Porter's 5 Forces_SM2

8/8/2019 Porter's 5 Forces_SM2

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Essence of strategy formulation is coping withcompetition.

Competition in an industry is rooted in its underlyingeconomics.

Competition in an industry depends on 5 basic forces.

Strategists goal to best defend the companyagainst these competitive forces.

Introduction


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Forces governing competition in an

industry


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Seriousness of threat of entry depends on:

Barriers present

Reaction from the existing players

Threat of Entry


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The 6 major sources of barriers to entry:

1. Economies of Scale: deter new entrants by forcingthem to come in on a large scale or suffer costdisadvantage.

2. Product Differentiation: creates barrier by forcing

entrants to spend heavily to overcome customerloyalty.

3. Capital Requirement

Threat of Entry


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4. Cost disadvantages independent of size: occurs dueto experience, govt. subsidies, favorable location,technology, prices, raw materials.

5. Access to distribution channels: barrier by limitingthe wholesale or retail channels available to the new

entrants.6. Government Regulations

Threat of Entry


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Suppliers can exert bargaining power by:

Raising prices

Reducing quality

Buyers can exert bargaining power by:

Forcing down prices

Demanding high quality or more service

Both of the above reduces the industry profits.

Powerful Suppliers and Buyers


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Supplier Group is powerful when:

Dominated by few players.

Product is unique and high switching costs.

Poses a threat of forward integration in industrysbusiness.

Industry is not an important customer.



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Buyer Group is powerful when:

Purchases in large volumes.

The products they purchase are standard.

Backward integration.

Product constitutes small fraction of buyers cost. Earns low profits.



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A company can improve its strategic posture by findingsuppliers or buyers who possess the least power toinfluence it adversely.

Strategic Action


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Threat can be avoided by:

Upgrading the quality

Product differentiation

Substitute products that get most attentionstrategically:

Improving price- performance trade off

Produced by high profit earning industries

Substitute Products


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Competitors are of same size and power.

Industry growth is slow.

The product lacks differentiation.

Exit barriers are high.

Jockeying for Position


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Focus on selling in fastest growing segments.

Avoid confrontation with competitors having highexit costs.

Strategies for reducing rivalry


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Assess the forces affecting competition in theindustry and their underlying causes.

Identify companys crucial strengths and weaknesses.

Devise plan of action:

Positioning the company

Influencing the balance

Exploiting industry change

Formulation of Strategy


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Knowledge of companies capabilities and the causesof competitive forces.

Find out where company should confrontcompetition and where it should avoid.

Positioning the Company


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Balance of forces is partly external and partly incompanys control.

Company can devise a strategy that is meant to alterthe causes of competition.

Influencing the Balance


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Industry trends keep on changing which can reduceor increase the competition.

By analyzing the competitive forces, a company canspot an opportunity and set up a diversificationstrategy for itself.

Exploiting Industry Change


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Example: TATA NANO


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Threat of new entrants isinfluenced by

Overall

Rating:LOW

Factors Tata NANO

Advantages

Threat of new

entrants

Entry Deterring Price Yes, The Price is Rs130,000.

Low

Retaliation by TATA in

case of competition

Yes, because of large

resources.

Low

High Entry Costs Yes,TATA spent Rs17oo* crore as initialinvestment + 4 yearson research

Medium because ofreverse engineeringprocess andavailability ofresources.

Experience HIGH because of itsparentexperience(TATAMotor)

Low

Other Cost advantages Yes** Low


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Bargaining Power of Buyers is

influenced by

OverallRating:LOWFactors Tata NANO

Advantages

Buyer Power

Differentiation Price , Durability ,Brand equity

Low

Concentration Large number ofconsumers

Low

Profitability Easy Availability ofloans

Low

Quality Car has passed thefull frontal crash andside impact crashPassed Govt. Test ofemission, noise andvibration

Low


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Bargaining Power of

Suppliers is influenced by

Factors Supplier Power

Concentration High Low

Organization/cartel No Low

Diversification of

supplier products

No Low

Overall

Rating:LOW


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Threat of Substitute product

is influenced byFactors Threat of substituteAvailability Same category -NO low

Other Category

substitutes

Yes, but, minimal

extent e,g. High endbikes and other carmodels likeReva,Alto

Medium

Time Lag inavailability of samecategory product

High Low

Quality of substitute Quality influencesthe customer.

Low in short term

OverallRatingLow


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Rivalry among Existingcompetitors is influenced by

Factors Rivalry amongexisting

competitors

Brand Image Brand equityinfluences thecustomer

Low among samecategory

No. of Competitors Negligible in shortterm

low

Size of payoff Depends on Volume Low

Switching costs Medium ascustomers canswitch to otherproducts

Medium

Origin ofcompetitors

Diverse High

Overall

RatingMedium


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The key to growth is:

To stake out a position less vulnerable to attack fromcompetitors.

This can be achieved by:

Solidifying relationships with favorable customers


Backward or forward integration

Innovation

Conclusion


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Thank You

Porter's 5 Forces_SM2

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