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The five competitive forces that shape strategy
Transcript of The five competitive forces that shape strategy
Deeper in details
The 7 major barriers of entry :
The power of suppliers
The power of buyers
Customer groups have negotiation leverage if :
Rivalry among existing competitors
The Threat of substitutes
Rivalry among existing
The power of
The Threat of
introduced to you by:
The power of
The threat of
The five competitive forces that shape strategy
Supply-side Economies of scale.
Demand-side benefits of scale.
Customer switching costs.
Incumbency advantages independent of size.
Unequal access to distribution channels.
Restrictive government policy.
Expected retaliation could be a threat if :
Incumbents have previously responded vigorously to new entrants.
Incumbents possess substantial resources to fight back.
Incumbents seem to cut prices.
Industry growth is slow.
Supplier groups are powerful if :
They are more concentrated than the industries they sell to.
supply group doesn't depend heavily on the industry for revenues.
industry participants face switching costs when changing suppliers.
Suppliers offering products that are differentiated.
There is no substitute for what the supplier provides.
The supplier group can threaten to integrate forward in the industry
who is a supplier ?
A supplier is someone whose business is to supply a particular service or commodity provider.
what is negotiation leverage ?
In negotiation, leverage is the ability to influence the other side to move closer to one's negotiating position. In our case negotiation leverage is the bargaining power that buyers have when purchasing goods and services.
There are few buyers or each one purchases in volumes that are large relative to the size of a single vendor.
The industries products are standardized or undifferentiated.
Buyers face few switching costs in changing vendors.
Buyers can credibly threaten to integrate backwards and produce industry's products themselves.
What is price sensitivity?
The degree to which the price of a product affects consumers purchasing behaviors.
Buyers group is price sensitive if :
The product it purchases from an industry is a significant fraction of it's cost structure.
Buyer group earns low profit , is strapped for cash or is trimming purchasing costs.
The quality of buyers product or service is little affected by the industry product.
Industry's product has little effect on buyers other costs.
Substitute is something that has same function but different methods.
High threat of substitutes :
Price performance trade off.
Low cost for switching.
Price competition is quickly to occur if :
Similar products or services with low switching costs.
High fixed cost, low marginal cost.
Expanding capacity in large increments.
Intensity and highest if :
Great number of competitors
High exit barriers
Lack of familiarity
Rivalry forms :
New product introductions
Still More to Know !
Factors not forces
Industry growth rate
Technology & innovation
Complementary products & services
Don't let the industry's growth rate the main objective of the strategy.
Statistics prove that low technology with:
enough switching costs
high entry barriers
are more profitable.
Government is not considered a sixth force because government involvement is neither good nor bad for industry profitability
To understand the influence of government on competition, analyze how specific government policies affect the five forces
Complements are products or services consumed together with an industry's product.
Complements arise when the customer benefit of two products together is greater than the sum of each product's value by it's own.
Changes in industry structure
Shifting threat of
changes to any of the seven barriers described above can raise or lower the threat of new entry.
strategic decisions of leading competitors often have a major impact on the threat of entry.
As the factors underlying the power of suppliers and buyers changes overtime their clout rises or declines.
Shifting threat of substitution
why substitutions become more threating ?
Advances in technology is the blame
New bases of rivalry
The nature of competition is changed by introducing new capabilities and ways of competing
Implication for strategy
Strategy : Developed by understanding the forces that shape industry competition.
(Strategy is a wall…. Forces are the bricks)
Every company should know the average profitability of its industry & how it's changing overtime
Forces are the basic line for sizing up company's strengths and weakness.
Best strategies help mangers toward many possibilities.
Positioning the company:
Aims to make a brand occupy a certain position relative to competing brands.
Applied by emphasizing the distinguishing features of their brand
Create a suitable image through advertising
once it's positioned it's very difficult to reposition it without destroying it's credibility
Wake up!!! we've got a video.
Difference in industry profitability
Industry analysis in practice
Understands the groundwork of competition and the causes of profitability.
Looks precisely at the structural base of profitability.
Prices and costs are directly affected by the strength of the Five Forces.
Does NOT just list positives and negatives but looks at an industry as a whole, systemic terms.
Steps in industry analysis :
Define the applicable industry
Identify participants and divide them into groups.
Determine which forces are strong and which are weak and why.
Determine industry structure as a whole and test the analysis for consistency.
Analyze positive and negative changes in each force.
Identify aspects of industry structure that might be influenced by competitors, new entrants or by your company.
common Pitfalls :
Defining the industry too broadly or too narrowly.
Paying equal attention to all forces rather than digging deeply into the most important ones.
Confusing effect with cause.
Using the framework to declare an industry attractive or unattractive rather than using it to guide strategic choices.
Defining the relevant industry :
Crucial for industry analysis.
Should not be defined too broadly or too narrowly.
The Boundaries of industry consists of two
Scope of the product
We are almost Done!!!
Thank You !!!
Soft drinks and Software are 6X more profitable than
Good industry analysis: