Strategic Financial Management

FINA 1035

Porters Five Forces

Dr Karen Brickman
January 2018
Polite notice

Can all students please ensure that their mobiles

phones are on silent and other electronic
equipment is safely put away.
 Learning outcomes

• To examine the environment of an organisation

through the five forces framework.

To apply the five forces model

3
Layers of the Business Environment

The
Organisation
 Industries and Sectors

Industry
Industry––aagroup
groupof
offirms
firmsproducing
producingthe
thesame
sameprincipal
principalproduct
productor
orservice
service
e.g.
e.g.mobile
mobilephones
phones

Sector
Sector––aagroup
groupof
oforganisations
organisationsproviding
providing aaparticular
particularservice
service
e.g.
e.g.healthcare
healthcare

Key Differece:
A sector refers to a large segment of the economy, whereas
industry refers to a specific group of firms or organisations.

Key Issue :
What are the Competitive Forces at work in the industry or SBU?
Analysis of forces within an
industry
•
Use Porter’s Five Forces model

• It works by looking at the strength of five important forces that affect

competition

• Helps identify Industry profit potential =

industry attractiveness

• Use to identify strong and weak forces

• Ultimate goal is to use the results of your analysis to adjust your

organization's strategy

THIS IS A KEY MODEL THAT MANY STUDENTS

MISUNDERSTAND
 The Five Forces Framework

Source: Adapted from M.E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors © 1980,
Free Press, 1980, p. 4. Copyright 1980,1988 by The Free Press, a division of Simon & Schuster Inc. Reproduced with
permission.
 Five Forces Analysis (1)

The threat of entry ...

Dependent on barriers to entry such as:
economies of scale
capital requirements of entry
experience
access to supply or distribution channels
customer or supplier loyalty
expected retaliation Just like the PESTLE,
legislation or government action these are generic
items, we do NOT
differentiation
want to see these in
your report. We will
want data and
evidence
 Five Forces Analysis (2)

Threat of substitutes

•Reduction in demand for products as customers

switch to alternatives
•Price/performance is key
•Substitutes come from OUTSIDE the industry
(SBU)

•Do not confuse with competitor threats from inside

the industry

Substitutes are products or services that

offer similar benefits to an industry’s products
or services but by a different process
 Five Forces Analysis (3)
Buyer power is likely to be high where
there
is / are:
a concentration of buyers
many small operators in the supplying industry
components/materials that are a high percentage
of cost to the buyer leading to “shopping around”
low switching costs
buyer competition threat (backward integration)
Note : buyer may not be same as the ultimate
consumer
 Five Forces Analysis (4)
Supplier power is likely to be high where
there
is / are:
a concentration of suppliers
customers that are fragmented and bargaining
power low
high switching costs
powerful supplier brand
supplier competition threat (possible forward
integration by the supplier)
Let’s look at the electric car
industry

What does the supplier power look like?

Materials for Electric Batteries
 Five Forces Analysis (5)
Competitive Rivalry is likely to be high when:
competitors are in balance
there is slow market growth (product life cycle)
there are high fixed costs in an industry
markets are undifferentiated
there are high exit barriers

Competitive rivals are organisations with

similar products or services aimed at the
same customer group
Key Aspects of 5-Forces Analysis (1)
•THE 5 FORCES MODEL IS USED TO ANALYSE
AN INDUSTRY - NOT AN INDIVIDUAL
PRODUCER/PLAYER IN IT

If an organisation has several Strategic Business Units (SBUs) :

1) Use the model for the industry of ONE SBU at a time (in
your report just select one SBU)

2) Define the industry or market you are applying the model to

3) To build an overall picture of the whole organisation, apply

the model separately to each SBU and its industry/market
Key Aspects of 5-Forces Analysis (2)

DON’T JUST LIST THE FORCES - DERIVE

IMPLICATIONS FOR INDUSTRY/ORGANISATION :

• Identify the strongest force(s)

• Say whether the industry is attractive or unattractive
Unattractive industry = many strong forces at work
Attractive industry = many weak forces
• Identify the underlying key PESTEL factors in the
macroenvironment driving the 5 Forces
• Will these change in the future?
• Establish interconnections between the five forces
• Identify how to use the forces as part of strategy rather than
accommodate them (eg erect barriers to entry)
Other Issues in a Five Forces
Analysis
Is the industry structure changing because
of :

Changing boundaries and convergence of

industries?
Complementary products ?
Industry life cycle ?
The Industry Life Cycle
Comparative Industry Structure Analysis
Comparative Industry Structure
Analysis

Is a tool used to map the dimensions of various scores in the 5

forces model.

Can be used as a visual representation of the analysis and can be

used to plot changes over time.

The implications of these changes can then be analysed and acted

upon.
How does Michael Porter apply the five forces model?

Porters video to go here

So let’s think about your report

You have to choose one SBU to analyse

Think carefully about the ultimate end of your

report
You have to choose one winning future strategic
option for the SBU
So choose the SBU that will help your sell that
option.
In your report you must state the SBU you have
chosen before you do this section.
So let’s think about your report

What we DO NOT want to see:

For example, SBU: Automotive

Rivalry:

a) Daimler is the biggest competitor

b) There is high competition in this SBU
So let’s think about your report

What we DO NOT want to see:

This is not about Tesla,
this is an SBU analysis
SBU: Automotive
Rivalry:
a) Daimler is the biggest competitor
b) There is high competition in this SBU
So let’s think about your report

What we DO NOT want toThis

see:tells me very little and
they is no evidence or data
to support it.
SBU: Automotive
Rivalry:
a) Daimler is the biggest competitor
b) There is high competition in this
SBU
What do we want to see?

SBU: Automotive
Rivalry:
Competition is high, with X of large competitors
with stable market positions. Impact: Difficult to
compete against large players.

Company 2013 2014 2015 2013 Market share

Daimler 1 ranking 1 1
BMW 2 2 2
Tesla 3 3 3
Ref: Euromonitor,
2017
What do we want to see?

SBU: Automotive SBU clearly stated before any

analysis
Rivalry:
Competition is high, with X of large competitors
with stable market positions. Impact: Difficult to
compete against large players.

Company 2013 2014 2015 2013 Market share

Daimler 1 ranking 1 1
BMW 2 2 2
Tesla 3 3 3
Ref: Euromonitor,
2017
What do we want to see?

A clear point
SBU: Automotive
Rivalry:
Competition is high, with X of large competitors
with stable market positions. Impact: Difficult to
compete against large players.
Company 2013 2014 2015 2013 Market share
Daimler 1 ranking 1 1
BMW 2 2 2
Tesla 3 3 3
Ref: Euromonitor,
2017
What do we want to see?
(including table) evidence and
SBU: Automotive data to support your point.

Rivalry:
Competition is high, with X of large competitors
with stable market positions. Impact: Difficult to
compete against large players.
Company 2013 2014 2015 2013 Market share
Daimler 1 ranking 1 1
BMW 2 2 2
Tesla 3 3 3
Ref: Euromonitor,
2017
What do we want to see?

Impact clearly explained

SBU: Automotive
Rivalry:
Competition is high, with X of large competitors
with stable market positions. Impact: Difficult to
compete against large players.
Company 2013 2014 2015 2013 Market share
Daimler 1 ranking 1 1
BMW 2 2 2
Tesla 3 3 3
Ref: Euromonitor,
2017
What do we want to see?

SBU: Automotive Reference provided – can go in

footnote
Rivalry:
Competition is high, with X of large competitors
with stable market positions. Impact: Difficult to
compete against large players.

Company 2013 2014 2015 2013 Market share

Daimler 1 ranking 1 1
BMW 2 2 2
Tesla 3 3 3
Ref: Euromonitor,
2017
Seminar

•You are all to prepare Porter’s five forces as if you

were writing it for your report.

•Remember this is more than simply looking at

market shares and stability. How do they compete
etc…..
Seminar

PRESENTATION ON FIVE FORCES

HOW GREAT LEADERS INSPIRE
ACTION

HOW GREAT LEADERS INSPIRE ACTION

Video is nearly 10 year old. I bet Elon Musk saw this!!