The 5 Competitive Forces That Shape Strategy

8/3/2019 The 5 Competitive Forces That Shape Strategy

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The Five CompetitiveForces That Shape Strategy


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The 5 Forces that Shape Strategy

Michael Porter is a leading authority on strategy and

competition in business. His five forces analysis has been

one of his largest contributions to his field. Porter defines

them as:

The threat of the entry of new competitors

The intensity of competitive rivalry

The threat of substitute products or servicesThe bargaining power of customers

The bargaining power of suppliers


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The 5 Forces that Shape Strategy

Competitive

rivalry

within an

industry

Bargaining

power of

suppliers

Bargaining power

of customers

Threat of

New

Entrants

Threat of

SubstituteProducts


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The Threat of the Entry of NewCompetitors

Danilyn A. Flores


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A new entrant - a brand new competitor or maybe a

new brand from on old competitor.

Why does competitive rivalry increase when a newcompetitor enters your industry?

A new competitor to an industry has no existing customers

As they start to poach customers the existingcompetitors respond to protect their business.

The exception to this is when an industry is

in rapid growth


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Analyze the threat of new entrants - this seeks to

identify the barriers to entry

the things about your industry

that will make it harder for a new

entrant to shift into your industry

What to do?


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Consider the following:


Economies of Scale

Proprietary Product Differences

Brand Identity

Switching Costs

Capital Requirements

Access to Distribution

Absolute Cost Advantage

Government Policy

Expected Retaliation

Industry Profitability

Stage in Industry Life Cycle


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Analysis CriteriaRisk Rating

High Medium Low

Economies of scale

Proprietary product differences

Brand identity

Switching costs

Capital requirements

Access to distribution

Absolute cost advantageGovernment policy

Expected retaliation

Industry Profitability

Stage in industry life cycle

Overall Risk Rating



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The Rivalry among ExistingCompetitors

Cheryl O. Tayo


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Rivalry Among Existing Competitor

Rivalry is intensified if:

Competitors are roughly equal in size

Industry growth is slow

Exit barrier is high

Aspiration for leadership

Cannot read each others signal well


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Price competition occur if:

Product are nearly identical & less switching cost

Fixed cost is high

To improve efficiency of production

Product is perishable



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Basis of competition:

Price

Product features Support service

Delivery time

Brand image



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The Threat of SubstituteProducts or Services

Kahlille O. Clerigo


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The existence of products outside of the realm of the

common product boundaries increases the propensity of

customers to switch to alternatives. Note that this should notbe confused with competitors' similar products but entirely

different ones instead. For example, Pepsi is not considered a

substitute for Coke but water, tea, and coffee are.


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Companies in one industry come under

competitive pressure from the actions of companies in aclosely adjoining industry whenever buyers view the

products of the two industries as good substitutes.

Just how strong the competitive pressures are from sellers of

substitute products depends on three factors:

a. Whether substitutes are readily available and attractively

priced

b. Whether buyers view the substitutes as being

comparable or better in terms of quality,

performance, and other relevant attributes

c. How much it costs end-users to switch to substitutes


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The Bargaining Power of Customers

Khaskie O. Clerigo


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The bargaining power of customers is also

described as the market of outputs: the ability of customers to put the firm under pressure, which also

affects the customer's sensitivity to price changes.



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Buyer Power is High/Strong if:

Buyers are more concentrated than sellers

Buyer switching costs are low

Threat of backward integration is high

Buyer is price sensitive

Buyer is well-educated regarding the product

Buyer purchases product in high volume

Buyer purchases comprise large portion of seller sales

Product is undifferentiated

Substitutes are available



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Buyer Power is Low/Weak if:

Buyers are less concentrated than sellers

Buyer switching costs are high

Threat of backward integration is low

Buyer is not price sensitive

Buyer is uneducated regarding the product

Buyer purchases product in low volume

Buyer purchases comprise small portion of seller sales

Product is highly differentiated

Substitutes are unavailable



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Power of Buyers

Emmer P. Ruaya


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Power of Buyers

The flip side of Powerful Suppliers

Capture more value by forcing down pricesdemanding better quality or more service ad

playing industry participants.


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groups of customers who differ in

bargaining power.

has negotiating leverage

price sensitive

Power of Buyers


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Group of Buyers has Negotiating

leverage

Buyers purchased volume that areBuyers purchased volume that are

large relative to the size of singlelarge relative to the size of single

vendor.vendor.

Example:Telecommunications Industries

Electronic Industries

Chemical Industries


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Buyers face few switching costs in

changing vendors

buyers believe they can always find an equivalentbuyers believe they can always find an equivalent

product, they tend to play one vendor against anotherproduct, they tend to play one vendor against another.

Because the industrys products areBecause the industrys products are

standardized or undifferentiatedstandardized or undifferentiated


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Price Sensitive

Buyers are likely to shop around

and bargain hard, as consumers

do for home mortgages.


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Price Sensitive cont

buyer group earns low profits, is strapped forcash, or is otherwise under pressure to trim

its purchasing costs.

buyers products or services is little affected

by the industrys product.


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buyers are usually more interested in quality

than in price.


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Power Buyer

Buyer power is the ability of a buyer to

reduce price profitably below a suppliers

normal selling price, or more generally the

ability to obtain terms of supply more

favorable than a suppliers normal terms.


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Bargaining Power of the Supplier

Elizabeth M. Reveche


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Supplier

- refer to the firms that provide inputs

to the industry.



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Bargaining power is the ability to influence the

setting of prices.

Refer to the potential of the suppliers to

increase the prices of inputs (labor, raw

materials, services, etc) or the costs of industry

in other ways.



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Bargaining power of supplier depends on:

- Concentration of suppliers.- Differentiation of inputs

- Presence of substitute inputs

- role of quality and service.- The industry is not a key customer group to

the suppliers.

- Switching costs.- vertical integration of the

suppliers


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vertical integration

- degree to which a firm owns its

upstream suppliers and its

downstream buyers.

Forward integration- Expansion of activities downstream

Backward integration- Expansion of activities upstream


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Vertical integration

RAWMATERIALS

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INTERMEDIATE

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NO INTEGRATION BACKWARD INTEGRATION FORWARD INTEGRATION


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The 5 Competitive Forces That Shape Strategy