Intra-Industry Rivalry

Strategic Business Unit

How strong is the rivalry among existing players? Does only one player dominate?

BargainingPower of the

Buyers

How strong is the position of the buyers? Can we sell

in large volumes? Do we need to discount heavily?

How easy or hard it is for new entrants to start and compete? Any barriers to their

entry?Potential New Entrants

How easy or hard it is for a new product or service to replace what already exists?

Substitute Products and Services

Bargaining Power of Suppliers

How strong is the position of the suppliers? Are there many? Few? Monopoly?

Porter’s model of 5 competitive forces is one of the most often used business strategy tools

Source: Michael E. Porter “Forces Governing Competition in Industry (Harvard Business Review, Mar.-Apr. 1979)

Porter’s Five Competitive Forces That Shape Strategy

www.youtube.com/watch?v=mYF2_FBCvXw

http://www.bbc.co.uk/dna/h2g2/alabaster/A583120 Porter’s Competitive Forces

Michael Porter on why America needs an economic strategy

Generic Strategies and Industry Forces

IndustryForce

Generic Strategies

Cost Leadership

Differentiation Focus

EntryBarriers

Ability to cut price in retaliation deters potential entrants.

Customer loyalty can discourage potential entrants.

Focusing develops core competencies that can act as an entry barrier.

BuyerPower

Ability to offer lower price to powerful buyers.

Large buyers have less power to negotiate because of few close alternatives.

Large buyers have less power to negotiate because of few alternatives.

SupplierPower

Better insulated from powerful suppliers.

Better able to pass on supplier price increases to customers.

Suppliers have power because of low volumes, but a differentiation-focused firm is better able to pass on supplier price increases.

Threat ofSubstitutes

Can use low price to defend against substitutes.

Customer's become attached to differentiating attributes, reducing threat of substitutes.

Specialized products & core competency protect against substitutes.

Rivalry Better able to compete on price.

Brand loyalty to keep customers from rivals.

Rivals cannot meet differentiation-focused customer needs.

Applying the Porter Competitive Model Applying the Porter Competitive Model to Wal-Martto Wal-Mart

Intra-Industry RivalrySBU: Wal-MartRivals: Kmart, Target,Toys R Us, Specialty Stores

BargainingPower of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services

PotentialNew Entrants

Consumers in Small Town U.S.A.

Consumers in the Metropolitans Areas in the U.S.

Canadian and Mexican Consumers

Other Foreign Consumers

Mail Order Home Shopping Network Electronic Shopping

U.S. Product Manufacturers Foreign Manufacturers Local Governments I/T Product and Service

Suppliers

Foreign General Merchandisers or Discounters

Established Retailer Shifting Strategy to Discounting or Megastores

Telemarketing Buying Clubs Door-to-door Sales

Porter Competitive ModelEducation Industry: U.S. Universities

Intra-Industry RivalryStrategic Business Unit

BargainingPower of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services

PotentialNew Entrants

Faculty and Staff Equipment, Service,

Suppliers Alumni Foundations, Business Government Books and Videotapes

Computer-Based Training Training Companies Consulting Firms

Students Parents Business Employers Legislators

Foreign Universities Distance Learning Motorola University Phoenix, DeVry, National

Porter’s Model and the Role of the Government:

The government plays an important role in Porter’s diamond model. Like everybody else, Porter argues that there are some things that governments do that they shouldn't, and other things that they do not do but should. He says, "Government’s proper role is as a catalyst and challenger; it is to encourage - or even push - companies to raise their aspirations and move to higher levels of competitive performance …"

Governments can influence all four of Porter’s determinants through a variety of actions such as

– Subsidies to firms, either directly (money) or indirectly (through infrastructure).

– Tax codes applicable to corporation, business or property ownership.– Educational policies that affect the skill level of workers.– They should focus on specialized factor creation. (How can they do this?)– They should enforce tough standards. (This prescription may seem

counterintuitive. What is his rationale? Maybe to establish high technical and product standards including environmental regulations.)

The problem, of course, is through these actions, it becomes clear which industries they are choosing to help innovate. What methods do they use to choose? What happens if they pick the wrong industries?

Criticisms Although Porter theory is renowned, it has a number of critics.

Porter developed this paper based on case studies and these tend to only apply to developed economies.

Porter argues that only outward-FDI is valuable in creating competitive advantage, and inbound-FDI does not increase domestic competition significantly because the domestic firms lack the capability to defend their own markets and face a process of market-share erosion and decline. However, there seems to be little empirical evidence to support that claim.

The Porter model does not adequately address the role of MNCs. There seems to be ample evidence that the diamond is influenced by factors outside the home country.