6 m porter's 5 forces competitive model

20
Makerere University Business School Strategic Management Course ENVIROMENTAL ANALYSIS - COMPLETION
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Transcript of 6 m porter's 5 forces competitive model

Page 1: 6 m porter's 5 forces competitive model

Makerere University Business School

Strategic Management Course

ENVIROMENTAL ANALYSIS - COMPLETION

Page 2: 6 m porter's 5 forces competitive model

INDUSTRY ANALYSIS• A firm operates in an industry• Need to compare a company’s operations with

others– Especially “the best-in-class” rivals

• Current level of competition– Technologies– Competitors’ Key Success Factors, among other key

issues.

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Industry components

• Customers• Suppliers • Competitors• Industrial trends– In line with your industry’s life cycle– In line your goals and objectives, your strategy

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Customers:• Who are they in terms of characteristics and

behaviours?• How manageable are their needs, wants,

expectations, tastes and preferences?• Why do they buy/what they value most?• When/how do they buy? Where do they buy?, etcDo all these trends/factors/developments

favor/benefit us (opportunities) or really scare/are against us (threats)?

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Suppliers;• Do we have alternative sources of

suppliers?• Can we rely on these suppliers to

provide our needed inputs in the right quantities ,quality, at the right time and place?• If the answer is yes , those are

opportunities. While no shows a threat (s)

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• What are their costs?• What are their terms of delivery and/or

payment?• How powerful are they?• What is their rate of entry and exit?• Which supplier is the best?Which supplier (s) will give us competitive

advantages (opportunities) or not/scare us( threat)?

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Competitors;• How many competitors of our size

and competence are we facing? Few-opportunity, many-threat•What market share do they

hold/how strong are they? Smaller/weaker-opportunity, Big/strong- threat• Cost of the available substitutes?

Find out

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• What are their competitive behavior? Friendly/cooperative- Opportunity, Un friendly-Threat

• What are the entry and exit barriers for these competitors? Easy for new rivals to join but difficult for the current ones to leave the industry-threat, Difficult to enter but easy to exit-favorable/opportunity

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• Before joining an industry, a firm should consider;

Industry size, structure, profitability, long term attractiveness, life cycle

Competitive situation analysis

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Level of technology in the industry

Competitive position of the firm

Ease of entry in the industry

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Michael Porter’s model• Michael E. Porter of the Harvard

Business School• Suggested five competitive forces

model;– Rivalry within the industry– Threat of new entrants– Threat of substitute products– Power of buyers– Power of suppliers

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Rivalry determinants

• Mutual dependence• Concentration of competitors• Number of competitors• Industry growth rate• Cost structure• Diversification by competitors• Differentiation and switching costs• Exit barriers• Capacity utilisation

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Entry barriers

• Economies of scale• Product differentiation• Capital requirements• Switching costs• Distribution channels access• Government policies• Expected retaliation

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Substitution determinants

• Price relativity• Switching costs• Buyer propensity to substitute

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Customer power determinants

• Intrinsic strength• Buyer volume• Switching costs• Buyer information• Backward integration ability• Substitute products• Price sensitivity• Impact on quality• Brand identity

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Supplier power

• Importance to supplier• Knowledge of product value to buyer– Brand– Quality

• Standardisation and differentiation• Switching costs• Threat of forward integration

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Model Basics• Helps managers to identify the

opportunities and threats confronting their company (ies). • The stronger the 5 competitive

forces, the more serious the threat and vise versa.• Through strategic change you can

alter the strengths of such forces

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Porter’s Model – Cont.

• Need to understand the forces in the industry, their impact/seriousness, how and when they benefit or be against you, and their sources.

• Confirm which forces favour your business success (opportunities) or scare your business success (threats)

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Limitations • Limited availability of the required

information i.e high level of secrecy in government bodies and some business associations

• The available information may not be up-to-date, or be irrelevant or even inaccurate

• The model ignores other trends like changes in demand, technology used in production, and the market growth/attractiveness