Download Chapter 2 - Bryan Mills

Industry Analysis - Porter's Five
Forces
Dr Bryan Mills
Components of the General Environment
macro
industry
competitors
you!
PESTEL
Political
Legal
Economic
Environmental
Social
Technological
Don’t knock SWOT!
It’s the starting point
• an overview of the strategic situation.
• raw material for more extensive internal
and external analysis.
Opportunities
• Possible Opportunities:
– Emerging customer needs ANSOFF
– Quality Improvements PLC?
• Vertical differentiation
– Expanding global markets ANSOFF
– Vertical Integration M&A
Threats
• Possible Threats:
– New entry by competitors 5 forces
– Changing demographics/shifting demand market
research
– Emergence of cheaper technologies 5 forces
– Regulatory requirements
The purpose of
Five-Forces Analysis
• The five forces are environmental forces
that impact on a company’s ability to
compete in a given market.
• The purpose of five-forces analysis is to
diagnose the principal competitive
pressures in a market and assess how
strong and important each one is.
Porter’s Five Forces
Threat of
New
Entrants
Bring new capacity,
the desire to gain market share,
and often substantial resources.
Companies diversifying through
acquisition into the industry from
other markets often leverage their
resources to cause a shakeup
Michael E. Porter, “How Competitive Forces Shape Strategy,”
Harvard Business Review 1979 (pp. 32-41)
Threat of New Entrants
Economies of Scale
Barriers to
Entry
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages
Independent of Scale
Government Policy
Porter’s Five Forces
Threat of
New
Entrants
Bargaining
Power of
Suppliers
Bargaining Power of Suppliers
Supplier industry is dominated by a few firms
Suppliers’ products have few substitutes
Suppliers exert power
in the industry by:
* Threatening to raise
prices or to reduce quality
Buyer is not an important customer to supplier
Suppliers’ product is an important input to
buyers’ product
Suppliers’ products are differentiated
Suppliers’ products have high switching costs
Supplier poses credible threat of forward
integration
Porter’s Five Forces
Threat of
New
Entrants
Bargaining
Power of
Suppliers
Bargaining
Power of
Buyers
Bargaining Power of Buyers
Buyer groups are likely to be powerful if:
Buyers are concentrated or purchases are large
relative to seller’s sales
Purchase accounts for a significant fraction of
supplier’s sales
Bargaining down prices
Products are undifferentiated
Forcing higher quality
Buyers face few switching costs
Buyers’ industry earns low profits
Buyer presents a credible threat of backward
integration
Product unimportant to quality
Buyer has full information
Playing firms off of
each other
Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
Bargaining
Power of
Buyers
Threat of
Substitute
Products
Threat of Substitute Products
Products
with similar
function
limit the
prices firms
can charge
By placing a ceiling on prices it
can charge, substitute products
or services limit the potential of
an industry. Unless it can upgrade
the quality of the product or
differentiate it somehow (as via
marketing), the industry will
suffer in earnings and possibly in
growth
Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
Rivalry Among
Competing Firms
in Industry
Threat of
Substitute
Products
Bargaining
Power of
Buyers
Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:
Jockeying for strategic position
Using price competition
Staging advertising battles
Increasing consumer warranties or service
Making new product introductions
Occurs when a firm is pressured or sees an opportunity
Price competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, but
may be costly to smaller competitors
Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when:
Numerous or equally balanced competitors
Slow growth industry
High fixed costs
High storage costs
Lack of differentiation or switching costs
Capacity added in large increments
Diverse competitors
High strategic stakes
High exit barriers
The Five Forces are Unique to
the Industry
• Five-Forces Analysis is a framework for
analyzing a particular industry.
Competitor Analysis
After industry analysis we need analysis of
a firm’s Competitors
Industry
Environment
Competitive
Environment
Competitor Analysis
Assumptions
What assumptions do our
competitors hold about the future
of industry and themselves?
Current Strategy
Does our current strategy support
changes in the competitive
environment?
Future Objectives
How do our goals compare to our
competitors’ goals?
Capabilities
How do our capabilities compare
to our competitors?
Response
What will our
competitors do in the
future?
Where do we have a
competitive
advantage?
How will this change
our relationship with
our competition?
Competitor Analysis
Future Objectives
How do our goals compare
to our competitors’ goals?
Where will emphasis be
placed in the future?
What is the attitude
toward risk?
What Drives the competitor?
Competitor Analysis
Future Objectives
How do our goals compare
to our competitors’ goals?
Where Current
will emphasis
be
Strategy
placed inHow
the future?
are we currently
What is the
attitude
competing?
toward risk?
Does this strategy
support changes in the
competitive structure?
What is the competitor doing?
What can the competitor do?
Competitor Analysis
Future Objectives
What does the competitor believe
about itself and the industry?
How do our goals compare
to our competitors’ goals?
Where Current
will emphasis
be
Strategy
placed in the future?
How are we currently
What is the
attitude
competing?
Assumptions
toward risk?
Does thisDo
strategy
we assume the future
support changes
in the
will be volatile?
competition
structure?
What
assumptions do our
competitors hold about the
industry and themselves?
Are we assuming stable
competitive conditions?
Competitor Analysis
Future Objectives
What are the competitor’s
capabilities?
How do our goals compare
to our competitors’ goals?
Where Current
will emphasis
be
Strategy
placed in the future?
How are we currently
What is the
attitude
competing?
Assumptions
toward risk?
Does this
Dostrategy
we assume the future
supportwill
changes
in the
be volatile?
competition
Whatstructure?
assumptions do our
competitors
hold about the
Capabilities
industry and themselves?
What are my competitors’
Are we operating under
strengths and weaknesses?
a status quo?
How do our capabilities
compare to our
competitors?
Competitor Analysis
Response
Future Objectives
How do our goals compare
to our competitors’ goals?
Where Current
will emphasis
be
Strategy
placed in the future?
How are we currently
What is the
attitude
competing?
Assumptions
toward risk?
Does this
Dostrategy
we assume the future
supportwill
changes
in the
be volatile?
competition
Whatstructure?
assumptions do our
Capabilities
competitors
hold about the
industry and themselves?
What are my competitors’
Are we operating
strengths under
and weaknesses?
a status quo?
How do our capabilities
compare to our
competitors?
What will our competitors
do in the future?
Where do we have a
competitive advantage?
How will this change our
relationship with our
competition?