The Five Forces model and competitive strategies by 4zp8tDG

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									     The Five Forces model and
       competitive strategies
      Geoff Leese September 2005 revised
    September 2006, July 2007, August 2008,
                 August 2009


1
    Porter’s five forces model
                 Potential Entrants to market
                                Threat of entry



                        Rivalry with
Suppliers                                          Buyers
                        competitors
    Bargaining Power                    Bargaining Power

                                    Threat of substitutes

                          Substitutes
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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?

3
    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

4
    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



5
    Threat of substitutes

       Product for Product
         Post   replaced by fax replaced by email
       Substitution of need
               quality castings reduces need for
         Better
          machine tools
       Generic substitution
         Holiday   or a new TV?
       Do without!

6
    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?



7
    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
8
    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?


9
 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?

10
 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

11
 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


13
 Competition

      Who & who has market dominance &
       why
      Market factors and intensity
      Resource comparisons
      General issues
          Cost and price comparisons
          Quality and service
          Logistics


14
 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


15
 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

16
 Strategic alternatives

      Growth and expansion
      Acquisition
      Integration
      Divestment




17
 Competitive strategies

        Porter’s generic strategies
          Costleadership
          Broad-market differentiation
          Focus Cost
          Focus differentiation




18
 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


19
 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


20
 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

21
 Differentiation(1)
        Perceived quality is the key!
          Whether    real or not.
          Intrinsic qualities of the product
          Pre/post sales service

        Allows premium pricing




22
 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


23
 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

24
 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




25
 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



26
 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



27
 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?



28
 Summary

      Five forces model
      Porter’s generic strategies




29
 Further reading

      The Cambridge University view – follow
       the link!
      More explanation – follow the link!
      Bennett chapter 3
      Johnson and Scholes chapters 3 and 6




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