The Five Competitive Forces That Shape Strategy

The 5 Forces that Shape Strategy

Michael Porter is a leading authority on strategy and competition in business. His five forces analysis has been one of his largest contributions to his field. Porter defines them as:
The threat of the entry of new competitors The intensity of competitive rivalry The threat of substitute products or services The bargaining power of customers The bargaining power of suppliers

The 5 Forces that Shape Strategy

Bargaining power of customers

Bargaining power of suppliers

Competitive rivalry within an industry

Threat of New Entrants

Threat of Substitute Products

The Threat of the Entry of New Competitors

Danilyn A. Flores

The Threat of the Entry of New Competitors

A new entrant - a brand new competitor or maybe a new brand from on old competitor. Why does competitive rivalry increase when a new competitor enters your industry? A new competitor to an industry has no existing customers As they start to poach customers the existing competitors respond to protect their business. The exception to this is when an industry is in rapid growth

The Threat of the Entry of New Competitors

What to do? Analyze the threat of new entrants - this seeks to identify the barriers to entry

the things about your industry that will make it harder for a new entrant to shift into your industry

The Threat of the Entry of New Competitors

Consider the following:
Economies of Scale Proprietary Product Differences Brand Identity Switching Costs Capital Requirements Access to Distribution Absolute Cost Advantage Government Policy Expected Retaliation Industry Profitability Stage in Industry Life Cycle

The Threat of the Entry of New Competitors

Analysis Criteria Economies of scale Proprietary product differences Brand identity Switching costs Capital requirements Access to distribution Absolute cost advantage Government policy Expected retaliation Industry Profitability Stage in industry life cycle Overall Risk Rating Risk Rating High Medium Low

The Rivalry among Existing Competitors

Cheryl O. Tayo

Rivalry Among Existing Competitor

Rivalry is intensified if:
Competitors are roughly equal in size Industry growth is slow Exit barrier is high Aspiration for leadership Cannot read each others signal well

Rivalry Among Existing Competitor

Price competition occur if:
Product are nearly identical & less switching cost Fixed cost is high To improve efficiency of production Product is perishable

Rivalry Among Existing Competitor

Basis of competition:
Price Product features Support service Delivery time Brand image

Rivalry Among Existing Competitor

The Threat of Substitute Products or Services

Kahlille O. Clerigo

The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives. Note that this should not be confused with competitors' similar products but entirely different ones instead. For example, Pepsi is not considered a substitute for Coke but water, tea, and coffee are.

Companies in one industry come under competitive pressure from the actions of companies in a closely adjoining industry whenever buyers view the products of the two industries as good substitutes. Just how strong the competitive pressures are from sellers of substitute products depends on three factors: a. Whether substitutes are readily available and attractively priced b. Whether buyers view the substitutes as being comparable or better in terms of quality, performance, and other relevant attributes c. How much it costs end-users to switch to substitutes

The Bargaining Power of Customers

Khaskie O. Clerigo

The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes.

The Bargaining Power of Customers

Buyer Power is High/Strong if: Buyers are more concentrated than sellers Buyer switching costs are low Threat of backward integration is high Buyer is price sensitive Buyer is well-educated regarding the product Buyer purchases product in high volume Buyer purchases comprise large portion of seller sales Product is undifferentiated Substitutes are available The Bargaining Power of Customers

Buyer Power is Low/Weak if: Buyers are less concentrated than sellers Buyer switching costs are high Threat of backward integration is low Buyer is not price sensitive Buyer is uneducated regarding the product Buyer purchases product in low volume Buyer purchases comprise small portion of seller sales Product is highly differentiated Substitutes are unavailable
The Bargaining Power of Customers

Power of Buyers

Emmer P. Ruaya

Power of Buyers
The flip side of Powerful Suppliers Capture more value by forcing down prices demanding better quality or more service ad playing industry participants.

Power of Buyers
groups of customers who differ in bargaining power.
has negotiating leverage price sensitive

Group of Buyers has Negotiating leverage

Buyers purchased volume that are large relative to the size of single vendor.

Example: Telecommunications Industries Electronic Industries Chemical Industries

buyers believe they can always find an equivalent product, they tend to play one vendor against another another.
Because the industrys products are standardized or undifferentiated

Buyers face few switching costs in changing vendors

Price Sensitive
Buyers are likely to shop around and bargain hard, as consumers do for home mortgages.

Price Sensitive cont

buyer group earns low profits, is strapped for cash, or is otherwise under pressure to trim its purchasing costs.

buyers products or services is little affected by the industrys product.

 buyers are usually more interested in quality than in price.

Power Buyer
Buyer power is the ability of a buyer to reduce price profitably below a suppliers normal selling price, or more generally the ability to obtain terms of supply more favorable than a suppliers normal terms.

Bargaining Power of the Supplier

Elizabeth M. Reveche

Bargaining Power of the Supplier Supplier

- refer to the firms that provide inputs to the industry.

Bargaining Power of the Supplier

Bargaining power is the ability to influence the setting of prices. Refer to the potential of the suppliers to increase the prices of inputs (labor, raw materials, services, etc) or the costs of industry in other ways.

Bargaining power of supplier depends on: - Concentration of suppliers. - Differentiation of inputs - Presence of substitute inputs - role of quality and service. - The industry is not a key customer group to the suppliers. - Switching costs. - vertical integration of the suppliers

vertical integration - degree to which a firm owns its upstream suppliers and its downstream buyers. Forward integration - Expansion of activities downstream
Backward integration - Expansion of activities upstream

Vertical integration
NO INTEGRATION RAW MATERIALS BACKWARD INTEGRATION RAW MATERIALS FORWARD INTEGRATION RAW MATERIALS

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