Description
This is a ppt describing the porters five forces model.
Porter Model
Introduction
? ?
?
Porter model first detailed in Competitive Strategy by Michael Porter in 1980 To a large extent it applied basic economic concepts like the structure-conductperformance paradigm to general business analysis The aim of the model is to analyse the basic forces that affect industry profitability and provide a guide to successful strategy
Five Force Model
Threats to Entry
Above-average returns will always attract potential entrants into an industry. Barriers to Entry: ? Economies of Scale ? Product Differentiation, Strong Brands ? Capital Requirements ? Switching Costs ? Distribution Channels ? Patents, location, government subsidies etc.
Intensity of Rivalry
? ? ? ? ?
?
Numerous, equally balanced competitors are more likely to compete intensely Slow Industry growth intensifies rivalry High fixed costs allow deep price cuts which will induce rivalry Lack of differentiation means that price is the main competitive variable which intensifies rivalry Diversity of competitors may mean that firms are unable to analyse other firms’ intentions and therefore make a price war more likely High exit barriers like highly specialized assets and long-term labour agreements will help prolong rivalry
Bargaining Power of Buyers
? ? ? ? ? ? ?
Bargaining power of buyers: percentage of total sales alternative sources, transactions and negotiating costs high costs of switching suppliers Threat of backward integration Price sensitivity: importance of the product to buyer strategy, cost of product as percentage of buyer’s budget Cost of servicing buyers: order size, shipping, selling cost, customer service
Companies should actively seek buyers who have the least bargaining power and relatively low costs of servicing
Bargaining Power of Suppliers
The following factors affect bargaining power of suppliers: ? If supplying industry is concentrated it will have more power ? Few substitutes for product that is being supplied ? If the industry isn’t important customer for supplier group ? Supplier group has a credible threat of forward integration Labour must also be considered an important supplier. E.g.. Power of unions
Threats of Substitutes
?
?
?
a) b)
Competition comes not just from within the industry but from products which perform the same function outside the industry. Sometimes the substitute may be quite different from the original industry. E.g.... equity brokers face indirect competition from real estate markets as an avenue for investment E.g.. Video-conferencing may be a substitute for business travel. Substitute products are especially important if: They face favourable trends in terms of cost/performance They are produced by an industry producing high profits
Three strategies
? ? ? ?
Porter identifies three strategies for coping with the five forces: Cost Leadership Differentiation Focus
The first two are the most important and a fundamental point of the Porter model is that there is a trade-off between the two
Cost Leadership
? ? ? ?
?
? ?
Economies of Scale Cost minimization should be pursued systematically across different divisions: R&D, sales, advertising etc Intense supervision of labour Ease of manufacture Incentives based on quantitative targets Cost leadership provides protection from rivals because low-cost firm will earn profits at lower prices giving it greater staying power in a price war Factors that provide low-cost leadership typically result in high barriers to entry because of scale advantages
Risks from cost leadership strategy: Technological progress that nullifies learning Economic growth that creates demand for superior products Inability to adjust to innovation because of low R&D budgets E.g. Ford and General Motor in 1920’s
Differentiation
Differentiation means creating a product or service which is viewed industry-wide as being unique ? Differentiation can come through brand-image, technology, customer service etc. ? This strategy requires strong marketing skills, R&D and engineering skills and a reputation for quality ? Risks: Price differentials become too large Brand differentiation declines as industry matures and buyers become more educated
?
Possible to combine the two?
?
?
?
A fundamental claim of the Porter model is that it is not possible to combine cost leadership and differentiation (a focus strategy is a possible exception) He argues that firms that do this will fall between two stools and lose both the high-volume customers who want low prices and customers who want high quality He also claims that firms that pursue both strategies will suffer from conflicting and confused corporate culture
Competitive Moves
? ? ? ? ? ?
?
Two broad strategies Co-operative strategy, high prices Offensive strategy, low prices, increased chances of price war Choice of strategy must be based on analysis of competitors: their financials, cost structure, likelihood of retaliation Commitment is a key strategic variable in deterring offensive moves from competitors Examples include large cash reserves, excess capacity, track record of rapid retaliation, communication E.g..... OPEC and the Saudi excess capacity
Industry Evolution
? ? ? ? ? ? ? ?
?
?
Demographic Changes Economic growth: effect depends on income elasticity Innovation: product, marketing, process Learning by buyers Learning by producers, economies of scale Reduction of uncertainty Diffusion of proprietary knowledge Consumer penetration Changes in adjacent markets: suppliers, substitutes, complements Public policy
Strategy and Industrial Evolution
Emerging industry: Rules of the game are unwritten ; firms have significant leeway in strategic behaviour Customers may be relatively unfamiliar with product Product quality likely to be erratic
?
Maturing industry Buyers become more knowledgeable and perhaps more cost-conscious Firm is growing at a much slower rate International competition may increase Profits fall and rivalry may increase
?
Declining Industry Of particular importance is the role of exit barriers which may keep a firm from exiting a sub-performing industry. E.g. specialized assets, legal restrictions, prestige and reputation etc.
?
Global Industries
? ?
?
? ?
Globalization and competing internationally bring new strategic issues: Foreign exchange risk, transportation costs Public policy across borders: e.g. anti-trust policy is different, tariffs Marketing: to what extent is your brand transferable across borders Corporate culture: Labour practices, managerial techniques etc may not be transferable
Strategic Decisions
? ?
?
? ?
Big strategic decisions include whether to vertically integrate, which new businesses to enter, how much to expand capacity. These decisions have a direct impact on the bottom line but also an important indirect impact through the five forces and the generic strategies E.g.... vertical integration may lead to cost savings and provide cost leadership and may also serve as a means of differentiation The threat to vertically integrate may affect bargaining power of buyers and suppliers Entry in one market may affect rivalry in other markets
Critique of the Porter Model
How relevant is the Porter model in the IT age? ? In IT based industries competition can come from radically new directions. E.g..... Google challenging MS. The Porter assumption of a stable industry structure isn’t that relevant ? Is there really a trade-off between low-cost and quality. Why can’t a firm provide both? E.g.... Blue Ocean strategy ? Porter model doesn’t have much to say about internal organization of the firm. In contrast the resource-based view provides detailed analysis of the how the firm can combine resources to create value ? Finally from the point of view of public policy, the Porter model may violate the principles of a competitive economy. A successful strategy may involve pursuing high returns by reducing the amount of competition
?
doc_933671105.ppt
This is a ppt describing the porters five forces model.
Porter Model
Introduction
? ?
?
Porter model first detailed in Competitive Strategy by Michael Porter in 1980 To a large extent it applied basic economic concepts like the structure-conductperformance paradigm to general business analysis The aim of the model is to analyse the basic forces that affect industry profitability and provide a guide to successful strategy
Five Force Model
Threats to Entry
Above-average returns will always attract potential entrants into an industry. Barriers to Entry: ? Economies of Scale ? Product Differentiation, Strong Brands ? Capital Requirements ? Switching Costs ? Distribution Channels ? Patents, location, government subsidies etc.
Intensity of Rivalry
? ? ? ? ?
?
Numerous, equally balanced competitors are more likely to compete intensely Slow Industry growth intensifies rivalry High fixed costs allow deep price cuts which will induce rivalry Lack of differentiation means that price is the main competitive variable which intensifies rivalry Diversity of competitors may mean that firms are unable to analyse other firms’ intentions and therefore make a price war more likely High exit barriers like highly specialized assets and long-term labour agreements will help prolong rivalry
Bargaining Power of Buyers
? ? ? ? ? ? ?
Bargaining power of buyers: percentage of total sales alternative sources, transactions and negotiating costs high costs of switching suppliers Threat of backward integration Price sensitivity: importance of the product to buyer strategy, cost of product as percentage of buyer’s budget Cost of servicing buyers: order size, shipping, selling cost, customer service
Companies should actively seek buyers who have the least bargaining power and relatively low costs of servicing
Bargaining Power of Suppliers
The following factors affect bargaining power of suppliers: ? If supplying industry is concentrated it will have more power ? Few substitutes for product that is being supplied ? If the industry isn’t important customer for supplier group ? Supplier group has a credible threat of forward integration Labour must also be considered an important supplier. E.g.. Power of unions
Threats of Substitutes
?
?
?
a) b)
Competition comes not just from within the industry but from products which perform the same function outside the industry. Sometimes the substitute may be quite different from the original industry. E.g.... equity brokers face indirect competition from real estate markets as an avenue for investment E.g.. Video-conferencing may be a substitute for business travel. Substitute products are especially important if: They face favourable trends in terms of cost/performance They are produced by an industry producing high profits
Three strategies
? ? ? ?
Porter identifies three strategies for coping with the five forces: Cost Leadership Differentiation Focus
The first two are the most important and a fundamental point of the Porter model is that there is a trade-off between the two
Cost Leadership
? ? ? ?
?
? ?
Economies of Scale Cost minimization should be pursued systematically across different divisions: R&D, sales, advertising etc Intense supervision of labour Ease of manufacture Incentives based on quantitative targets Cost leadership provides protection from rivals because low-cost firm will earn profits at lower prices giving it greater staying power in a price war Factors that provide low-cost leadership typically result in high barriers to entry because of scale advantages
Risks from cost leadership strategy: Technological progress that nullifies learning Economic growth that creates demand for superior products Inability to adjust to innovation because of low R&D budgets E.g. Ford and General Motor in 1920’s
Differentiation
Differentiation means creating a product or service which is viewed industry-wide as being unique ? Differentiation can come through brand-image, technology, customer service etc. ? This strategy requires strong marketing skills, R&D and engineering skills and a reputation for quality ? Risks: Price differentials become too large Brand differentiation declines as industry matures and buyers become more educated
?
Possible to combine the two?
?
?
?
A fundamental claim of the Porter model is that it is not possible to combine cost leadership and differentiation (a focus strategy is a possible exception) He argues that firms that do this will fall between two stools and lose both the high-volume customers who want low prices and customers who want high quality He also claims that firms that pursue both strategies will suffer from conflicting and confused corporate culture
Competitive Moves
? ? ? ? ? ?
?
Two broad strategies Co-operative strategy, high prices Offensive strategy, low prices, increased chances of price war Choice of strategy must be based on analysis of competitors: their financials, cost structure, likelihood of retaliation Commitment is a key strategic variable in deterring offensive moves from competitors Examples include large cash reserves, excess capacity, track record of rapid retaliation, communication E.g..... OPEC and the Saudi excess capacity
Industry Evolution
? ? ? ? ? ? ? ?
?
?
Demographic Changes Economic growth: effect depends on income elasticity Innovation: product, marketing, process Learning by buyers Learning by producers, economies of scale Reduction of uncertainty Diffusion of proprietary knowledge Consumer penetration Changes in adjacent markets: suppliers, substitutes, complements Public policy
Strategy and Industrial Evolution
Emerging industry: Rules of the game are unwritten ; firms have significant leeway in strategic behaviour Customers may be relatively unfamiliar with product Product quality likely to be erratic
?
Maturing industry Buyers become more knowledgeable and perhaps more cost-conscious Firm is growing at a much slower rate International competition may increase Profits fall and rivalry may increase
?
Declining Industry Of particular importance is the role of exit barriers which may keep a firm from exiting a sub-performing industry. E.g. specialized assets, legal restrictions, prestige and reputation etc.
?
Global Industries
? ?
?
? ?
Globalization and competing internationally bring new strategic issues: Foreign exchange risk, transportation costs Public policy across borders: e.g. anti-trust policy is different, tariffs Marketing: to what extent is your brand transferable across borders Corporate culture: Labour practices, managerial techniques etc may not be transferable
Strategic Decisions
? ?
?
? ?
Big strategic decisions include whether to vertically integrate, which new businesses to enter, how much to expand capacity. These decisions have a direct impact on the bottom line but also an important indirect impact through the five forces and the generic strategies E.g.... vertical integration may lead to cost savings and provide cost leadership and may also serve as a means of differentiation The threat to vertically integrate may affect bargaining power of buyers and suppliers Entry in one market may affect rivalry in other markets
Critique of the Porter Model
How relevant is the Porter model in the IT age? ? In IT based industries competition can come from radically new directions. E.g..... Google challenging MS. The Porter assumption of a stable industry structure isn’t that relevant ? Is there really a trade-off between low-cost and quality. Why can’t a firm provide both? E.g.... Blue Ocean strategy ? Porter model doesn’t have much to say about internal organization of the firm. In contrast the resource-based view provides detailed analysis of the how the firm can combine resources to create value ? Finally from the point of view of public policy, the Porter model may violate the principles of a competitive economy. A successful strategy may involve pursuing high returns by reducing the amount of competition
?
doc_933671105.ppt