Chapter 1: The Five competitive forces that shape strategy

Industry Analysis in Practice

“ In Essence , The job of the strategist is to understand and cope with competition. Not too narrow for only competitor, but goes beyond rivals to 4 other competitive forces.”

Economic Cycle

Competition & Strategy

The Treat of New Entrants

Barrier to entry Supply side economies of scale Demand side benefits of scale Customer Switching cost Capital requirements Incumbency advantages independent of size Unequal access to distribution channels Restrictive government policy

The Power of Suppliers

It is more concentrated than the industry its sell to EX. Microsoft. Suppliers group does not depend heavily on industry for its revenue. Industry participants face high switching costs in changing supplier. Suppliers offer products that are differentiated. There is no substitute for what the supplier group provides. The supplier group can credibly threaten to integrate forward into industry.

A supplier group is powerful if :

The Power of Buyers

There are few buyers or each one purchase in high volumes. The industry’s product are standardized or undifferentiated Buyers face few switching cost In changing vendor. Buyers can credibly integrate backward and produce the product by themselves.

A Customer group has negotiating leverage if :

A Customer group is price sensitive if : The product it purchases from the industry represents a significant fraction of

its cost structure. The buyer group earns low profits or under pressure to trim its purchasing

costs. The quality of buyers’ product is little affected by industry’s product.

The Treat of Substitutes

It offers an attractive price performance trade-off to the industry’s product. The buyer’s cost of switching pantent to the substitute is low.

A Threat of substitute is high if :

Rivalry among existing competitors

Competitors are numerous. Industry growth is slow. Exit barriers are high. Rivals are highly committed to the business and have aspirations for leadership.

The intensity of rivalry is greatest if :

Product of rivals are nearly identical & few switching cost for buyers. Fixed costs are high & marginal costs are low. Capacity must be expanded in large increments to be efficient. The product is perishable. (ex. Computer, Hotel)

The Price competition is most liable to occur if :

Common Pitfalls

Defining the industry too broadly or too narrowly Paying equal attention to all of the forces rather than digging deeply into one force Framework Industry growth rate Mistake Technology & innovation Mistake Government Complementary products & services

Changes in industry structure

New Entry : Ex patent expired , Strategy change Supplier or buyer : Ex Change of power , integration Substitute : Ex Advance Technology Rivalry : New base level from intensive competition.

Shifting in Five Forces

Implication for strategy Positioning for company Exploiting industry change Shaping industry structure Re-dividing profitability Expanding profit pools

Defining the relevant industry Geographic that industry take place Overlook Scope:Too Narrow (Common or Linkage)Too Broadly (Differentiate or Positioning) Boundaries of Product/Service and Location 5 Force analys which is competes

Competition & value Key Driver of Performance Industry understand is equally for Investor as of manager 5 Force competitive reveal truly Attractive to investor take advantage

Q & A

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