Transcript: Substitutes * Industries must distance themselves to survive! ? Low switching costs for buyers 7 End users may be further empowered by manufacturer (not seller) employs a pull strategy, making them demand a certain product at the retailer - hence increasing manufacturer bargaining power towards seller. The Power of Consider who the entrants are of course. Small startups or big ugly corporations? Equal size Workers union Mono/oligopolistic supplier situation Always present The investment to enter; asset heavy, scale Entry Barriers: geographical location, laws, current competitive situation. Incumbency advantages independent of size Bargaining power of suppliers Rory Integration forward Capital requirements Newcomers can expect retaliation from incumbents who have responded vigorously to new entrants in the past, possess substantial resources to fight back, seem likely to cut prices and industry growth is slow. Creates a ceiling price on product E.g. samsung that used to be a components supplier for Sony (E.g. R&D and lobbying) Pilots union When the threat of a substitute is high: Similarities with low switching costs Entry Barriers: Number/size of buyers Knowledgeable customers MB: High because of high switching cost The major sources Suppliers Easy to overlook Network effect Loyality, people may be connected or be happy to be grouped with other customers. If one large firm supplying. E.g. one dominant player to which most customers are connected. Existing competitive situation Economics of scale (E.g. Bloomberg system) New Entrants Government policy Unfamiliarity Switching Costs Article #5 The supplier is not dependent on single industry. Benefits of scale Rivalry Among Existing Competitors Newcomers are likely to fear expected retaliation if: Incumbents have previously responded vigorously to new entrants. Incumbents possess substantial resources to fight back, including excess cash and unused borrowing power, available productive capacity, or clout with distribution channels and customers. Incumbents seem likely to cut prices because they are committed to retaining market share at all costs or because the industry has high fixed costs, which create a strong motivation to drop prices to fill excess capacity. Industry growth is slow so newcomers can gain volume only by taking it from incumbents. Suppliers offer differentiated Threat of a substitute is high if: External Threat of substituting product P5F The power of Substitutes maybe be very different from industry's product *Father's Day gift High fixed, low marginal costs Sam Substitutes Travel or Video-Conferencing Aluminum OR Plastic Express Mail OR Email Indirect Threats Software sold to travel agents Any other indirect examples??? If price of product is a significant fraction of the cost structure =price sensitivity = will be likely to look for best deal Attractive price-performance tradeoff Slow market growth The Threat of Not only where it is now, but in which direction is it moving? Lower entry barriers? Subsidiaries? New technology? Group #2: Justin Decker, Justin Dudley, John Lindell, & Shelbee Jensen High exit barriers Industry profitability suffers Switching costs intermediate buyers (not end users) may have significant bargaining power, as they may affect purchasing decisions on customers downstream. Balanced Scorecard Powerful Suppliers Effects: Increased competition pressure on prices, shift in bargaining power (depending on the size of the entrant) Expected retaliation (Supply side) High commitment Industry faces high switching costs (E.g. Patented drugs for hospitals) Capacity increments Bargaining power may depending on industry. E.g. Pilots Union Internal Johanna Monopoly Backward integration No Substitutes Buyers Bargaining power of customers Price competition* New entrants Perishability Price sensitivity Unequal access to distributions channels Standardized or Unique? (Demand side) That Shape Strategy Another element may be how the entrants expect the incumbent to react Peter
Transcript: In pairs: 1. read through the example hand out, detailing a P5F analysis of the UK music industry. 2. Complete a P5F analysis of a streaming service of your choice. prepare a presentation. N.B. To complete this task adequately you are going to need to spend some considerable time researching Threat of New Entry Power is affected by the ability of people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it. So ask yourself the questions: What’s the threat of new businesses starting in this sector? How easy is it to start up in this business? What are the rules and regulations? What finance would be needed to start-up? Are there barriers to entry which give you greater power? Supplier Power Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are. Examine how many suppliers are in the market? Are there a few who control prices? Or many so prices are lower? Do your suppliers hold the power? How easy is it to switch, what’s the cost? Competitive Rivalry What is important here is the number and capability of your competitors. If you have many competitors, and they offer equally attractive products and services, then you'll most likely have little power in the situation, because suppliers and buyers will go elsewhere if they don't get a good deal from you. On the other hand, if no-one else can do what you do, then you can often have tremendous strength. What’s the level of competition in this sector? What’s the competitor situation? Many competitors and you’re all in a commodity situation or a few? How can I use Porters five Forces? To apply Porter’s Five Forces, you need to work through these questions for each area: Force 1: Threat of New Entry? Force 2: Buyer Power? Force 3: Threat of Substitution? Force 4: Supplier Power? Force 5: Competitive Rivalry? Porters 5 forces Simon Thomas Buyer Power (Customers) Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, then they are often able to dictate terms to you. Questions here include: How powerful are the buyers? How many are there? Can the buyers get costs down? Do they have the power to dictate terms? Threat of Substitution This is affected by the ability of your customers to find a different way of doing what you do – for example, if you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power. How easy is it to find an alternative to this product or service? Can it be outsourced? Or automated? What is Porter’s five Forces model? This model helps marketers and business managers to look at the ‘balance of power’ in a market between different types of organisations, and to analyse the attractiveness and potential profitability of an industry sector. It’s a strategic tool designed to give a global overview, rather than a detailed business analysis technique. It helps review the strengths of a market position, based on five key forces. Porter’s Five Forces works best when looking at an entire market sector, rather than your own business and a few competitors. Task
Transcript: ARE WE HAVING FUN? "Easy drinking, Ease of Selection, Sense of fun and adventure." Rivalry: Competition in the aero engine market is dominated by 3 firms. Rolls Royce Case Study RIVALRY YELLOWTAIL WINERIES The number of suppliers is heavily saturated,leaving them with fragmented power. "BOS" CASE STUDY THREAT OF SUBSTITUTES BOS Threat to entry is small, largely due to the complexity of the process. Two on One? That's not fair! ALL SYSTEMS IN SYNC THREAT OF NEW ENTRANTS BLUE OCEAN STRATEGY ALL SYSTEMS ARE GO! REFERENCES A company can use innovation to differentiate itself. The threat of substitutes is minor, with little air travel becoming increasingly popular, Rolls Royce concedes there are some credible threats however. We're lovers not fighters, that's why we're doing are own thing! STRATEGY by Andrew Burke, André van Stel, and Roy Thurik Kim, WCh, Mauborgne, R. 2005c. Value Innovation: A Leap into the Blue Ocean, Journal of Business Strategy 26, 22-28. Kim, WCh, Mauborgne, R. 2005b. Blue Ocean Strategy: From Theory to Practice, California Management Review 47, 105-121. Porter, ME. 1998. Clusters and the New Economics of Competition, Harvard Business Review, 76, 77-90. Porter, ME. 2000. Location, Competition and Economic Development: Local Clusters in a Global Economy, Economic Development Quarterly, 14, 15-34. Websites: http://businesscasestudies.co.uk/rolls-royce/competing-within-a-changing-world/porters-five-forces-model.html#axzz2kI9yODtW http://www.google.com.au/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&sqi=2&ved=0CCkQFjAA&url=http%3A%2F%2Fblueoceanstrategy.org%2FPresentation.ppt&ei=pSeAUu-BOoXAiQfXp4HoCw&usg=AFQjCNELnOUIppJwMB3YCrp6MDJ4JpPPPg Now we move onto BOS aKa "BLUE OCEAN STRATEGY" PORTERS 5 V BOS PORTERS 5 V BOS??? WHICH TEAM ARE YOU ON?? Yellow Tail eliminated "Oneological terminology and distinctions, Aging qualities, Above the line marketing." SUPPLIER POWER The number of aero engine buyers are low, therefore handing power to the buyers. EVOKE NEW DEMAND ELIMINATING COMPETITION PORTERS 5 BUYER POWER By reducing "Wine complexity, Wine range, Vineyard prestige." Making the competition irrelevant. Entry into the market weakens an already established companies power. Intensity of the competition among existing competitors in the market. This is how much control buyers have to drive down your products price. This is how strong the position of a seller is. SO LETS COMPARE! THANK YOU! Creating the Market PORTERS 5 FORCES CREATE YOUR OWN MARKET Power of Suppliers Threat to Substitutes By creating and differentiating products a company can sets themselves apart from the rest. How easily consumers can switch to competitors products. COMPETITION? WHAT COMPETITION? Power of Buyers Threat of Entry "Price versus Budget Wines, Simplicity of retail store environment, Enthusiasm of Sales People." It is critical that company molds its thinking striving for innovation and a well adjusted cost strategy. EVOKED NEW DEMAND
Transcript: Porters Five Forces Unequal Access to Distribution Channels •Licensing •Foreign Investment Restrictions •Patents Industry Analysis in Practice •Subsidies •Research & Development Threat of Entry SAUCE Importance of understanding barriers to entry 1- As an established firm we can prevent competition. 2- As a new firm we know how to overcome those barriers if possible. Porters Five Forces Government can also Ease Entry What are the porters five forces? Threat of entry, power of suppliers, power of buyers, threat of substitute, and rivalry among existing competitors. Customers, suppliers, potential entrants, and substitute products. These five forces define an industries structure and shape the nature of competitive interaction with in an industry. CAPITAL REQUIREMENTS Industry Analysis in Practice The point of industry analysis is not to declare the industry attractive or unattractive but to understand the foundations of competition and root cause of profitability. Analysis need to look at industries structure quantitatively, rather than lists of qualitative factors. The structure of industries defines the gap that is between revenues and costs. By: Trevor Platt Porters Five Forces SAUCE INCUMBENCY ADVANTAGE RESTRICTIVE GOVERNMENT POLICY Barriers to Entry INCUMBENT What dives an industry? An industry is driven by competition and profitability. First step is understanding the appropriate time horizon. Which is usually a full business cycle or 3-5 years is fine. 1- Supply-Side Economies of Scale Producing larger volumes at lower cost per unit 2- Demand-Side Benefits of Scale People buy from you because everyone else does 3- Customer Switching Costs Cost of changing suppliers •PROPRIETARY TECHNOLOGY •BETTER MATERIAL SOURCES •BETTER GEOGRAPHIC LOCATION •ESTABLISHED BRAND IDENTITY •EXPERIENCE OF THE LAST 14 PRESIDENTS ONLY 5 HAVE LOST RE-ELECTION What happens when an large industry does incorporate porters five forces intensely? No company gets attractive returns on investments. What happens when porters five forces are benign in industries like software, and soft drink companies? Then they are profitable. •FIXED FACILITIES •CUSTOMER CREDIT •INVENTORY BUILD-UP •START-UP LOSES •UP-FRONT ADVERTISING •RESEARCH & DEVELOPMENT
Transcript: Product for Product - Post v email Improved processes/product that reduce the need for other processes products - Phone cameras replaced point and press - Jessops Competition for the same money - Furniture v White Goods New Entrants Size - Large/Less competition Growth - In a growth industry it is easy to grow Global Markets Over Capacity Differentiation High Costs If buyers have any power and can negotiate then the industry is less attractive Concentration - Banks Switching costs - Aero engines Brand - Levis Forward Intergration easy Customer highly fragmented - Brewery E of S - Nestle Capital - BMW Access to distribution - Breweries Experience/Reputation - Boeing Retaliation - BA Government legislation - Licences Differentiation - Apple Concentration of buyers Volumes - Tescos Homogenous product High % of costs Switching is low Backward intergration is easy Substitutes The pressure of substitutes can lower the attractiveness of the industry The industry will be more competitive the easier it is to enter or exit the industry Suppliers Porters 5 Forces Buyers If suppliers have high bargaining power over a company then the industry is less attractive Competitive Rivalry The nature of competition within the industry will have an impact on the potential to make profits Some industries are more profitable than others. Why - The answer lies in understanding the dynamics of competitive structure in an industry The most influential analytical model for assessing the nature of competition in an industry is Michael Porter's Five Forces Model
Transcript: Power of Buyer Power of Buyers LOW The power of buyers are low as the product is highly differentiated in regards to being the only female imitated form of contraception to protect users from both pregnancies and STIs, therefore there are no substitutes available. Users may use contraceptives such as the pill, implant and the coil, which are free with the NHS as a substitute however these do not protect from STIs. The switching of costs would be low as the Femex will be priced marginally at an affordable price allowing consumers of all incomes to afford it. LOW To inform and educate the targeted segment (women aged 16-30 years old) about the advantages of hormone-free contraception and the impact hormonal contraception can have on both mental and physical health, whilst reaching an audience of 15,000 on social media within the first 2-3 months. S.M.A.R.T. GOAL SMART Goal Competitive Rivalry Competitive Rivalry -Medium The female condom market is small, the only competitor being the FC2 which can only be ordered online. Femex will be accessible both online and in stores removing this threat. However male condom industry leaders: Durex may replicate the product, which would be high risk as they are a pre-established brand with a high following. Requires a high switching cost of people converting from hormonal contraception to the Femex. MEDIUM The social media: Facebook, Twitter, will have a collective following of 10,000 in the first 3 months, and regularly engage with the audience with polls, competitions, and support lines to build a strong relationship with the audience, encouraging loyalty. S.M.A.R.T. GOAL SMART Goals Threat of Substitute Threat of Substitutes LOW Femex will be the only female-initiated form of contraception which prevents both pregnancies and STIs which can be bought nationwide in high-street stores. Substitutes of other branded female condoms can be purchased online or prescribed, however Femex will be more widely accessible, via the use of intermediaries and online stores. There are other forms of contraceptives substitutes: the pill, coil, and implant. However these do not protect from STIs and can impact the user's mental health. One in four women believes the pill has negatively impacted their mental health (Petter, 2019). LOW To have Femex stocked nation-wide in a variety of easily accessible high street shops: Boots, Superdrug, Ann Summers… whilst also stocked in supermarkets within the first 2 years of operations. S.M.A.R.T. GOAL SMART Goal Supplier Power Supplier Power LOW Female condoms can be manufactured using multiple materials: polyurethane, polyisoprene, or synthetic nitrile. Therefore the supplier power is low. If the suppliers raise the price, change the quality or reduce availability alternate products can easily be sourced and used, and this will not drastically impact the pricing. LOW Threat of New Entry Threat of New Entry HIGH The female condom market is small creating a threat of new entry and replications of product, however Femex will utilize the time advantage in the first 6 months of business to ensure maximum reach and conversions, and a strong push on the support and care to create loyalty. HIGH Complete monthly consumer feedback and small marketing business audits for the first year of business to be aware of the markets changes, needs, and demands, creating Femex the opportunity to act on these before new entry companies do. S.M.A.R.T. GOAL SMART Goal
Transcript: (Barney, 2007) As seen in the diagram above, when a product is too expensive the brand will manage a strategy that makes the item seem more appealing. (Wylie, 2015) This map shows the concentration of supermarkets in Central Manchester in 2015. The marked locations highlight all the choices the consumer has and how hard it will be for each retailer to compete in such a dense environment New entrants might find that the economies of scales make it difficult to surface as a new brand. Some of the considerable factors for a start up supermarket include high costs per unit, high interest rates on loans and scale of operations. Perceptively, “large-scale economies, as understood here, mean reductions in input coefficients that result from an increase in the size of the market” (Balassa, 2019). The cost of switching for the supplier is very high and proves why brands stick to their core strategies. This might not be through direct costs but instead costs to the brand identity. A brand such as M&S wouldn’t become a discounter due to the upkeep of their specialty services and dislike of the “me-too” image (Gronlund, 2013). There is little cost to changing your grocery supplier and usually the incentive is saving. The average UK consumer now saves up to from switching from Tesco to Aldi (Simon, 2018). The number of suppliers effects the amount of control each brand holds over the market. Due to the small amount supermarkets in the UK it has been easier for suppliers to manipulate pricing strategy. A form of this is “Zone Pricing” where shops bases their prices on average income of the consumers in the area (Franco, 2014). Barriers to entry restrict how many new brands make it into the market. These barriers include; start up costs, brand salience and lack of strategic management. Explaining why there are currently only few successful names. Discounter brand Choppies defied the odds in 2015 when their expansion began with 1 store to 31 in 7 years. They did this by using “relatively cheap products with a strong focus on its own-label brands” (Nair, 2016). The consumer holds a sense of control over suppliers when it comes to what we do and don’t buy. This is evident when low selling products are swapped for products in demand. The event of Brexit will impact the UK supermarkets heavily as of food we receive in the UK is arriving from the EU (Mckevitt, 2019). Aldi and Lidl dominate the discounter sector with their cut prices and no-frills strategy. Ways they save resources include not focusing on customer service and selling their fruit directly from cardboard boxes (Schmid, 2018). 32% After the recession in 2008, the average UK consumer has become more price sensitive. This has meant that we see of consumers shopping at several stores to save money through competitive pricing (Skrovan, 2017). 81% 76% 16% Each brand has a unique selling point they provide for the consumer. Whether that is Sainsbury’s fresh sushi counter or Waitrose free loyalty coffee. “A firm that has a valuable, rare, and imperfectly imitable culture enjoys a sustained competitive advantage that reflects that culture” (Barney, 2007). KPI’s are important are they can change the perceptions of every shareholder to the business. Tesco pride themselves on their KPI of colleague satisfaction (Tesco, 2016).
Transcript: Summary Weak http://www.free-management-ebooks.com/faqst/porter-07.htm Source of Information Ibis World Weak Bargaining power from suppliers (fewer suppliers = more power) Ease of substitution (switching costs, inclination to change) Buying power of consumers (product differentiation; power = high w/ small # of consumers) Competition (high = few businesses selling same product/service; advertising/price wars) Barriers to entry (Easy entry = greater risk for loss of market share) Considerations: today's market is very different from that of the late 70's (rate of change & market stability). only provides you with a "snapshot" of the environment does not include non-market forces outdated Function & Purpose Josh Barsness Meagan Faust Andrew Fiola Aelise Nieves Brian Schuette Attractive Conclusion https://www.strategicmanagementinsight.com/tools/porters-five-forces.html http://www.businessnewsdaily.com/5446-porters-five-forces.html Works Cited Named after Michael E. Porter, identifies and analyzes five competitive forces that shape every industry The framework for analyzing the level of competition within the industry and the business strategy Analyzes a company’s competitive advantage from an external source Porter's 5 Forces Few = Low competition Nasdaq How We Use It Higher barriers to enter
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