Amruth Pavan Davuluri140101017

Section A

Forces of competition are not only limited to direct competitors.

Competition for profits goes beyond established industry rivals to include four other competitive forces as well

Five forces collective strength determine the competition in the market

New entrants may bring new capacity, the desire to gain market share, and often substantial resources The seriousness of the threat of entry depends on

the barriers present and on the reaction from existing competitors that entrants can expect

If the barriers to entry are high and newcomers can expect sharp retaliation from the entrenched competitors.

1. Economies of scale which force a new aspirant to come in on a large scale or to accept a cost disadvantage.

2. Product differentiation which creates a barrier by forcing entrants to spend heavily to overcome customer loyalty.

3. Capital requirements which create the need to invest large financial resources in order to compete.

4. Cost disadvantages independent of size due to experience curves, proprietary technology, access to the best raw materials, etc.

5. Access to distribution channels that are tied up by existing competitors which makes it more difficult for new entrants to get started.

6. Government policy which can limit or even foreclose entry by controlling such items as license requirements and limits on the access to raw materials.

A supplier group is more powerful if:

1. It is dominated by a few companies2. It is more concentrated than the industry it sells to3. Its product is unique or at least differentiated4. The supplier has built up switching costs5. It does not contend with other products for sale to

the industry6. It poses a credible threat of integrating forward

into the industry’s business7. The industry is not an important customer of the

supplier group

A buyer group is more powerful if:1. It is a concentrated or purchased in large volumes2. The products it purchases from the industry are standard

and undifferentiated3. The products it purchases form a component of its

products and represent a significant fraction of its costs4. It earns low profits, which creates great incentive to lower

its purchasing costs5. The industry’s product is unimportant to the quality of the

buyers’ products or services6. The industry’s products do not save the buyer money7. The buyer poses a credible threat to integrating backward

to make the industry’s product

Substitute products and services can have animpact on the industry because: By placing a ceiling on the prices it can charge,

substitute products or services limit the potential of an industry

Substitutes not only limit profits in normal times but also reduce the bonanza an industry can reap in boom times

Substitute products that deserve the most attention strategically are those that are a. subject to trends improving their price-

performance trade-off with the industry’s product or

b. produced by industries earning high profits

Intense rivalry occurs when:

Competitors are numerous or are roughly equal Industry growth is slow, precipitating fights for

market share that involve expansion The product or service lacks differentiation or

switching costs Fixed costs are high or the product is perishable,

creating strong temptation to cut prices Capacity normally is augmented in large

increments Exit barriers are high Rivals are diverse in strategy, origin, and

personality

1. Positioning the company: Strategy can be viewed as building defense against the competitive forces or as finding positions in the industry where the competitive forces are weakest

2. Exploiting and expecting industry change: Industry evolution is important strategically because we want to know how these changes are effecting the sources of competition

3. Shaping the Industry Structure: Use tactics that are designed specifically to reduce the share of profits leaking to other companies

In a world of more open competition and relentless change, it is important than ever to think structurally about the competition

Awareness of the Five forces can help a company stakeout a position in its industry that is less vulnerable to others

Whatever their collective strength is, the corporate strategist’s goal is to find a position in the industry where his or her company can best defend itself against these forces or can influence them in its favor

Defining the industry too broadly or too narrowly

Paying equal attention to all the forces rather than digging deeply into the important one

Using static analysis that ignores industry trend

Using the framework to declare an industry attractive or unattractive rather than using it to guide strategic choices