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INSTRUCTOR SLIDES

EQUITY

LECTURE 30
THE FIVE COMPETITIVE FORCES THAT SHAPE STRATEGY

Michael Porter’s Five Forces Industry structure drives competition and profitability 1. 5. INSTRUCTOR SLIDES | The Five Competitive Forces That Shape Strategy 2 . Power of buyers. Threat of new entry. Rivalry among existing competitors. Threat of substitutes. 4. Power of suppliers. 2. 3.

g.g.g. brand. ERP SAP) Capital requirements. INSTRUCTOR SLIDES | The Five Competitive Forces That Shape Strategy 3 . (e. (e. Restrictive government policy. etc) ● New firms will not be inclined to enter an industry if they expect existing firms to have a strong. ● Barriers to entry are advantages that incumbents have relative to new entrants. acces to raw material.Threat of Entry ● The entry of new firms puts pressure on existing firms’ profits. MS office) Customer switching costs. Other incumbency advantages (e. Intel: economies of scale in r&d) Demand-side benefits of scale. Unequal access to distribution channels. They may arise from: o o o o o o o Supply-side economies of scale (e.g. antagonistic reaction to their entry. Cost and quality advantages as a result of their experience.

new entrants would only be able to gain market share by taking it away from incumbents. o Incumbents have the ability and willingness to lower prices to retain their market share. o Incumbents have substantial resources to fight back. o Industry growth is slow.Threat of Entry ● Expected retaliation is likely to be strong if: o Incumbents have retaliated vigorously to new entrants in the past. INSTRUCTOR SLIDES | The Five Competitive Forces That Shape Strategy 4 .

It is relatively easy for the supplier to integrate forward into the industry.Power of Suppliers ● Powerful suppliers can capture a higher proportion of industry profits by: o Charging higher prices for raw materials. ● The bargaining power of a supplier firm is relatively high if: o o o o o The number of suppliers is small. Substitutes are not easily available. Industry participants would face significant switching costs if they switched suppliers. INSTRUCTOR SLIDES | The Five Competitive Forces That Shape Strategy 5 . o Limiting quality or services. o Passing on the bulk of costs to industry participants. The supplier serves multiple industries.

● Buyers are relatively price sensitive if: o The product constitutes a significant portion of buyers’ total cost of inputs. INSTRUCTOR SLIDES | The Five Competitive Forces That Shape Strategy 6 . o Demand better quality products or services. o Switching costs are low. o Play industry participants off against each other. o The industry offers standardized or undifferentiated products. o It is relatively easy for them to integrate backwards. o They are under pressure to cut down expenses (due to low profit margins) o Quality of the buyers’ final product or service does not depend heavily on the industry’s product. ● Buyers generally have relatively strong negotiating leverage if: o There are only a few buyers (or buyer of large quantities).The Power of Buyers ● Powerful buyers may: o Force down prices.

Empresa DuPont) INSTRUCTOR SLIDES | The Five Competitive Forces That Shape Strategy 7 .The Threat of Substitutes A substitute product is one that performs the same. Buyers face low switching costs. function as that performed by the industry’s product. (Ej. or a similar. 2. The threat of a substitute is high if: 1. Note: Analysts should be alert to changes in other industries that can make their products attractive substitutes. The substitute offers a better price-performance than the industry’s product.

● New product introductions. The basis of competition among companies (si es en precio. no ayuda. INSTRUCTOR SLIDES | The Five Competitive Forces That Shape Strategy 8 . ● Industry growth is slow. ● Industry firms are highly committed to the business.Rivalry among Existing Competitors Rivalry among industry firms can take the form of: ● Price discounting. ayuda a la rentabilidad de las empresas) The intensity of rivalry is relatively high if: ● There are a large number of competitors of similar size and power. The impact of rivalry among existing competitors depends on: 1. ● Industry firms are not familiar with each other’s competitive strategies. ● Aggressive advertising. Si es en otro atributo. The intensity of competition among companies. 2. ● There are high exit barriers.

profitability may improve as the needs of a wider variety of customers are satisfied → Positive-sum competition. ● The product has a short shelf life.g. (e. ● When each firm concentrates on a different segment or feature. and the result is zero-sum competition. Airlines) ● Capacity enhancements can only be undertaken in large increments.Rivalry among Existing Competitors Firms are more likely to compete on price if: ● They offer products that are almost identical. INSTRUCTOR SLIDES | The Five Competitive Forces That Shape Strategy 9 . one firm’s gain is another’s loss. Rivals competing on the same dimension: ● When all firms compete on the same attribute. ● Customers face low switching costs ● They incur high fixed costs and low marginal costs.

● It cannot guarantee profitability if the threat of substitutes is high. Technology and Innovation ● Low-tech industries with price insensitive buyers. ● It can make the industry more attractive to potential entrants. Industry Growth Rate A high growth rate is not always a positive sign for an industry. it can work against industry participants in the following ways: ● Rapid growth can increase the bargaining power of suppliers. ● (buscar en industrias “aburridas”) INSTRUCTOR SLIDES | The Five Competitive Forces That Shape Strategy 10 . high switching costs or high entry barriers may be more profitable than ‘sexy’ industries.Fleeting Factors 1. 2.

and can also influence the intensity of industry rivalry. INSTRUCTOR SLIDES | The Five Competitive Forces That Shape Strategy 11 . Government ● The impact of government policies on an industry is best evaluated in terms of their impact on the five competitive forces. Complementary Products and Services ● Complements are goods and services that are used together with the industry’s product. 4. policies in favor of labor unions increase the bargaining power of suppliers. ● On the other hand.Fleeting Factors 3. licensing requirements raise barriers to entry. can affect the threat of substitutes. ● They can raise or lower barriers to entry. o For example. increasing an industry’s profit potential. limiting profitability.

4.g. 1.Changes in Industry Structure The structure of any given industry changes over time. Shifting threat of substitution. Note: The nature of competition in the industry is also affected by companies pursuing mergers and acquisitions to improve their cost and/or quality. INSTRUCTOR SLIDES | The Five Competitive Forces That Shape Strategy 12 . 3.: expiration of a patent) 2. New bases for rivalry. Shifting threat of new entry. This makes it essential for analysts to be on the lookout for changes as they can have a significant impact on industry profitability. Changing supplier or buyer power. (e. (rivalry among firms intensifies as the industry matures and growth slows down).

● Allow a company to evaluate whether an industry is declining. ● Help identify industries that have bright prospects. the company may look to exit the industry.Positioning the Company The five forces framework may: ● Reveal profitable positioning opportunities within the industry. in such a case. INSTRUCTOR SLIDES | The Five Competitive Forces That Shape Strategy 13 .

which has wrestled the dominant position in the industry away from the 4 (previously 6) major labels. INSTRUCTOR SLIDES | The Five Competitive Forces That Shape Strategy 14 . but competitors remained reluctant to distribute their products through a channel owned by a rival.Exploiting Industry Change Example: Consider the music industry: Unauthorized music downloads over the internet were replacing services provided by record companies. Different record companies tried to overcome this problem by creating technical platforms for digital distribution of music. Apple was successfully able to exploit this change in the industry by introducing its iTunes music store.

● Threat of substitutes. (airlines vs travel agents  reduce agent commissions) ● Supplier power.Shaping Industry Structure A company may reshape industry structure by: 1. Increase the overall pool of economic vale: finding new buyers. INSTRUCTOR SLIDES | The Five Competitive Forces That Shape Strategy 15 . buyers. coordinating witth suppliers to limit unnecessary costs and agreeing on better quality standards to be able to charge premium prices. and substitutes or sacrificed to deter entrants by reducing: ● Customer power. ● Rivalry. (capturar una porción más grande del “pie”) 2. Expanding the profit pool. ● Threat of entry. Redividing profitability. (incrementar el “pie”) A company may reduce the share of industry profits captured by suppliers.

both positive and negative Identify aspects of industry structure that might be influenced by competitors. suppliers. Es consistente en el largo plazo) Analyze recent and likely future changes in each force. if appropriate Assess the underlying drivers of each competitive force to determine which forces are strong and which are weak and why Determine overall industry structure. by new entrants. or by your company INSTRUCTOR SLIDES | The Five Competitive Forces That Shape Strategy 16 . and test the analysis for consistency (nivel de rentabilidad y como se la reparten. competitors. substitutes and potential entrants).Typical Steps in Industry Analysis Define the relevant industry (products and geographic scope) Identify the participants and segment them into groups (buyers.

● Paying equal attention to all of the forces rather than digging deeply into the most important ones. ● Confusing effect with cause. ● Using static analysis that ignores industry trends. INSTRUCTOR SLIDES | The Five Competitive Forces That Shape Strategy 17 . ● Making lists instead of engaging in rigorous analysis. ● Using the framework to declare an industry attractive or unattractive rather than using it to guide strategic choices. avoid the following common mistakes: ● Defining the industry too broadly or too narrowly. ● Confusing cyclical or transient changes with true structural changes.Common Pitfalls While conducting an analysis.