Five Force Analysis of Event Management Industry by ett84169

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									Five Forces   Structural Analysis       Generic Competitive Strategies   Competitor Analysis




                        Five-Forces Analysis

                                    Franz Hubert
Five Forces         Structural Analysis     Generic Competitive Strategies   Competitor Analysis




Motivation


       We have analyzed a number of well defined problems in rigorous
       game theoretic models.
       We have introduced heuristic devices, ”value net” and PARTS, to
       organize our analysis in an applied situation.
       Now we want to introduce an alternative framework for
       ”understanding the underlying forces of competition in industries”,
       captured in Porter’s ”five forces”.
       Porter (1998) Competitive Strategy - Techniques for Analyzing Industries and
       Competitors, (first ed. 1980)
Five Forces   Structural Analysis   Generic Competitive Strategies   Competitor Analysis




Five Forces
Five Forces            Structural Analysis   Generic Competitive Strategies   Competitor Analysis




Five Forces


       The collective strength of ”Five Forces”:
              1 Threat of Entry
              2 Intensity of Rivalry between Existing Competitors
              3 Pressure from Substituting Products
              4 Bargaining Power of Suppliers
              5 Bargaining Power of Buyers
       determines the ultimate profit potential in the industry.
       (This resembles the ”A” added value in the PARTS analysis, but it
       refers to industry not a player).
Five Forces       Structural Analysis   Generic Competitive Strategies   Competitor Analysis




Threat of Entry




       Threat of entry ”depends on barriers to entry that are present,
       coupled with the reaction from existing competitors that the
       entrant can expect.” (p. 7)
       In formal models:
       Sunk cost of market entry f ,
       post entry competition (Bertrand, Cournot...)
Five Forces          Structural Analysis   Generic Competitive Strategies   Competitor Analysis




Barriers to Entry



              economies of scale
              product differentiation and customer loyalties
              capital requirements (sunk investment)
              switching cost
              access to distribution channels
              other cost advantages of incumbents (patents, favorable
              locations, experience)
              government policy
Five Forces          Structural Analysis   Generic Competitive Strategies   Competitor Analysis




Expected Retaliation



       Reaction to market entry is likely to be hostile if:

              a history of vigorous retaliation to entry
              incumbents with resources to fight (excess cash, excess
              production capacity)
              incumbents with commitment to the industry (illiquid assets)
              slow industry growth: little capacity to absorb new entrants
              without compromising financial performance of incumbents.
Five Forces          Structural Analysis   Generic Competitive Strategies   Competitor Analysis




Intensity of Rivalry between Existing Competitors


       Strategic instruments: One major characteristic is the type of
       competition: prices, quantities, services, advertizement.
              Price competition tends to be very harmful.
              Advertisement battles may increase market and enhance
              product differentiation.
       Structural features: that increase rivalry:
              Lack of differentiation and switching cost.
              High fixed or storage cost create pressure to sell.
              High exit barriers.
Five Forces       Structural Analysis   Generic Competitive Strategies   Competitor Analysis




Pressure from Substituting Products



       ”All firms in an industry are competing, in a broad sense, with
       industries producing substitute products.”

       ”The more attractive the price performance alternative offered by
       substitutes, the firmer the lid on industry profits.” (p 23)

       Problem: How is the industry delineated in the first place?
Five Forces          Structural Analysis   Generic Competitive Strategies   Competitor Analysis




Bargaining Power of Buyers


       Buyers compete with the industry by forcing down prices, bargain
       for higher quality or more services, and playing competitors against
       each other.
       A buyer group is powerful if:
              It is concentrated or purchases large volumes relative to seller
              sales.
              Its purchase represent a significant fraction of the buyer’s cost
              or purchases.
              Products are standard or undifferentiated (homogenous).
Five Forces          Structural Analysis     Generic Competitive Strategies   Competitor Analysis




Bargaining Power of Buyers




              It faces few switching cost.
              It earns low profits.
              Buyers pose a credible threat of backward integration.
              The product is unimportant to the quality of the buyer’s
              product..
              The buyer has full information on demand, supplier cost etc.
Five Forces          Structural Analysis   Generic Competitive Strategies   Competitor Analysis




Bargaining Power of Suppliers


       Is largely symmetric to bargaining power of buyers. Suppliers are
       powerful if:
              It is concentrated relative to buyers.
              Faces little competition from substitutes.
              Buyers’ industry is not an important customer.
              The product is an important input to the buyers’ industry.
              The supplier group’s products are differentiated.
              The supplier poses a threat of forward integration.
Five Forces       Structural Analysis   Generic Competitive Strategies   Competitor Analysis




Bargaining Power




       It is worthwhile mentioning that there is no theory of bargaining
       power behind all these claims!
Five Forces       Structural Analysis   Generic Competitive Strategies   Competitor Analysis




Structural Analysis and Competitive Strategy




       Structural Analysis of Industry: A systematic evaluation of the
       ”five forces” with the aim to develop a competitive strategy.
       An effective competitive strategy takes offensive or defensive
       action in order to create a defendable position against the five
       competitive forces.
Five Forces        Structural Analysis   Generic Competitive Strategies   Competitor Analysis




Approaches to Competitive Strategy


       Positioning the firm so that its capabilities provide the best
       defense against the existing array of competitive forces.
       Influence the balance of forces through strategic moves.
       Exploiting change: Structural analysis can be used to anticipate
       change affecting the structural source of competition and exploit it
       before rivals recognize it.
       Diversification Strategy: Structural analysis provides a guide to
       judge the potential of a business, which is central for diversification
       and acquisitions.
Five Forces             Structural Analysis   Generic Competitive Strategies   Competitor Analysis




Generic Strategies




       In coping with five forces, there are three potentially successful
       generic strategic approaches to outperforming other firms.

              1 overall cost leadership
              2 differentiation
              3 focus
Five Forces          Structural Analysis   Generic Competitive Strategies   Competitor Analysis




Overall Cost Leadership


       ”Cost leadership requires:
              aggressive construction of efficient-scale facilities
              vigorous pursuit of cost reductions from experience
              tight cost and overhead control
              avoidance of marginal customer accounts
              cost minimization in R& D, service, sale force, advertising
       .. though quality, service, and other areas cannot be ignored”.
       (italics added)
Five Forces          Structural Analysis   Generic Competitive Strategies   Competitor Analysis




Differentiation


       ”creating something that is perceived industrywide as being
       unique.”

              design or brand image
              technology
              features
              customer service
              dealer network

       ”.. differentiation does not allow the firm to ignore cost, but rather
       they are not the primary target.”
Five Forces        Structural Analysis   Generic Competitive Strategies   Competitor Analysis




Focus




       Focus on a particular buyer group, segment of the product line, or
       geographic market. Results in differentiation from better meeting
       the need of the target or lower cost in serving this target or both.
Five Forces          Structural Analysis             Generic Competitive Strategies         Competitor Analysis




Generic Strategies




                                                       Strategic Advantage
                                 uniqueness perceived by                      low cost position
                                      the customers

              industrywide                 differentiation               overall cost leadership

                 particular                                      focus
              segment only
Five Forces             Structural Analysis      Generic Competitive Strategies              Competitor Analysis




Framework for Competitors Analysis

                      What drives                                         What the competitor
                    The competitor                                        Is doing and can do
                     future goals                                           current strategy

              at all levels of management                                 how the business is
              and in multiple dimensions                                  currently competing

                                      Competitors Response Profile

                    assumptions                                                   capabilities

                   held about itself                                         both strengths
                   and the industry                                         and weaknesses
Five Forces        Structural Analysis   Generic Competitive Strategies   Competitor Analysis




Competitors Response Profile




       Is the competitor satisfied with its current position?
       What likely moves or strategy shifts will the competitor make?
       Where is the competitor vulnerable?
       What will provoke the greatest and most effective retaliation by
       the competitor?
Five Forces               Structural Analysis           Generic Competitive Strategies              Competitor Analysis




Assessment Chart


                                 Vulnerability of the    Degree to which         Effectiveness of
                                 Competitor to the      Event will Provoke       the Competitor’s
                 Events                Event               Retaliation              Retaliation
         Feasible Strategic
              Moves

        Increase product
        quality and service

        Reduce price and
        compete on cost

                Possible
              Environmental
                Changes

        Increases in cost of
        raw materials

        Downturn in sales

								
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