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Porter's Five Forces
Transcript of Porter's Five Forces
Cost disadvantages independent of size
Economies of scale
Economies of product differences
Switching costs or sunk costs
Access to distribution
Customer loyalty to established brands
Industry profitability (the more profitable the industry the more attractive it will be to new competitors)
The Five Forces are in action in all markets
Is this really true? Let's try a thought experiment!
What are the five forces at play in a given market?
1) Threat of new entrants
New entrants increase competition within the market, driving down profits. Are there any threats of new entrants to our market?
2) Threat of substitute products or services
Are there any direct or indirect substitutes for our product in this market?
Think carefully, often substitutes are not easily identified. Sometimes substitutes come from surprising places outside of the existing market.
What factors play into the choices of substitutes for the consumer?
Buyer propensity to substitute - how likely are they to find a substitute?
Relative price performance of substitute - are those substitutes truly competitive for the value?
Buyer switching costs - does it cost the buyer anything to switch their source?
Perceived level of product differentiation - do consumers recognize the differences in the products?
Number of substitute products available in the market
Ease of substitution. Information-based products are more prone to substitution, as online product can easily replace material product.
3) Bargaining power of customers (buyers)
The bargaining power of customers can be thought of as the ability of customers to put the firm under financial pressure, which determines the customer's price sensitivity. Firms can take measures to reduce buyer power, such as implementing a loyalty program. What sort of measures could be put into play in our market?
Porter's Five Forces
What factors contribute to the bargaining power of the consumer?
Consumer to supplier ratio
Degree of dependency upon existing channels of distribution
Bargaining leverage, particularly in industries with high fixed costs
Buyer switching costs relative to firm switching costs
Buyer information availability
Force down prices
Availability of existing substitute products
Buyer price sensitivity
Differential advantage (uniqueness) of industry products
RFM (customer value) Analysis
The total amount of trading
4) Bargaining power of suppliers
Supplier switching costs relative to firm switching costs - how expensive is it to find a new supplier?
Degree of differentiation of inputs - does the supply differ from supplier to supplier?
Impact of inputs on cost or differentiation - does one supplier cost more than another?
Presence of substitute inputs - are there alternate materials or services for us to make our product?
Strength of distribution channel - how is your relationship with the supplier? do you have alternates?
Supplier concentration to firm concentration ratio - how many suppliers are there compared to alternate outlets?
Employee solidarity (e.g. labor unions) - can your employees leverage their salaries?
Supplier competition: the ability to forward vertically integrate and cut out the buyer. - can your supplier deal directly with your customers?
Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm when there are few substitutes
What factors influence supplier power?
How intense is the competetive rivalry?
The level of competition in the market is directly influenced by the internal level of competition between the major players.
What factors are at play in internal competetiveness?
Sustainable competitive advantage through innovation
Competition between online and offline companies
Level of advertising expense
Powerful competitive strategy
Firm concentration ratio
Degree of transparency
As we saw in Marketing Principles and Marketing Strategy, Porter's Five Forces are very useful in analyzing the market terrain of an arts organization. We wanted to expand our understanding of this sort of analysis beyond that scope.
Industry analysis utilizing Porter's Five Forces