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The Five Forces model and competitive strategies

The Five Forces model and competitive strategies. Geoff Leese September 2005 revised September 2006, July 2007, August 2008, August 2009. Rivalry with competitors. Porter’s five forces model. Potential Entrants to market. Threat of entry. Suppliers. Buyers. Bargaining Power.

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The Five Forces model and competitive strategies

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  1. The Five Forces model and competitive strategies Geoff Leese September 2005 revised September 2006, July 2007, August 2008, August 2009

  2. Rivalry with competitors Porter’s five forces model Potential Entrants to market Threat of entry Suppliers Buyers Bargaining Power Bargaining Power Threat of substitutes Substitutes

  3. Threat of entry • More likely when • Economies of scale are possible • Capital requirements of entry are low • Easy access to distribution channels • No dominant “player” • Little expected retaliation • Little government/legislative intervention • Low levels of differentiation • Important issues • What barriers exist? • What is our position?

  4. Buyer power • More likely when • High concentration of buyers • Large number of small suppliers • Little risk/low cost of switching • Alternative sources of supply • Low differentiation • High levels of competition • High risk of backward integration

  5. Supplier power • More likely when • High concentration of suppliers • Cost of switching suppliers is high • Risk of switching suppliers is high • Supplier has powerful brand • Supplier dominates market • High risk of forward integration

  6. Threat of substitutes • Product for Product • Post replaced by fax replaced by email • Substitution of need • Better quality castings reduces need for machine tools • Generic substitution • Holiday or a new TV? • Do without!

  7. Competitive rivalry (1) • Rivalry between competing organisations • Issues – • What is it based on? • Increasing or decreasing? • How is it affecting us? • What can we do about it?

  8. Competitive Rivalry(2) • Balance of rivalry • Lots of small, balanced competitors? • Market domination? • Market growth rates • Product life cycle? • Global markets? • High fixed costs • High cost of extra capacity • Level of differentiation • High exit barriers • Easy acquisition

  9. Collaboration and competition • Collaboration between buyer and seller • Input and output! • Collaboration to increase buying power • NISA, SPAR, SURF? • Collaboration to avoid substitution or prevent entry • Collaborative R&D, marketing boards • Collaboration to gain entry • Honda/Rover?

  10. Key issues • What are the key forces at work in our competitive environment? • Are there underlying forces (SLEPT analysis?) contributing to this? • Is it likely that these forces will change? If so how and why? • How do our competitors stand? • How do WE stand? • What can be done to influence these forces?

  11. Critical (Key) Success Factors • CSFs are aspects of strategy where you must provide better value and beat the competition • Competences needed in activities which underpin each critical success factor • Performance standards for these determine how competitive advantage will be achieved • Advantage lost by competitor performance & CSFs changing

  12. Identifying Critical Success Factors • These are for an Industry • Ohmae gives 3 areas to consider, the 3 Cs • Customer issues • The competition • The business (or Corporation)

  13. Customers • Who are they now & potentially • Segments in the market • Why do they buy from whoever • General issues • price • service • reliability + quality • tech spec • brands

  14. Competition • Who & who has market dominance & why • Market factors and intensity • Resource comparisons • General issues • Cost and price comparisons • Quality and service • Logistics

  15. The Business • What do our competitors actually deliver to customers • What is our biggest cost area • General issues • Low cost, labour costs, economy of scale • Output and quality • People - skills, relationships • Innovation and technology

  16. Competitor Analysis • Who are your competitors • Where are they • How many • What do they compete on • What market share do they have • Is the market segmented • How strongly do they compete • Are there any alliances

  17. Strategic alternatives • Growth and expansion • Acquisition • Integration • Divestment

  18. Competitive strategies • Porter’s generic strategies • Cost leadership • Broad-market differentiation • Focus Cost • Focus differentiation

  19. Cost leadership (1) • Low level of differentiation • Aim for average customer • Introduce improvements only when customers demands them • Pricing strategies • Sell at industry average, improve profits • Sell at below average, improve market share

  20. Cost leadership(2) • Needs these strengths • Access to capital required for significant investment in process technology • Ability to design products/services that have low production costs • Exclusive access to low cost materials/components • Efficient distribution channels

  21. Cost leadership(3) • Advantages • Cost advantage can protect from new entrants • Pricing at industry average allows price-cutting if necessary • Risks • Technology may be leapfrogged or copied • Risk from a number of focussed cost leading enterprises

  22. Differentiation(1) • Perceived quality is the key! • Whether real or not. • Intrinsic qualities of the product • Pre/post sales service • Allows premium pricing

  23. Differentiation(2) • Typical strengths required • Access to leading edge R&D • Highly skilled and creative product development • Strong sales team • Corporate reputation for quality and innovation

  24. Differentiation(3) • Advantages • Price increases from powerful suppliers can be passed on to buyers • Brand loyalty protects from substitution • Brand loyalty protects against market entry • Buyers’ cost of switching may be high • Risks • Imitation is a possible threat • “Novelty” value short-lived • Limits to price elasticity • Customer tastes may change

  25. Focused strategies (1) • Focuses on a narrow market segment (niche market) and attempts to obtain competitive advantage on a cost or differentiation basis. • Often generates fierce customer loyalty • Concentrate on core competences

  26. Focused strategies(2) • Advantages • Power of buyers – often sole source of supply • Brand loyalty helps protect against substitution or market entry • Easier to stay close to customer and respond quickly to changes in need

  27. Focused Strategy (3) • Risks • Low purchasing quantities hands power to suppliers • Low production volume brings high unit costs • Change in consumer taste means that niche markets disappear • May be easy for cost leaders/big differentiators to adapt their products to compete

  28. Stuck in the middle? • Porter argues long term interests are best served by picking a strategy and sticking to it. • How does one then cope with mixed consumer needs, quality and price for example?

  29. Summary • Five forces model • Porter’s generic strategies

  30. Further reading • The Cambridge University view – follow the link! • More explanation – follow the link! • Bennett chapter 3 • Johnson and Scholes chapters 3 and 6

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