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Competitive Strategy

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Cameron Just

on 23 July 2014

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Transcript of Competitive Strategy

Competitive Strategy
Porter Five Forces Analysis
of Industry Competition

Buyers
Industry
competitors

Suppliers
Potential
Entrants

Substitutes
Professor at the Institute for Strategy and Competitiveness, Harvard Business School

wrote
Competitive Strategy: Techniques for Analyzing Industries and Competitors
, 1980

Porter Five Forces Analysis
– a framework for describing factors that affect the profitability and attractiveness of industries
Michael Porter
The five forces determine the intensity of industry competition and profitability

Competition in an industry goes beyond the established players

The strongest forces become crucial for forming strategy

Perfect competition: entry is free, no bargaining power with buyers or suppliers, and rivalry is unlimited due to identical firms and products

Developed in response to the SWOT model, which Porter found unrigorous and ad hoc
Threat of new entrants
ENTRY BARRIERS*
economy of scale
capital requirements
switching costs
patented know-how
access to distribution channels
product differentiation & brand
government policy
ENTRY DETERRING PRICE
prices too high: encourage new entrants
prices too low: lowers profits of incumbents
EXPECTED RETALIATION
firms with illiquid assets
slow industry growth
history of retaliation
resources to fight back
Intensity of rivalry among existing competitors
Numerous or equally balanced competitors

Slow industry growth - must compete for share of the existing market instead

High fixed costs
High exit barriers*

Capacity expansion
comes in large segments

Lack of product differentiation or switching costs


Threat of substitute products

Products/services that perform the same function

Substitutes put a ceiling on prices

Biggest threat comes from potential
substitutes produced in highly profitable industries

Low switching costs


Eg: Security guards vs electronic alarm systems
Stockbrokers vs real estate, money market
Game consoles vs mobile gaming apps

Industry Barriers & Profits
Exit Barriers
Low

High
Entry Barriers
High

Low
Low, stable returns
Low, risky returns
High, stable returns
High, risky returns
Bargaining power of buyers
stronger when:

it purchases a large volume of seller's overall sales
standard, undifferentiated product
fewer switching costs
buyer earns low profits
buyer poses a threat of backwards integration
product is not essential to the quality of the buyer's end product
buyer has full information
Bargaining power of suppliers
stronger when:

supplier's industry is more concentrated
absence of substitutes
products are differentiated
high switching costs
supplier poses a threat of forward integration
Some practical
examples

Airlines
Power of suppliers:
High
Threat of entrants:
Low
Power of buyers:
Medium
Existing rivalry:
High
Threat of substitutes:
Low
Business in India
Power of suppliers:
High
Threat of entrants:
Low
Power of buyers:
Low
Existing rivalry:
High
Threat of substitutes:
High
Coca Cola
Power of suppliers:
Low
Threat of entrants:
Medium
Power of buyers:
Low
Existing rivalry:
High
Threat of substitutes:
Med
-High
Automotives
Power of suppliers:
Low
Threat of entrants:
Low
Power of buyers:
High
Existing rivalry:
High
Threat of substitutes:
Low
Full transcript