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Understanding Industry Dynamics: Porter’s Five Forces Model Overview

This overview explains Porter’s Five Forces Model, a framework for analyzing industry competition. It highlights key concepts such as entry barriers, rivalries among firms, supplier and buyer power, and the threat of substitutes. By evaluating these forces, businesses can gain insights into their competitive environment and strategize accordingly. This session will prepare students for the next Wednesday exam and aid in grasping Chapter 3's core concepts relating to strategic management and market dynamics, emphasizing the importance of positioning within the industry.

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Understanding Industry Dynamics: Porter’s Five Forces Model Overview

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  1. Activities for Today • Attendance • CEP • Goals for Today • Chapter 3 • Homework • Chapter 3 • Simulation – Trial Round # 2 • Next Wednesday Exam MQM385/Sp08/Class9

  2. Chapter Overview • Industry • Strategic Groups • Porter’s Five Forces Model (Next Class)

  3. Industry: Defined Companies with similar products/services compete for fulfilling customer satisfaction

  4. Strategic Groups: Not All Competitors Are Created Equal Source: Adapted from Dess and Lumpkin, Strategic Management: Creating Competitive Advantages (New York: McGraw-Hill. 2002), p. 63

  5. Five Forces Model Source: Adapted from Michael E. Porter, Competitive Strategy (New York: The Free Press, 1980, pp. 3-33.

  6. Force 1: Potential Competitors • Create high entry barriers • Economies of scale • Experience curve • Capital requirements • Switching costs • Product differentiation and brand loyalty • Access to key supplies/distribution channels • Government regulations

  7. Creating Entry Barriers Barriers to entry increase industry concentration • Raises cost of entry over benefits of entry • Necessary, but not sufficient to avoid price competition • When firms overcome entry barriers they show it can be done, thus inviting others to do so

  8. Measuring Market Concentration with the Herfindahl-Hirschman Index (HHI) Source: US Bureau of the Census (1997)

  9. Force 2: Rivalry Among Incumbent Firms • Industry structure • Demand conditions • Exit barriers

  10. Exit Barriers

  11. Force 3: Supplier Power (I) • Number of suppliers • Uniqueness of product/service substitutes • Kind of technology • Switching costs • Ability to integrate backwards

  12. Force 3: Supplier Power (II)

  13. Supplier Power – Beverage Industry

  14. Force 4: Buyer Power (I) • Number of sellers • Amount of product differentiation • Purchase size • Switching costs • Ability to integrate backwards

  15. Force 4: Buyer Power (II)

  16. Neutralizing Buyer Power • Differentiate product • Stimulate demand for complementary products • Discriminate on price among buyers • Narrow offerings to buyers • Find new buyers • Increase switching costs • Price at or below marginal cost

  17. Force 5: Substitute Products/Services • Availability of complementary products • Price of complementary products

  18. Neutralizing Substitute Power • Differentiate your product • Create demand for complementary products • Innovate • Narrow the availability of substitutes • Create switching costs

  19. High profit potential Secure a market position by building high entry barriers Low profit potential Proactively alter industry conditions by securing an advantageous market position Neutralize the threats posed by the five forces Using the Five Forces Model

  20. Five Forces - Strengths • Intuitive model • Takes into account a firm’s environment

  21. Five Forces - Weaknesses • Not relevant in dynamic markets • Does not consider firm’s internal competencies

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