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Five Forces Model: Forces that drive the industry competition, and determine its intensity
• Potential Entrants
• Suppliers
• Buyers
• Substitutes
• Rivalry among existing firms
Potential Entrants
• Barriers to entry: These may change according to happening that is not in control
of the firm.
o Economies of scale: In case of R&D, manufacturing, marketing
o Product differentiation: brand identification, customer loyalties
o Capital requirements: If the initial capital is high
o Switching costs: Costs that an entrant incurs in switching the end user
from one product to his
o Access to distribution networks
o Cost disadvantages independent of scale:
Know-how
Favorable access to raw materials
Favorable location
Government subsidies
Learning or experience curve
o Government policy
• Entry deterring price: If the price is above the returns that the person forecasts
then he will enter
• Experience and scale as entry barriers: however this can be offset by the
flexibility that a new entrant brings in, in terms of newer technology
Intensity of rivalry among existing firms: This is determined by the following factors
• Number and equality of competitors
• Growth of the industry
• Capital investments
• Lack of differentiation or switching costs
• Capacity augmented in large increments
• Exit and entry barrier risks
• Stakes of individual competitors in the industry
Low High
Low Low, Stable Low, risky
returns returns
High stable High risky
High returns returns
Threat of Substitution
Identifying the product that can provide the same function to the end customer.
The high margins that are generated have to plough back so there can be sustainable
advantages. The risks faced here are
• Technological innovations nullify past investments
• Low cost focus leads to lack of focus on the customer
• Imitation
Differentiation
• Brand Image
• Technology
• Features
• Customer Service
The risks are
• The differentiating factor becomes outdated
• Imitation
Focus
• Particular buyer
• Segments of the product line
• Geographic market
Serve a particular customer segment well. The risks are:
• Competitors find subgroups within the market
• Cost differential becomes too large between the large companies and the focused
company
Particular segment
Focus
Competitor analysis
Future Goals: Unless explicitly stated one can deduce it from the following questions:
• Financial goals
• Attitude towards risk
• Values or beliefs: is it a maverick industry statesman
• Organizational structure: where are the decisions coming from
• Control and incentive
• Accounting system
• What kind of managers comprise the leadership position, the board, and how
much unanimity among the members
• Are there any regulatory threats
• If controlled by a parent then the following questions can also be asked:
o What are the current results of the parent company
o What is the overall goal of the parent
o How important is the subsidiary to the parent
o Why did the parent get into this business
o What are the corporate wide strategies
o Is there a generic strategy that the parent has compiled
o What are the parent company’s diversification plans
o What clues can one gather from the organization structure of the parent
o What is their reward and punishment system
o Where does the organization recruit from
• Analyze the firm portfolio to determine which businesses are cash cows and
which are not
Assumptions: The competitor has about himself and about the industry and the firms in it.
These can help identify blind spots.
• What does the competitor believe about its relative position in cost, quality etc.
• What is the culture that the competitor comes from
• Does he have emotional attachments to the product
• What does he think about other competitors
• What is the current strategy, and are any assumptions thrown open by them
In all cases locating blind spots can be critical.
The history can also serve as an indicator
• What is the current vs. past performance
• What is the history in the marketplace
• What has he done well at and not done well at
• How has he reacted to particular strategic moves in the past? Reactive, proactive?
Defensive ability
• Vulnerability to events in the environment
• Provocation: What moves provoke a reaction
• Effectiveness of retaliation: What are the events that competitor cannot react
quickly to?
All this should lead to picking the best strategy to counter the competitor. Counter need
not mean head-on-head, it can also mean finding the optimal strategy where both benefit.
Structural Analysis within Industries
Profitability in an industry does not depend only on the industry but also on where you
want to enter within the industry. Also once you are in a strategic group, the ability to
shift to another is also determined by where you are and where you want to go.
Strategic grouping is not similar to market segmentation but is at a more strategic level.
First divide the firms into strategic groups.
The other factor that affects profitability, apart from the strategic group, is the
implementation ability of the firm.
Plot target customer segment along with the key strategic dimension to figure out how
various firms compete for which customer, and where the competition is likely.
Consolidating the entire thing
1) Find out the industry characteristics like overall growth, demand, and aspects of
tech , the bargaining power of buyers and suppliers etc
2) Next find out the strategic groups and apply the five forces to each strategic group
3) Find out then the firms position within the strategic group: The degree of
competition within the strategic group, the difference in implementation ability,
and also the scale of the firm relative to others
At the end of the show what we are saying is that the firm is faced with the following
strategic opportunities:
1) Create a new strategic group
2) Shift to a more favorable strategic group
3) Strengthen the structural position of the existing group or firms position in the
group
4) Shift to a new group, and strengthen that groups structural position
The structural environment: Most early industry firms face the following:
• Technology uncertainty
• Strategic uncertainty
• High initial cost, but steep cost reduction: steep learning curves, and high cost of
volumes
• Embryonic companies and spin-offs: These may cause a scenario where there is
perceived opportunity and profitability
• First time buyers: Emerging industries are faced with new buyers, who must be
informed about the product
• Short time horizon: problems are dealt with either in a hurry or from previous
experience, rather than a detailed analysis of the future scenario
• Subsidy: The government might subsidize much of the raw materials to encourage
formation of the infant industry
• Early mobility barriers:
o Proprietary technology
o Access to distribution channels
o Access to raw materials
o Cost advantages due to experience, made more significant by uncertainties
o Risks which affect the opportunity cost of capital
Early and late markets: deciding which products will come early and which ones later
What is the nature of benefit we are offering the buyer? These can be performance or cost
• Performance advantage
o How large is the performance benefit to the buyer
o How obvious is the advantage
o How pressing is the need from the buyer to improve across the dimensions
offered by the new product
o Does the new product better the competitive advantage of the buyer
o How strong is the competitive pressure to compel changeover
o How price sensitive is the buyer
• Cost advantage
o How large are the cost advantages for the buyer
o How obvious is the advantage
o Can lasting competition be got from lowering cost
o How cost oriented is the buyer in his current business
Strategic Choices: What are the strategies the firm can adopt?
• Shaping industry structure
• Externalities in Industry Development: induce cooperation and policy changes
• Changing role of supplier channels:
• Shifting mobility barriers
• What time should it enter the industry
• How should it cope with competitors
• What are the techniques for forecasting
• Which emerging industry to enter
o Profitable
o Long run profitability
o Can the firm defend itself in the long run
Competitive strategies in declining industries
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These will be so when there are low exit barriers, low uncertainty and things like that