Course Name: Strategic Management

Course Code: MGT 4802

Group 2
Group Assignment on HBR on Strategy
The Five Competitive Forces That Shape Strategy

Submitted to
Major General (Retired), Alauddin M A Wadud, Bir Protik
ndc (India), psc (USA), MBA (RRU- Canada), MDS (NU- BD)
Adjunct Faculty, Department of Business Administration - General
Bangladesh University of Professionals

Submitted by
Akif Shadman Pathan (Group Leader) ID No. 19231086

Amir Hamza ID No. 19231016

Rifat Ara Maliha ID No. 19231042

Sadin Ezaz Choudhury ID No. 19231072

Ahmed Rubab Thakur ID No. 19231104

Date of Submission: August 10, 2022

 The Five Competitive Forces that Shape Strategy:

Introduction

The five competitive forces makes up a framework which strategists use to understand the competitive
forces involved in an industry. These forces pave the way for economic value to be divided among the
components functioning in the industry. This concept was first described by Michael Porter back in 1979
in a Harvard Business Review article and many of his insights are still used by strategists today.
Knowing the nature of an industry and the interaction of the competitive forces within enables strategists
to make better strategies which improves profitability and helps to better anticipate the competition.

Five Competitive Forces

The five forces are:

 Threat of entry
 Threat of substitutes
 Power of suppliers
 Power of buyers
 Rivalry among existing competitors

Threat of Entry- New entrants attracted by the profitability of the industry threatens existing
organizations. These new firms’ looks to obtain market share and put pressure on prices, costs and
investments required to compete. The threat of entry into an industry depends on the entry barriers in
that particular industry. These entry barriers could be:

 Supply side economies of scale – Diminishing incremental costs as output of that particular good
increases.
 Demand side benefits of scale – The value of a product or service increases with the number of
users of that product or service.
  Customer switching costs – These are the costs that a consumer incurs due to a change of brand,
supplier, or a product.
 Capital requirements - The amount of capital a bank or other financial institution requires
according to their financial regulators.
 Incumbency advantages independent of size – The incumbents will always have cost or quality
advantages over new entrants regarding the size of the incumbents.
 Unequal access to distribution channels. – New entrants have unequal access to selling their
goods as the already existing firms control them.
 Restrictive government policy – Government impose restrictive policies and these policies vary
in different regions.

Expected Retaliation: Companies already operating in the industry may react vigorously to market
entrants and take necessary measures so that they don’t lose out important market share to new players.
There are a few things that an incumbent company might do:

 Companies in the past have taken action to tackle new market entrants
 Incumbents have experience and monetary power to fend off competition from new market
entrants
 Incumbents may offer discounts to keep customers
 If the industry has little room for growth, the market share can only be taken away from current
players
In an old industry the challenge of market entry is daunting but the strategy needs to be made keeping
profitability in mind.

The Power of Suppliers: Suppliers play a huge role in profitability of a company. Charging high prices
if the supplier sees no alternative supplier in the market is a common phenomenon. Other actions that
may affect the companies are:

 Suppliers serving multiple industries would try to earn maximum profit from each of the industry
they serve
  Industry participants may find it hard to switch to a different supplier as the cost may be too high
and companies may simply be to use to the suppliers raw materials.
 Suppliers who sell unique products have more sway over industries as they are the sole
producers of that product.
 There may simply be no alternative for the supplier.
 Suppliers can themselves start to enter the market they serve by utilizing their own raw material
production i.e., forward integration.

The Power of Buyers: If the buyer is in a bargaining position they can drive down prices and ask for
better quality products. The buyer can

 Buyers who buy in bulk can create pressure on suppliers buy asking to keep the high volume of
production steady.
 The industry raw materials do not differentiate much from one supplier to another the buyer can
always shift to another supplier.
 Buyers face switching cost in changing vendors.
 Buyers can potentially produce their own raw materials to drive down the price of production.
A buyer group can be price sensitive:

 If the raw material pricing takes up a large chunk of the companies budget, the company maybe
prone to seeking alternative suppliers at a discounted price.
 Companies low on cash are price sensitive, however, companies with high cash flows are less
susceptible to price changes.
 When the buyers products are less affected by price changes they don’t bother about the price
charged.
 When buyers are more interested in the quality rather than the price, the product or service
becomes price insensitive.
The threat of substitutes

A substitute uses a different method to carry out the same or a similar function to the industry's product.
There are always substitutes, but they are simple to miss because they could seem extremely dissimilar
from the output of the industry. Industry profitability falls when substitutes are a significant threat. By
setting a price cap, substitute goods and services reduce the potential for industrial profit. An industry
will suffer in terms of profitability—and frequently growth potential—if it does not distinguish itself
from replacements through product performance, marketing, or other strategies.

Substitute poses a high threat if:

 it offers an appealing price-performance trade-off to the industry's product; and

 The buyer's cost of switching to the substitute is low.

Rivalry among existing competitors

Existing competitor rivalry takes many familiar forms, such as price cuts, new product introductions,
advertising campaigns, and service enhancements. High rivalry limits an industry's profitability. The
extent to which rivalry reduces an industry's profit potential is determined by two factors: first, the
intensity with which companies compete, and second, the basis on which they compete.

The intensity of rivalry is greatest when the following conditions exist:

 Competitors are numerous or roughly equal in size and power

 Industry growth is slow.
 Exit barriers are high
 Rivals are deeply committed to the business and aspire to leadership, especially if their goals
extend beyond economic performance in the specific industry.
 Firms cannot read each other's signals well because they are unfamiliar with one another, have
different approaches to competing, or have different goals.

Price competition transfers profits directly from an industry to its customers, making price competition
especially damaging to profitability.

Price competition is most likely when:

  Rival products or services are nearly identical, and buyers have few switching costs.
 The fixed costs are high, while the marginal costs are low.
 The item is perishable.

Factors, Not Forces

The strength of the five competitive forces, as manifested in industry structure, determines the industry's
long-run profit potential because it determines how the economic value created by the industry is
divided. A strategist maintains overall structure by considering all five forces rather than gravitating to
any one element. Furthermore, the strategist's focus remains on structural conditions rather than fleeting
factors. It is especially critical to avoid the common pitfall of mistaking an industry's visible
characteristics for its underlying structure. Consider this following:

Industry growth rate

A common misconception is that fast-growing industries are always appealing. Growth tends to muffle
rivalry because a growing pie provides opportunities for all competitors. Even in the absence of new
entrants, rapid growth does not guarantee profitability if customers are powerful or substitutes are
appealing. One of the primary causes of poor strategy decisions is a narrow focus on growth.

Technology and innovation

Advanced technology or innovations alone are insufficient to make an industry structurally appealing (or
unattractive). Ordinary, low-tech industries with price-insensitive buyers, high switching costs, or high
entry barriers due to scale economies are frequently far more profitable.

Government

Because government involvement is neither inherently good nor bad for industry profitability, it is not
best understood as a sixth force. Government operates at multiple levels and through numerous policies,
each of which has a different impact on structure.
Complementary products and services

Complements are products or services that are used in conjunction with an industry's product.
Complements occur when the customer benefit of two products combined is greater than the sum of the
value of each product separately. Computer hardware and software, for example, are valuable when
combined but useless when separated. Complements can be significant when they influence the overall
demand for a product in an industry. To determine the impact of complements on profitability, the
strategist must trace their positive or negative influence on all five forces. The presence of complements
can raise or lower entry barriers. The presence of complements may also influence the threat posed by
substitutes.

Changes in Industry Structure

Time to time changes can be seen in the industry structure due to changes in technology, changes in
customer needs etc. This increase or decrease the profit of the industry. Industry structure proves to be
relatively stable and industry profitability differences are persistent. The change in structure can be
influenced by inside the industry or outside the industry. The change in structure can be caused by the
boost in technology, change in customer behavior, change in demand and economical condition.

Shifting threat of new entry: For example the expiration of patent may release new entrants in the
market. If a patent of a particular product is expired there is a possibility of producing the same product
which leads to new market entrants.

Another one is strategic decisions of leading competitors which often leads to new market entrants. For
example the automated distribution centre of Walmart, their barcoding system has been adapted by the
people.

Changing supplier or buyer power: The power of suppliers and buyers change time to time depending
on the company whether it increases or decreases. For example many companies have shift from
specialty stores to big box retailer. Airlines have started to sell tickets from their own website rather than
selling from any agents which leads to the shift of power from the agents to the airlines.
Shifting threat of substitution: Everyday science and technology is developing which resulting in new
advanced inventions. These inventions create new substitute for example flash computer memory is a
great substitute for low capacity hard disk drives.

New bases of rivalry: The intensity of rivalry among firms is one of the main forces that shape the
competitive structure of an industry.

Implications for Strategy

For developing strategy understanding the competition is very vital. The companies should have idea
about their industry in terms of their average profit and how they are changing every day. This will help
the companies to implicate their strategies in the market. A clear idea about the industry structure helps
the managers to develop their strategies well enough to compete. Which includes positioning the
company better to compete with the current competitive forces, anticipating and exploiting shifts in the
forces and shaping the balance of forces to create a new industry structure.

Positioning the company: Positioning a company is very important because this will help the company
to gain a reorganization among the people which will act as a defense against the competitors. Along
with that positioning also helps finding a position in the industry where the forces are weak. This will
help the company to avoid buyer power and price based rivalry.

Exploiting industry change: A manager can bring new strategies considering the change of industry
only if he/she has a clear knowledge about the competitive forces. Structural changes open up new needs
and new ways to serve existing needs. For this reason this needs can bring out new strategies to fulfil
them.

Shaping industry structure: A company can shape their industry structure. They can lead the industry
towards the way they want. In reshaping structure, a company wants its competitors to follow so that the
entire industry will transform. This will mostly benefit the innovators also the participants in this
process.
Industry Analysis

Why industry analysis is important?

Industry analysis, as a form of market assessment, is crucial because it helps a business understand
market conditions. It helps them forecast demand and supply and, consequently, financial returns from
the business. It indicates the competitiveness of the industry and costs associated with entering and
exiting the industry. It is very important when planning a small business. Analysis helps to identify
which stage an industry is currently in; whether it is still growing and there is scope to reap benefits or
has reached its saturation point.

With a very detailed study of the industry, managers can get a stronghold on the operations of the
industry and may discover untapped opportunities. It is also important to understand that industry
analysis is somewhat subjective and does not always guarantee success. It may happen that incorrect
interpretation of data leads managers to a wrong path or into making wrong decisions. Hence, it
becomes important to collect data carefully.

Typical Steps in Industry Analysis

Step 1. Define the relevant industry:

• What products are in it? Which ones are part of another distinct industry?

• What is the geographic scope of competition?

Step 2. Identify the participants and segment them into groups, if appropriate:

Who are?
• The buyers and buyer groups?

• The suppliers and supplier groups?

• The competitors?

• The substitutes?

• The potential entrants?

Step 3. Assess the underlying drivers of each competitive force to determine which forces are strong and
which are weak and why.

Step 4. Determine overall industry structure, and test the analysis for consistency:

• Why is the level of profitability what it is?

• Which are the controlling forces for profitability?

• Is the industry analysis consistent with actual long-run profitability?

• Are more-profitable players better positioned in relation to the five forces?

Step 5. Analyze recent and likely future changes in each force, both positive and negative.

Step 6. Identify aspects of industry structure that might be influenced by competitors, by new entrants,
or by your company.

Common mistakes while doing industry analysis

• Defining the industry too broadly or too narrowly.

• Making lists instead of engaging in rigorous analysis.

• Paying equal attention to all of the forces rather than digging deeply into the most important ones.

• Confusing effect (price sensitivity) with cause (buyer economics).

• Using static analysis that ignores industry trends.

• Confusing cyclical or transient changes with true structural changes.

• Using the framework to declare an industry attractive or unattractive rather than using it to guide
strategic choices.