sellDifficult to Exit if there are: Hard to sell assetsHigh exit costsInterrelated BusinessesBrand IdentityConsumers will believe that a product with a well-known name is better than products with a less well-known name New firms wont join if there is a big name brand

Economics of ScaleThis has to do with the MES which is the Minimum Efficient ScaleUnit cost for production are at a minimum ex. the most cost efficient level of productionIf MES for firms in an industry is known, then we can determine the amount of market share necessary for low cost entry

Creates a barrier: The greater the difference between industry MES and entry unit cost, the greater the barrier to entry. Specialized Assets Extent to which the firms assets can be utilized to produce a different product Expensive assets/ equipment Provides a barrier for two reason:when a firm already holds specialized assets, new companies dont bother in joining the market segment because it would be intense rivalry (not a lot of profit)Potential entrants do not want to make huge investments in highly specialized assets-hard to sell if venture fails Others.Time and cost of entry: -is it expensive to enter the market? Does it require a lot of time to enter?______________________________________________________________________________Access to distribution:-is there a company that already has the distribution rights? -A lack of access will make it difficult for newcomers to enter the market______________________________________________________________________________Training is available:-do your employees need to be specially trained? Can they get the training somewhere?Ex- CPR training

OthersExperience is needed:-do you already have to have experience in the field to join the market?---------------------------------------------------------------------------------------------------------------------------Investment Cost:-High cost will deter entry-High capital requirements might mean that only large businesses can competeThreat of Substitutes Refers to products in other industriesSubstitution is easy=weakens your powerEx:

Instead of

Threat of Substitutes Threat of Substitute exists when a products demand is affected by the price change of substitute productsPrice elasticity: as more substitutes become available, demand becomes more elastic since buyers have more options A close substitute product constrains the ability of firms in an industry to raise pricesSubstitute performance: price and performance of the substitute can match the industrys productCost of Change: if it is low cost to switch then you is in serious trouble