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Porter’s Five Forces
Transcript of Porter’s Five Forces
think oligopolies or monopolies
(Ex: oil industry) There are certain factors that make suppliers’ bargaining power stronger: Suppliers – Bargaining Power 2. High switching costs:
difficult or expensive to change suppliers
(Ex: Microsoft – difficult switch to Linux or Apple) 3. Supplier Competition threat:
forward vertical integration (Ex: Airline and travel agencies - if your supplier buys you out or cuts you out of the business) This may be the most important environmental factor. Always knowing what your customers want will allow you to innovate and create products or services that they need
Buyer’s power can be very strong, especially if: Buyers – Bargaining Power 1. Concentrated buyers: Few amount of buyers and a large amount of sellers. They can pressure a company in decreasing their prices (Ex: Walmart in USA). 2. Low switching costs: If buyers can easily find substitutes, they can pressure the supplier a lot more (Ex: rice brands in Colombia) 3. Buyer competitor threat: if buyers can supply themselves without passing by the supplier, getting rid of the middle man. Backward vertical integration (Ex: Shop in Colombia – if you buy directly from large shopping centers, the Shop will disappear). The Porter´s Five forces is a strategic model made by the economic and teacher Michael Porter of the Harvard Business School in 1989. Barriers to entry are what prevent a company from entering a market. These factors make high barriers of entry for potential entrants: POTENTIAL ENTRANTS – THREAT OF ENTRY 1. Scale and experience: economies of scale (high production levels and expansion with lower costs), investment requirements, experience in the production of the P or S. 2. Access to supply or distribution channels: companies present in the market may have great relationships with suppliers & buyers making it hard to enter. They may even own distribution channels (vertical integration). 3. Expected retaliation: Price wars. 4. Government action: Patent protection, regulation of markets, direct government action. 5. Differentiation: Is the entering company sufficient different to make changing P or S worthwhile? Threat of Substitutes Substitutes can reduce demand for a particular class of P or S as customers switch to the alternative. For example: The bus is a substitute to the car; Pasta is a substitute to rice. The simple risk of substitute is that they influence the prices that can be charged in an industry. Two important things to keep in mind when talking about substitutes: 1. Price/Performance Ratio: A substitute remains a threat, even if it is more expensive, when it offers performance advantages that customers value. The ratio of price to performance matters; not the simple price. 2. Extra-industry effects: Substitutes are not competition, they are P or S that people could use instead of the ones a company offers. The more threats of substitution exist, the less attractive is the industry. Competitive Rivalry within an Industry Competitive rivals are the direct competition that a company has.
They are the organizations with similar P or S aimed at the same customer groups. Factors influencing how competitive rivalry is are:
1. Competitor Balance: if competitors are of equal size, there is high risk of fierce competition 2. Industry Growth Rate: in a growing market everybody wins; whereas in a declining market any growth means someone else’s decline. 3. High Fixed Costs and High Exit Barriers: HFC & HEB mean high rivalry because failure means millions lost. 5. Low differentiation: if P or S is so similar that there is little differentiation, there will be high competition on price – the only differentiating factor. THANKS... NATHALIE CHAPARRO