- Slides: 30
The Five Forces model and competitive strategies Geoff Leese September 2005 revised September 2006, July 2007, August 2008, August 2009 1
Porter’s five forces model Potential Entrants to market Threat of entry Suppliers Rivalry with competitors Bargaining Power Buyers Bargaining Power Threat of substitutes Substitutes 2
Threat of entry n More likely when ä ä ä ä n Important issues ä ä 3 Economies of scale are possible Capital requirements of entry are low Easy access to distribution channels No dominant “player” Little expected retaliation Little government/legislative intervention Low levels of differentiation What barriers exist? What is our position?
Buyer power n More likely when ä High concentration of buyers ä Large number of small suppliers ä Little risk/low cost of switching ä Alternative sources of supply – Low differentiation – High levels of competition ä High 4 risk of backward integration
Supplier power n More likely when ä High concentration of suppliers ä Cost of switching suppliers is high ä Risk of switching suppliers is high ä Supplier has powerful brand ä Supplier dominates market ä High risk of forward integration 5
Threat of substitutes n Product for Product ä Post n replaced by fax replaced by email Substitution of need ä Better quality castings reduces need for machine tools n Generic substitution ä Holiday n 6 or a new TV? Do without!
Competitive rivalry (1) Rivalry between competing organisations n Issues – n ä What is it based on? ä Increasing or decreasing? ä How is it affecting us? ä What can we do about it? 7
Competitive Rivalry(2) n Balance of rivalry ä ä n Market growth rates ä n n n 8 Lots of small, balanced competitors? Market domination? Product life cycle? Global markets? High fixed costs High cost of extra capacity Level of differentiation High exit barriers Easy acquisition
Collaboration and competition n Collaboration between buyer and seller ä n Collaboration to increase buying power ä n Collaborative R&D, marketing boards Collaboration to gain entry ä 9 NISA, SPAR, SURF? Collaboration to avoid substitution or prevent entry ä n Input and output! Honda/Rover?
Key issues n n n 10 What are the key forces at work in our competitive environment? Are there underlying forces (SLEPT analysis? ) contributing to this? Is it likely that these forces will change? If so how and why? How do our competitors stand? How do WE stand? What can be done to influence these forces?
Critical (Key) Success Factors n n 11 CSFs are aspects of strategy where you must provide better value and beat the competition Competences needed in activities which underpin each critical success factor Performance standards for these determine how competitive advantage will be achieved Advantage lost by competitor performance & CSFs changing
Identifying Critical Success Factors These are for an Industry n Ohmae gives 3 areas to consider, the 3 Cs n Customer issues n The competition n The business (or Corporation) n 12
Customers n n Who are they now & potentially Segments in the market Why do they buy from whoever General issues ä ä ä 13 price service reliability + quality tech spec brands
Competition Who & who has market dominance & why n Market factors and intensity n Resource comparisons n General issues n ä Cost and price comparisons ä Quality and service ä Logistics 14
The Business What do our competitors actually deliver to customers n What is our biggest cost area n General issues n ä Low cost, labour costs, economy of scale ä Output and quality ä People - skills, relationships ä Innovation and technology 15
Competitor Analysis n n n n 16 Who are your competitors Where are they How many What do they compete on What market share do they have Is the market segmented How strongly do they compete Are there any alliances
Strategic alternatives Growth and expansion n Acquisition n Integration n Divestment n 17
Competitive strategies n Porter’s generic strategies ä Cost leadership ä Broad-market differentiation ä Focus Cost ä Focus differentiation 18
Cost leadership (1) Low level of differentiation n Aim for average customer n Introduce improvements only when customers demands them n Pricing strategies n ä Sell at industry average, improve profits ä Sell at below average, improve market share 19
Cost leadership(2) n Needs these strengths ä Access to capital required for significant investment in process technology ä Ability to design products/services that have low production costs ä Exclusive access to low cost materials/components ä Efficient distribution channels 20
Cost leadership(3) n Advantages ä Cost advantage can protect from new entrants ä Pricing at industry average allows pricecutting if necessary n Risks ä Technology may be leapfrogged or copied ä Risk from a number of focussed cost leading enterprises 21
Differentiation(1) n Perceived quality is the key! ä Whether real or not. ä Intrinsic qualities of the product ä Pre/post sales service n 22 Allows premium pricing
Differentiation(2) n Typical strengths required ä Access to leading edge R&D ä Highly skilled and creative product development ä Strong sales team ä Corporate reputation for quality and innovation 23
Differentiation(3) n Advantages ä ä n Risks ä ä 24 Price increases from powerful suppliers can be passed on to buyers Brand loyalty protects from substitution Brand loyalty protects against market entry Buyers’ cost of switching may be high Imitation is a possible threat “Novelty” value short-lived Limits to price elasticity Customer tastes may change
Focused strategies (1) Focuses on a narrow market segment (niche market) and attempts to obtain competitive advantage on a cost or differentiation basis. n Often generates fierce customer loyalty n Concentrate on core competences n 25
Focused strategies(2) n Advantages ä Power of buyers – often sole source of supply ä Brand loyalty helps protect against substitution or market entry ä Easier to stay close to customer and respond quickly to changes in need 26
Focused Strategy (3) n Risks ä ä 27 Low purchasing quantities hands power to suppliers Low production volume brings high unit costs Change in consumer taste means that niche markets disappear May be easy for cost leaders/big differentiators to adapt their products to compete
Stuck in the middle? Porter argues long term interests are best served by picking a strategy and sticking to it. n How does one then cope with mixed consumer needs, quality and price for example? n 28
Summary Five forces model n Porter’s generic strategies n 29
Further reading The Cambridge University view – follow the link! n More explanation – follow the link! n Bennett chapter 3 n Johnson and Scholes chapters 3 and 6 n 30