THE FIVE COMPETITIVE FORCES THAT SHAPE STRATEGY

MICHAEL E PORTERHARVARD BUSINESS SCHOOL

JOB OF A STRATEGIST

• UNDERSTAND AND COPE WITH COMPETITION

• NOT ONLY DIRECT COMPETITION• DRIVERS OF PROFITABILITY SAME

ACROSS INDUSTRIES• INTENSE FORCES-DRIVE DOWN

PROFITABILITY• BENIGN FORCES-DRIVE UP• INDUSTRY STRUCTURE DECIDES THE

FORCES

SHAPING STRATEGY

• THE FIVE COMPETITIVE FORCES• POTENTIAL ENTRANTS• SUPPLIERS• CUSTOMERS• SUBSTITUTE PRODUCTS• EXISTING COMPETITION

• DEFENDING & SHAPING THE C.F• KEY C.F SHAPES STRATEGY

FORMULATION

POTENTIAL ENTRANTS –THREAT OF ENTRY

• NEW ENTRANTS• ADD ADDITIONAL CAPACITY

• PUT A CAP ON PROFIT BY DRIVING DOWN PRICES

BARRIERS TO ENTRY

• SUPPLY SIDE (INTEL)• DEMAND SIDE (IBM, e-BAY)• CUSTOMER SWITHCING COSTS (SAP)• CAPITAL REQUIREMENTS• INCUMBANCY ADVANTAGES INDEPENDENT

OF SIZE• UNEQUAL ACCESS TO DISTRBN CHANNELS-

Eg: LOW COST AIRLINES• RESTRICTIVE GOVT.POLICY• EXPECTED RETALIATION (Retail Associations

in India)

POWER OF SUPPLIERS

• MORE POWERFUL CAPTURE MORE VALUE (MICROSOFT)

• SUPPLIER DEPENDENCY (BLOOMBERG)

• DIFFERENTIATED PRODUCTS• HIGH CUSTOMER SWITCHING

COSTS

POWER OF BUYERS

• FEW BUYERS HIGH VOLUMES Eg;BSNL

• STANDARDISED PRODUCTS• LOW/MINIMUM SWITHCING COSTS• POSSIBILITY OF BACKWARD

INTERGARTION BY CUSTOMERS

THREATS OF SUBSTITUTES

• ALTERNATE CHEAPER PRODUCTS/ SERVICES

• ATTRACTIVE PRICE PERFORMANCE TRADE OFF

• SWITHCING COSTS TO NEW SUBSTITUTE LOW

RIVALRY AMONG EXISTING COMPETITORS

• NUMEROUS COMPETITORS OF EQUIVALENT SIZE

• SLOW GROWTH RATE• HIGH EXIT BARRIERS• HIGHLY COMMITTED RIVALS• HIGH PRICE COMPETITION

VISIBLE INDUSTRY ATTRIBUTES

• INDUSTRY GROWTH RATE• TECHNOLOGY AND INNOVATION• GOVERNMENT• COMPLEMENTARY PRODUCTS AND

SERVICES (Eg: Microsoft, Antivirus bundled PC)

CHANGES IN INDUSTRY STRUCTURE• INDUSTRY DEVELOPMENTS DICTATE

CHANGE• SHIFTING THREAT OF NEW ENTRY

(Eg;PATENT EXPIRY FOR DRUGS)• CHANGING SUPPLIER OR BUYER POWER

(BIG BAZAR)• SHIFTING THREAT OF SUBSTITUTION

(Eg:PENDRIVE)• NEW BASES OF RIVALRY

IMPLICATIONS FOR STRATEGY• FIVE FORCES REVEAL MOST SIGNIFICANT OF

THE INDUSTRY ASPECTS• SWOT ANALYSIS• SHAPING THE FORCES• POSITIONING THE COMPANY• EXPLOITING INDUSTRY CHANGE (Apple i-tunes)• SHAPING INDUSTRY STRUCTURE

• REDIVIDING PROFITABILITY• EXPNADING PROFIT POOL

DEFINING INDUSTRY

• SCOPE OF PRODUCTS/ SERVICES• GEOGRAPHICAL SCOPE

TYPICAL STEPS IN INDUSTRY ANALYSIS

• DEFINE THE RELEVANT INDUSTRY• IDENTIFY PARTICIPANTS• ASSESS DRIVERS OF COMPETITIVE

FORCES• DETERMINE OVERALL INDUSTRY

STRUCTURE• TEST ANALYSIS FOR CONSISTENCY

TYPICAL STEPS IN INDUSTRY ANALYSIS (Contd..)

• ANALYSE RECENT AND LIKELY FUTURE CHANGES• POSITIVE / NEGATIVE

• INDUSTRY ASPECTS INFLUENCED BY OTHER FORCES

• COMMON PITFALLS

COMPETITION AND VALUE

• UNCOVERING OPPORTUNITIES• THINKING STRUCTURALLY ABOUT

COMPETITION• ATTRACTION TO THE INDUSTRY• CREATE TRUE ECONOMIC VALUE

THAN “ PLEASSING THE WALL STREET”

THANK YOU

SLIDES BY P. RAJU IYER