3 Strategic Management

EXTERNAL ENVIRONMENT

INDUSTRY MACRO COUNTRY

ENVIRONMENT ENVIRONMENT ENVIRONMENT

PORTER PESTEL PORTER

FIVE FORCES MODEL

PORTER FIVE FORCES MODEL - 1

HOW DO WE ANALYSE INDUSTRY ENVIRONMENT ?

LOOK FOR OPPORTUNITY POWER COMPANY OWNS

COAL BLOCKS

LOOK FOR THREAT COMPANY WHICH IS PART OF

AN INDUSTRIAL GROUP ENTERS AIRLINE INDUSTRY

USE MODEL TO PROVIDE FRAMEWORK TO SPOT

OPPORTUNITIES AND THREATS.


IDENTIFIES FIVE FORCES WHICH PLAY DISTINCTIVE

ROLE IN GENERATING OPPORTUNITIES AND THREATS

AND IN MAKING INDUSTRY MORE ATTRACTIVE

ROLE OF STRATEGY: TAKE ADVANTAGE OF

OPPORTUNITIES AND GUARD AGAINST THREATS

ANOTHER ROLE OF STRATEGY: ALTER STRENGTH OF

THESE FORCES TO THE ADVANTAGE OF COMPANY


FORCE 1 EASE OF ENTRY OF POTENTIAL COMPETITOR

DEPENDS ON THE ENTRY BARRIERS

BRAND LOYALTY

ECONOMIES OF SCALE

ACCESS TO DISTRIBUTION CHANNELS



DEPENDS ON ENTRY BARRIERS

BRAND LOYALTY

* Product quality Dettol

* Product innovation Apple

* High promotion Colgate




ECONOMIES OF SCALE

Standardisation Boeing

Bulk purchase Walmart

Spreading fixed costs Pharma




ACCESS TO DISTRIBUTION CHANNELS

Jewellery


FORCE 2 RIVALRY AMONG COMPANIES

COMPETITIVE STRUCTURE

RATE OF GROWTH

PRODUCT CHARACTERISTICS

AMOUNT OF FIXED COSTS

SIZE OF CAPACITY INCREASE

EXIT BARRIER



COMPETITIVE STRUCTURE

Number and relative size of players

Few players of equal size Rivalry high Telecom

Many small players Rivalry low Lodges

Few players of different

backgrounds Rivalry high Full service

airlines



RATE OF GROWTH

Rate of growth high Rivalry low Automobiles

No price wars



PRODUCT CHARACTERISTICS

Differentiated Rivalry low Restaurants

Each to his own

Commodity Rivalry high Newspaper

distribution



AMOUNT OF FIXED COSTS

High fixed costs Rivalry high Telecom



SIZE OF CAPACITY INCREASE

High size of capacity Rivalry high Metals

increase Frequent price war



EXIT BARRIER

High exit barrier Rivalry high

Difficult to leave

Plant can make no other product Telecom

Plant has many workers who have

to be given severance wages Banks


FORCE 3 EXISTENCE OF SUBSTITUTES

SUBSTITUTE – PRODUCT SATISFYING SAME NEED

STRONG SUBSTITUTES MAKE INDUSTRY LESS

ATTRACTIVE

CINEMA THEATRES - DECLINING

MULTIPLEX - GROWING


FORCE 4 BARGAINING POWER OF BUYERS

PROPORTION OF PRODUCT BOUGHT

POTENTIAL FOR BACKWARD INTEGRATION

HOW MANY ALTERNATE SUPPLIERS

SWITCHING COSTS

IMPORTANCE OF PRODUCT TO BUYER



PROPORTION OF PRODUCT BOUGHT

High proportion High power Supplier to HUL who

brands and sells

Low proportion Low power Supplier to dealers who

stock and sell



POTENTIAL FOR BACKWARD INTEGRATION

High potential High power Supplier of machined part

to Maruti

Low potential Low power Supplier of forged part to

Maruti



HOW MANY ALTERNATE SUPPLIERS

Many suppliers High power Supplier of steel to Maruti

Few suppliers Low power Supplier of gears to ELGI

wet grinder



SWITCHING COST

Switching cost high Power low Paint supplier to Maruti

Switching cost low Power high Steel supplier to Maruti



IMPORTANCE OF PRODUCT TO BUYER

Importance high Power low Supplier of motor to ELGI

wet grinder

Importance low Power high Supplier of paint to ELGI

wet grinder


FORCE 5 BARGAINING POWER OF SUPPLIERS

NUMBER OF SUPPLIERS

PRODUCT BEING SUPPLIED IS COMMODITY

OR DIFFERENTIATED

ARE THERE SWITCHING COSTS

CAN SUPPLIERS INTEGRATE FORWARD

PROPORTION OF SUPPLIER’S PRODUCT

BEING BOUGHT



NUMBER OF SUPPLIERS

Number high Power low Telecom service to house

Number low Power high Electricity supplied to house



IS PRODUCT BEING SUPPLIED DIFFERENTIATED OR

COMMODITY

Differentiated Power high Paint supplier to Maruti

Commodity Power low Steel supplier to Maruti



SWITCHING COSTS

Switching cost high Power high Paint supplier to Maruti

Switching cost low Power low Steel supplier to Maruti



CAN SUPPLIERS INTEGRATE FORWARD?

Yes Power high Colour Plus supplying to retail store

No Power low Small supplier to a big retail store



PROPORTION OF SUPPLIER’S PRODUCT BEING

BOUGHT

Proportion high Power low Small supplier who supplies

soap to HUL who brands it

Proportion low Power high Petrol pump supplying petrol

to individual customer


Evaluates attractiveness of an industry

sustained profit making potential


Organised retail industry ie supermarket industry

Walmart asking itself question:

Is supermarket industry in India attractive ?


MODEL APPLIED TO SUPERMARKET INDUSTRY

FORCE 1 EASE OF ENTRY FOR COMPETITORS

( Potential Competitors: TESCO, METRO )

BRAND LOYALTY Difficult for competitors +1

ECONOMIES OF SCALE Difficult for competitors +1

ACCESS TO DISTRIBUTION CHANNELS not relevant

ATTRACTIVENESS SCORE = +1 +1 = +2




COMPETITIVE STRUCTURE Rivalry high -1

RATE OF GROWTH Rivalry low +1

PRODUCT CHARACTERISTICS Rivalry low +1

AMOUNT OF FIXED COSTS Rivalry high -1

SIZE OF CAPACITY INCREASE Rivalry low +1

EXIT BARRIER Rivalry high -1

ATTRACTIVENESS SCORE = -1 +1 +1 -1 +1 -1 = 0



FORCE 3 EXISTENCE OF SUBSTITUTES

THERE ARE NO SUBSTITUTES +1

ATTRACTIVENESS SCORE = +1




PROPORTION OF PRODUCT BOUGHT +1

POTENTIAL FOR BACKWARD INTEGRATION +1

HOW MANY ALTERNATE SUPPLIERS -1

SWITCHING COSTS -1

IMPORTANCE OF PRODUCT TO BUYER -1

ATTRACTIVENESS SCORE = +1 +1 -1 -1 -1 = -1




NUMBER OF SUPPLIERS +1

PRODUCT BEING SUPPLIED IS COMMODITY 0

OR DIFFERENTIATED

ARE THERE SWITCHING COSTS +1

CAN SUPPLIERS INTEGRATE FORWARD +1

PROPORTION OF SUPPLIER’S PRODUCT +1

BEING BOUGHT

ATTRACTIVENESS SCORE = +1 0 +1 +1 +1 = +4



ATTRACTIVENESS SCORE

FORCE 1 +2

FORCE 2 0

FORCE 3 +1

FORCE 4 -1

FORCE 5 +4

COMBINED +6

attractive

3 Strategic Management

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