Competition Analysis - Porter's 5 Forces Model For

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Competition Analysis – Porter's 5

Forces Model for CompetitiveEnvironment,



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Competitor Analysis

• Competitor analysis in marketing assessmentof the strengths and weaknesses of current and potential competitors.

• This analysis provides both an offensive anddefensive strategic context to identifyopportunities and threats.



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Competitor Profiling

• The raw material of competitive advantageconsists of offering superior customer value inthe firm's chosen market.

• Customer value is defined relative to rivalofferings making competitor knowledge anintrinsic component of corporate strategy.

• Customer profiling can reveal strategicweaknesses in rivals that the firm may exploit.



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• The proactive stance of competitor profilingwill allow the firm to anticipate the strategicresponse of their rivals to the firm's planned

strategies, the strategies of other competingfirms, and changes in the environment. This proactive knowledge will give the firmsstrategic agility.

• Offensive strategy can be implemented morequickly in order to exploit opportunities andcapitalize on strengths.

•



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COMPETITOR ANALYSIS:

• It is required for formulating right strategydetermining right positioning for the firm in theindustry.

• Competitor analysis seeks to find answers to followingquestions-

• Who are the competitors?

• Which are the current strategies of the competitor?

•

What are the future goals& likely strategies?• What drives the competition?

• When the competitor is vulnerable

•

How the competitors are likely to respond to thestrategies of others?



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What strategic moves are rivals likelyto make?

• Unless a company pays attention to what competitorsare doing, it ends up flying blind into competitive

battle.

• A company cannot plan its moves without monitoringcompetitor’s actions, understanding their strategies &anticipating what moves they are likely to make next.

• Competitive intelligence is about strategies rivals aredeploying, their latest moves, their resources,

strengths, & weakness & the plans they haveannounced is essential to anticipating the actions theyare likely to take next & what bearing their movesmight have on a company’s own best strategic moves.



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Monitoring Competitors Strategies:

• The best source of information about a competitor’sstrategy comes from examining what it is doing in themarketplace & from what its management is sayingabout the company’s plans.

• Addition to this what competitor is up to & its futurestrategy can be achieved by considering thecompetitor’s geographic arena, strategic intent, marketshare objectives, position on the industry strategicgroup map & willingness to take risks, further it is

important to know whether the competitors recentmoves are mostly offensive or defensive.



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Good sources include-

• The company’s annual report.

• Recent speeches by its managers

•

The reports of security analyst• Articles in business media

• Company’s press release

•

Information at company’s website• Exhibits at international trade show

• Conversation with rivals customers & former

employees .



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The concept of Driving Forces:

• It is important to judge what growth stage an industryis in , there is more analytical values in identifying thespecific factors causing fundamental industry &competitive adjustment. Industry & competitiveconditions change because forces are in motion thatcreate incentive or pressure for change.

• The most dominant force s are called ‘driving forces’,

because they influence the kinds of changes that willtake place in the industry’s structure & competitiveenvironment.



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COMPETITIVE FORCES

An organisation in any industry area directlyaffected by at least five forces. They are-

• Competitors

• Potential entrants

• Substitutes

•

Suppliers• Buyers

• The combined strength of these forces affects

long-term profitability of a firm




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PORTER’S FIVE FORCESMODEL:

The state of competition in an

industry depends upon the five basic competitive forces.



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Porter's five forces include

• Three forces from 'horizontal'competition

• Two forces from 'vertical' competition



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Three forces from 'horizontal'

competition:• Threat of substitute products,

•

The threat of established rivals, and• The threat of new entrants; and



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Two forces from 'vertical'competition:

• The bargaining power of suppliers,

• Bargaining power of customers.




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RIVALRY AMONGEXISTING FIRMS

(INDUST COMPETITION)

POTENTIALENTRANTS

SUBSTITUTES

SUPPLIERZS BUYERS

THREAT OF NEW ENTRANTS

THREAT OF SUBSTITUTES

BARGAINING POWER

OF BUYERBARGAINING POWEROFSUPPLIER



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• The collective strengths of the forces determineultimate profit potential in the industry., where profit

potential is measured in terms of long run returns oninvested capital.

• The goal of the competitive strategy for a business unitin an industry is o find a position in the industry wherehe the company can best defend itself against theseforces or can influence them in its favor.

• The strategic business manager seeking to develop anedge over its rival firms can use this model to better understand the industry context in which the firmoperates.



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• Porter’s Five Forces Model is a powerful tool for systematically

diagnosing the principle competitive pressure in a market & assign howstrong & important each one is.

RIVALRY AMONG THE



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RIVALRY AMONG THEEXISTING FIRMS:

• The existing firms are engaged in repeated &regular moves against each other. This is thestrongest of the five competitive forces.

• In some industries, cross –company rivalry iscentered on price competition—a competitionto offer buyers the best price is typical among

retailers & sellers of standard commoditiessuch as nails, plywood, sugar, printed paper,



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• Occasionally price can be so lively that market price temporarily falls below unit costs,forcing losses on some or most rivals.

• In other industries , price competition isminimal to moderate & rivalry is focused onone or more of the following factors,



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• Offering buyers the most attractivecombinations of performance features,

• Being first to the market with innovative product,

• Out competing rivals with higher quality or more durable products,

• Offering buyers longer warranties,

• Providing superior after sales service,

•

Creating a stronger brand image,



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• The pattern of action & reactionmakes competitive rivalry a ‘war

games’ type of contest conducted in amarket setting according to the rulesof fair competition.



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The common factors influence thetempo of the cross- company rivalry:

• Rivalry intensifies as the numbers of competitorsincrease & as competitors become more equal in size& capability.

•

Rivalry is usually stronger when demand for the product is growing slowly.

• Rivalry is more intense when condition temptcompetitors to use price cuts other competitive

weapons to boost & with volume.• Rivalry is stronger when customer’s cost to switch

brand is low.



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• Rivalry is stronger when one or morecompetitors are dissatisfied with their market position & launch moves to bolster their standing at expense

• Rivalry increase in proportion to the size of the pay offs from a successful strategic move.

• Rivalry tends to be more vigorous when it

costs more to get out of business than to stayin & compete.

• Rivalry becomes more volatile & unpredictedthe more diverse competitors are terms of their

visions, strategic intents, objectives, strategies,



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• Rivalry is stronger when one or more competitors are

dissatisfied with their market position & launchmoves to bolster their standing at expense

• Rivalry increase in proportion to the size of the pay

offs from a successful strategic move.• Rivalry tends to be more vigorous when it costs more

to get out of business than to stay in & compete.

• Rivalry becomes more volatile & unpredicted themore diverse competitors are terms of their visions,strategic intents, objectives, strategies, resources &countries of origin.



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• According to a traditional economicmodel competition among the rival

firms drives profit to zero. Firmsstrive for a competitive advantageover their rival. The intensity of

rivalry among the firms varies acrossthe industry.



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• Economist measures the rivalry byconcentration ratio (CR). A high CR indicateshigh concentration market share is held by the

largest firm-the industry is concentrated. Fewfirms holding a large market share thecompetitive bondage is less competitive or closet monopoly.

•

A low CR indicates that the industry ischaracterised by many rivals none of themholding significant market share-thefragmented market. These fragmented markets

are said to be competitive.



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• If the rivalry among the firms in theindustry is low, the industry is said to bedisciplined.

• Common competitive actions includes-

• Price change

•

Promotional measures• Customer service

• Warranty

• Product im rovement



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Factors influencing intensity of rivalry:

• Number of firms and their relatives market share,strength. etc

• State of growth industry. In case of stagnant or

declining and slow growth rate a firm is able toincrease its sales by increasing its market share.

• Low switching cost increase rivalry.

•

Strategic stakes are high when a firm is loosingmarket position or has potential for greater gains.

• High exit barriers cause a firm to remain in theindustry even when the venture is not profitable.eg

.The plant & equipment required for manufacturing a



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• A diversity of rivals with different culture,history and philosophy make an industry

unstable.• Industry shakeout- Growing market and the

potential for higher profit induces new firms

to enter market and incumbent firms toincrease production .

• Appoints reached where the industry becomes

crowded with competitors and demand cannotsupport the new entrants and the resultingincreased supply .Too many goods and few buyers.



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THREATS OF SUBSTITUTES:

• An important force of competition is the power of substitutes.

• To the economists a threat of substitutes existswhen the product demand is affected by the price changes of substitute product.

• As more substitutes become available the

demand decreases .eg. -To the tyremanufacturer tyre retreader is a substitute.



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• Firms in one industry are quite often close

competition with firms in another industry because their respective products are goodsubstitutes.

•

Eg. The producer of eyeglasses competes withthe makers of contact lenses & with eyespecialists who performs laser surgery tocorrect vision problems.

• Cotton & wool producers are in head oncompetition with the makers of polyester fabric



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The strength of substitute dependsupon

• Whether attractively priced substitutes areavailable,

• Whether buyers view substitute as beingsatisfactory in terms of quality, performance &other relevant substitute.

• Whether buyers can switch to substitutes

easily.



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• The availability of substitutes inevitablyinvites customers to compare quality, features, performance, ease of use & other attributes aswell as price.

• Another determinant of the strength of substitutes is how difficult or costly it is for

industry’s customer to switch to a substitute.• The switching costs includes price premium,

the costs of additional equipment, time & costin testing the reliability & quality of thesubstitute, the psychic cost of serving oldsupplier relationship & establishing new ones.



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BARGAINING POWER OFBUYERS:

Whether seller –buyer relationship represents aweak or strong competitive forces depends upon-

• Whether buyers have sufficient bargaining

power to influence the terms & conditions of sales in their favour &

• The extent competitive importance of seller –

buyer strategic partnership in the industry.



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How buyer bargaining power cancreate competitive pressures:

• Large retail chains like Wal-Mart have a considerablenegotiating leverage in purchasing products frommanufacturers because of manufacturers need for

broad exposure & favourable shelf spaces for their products.

• Retailers may stock one or even several brands butrarely all brands, so competition among rival

manufacturers for the business of popular or highvolume retailers gives such retailers significant bargaining leverage



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• Buyers have substantial bargaining leverage ina number of occasions, the most obvious iswhen the buyers are large & purchases a

sizable quantity of industry out put.• Even if buyers do not purchase in large

quantities or offer a seller important market

exposure or prestige , they may still havesome degree of bargaining power infollowing cases ,



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• If buyers cost of switching to competitive brands or substitutes are relatively low.

• If the number of buyers is small or if a

customer is particularly important to a seller.• If the buyers are well informed about sellers

products, prices, & costs.

•

If the buyer pose a credible threat of integrating backward into the business of sellers.

• If buyers have discretion in whether & whenthe urchase the roduct.



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• Buyers typically have weak bargaining power when they buy infrequently or in smallquantities & when they have high cost to

switch brands.• High switching cost s can keep buyer locked

into present brand.

• In some cases in industry buyers are potentialcompetitors- they may integrate backward .

• The power of buyers is the impact that

customer have on producing industry.



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• Eg -Monospony -Many supplier to one buyer (INDIAN RAILWAY) ,in this condition buyer can set price

•

Buyer power depend upon – • Volume of purchase relative to the total sale of

the seller.

•

Product is important to the buyer interims of total cost.

• Profitability of the buyer.

•

The extent of standardisation or differentiation



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How Collaborative partnerships between sellers & buyers can create

competitive pressures:

• Partnership between sellers & buyers are anincreasingly important element of competitive picture in business –to-business relationships

as opposed to business –to consumer relationships.



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• Eg. Wal –Mart provides the manufacturer withwhom it does business with daily sales datafrom each of its stores so that they can

replenish inventory stocks on time.



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BARGAINING POWER OFSUPPLIR:

Whether supplier –seller relationship representsweak or strong competitive forces depends upon

• Whether supplier can exercise sufficient

bargaining power to influence the terms &conditions of supply in their favour.

• The extent of supplier-seller collaborations in

the industry..



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How supplier‘s bargaining power can create competitive pressure:

.• Suppliers have no or little bargaining power or

leverage over rivals when the items they

provide are available in the open market fromnumerous suppliers with ample capabilities tofill orders.



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• Suppliers are likewise relegated to weak bargaining positions whenever there are goodsubstitutes for the items they provide & buyer

fined it neither costly nor difficult to switchtheir purchase to the supplier of alternativeitems.

•

Supplier also tends to have little bargaining power over price & other terms of sale whencompany they are supplying is a major customer.



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• When suppliers provides an item that accountsfor a sizable fraction of the costs of an industry

‘s products, is crucial to the industry; s production process, or significantly affects thequality of the industry product, suppliers haveconsiderable influence on the competitive process.

• Supplier’s e more powerful when they cansupply components more cheaply than industrymembers can make it themselves.

H ll b i hi b



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How collaborative partnership betweensellers & suppliers can create

competitive pressure:

In many industries sellers are forming strategic

& close relationship with select suppliers inorder to,

• Promote just in time deliveries & reducedinventory & logistic costs.

• Speed the availability of next generationcomponents.



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Eg. Dell Computers has used strategic partnership with key suppliers as a major

element in its strategy to be the world’s low costsuppliers of branded PC’s.

• The producing industry requires raw materials

and other supplies. This leads to supplier- buyer relationship.

• A powerful supplier can pressurise producing

industry by selling raw material at higher priceto capture some of the industry profits.



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Factors influencing supplier power-

• Importance of product to the buyer.

•

Extent of substitutability of the product.• Switching costs

• Extent of convention & dominance in the in

the supplier industry



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THREAT OF NEW ENTRANTS:

• New entrants to a market bring new production capacity, a desire to establish asecure place in the market & sometimes-

substantial resources with which it competes.• The seriousness of the threat of entry in a

particular market depends upon two factors;

• Barriers to entry,

• The expected reaction to the of incumbentfirms to the new entry.



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• Entry of new firms affects competition. In caseof markets having normal profit it is easy toenter and exit. Industry posses characteristic

that protects the high profit level of firms inthe market and inhibit additional rivals fromentering the market.

•

These are the barriers to entry. Barriers reducethe rate of entry of new firms thus maintaininga kevel of profit for those already in theindustry.



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• Government creates barrier throughreservation policy, industrial licensingrestricting foreign capital &technology.

• Patents and proprietary knowledge serveto restrict entry into an industries-POLOROID –Edwin Land in1947-camera

for instant photograph. KODAK-1975.SUED KODAK &kept them out of industry.

•

Economies of scale.



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• Cost & resources disadvantagesindependent of size.

•

Learning & experience curve effects..• Inability to match technology &

specialized know –how of firms already in

the industry.• Brand preference & customer loyalty .

• Capital requirements.



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• Entry barriers can be formidable for star- upenterprises trying to compete againstestablished companies.

• In evaluating the potential threat of entry, themanagement must look for,

• How formidable the entry barriers are for each

type of potential entrant.• How profit prospects are for new entrants.



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• The stronger the threat of entry the more thatincumbents firms are driven to fortify their position in the market place against the new

comers, endeavouring not only to protect their market share but also to make entry morecostly & difficult.

•

The threat of entry changes as the industry ‘s prospects grow brighter or dimmer & as anentry barriers rise or fall eg.

• The expiration of key patent can greatly

St t i I li ti f th Fi



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Strategic Implication of the FiveCompetitive Forces:

• The special contribution of the five forces model is thethoroughness with which it exposes what competitionis like in a given market –

• The strength of each of the five competitive forces.

• The nature of the competitive pressures comprisingeach force.

• Overall structure of competition.

• As a rule stronger the collective impact of competitiveforces the lower the combined profitability of

participating firms.



• When competitive forces are not collectively strongthe competitive structure of industry is favorable or attractive from the standpoint of earning superior

profits.

• The ideal competitive condition is one in which bothsuppliers & customers are in weak bargaining

positions, there are no substitutes, entry barriers arerelatively high & rivalry among present sellers is only

moderate.• When some of the five forces are strong , an industry

can be competitively attractive to those firms whosemarket position & strategy provides a good enough

Competition Analysis - Porter's 5 Forces Model For

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