Forces at Work&SCP

FORCES AT WORK

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"The essence of formulating competitive strategy is relating a company to its environment"

Competitive Strategy: Techniques for Analysing Industries and Competitors, 1980

MICHAEL E. PORTER

WHO DO WE THANK (OR BLAME) FOR THE FORCES AT WORK FRAMEWORK?

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Industry competitors

How intense is the rivalry ?

Suppliers

What is their bargaining power?

Buyers

What is their bargaining power?

Potential Entrants

What is the threat ?

Substitutes

What is the threat?

ELEMENTS OF THE FORCES AT WORK FRAMEWORK

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Maruti, Hyundai GM, Toyota...

Suppliers

Parts manufacturers, steel mills, labor unions...

Buyers

Households, governments, rental car companies...

Potential Entrants

Motorcycleand truck

manufacturers...

Substitutes

Manufacturers and operators of

trains, buses, airplanes,

motorcycles...

WHO ARE THE PLAYERS IN THE AUTOMOBILE MANUFACTURING INDUSTRY?

BOS-ZZQ387-20040325-GIRIHR1

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STRUCTURAL FACTORS IN “INDUSTRY RIVALRY”


Suppliers Buyers

Potential Entrants

Substitutes

• Basis of competition (e.g., quality, price, service)

• Industry growth• Product differentiation• Brand identity/loyalty• Switching costs• Fixed cost/value added• Nature of capacity (shortage/excess)• Exit barriers• Corporate stakes (e.g., strategic

importance, reputation)• Diversity of competitors• Information complexity/transparency

• Basis of competition (e.g., quality, price, service)

• Industry growth• Product differentiation• Brand identity/loyalty• Switching costs• Fixed cost/value added• Nature of capacity (shortage/excess)• Exit barriers• Corporate stakes (e.g., strategic

importance, reputation)• Diversity of competitors• Information complexity/transparency


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• Bargaining leverage– Buyer concentration vs. firm

concentration– Buyer volume– Buyer switching costs– Buyer information– Ability to backward integrate– Availability of substitute

products

• Price sensitivity– Price/total purchases– Product differences– Brand identity/ quality

perception– Buyer income/profits

• Bargaining leverage– Buyer concentration vs. firm

concentration– Buyer volume– Buyer switching costs– Buyer information– Ability to backward integrate– Availability of substitute

products

• Price sensitivity– Price/total purchases– Product differences– Brand identity/ quality

perception– Buyer income/profits


Suppliers Buyers

Potential Entrants

Substitutes

DETERMINANTS OF BUYER POWER


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• Differentiation of inputs

• Switching costs of suppliers and competitors in the industry

• Availability of substitute inputs

• Supplier concentration

• Importance of volume to supplier

• Cost relative to total purchases in the industry

• Role of inputs with respect to product/service differentiation

• Threat of forward integration relative to threat of backward integration by firms in industry

• Differentiation of inputs

• Switching costs of suppliers and competitors in the industry

• Availability of substitute inputs

• Supplier concentration

• Importance of volume to supplier

• Cost relative to total purchases in the industry

• Role of inputs with respect to product/service differentiation

• Threat of forward integration relative to threat of backward integration by firms in industry


Suppliers Buyers

Potential Entrants

Substitutes

DETERMINANTS OF SUPPLIER POWER


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• Economies of scale

• Proprietary product differences

• Brand identity

• Switching costs

• Capital requirements

• Absolute cost advantages– Proprietary learning curve– Access to necessary inputs– Proprietary, low-cost product

design

• Government policies/regulation

• Expected retaliation

• Economies of scale

• Proprietary product differences

• Brand identity

• Switching costs

• Capital requirements

• Absolute cost advantages– Proprietary learning curve– Access to necessary inputs– Proprietary, low-cost product

design

• Government policies/regulation

• Expected retaliation


Suppliers Buyers

Potential Entrants

Substitutes

DETERMINANTS OF BARRIERS TO ENTRY


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• Relative price performance of substitutes

• Switching costs

• Buyer propensity to substitute

• Relative price performance of substitutes

• Switching costs

• Buyer propensity to substitute


Suppliers Buyers

Potential Entrants

Substitutes

DETERMINANTS OF SUBSTITUTION THREAT


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Overview of the forces at work framework

Examples of forces at work framework

Steps for creating a forces at work framework

PRESENTATION OVERVIEW


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Intense competition• Little industry growthLittle industry growth

• Recent excess capacityRecent excess capacity

• Little product differentiationLittle product differentiation

• No switching costNo switching cost

• Some brand equitySome brand equity

SuppliersSuppliersLittle supplier power • Low input differentiationLow input differentiation

• Low switching costs for inputsLow switching costs for inputs

• Highly dependent on volumeHighly dependent on volume

• No input impact on No input impact on differentiationdifferentiation

• Low impetus for forward Low impetus for forward integrationintegration

New entrantsNew entrants Some barriers to entry• Significant economies of scale Significant economies of scale

in productionin production

• High capital requirementsHigh capital requirements

• Established brand equitiesEstablished brand equities

• No significant proprietary No significant proprietary product differenceproduct difference

• Low barriers for other dairy Low barriers for other dairy companiescompanies

SubstitutesSubstitutes

Significant threat of substitution

• Large substitution threat from premium, Large substitution threat from premium, non-premium ice creamnon-premium ice cream

• No switching cost to consumerNo switching cost to consumer

BuyersBuyers

Substantial buyer power• Immense distributor concentrationImmense distributor concentration

• Little buyer switching costLittle buyer switching cost

• Product costs passed through to Product costs passed through to consumerconsumer

• Large ability to buy variable Large ability to buy variable volumes based on consumer volumes based on consumer acceptanceacceptance

FORCES AT WORK IN THE SUPER PREMIUM ICE CREAM INDUSTRY


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Buyers have significant buying power

• Highly concentrated buying power (top 4 companies represent 67% of market)

• Growing preference for turnkey solutions

• 20% - 40% price reductions observed from 1990 to 1994

Product innovation in the rail transportation industry has reduced

the threat of substitutes• High speed rail networks have

outperformed air travel for shorter trips (under 3 hours)

• Urban railway systems preferred in many regions with road congestion and pollution

Although increasing, supplier’s bargaining power remains low

• Highly fragmented supply chain

• Bargaining power is increasing due to growing upstream integration between manu-facturers and suppliers

Current barriers to entry are high but are falling due to adoption of technical standards

• High capital requirements for R&D efforts

• Development of modular platforms will reduce R&D costs and will increase economies of scale

Intense rivalry based largely on non-price competition

• Product differentiation achieved via technical innovation, integrated systems, and project financing

• Large but infrequent orders• Excess production capacity

FORCES RESHAPING THE EUROPEAN ROLLING STOCK INDUSTRY


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Overview of the forces at work framework?

Examples of forces at work framework

Steps for creating a forces at work framework

PRESENTATION OVERVIEW


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Synthesize your findings into summary messages for each category. Include prioritized bullet points under each summarized message


Suppliers

Intensity of rivalry

Substitutes

New entrants

Buyers

4Define the industry that you will analyze using the framework

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Create an exhibit lead that captures the key message of the framework

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Review exhibit for quality control purposes

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Create an exhibit that explicitly identifies competitors, customers, suppliers, potential new entrants and substitutes

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CompetitorsSuppliers

Substitutes

Entrants

Buyers

Review trade press, financial reports, market research, broker reports and interview notes, organizing key information into the major categories of forces

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Six steps for building a forces at work framework


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SOME ISSUES RELATED TO USING FORCES AT WORK

CautionCaution Incomplete information can damage the conclusion greatly, but incompleteness is not easy to detect

What’s next?What’s next? Use S-C-P for dynamic treatment

BOS-ZZQ363-20040110-GIRIOH9

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SITUATION ANALYSIS –STRUCTURE-CONDUCT-PERFORMANCE (SCP) FRAMEWORK

Structure Conduct Performance

Rigorous approach to analyze industry structure

Emphasis on conduct as key determinant of economic returns

Performance defined from the rational shareholder perspective

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Structure

THE ELEMENTS OF THE S-C-P FRAMEWORK – INDUSTRY STRUCTURE

Economics of supply• Concentration of producers• Import competition• Diversity of producers• Fixed/variable cost structure• Capacity utilization• Technological opportunities• Shape of supply curve• Entry/exit barriers

Economics of demand• Availability of substitutes• Differentiability of products• Rate of growth• Volatility/cyclicality

Industry chain economics• Bargaining power of input

suppliers• Bargaining power of

customers• Information market failure• Vertical market failure


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THE ELEMENTS OF THE S-C-P FRAMEWORK – PLAYERS’ CONDUCT

Vertical integration• Forward/backward integration• Vertical joint ventures• Long-term contracts

Marketing• Pricing• Volume• Advertising/promotion• New products/R&D• Distribution

Capacity change• Expansion/contraction• Entry/exit• Acquisition/merger/ divestiture

Internal efficiency• Cost control• Logistics• Process R&D• Organization effectiveness

Cooperation versus Rivalry

ConductStructure


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THE ELEMENTS OF THE S-C-P FRAMEWORK – PLAYERS PERFORMANCE

Non-financial• Technological progress• Employment objectives• Customer value/service

Financial• Profitability

– EBIT– ROS– Margins

• Value creation– EVA– ROE– TRS

ConductStructure Performance

Forces at Work&SCP

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