Strategic Five Forces

8/6/2019 Strategic Five Forces

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Business Policy 445External Environment


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C ompanys External Environment

C omponents of macroenvironment


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7 Strategic Questions about aC ompanys Industry / Environment

What Are the Industrys Dominant Economic Features? What Kinds of Competitive Forces Are Industry Members

Facing, and How Strong Is Each Force?

What Factors Are Driving Industry Change and WhatImpacts Will They Have? What Market Positions Do Rivals OccupyWho Is

Strongly Positioned and Who Is Not?

What Strategic Moves Are Rivals Likely to Make Next? What Are the Key Factors for Future Competitive

Success?

Does the Outlook for the Industry Present an AttractiveOpportunity?


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Q1: Industrys Dominant EconomicFeatures

Market size and growth rate Number of rivals Scope of competitive rivalry (Geographic,

population & product lines)

Buyer needs and requirements Degree of product differentiation Product innovation Supply/demand conditions Pace of technological change Vertical integration Economies of scale Learning and experience curve effects


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7 Strategic Questions about aC ompanys Industry / Environment

What Are the Industrys Dominant Economic Features? What Kinds of Competitive Forces Are Industry Members

Facing, and How Strong Is Each Force?

What Factors Are Driving Industry Change and WhatImpacts Will They Have? What Market Positions Do Rivals OccupyWho Is

Strongly Positioned and Who Is Not?

What Strategic Moves Are Rivals Likely to Make Next? What Are the Key Factors for Future Competitive

Success?

Does the Outlook for the Industry Present an AttractiveOpportunity?


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Q2: C ompetitive Forces of the Industry

Understanding industrys competition and profitability =analyzing industrys underlying structure in terms of thecompetitive forces.

Factors affecting industry profitability in the short run thebusiness cycle, weather, etc. Industry structure, reflected in the competitive forces, sets

industry profitability in the medium and long run.

Key analytical tool Michael Porters Five-Forces Model.


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Q2: C ompetitive Forces of the Industry

(Porter, 2008)


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M ichael Porter on Five C ompetitiveForces

http://www.youtube.com/watch?v=mYF2_FB C vXw


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3 Steps for Analysis of C ompetitiveForces

Step 1 - Identify the specific competitivepressures associated with each of thefive forces.

Step 2 - Evaluate the strength of eachcompetitive force -- fierce, strong,moderate to normal, or weak.

Step 3 - Determine whether the collectivestrength of the five competitive forces isconducive to earning attractive profits.


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C ompetitive Pressures Among RivalSellers

Forms of rivalry: price discounting, new product introductions, advertising campaigns, and service improvements, etc.

High rivalry limits the profitability of an industry The degree to which rivalry drives down an

industrys profit potential depends on:a) the intensity with which companies compete and,b) the basis on which they compete.


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The intensity of rivalry is greatest if:

Competitors are numerous / are roughlyequal in size and power.

Industry growth is slow. Exit barriers are high. Rivals are highly committed to the business

and have aspirations for leadership.


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Most destructive rivalry price competition occurs when:

Products or services of rivals are nearlyidentical and there are few switching costsfor buyers.

Capacity must be expanded in largeincrements to be efficient.

The product is perishable.


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T hreat of New Entrants

If entry barriers are low, the threat of entry is high andindustry profitability is moderated.

It is the threat of entry, not whether entry actually occurs,that holds down profitability.

Barriers to entry: Supply-side economies of scale

Demand-side benefits of scale

Customer switching costs

Capital requirements Incumbency advantages independent of size

Unequal access to distribution channels

Restrictive government policy


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T he Power of Suppliers

Powerful suppliers capture more value by: Charging higher prices, Limiting quality or services, or Shifting costs to industry participants.A supplier group is powerful if: More concentrated than the industry it sells to; Does not depend heavily on the industry for its revenues; Industry participants face switching costs in changing

suppliers; Suppliers offer products that are differentiated; There is no substitute for what the supplier group

provides; The supplier group can credibly threaten to integrate

forward into the industry.


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T he Power of Buyers

Buyers are powerful if they have negotiating leverage.Powerful customers capture value by: forcing down prices, demanding better quality or more service (thereby driving up

costs), and generally playing industry participants off against one another.A customer group has negotiating leverage if: There are few buyers, or each one purchases in volumes that

are large relative to the size of a single vendor. (Monopsony) The industrys products are standardized or undifferentiated. Buyers face few switching costs in changing vendors. Buyers can credibly threaten to integrate backward and

produce the industrys product themselves if vendors are tooprofitable.


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T he T hreat of SubstitutesSubstitute products two or more products for which an

increase in the price of one leads to an increase in the demandfor the other.

Substitute products or services limit an industrys profitpotential by placing a ceiling on prices.

When the threat of substitutes is high, industry profitabilitysuffers.

T he threat of a substitute is high if:

There is an attractive price-performance trade-off to theindustrys product

The buyers cost of switching to the substitute is low.


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T he T hreat of Substitutes

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Strategic Five Forces