Scribd
Upload
149 views10 pages

The Five Competitive Forces That Shape Strategy

This document discusses Michael Porter's five forces framework for analyzing industry competition and profitability. It provides an overview of each of the five competitive forces and how they influence industry profitability. It also gives examples of industries with intense versus benign competitive forces and discusses how companies can exploit changes in industry structure.

Uploaded by

Duong Do
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
149 views10 pages

The Five Competitive Forces That Shape Strategy

This document discusses Michael Porter's five forces framework for analyzing industry competition and profitability. It provides an overview of each of the five competitive forces and how they influence industry profitability. It also gives examples of industries with intense versus benign competitive forces and discusses how companies can exploit changes in industry structure.

Uploaded by

Duong Do
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 10

The Five Competitive Forces That

Shape Strategy
By Michael E. Porter, 2008

Presented by:
Hayley Stewart
Duong Do
Introduction
 An update and extension of 1979
classic article
 Different industries, same underlying
profitability drivers
 Industry structure determines profitability

 Intense forces = no company earns attractive ROI


 Examples: Airlines and hotels

 Benign forces = many companies are profitable


 Examples: Software, soft-drinks, toiletries

 Most profitable industry will have companies that properly segment


and target distinct customer bases
1st Force: Rivalry Among Existing Competitors
 2 factors that erode profitability
 INTENSITY with which companies compete
 There are numerous competitors
 Industry growth is low and exit barriers are high
 Rivals are highly committed to the business
 Firms cannot read each other’s signals well

 BASIS on which they compete


 Companies must target distinct segments

 Examples of Rivalry include


 service improvements  advertising campaigns
 new product introductions  price discounting/ competition
Retaliating leads to less $$
 Industry profitability erodes fastest with price wars

 Price Competition will occur if


 Large capacity expansion  Low switching costs
 Products are identical  Low quality product
 High fixed costs and low marginal costs  Product is perishable

 Instead of price, industry should compete on


 Product features  Delivery time
 Support services  Brand image
 Strategic positioning
Competition is more than rivalry among
existing competitors
Bargaining Power of Bargaining Power of Threat of New
Threat of Substitutes
Suppliers Buyers Entrants
• Can be downstream • Can take a big slice • Can force prices • Pressure prices,
or direct of the pie down costs, & investment

• Substitutes can be • Power is high when • Negotiating leverage • Threat is enough


in a different • Few suppliers and price sensitivity
product category/ • Supplier not overly create power if • New Entrants will
industry dependent on • There are few enter if
industry’s revenues buyers • They can leverage
• Power is high when • High switching • It is a high-volume existing capabilities
• Attractive price- costs exist customer • Low retaliation
performance trade- • They offer highly • Buyer offers • Low barriers to
off differentiated standardized entry
• Switching costs are products products
low • Risk of Forward • There are low
integration switching costs
• Risk of backward
integration
Barriers to Entry
1. Supply-Side Economies of Scale
 New Entrants must accept cost disadvantage

2. Demand-Side Benefits of Scale (ie: network effects)


 Limits willingness to buy from smaller newcomer

3. Customer Switching Costs


 Example: ERP system

4. Incumbency Advantages (independent of size)


 Proprietary technology, access, brand, experience curve effects, substantial
resources to retaliate, patents

5. Unequal Access to Distribution Channels


 May have to create own

6. Capital Requirements
 P&E, extending credit, R&D, advertising
 Investors will fund if industry is profitable

7. Restrictive government policy


 Licensing requirements, environmental and safety regulations
 Can also provide subsidies and break up monopolies
Technology Complements

Some wrongly believe other


Government forces exist like
Change can be good
 Changes in industry structure can increase/
decrease the industry’s profits/losses

 Companies should exploit changes in


industry structure in order to
 Re-divide profitability
 Expand the profit pool
 Develop niches
 Attract investors

 When an industry is unprofitable try these solutions:


 Focus on segmentation
 Differentiate product/service
 Mediate switching costs
 Re-invest in brand equity
 Cautiously invest in infrastructure,
technology, and labor
Questions?
1. Can you think of any limitations to the five forces model?

2. Do you agree or disagree with Porter’s assertion that there are not “sixth
forces” such as complements, government, technology, the public,
shareholders, employees or the media? Why?

3. The Airlines industry had the lowest profitability from 1992 through 2006.
Today the airline industry is still unprofitable. IBM Global Business
Services released a 2010 study saying that the airline business model is
based on a trade-off between cost and quality of service. Explain how this
industry model makes each of the five forces intense?

4. How do you think the airline industry can improve its profitability?

5. In your opinion, what is different about the airline industry compared to the
soft drink industry? The soft drink industry was more than 6X more
profitable than the airline industry.

You might also like