Porter's 5 Forces
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What you will learn in this Section ? • Envisioning Strategy – Definition – Framework – Visual Models • External Analysis – PEST – PEST Impact Analysis • Industry and Competitive Analysis – Industry Structure – Evolution of Industries – Industry Supply Chain – Potential Industry Earnings – Porter’s 5 Forces Analysis – Competitive Intensity – Strategies for minimizing competitive forces – Perceptual Map – Barriers to Entry/Incumbency advantages – DSIR effect • Company Resources and Capabilities – ARC Analysis/HR – SWOT Analysis – Value Creating Processes/Core Competencies – Strategic Gameboard – Balanced Scorecard – Change Management © Sunil Mehrotra
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Transcript of Porter's 5 Forces
What you will learn in this Section ?• Envisioning Strategy
– Definition– Framework– Visual Models
• External Analysis– PEST– PEST Impact Analysis
• Industry and Competitive Analysis– Industry Structure– Evolution of Industries– Industry Supply Chain– Potential Industry Earnings– Porter’s 5 Forces Analysis– Competitive Intensity– Strategies for minimizing competitive forces– Perceptual Map– Barriers to Entry/Incumbency advantages– DSIR effect
• Company Resources and Capabilities– ARC Analysis/HR– SWOT Analysis– Value Creating Processes/Core Competencies– Strategic Gameboard– Balanced Scorecard– Change Management © Sunil Mehrotra
Fortune's ranking of Industries by profits
Tobacco Products, OtherForeign Regional Banks
Application Softw areManagement Services
Gas UtilitiesTelecom Services - Foreign
Oil & Gas Drilling & ExplorationJew elry Stores
Personal ProductsDiscount, Variety Stores
0
10
20
30
40
50
60
70
80
90
Industry Ranking
% ROE
Industry
% R
OE
Industry AnalysisWhy are some industries more profitable than
others?
Industry Analysis:Porter's Insight
© Sunil Mehrotra
Suppliers
Customers
The incumbentfirms
New entrant
Substitutes
• Porter’s insight recognizes that the following characteristics are important to profitability of the incumbent:
The intensity of competition The ability of suppliers or buyers of
industry products to restrain industry profits
The behavior of firms producing closely related goods not included in the industry
Potential for entry into the market by new firms
Competitive rivalry
Porter's 5 Forces impact on profitability
Suppliers
Bargaining power of
Customers
Bargaining power of
New entrant
Threat of New Entrants
Substitutes Threat fromSubstitutes
The incumbentfirms
Competitive rivalry
Root causes that put pressure on industry profitability
Few large suppliersNo substitutesCustomers are fragmentedSwitching costs to another supplier are highSupplier integrating forward
Economies of scaleDownstream more profitableLow barriers to entry downstream
Concentration of buyersIncumbents are fragmentedProduct is undifferentiatedSwitching to another supplier is simpleProduct is not strategic to the customerCustomers can produce the product themselvesCustomer knows the production costsCustomers can integrate back-words
Better pricesBetter performanceSimilar functionality
Many small playersHigh cost to exitUndifferentiated products compete on priceLow brand loyaltyLow switching costsSlow/no growth market
www.themanager.org
© Sunil Mehrotra
Low barriers to entry
Suppliers
Bargaining power of
The incumbentfirms
Competitive rivalry
Substitutes Threat fromSubstitutes
Customers
Bargaining power of
New entrant
Threat of New Entrants
Impact on Profitability
Competitive Intensity
Bargaining power of Suppliers
Bargaining power of Customers
Threat of New Entrants
Threat from Substitutes
High LowModerate
Profits © Sunil Mehrotra
Threat/Power
Discount Stores Tobacco Industry
Porter's 5 Forces impact on profitability
Suppliers
Bargaining power of
Customers
Bargaining power of
New entrant
Threat of New Entrants
Substitutes Threat fromSubstitutes
The incumbentfirms
Competitive rivalry
Competitive Intensity impactsIndustry profitability
MonopolySingle Firm
Dominant Firm•Few large firms•More small firms•Pricing leadership•Protected Niches
Oligopoly•Few Firms•Strategic Interdependence•Profitability determined by behavior
Niche Market•Product Differentiation•Localized competition
Perfect Competition•Many firms•No product differentiation•Price based competition
HighLow
Industry Profitability
© Sunil MehrotraAdapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
UtilitiesComputer OS
AutomobilesCommercial Aircrafts
Clothing StoresGas Stations
Commodities
1000-1800
http://www.usdoj.gov/atr/public/testimony/hhi.htmHHI
Strategies for minimizing the power of competitive forces
Adapted from: www.themanager.org
Reducing competitive rivalry withinDifferentiate your productAvoid price competitionReduce industry over capacityFocus on different customer segments
The incumbentfirms
Competitive rivalry
Product Differentiation minimizes competitive intensity
• Perceptual Maps are a visual display (usually on two dimensions) of how brands are perceived by customers.
• The closer the brands are positioned in this space the more competitive they are to each other.
• Perceptual Maps identify “open spaces”or unmet customer needs.
• Perceptual Maps identify salient attributes of the products on which consumers differentiate brands.
Adapted from: http://en.wikipedia.org/wiki/Perceptual_mapping
Perceptual Map for Travel Agency Industry
Online self-service
In person, concierge service
Extreme AdventureGuided tours
Perceptual Map of the Auto IndustryPrestige
Basic
Sporty
Conservative
Perceptual Map Example:Contemporary
Classic
ExpensiveDiscount
Zara
Nina Tooley, April 2008 MBA,Graziadio School of Business and Management Pepperdine University
Contemporary
Classic
Perceptual Map Example:
MatureYoung
Zara
Nina Tooley, April 2008 MBA,Graziadio School of Business and Management Pepperdine University
Perceptual Map of the Beer Market
Premium
Popular with MenHeavy
Special Occasions
Dining Out
Popular with
Women
Light
Pale Color
On a Budget
Good Value Blue Collar
Full Bodied
PremiumBudget
Light
Heavy
•
Meister Brau
Stroh’s
•
•
•
Beck’s
• Heineken
Old Milwaukee
•
Miller •
Coors•
Michelob•
Miller Lite
• Coors Light•
OldMilwaukee Light
•
Budweiser
Less Filling
Adapted from: Prof. Ganesh Iyer, UC Berkeley
Perceptual Map of 2000 Presidential Candidates
Colin PowellJohn McCain
George W. Bush
Alan Keyes
Pat Buchanan
Steve Forbes
Donald Trump
Elizabeth Dole
Jesse Jackson
Bill Bradley
Al Gore
Leader
Opportunistic
ReligiousConservative
Source: 12Americans.com, 2000www.populus.com
TraditionalLiberal
Republican
Democrat
Independent
Why Differentiation is an effective strategy
Competitive Intensity
Bargaining power of Suppliers
Bargaining power of Customers
Threat of New Entrants
Threat from Substitutes
Differentiation
Brand loyalty to keep customers from switching
Better able to pass on supplier price increases to customers
Fewer alternatives available to switch to
Customer loyalty can deter new entrants
Customers less willing to accept substitutes
www.studymarketing.org
Example:
Effective differentiation is when a product/brand occupies a piece of the
customer’s mind
That is the hook !
New entrant
Threat of New Entrants
Strategies for minimizing the power of competitive forces
Adapted from: www.themanager.org
Reducing the threat of New Entrants
Increasing minimum efficient scales of operations
Creating brand image/loyalty
Protection of intellectual property
Alliances with linked products/services
Tie up with suppliers
Tie up with distributors
Retaliation tactics
Cut out intermediaries
Reducing threat of substitutesIncrease switching costsForm alliancesEnter substitute market Accentuate differences
Reducing competitive rivalry withinDifferentiate your productAvoid price competitionReduce industry over capacityFocus on different customer segments
Reducing the Bargaining Power of SuppliersPartneringSupply Chain ManagementIncrease mutual dependencyBuild knowledge of supplier costs/methodsTake-over supplier
Reducing the Bargaining Power of CustomersPartneringIncrease loyaltyIncrease incentives and value addedIncrease switching costsCut out intermediaries
Suppliers
Bargaining power of Suppliers
The incumbentfirms
Competitive rivalry
Substitutes Threat fromSubstitutes
Customers
Bargaining power of
Porter's 5 Forces impact on profitability
Suppliers
Bargaining power of Suppliers
Customers
Bargaining power of
New entrant
Threat of New Entrants
Substitutes Threat fromSubstitutes
The incumbentfirms
Competitive rivalry
Nappies 14-16?
Porter's 5 forces insight-Intensity of competition amongst incumbents-Bargaining power of suppliers and buyers- Threat from substitutes and new entrants
Spectrum of competition-monopoly to perfect competition-Herfindahl-Hirschman index measure of intensity-strategies for minimizing intensity of competition
Product and brand differentiation is a key strategy-Perceptual mapping technique-Using perceptual maps for positioning products and brands
Mnemonic 5
Mnemonic 6
Adapted from: http://en.wikipedia.org/wiki/Perceptual_mapping
