DEPARTMENT OF ATHM

MBA THM-3sem BAT-702 Unit-2

TOPICS/CORE

Porters five forces Model

The secret of success in competition lies often not so
much in the use of one's own strength but in the
exploitation of the other side's weaknesses.
LEARNING OBJECTIVES

1 Understand the importance of the external context

for strategy and firm performance

2 Identify the major features of an industry and the

forces that affect industry profitability

3 Understand the dynamic characteristics of the

external context
COMPONENTS OF THE GENERAL ENVIRONMENT

Economic

Demographic
Sociocultural

Industry
Environment

Competitive
Environment

Political/
Global
Legal

Technological
THE EXTERNAL ENVIRONMENT OF THE
ORGANIZATION
Macro Environment
Political, Economic, Sociocultural,
Technological, Environmental, Legal

Industry Environment

Strategic Group

The Organization
FORMS OF COMETITION

Generic Competition

Form Competition

Industry Competition

Brand Competition
INDUSTRY FRAGMENTATION AND
CONCENTRATION
Monopoly Duopoly Fragmented
KEY QUESTION TO ASK

What macro environmental

conditions will have a material What is our
effect on our ability to implement firms industry?
our strategy successfully?

What are the

characteristics of the
How stable are these
industry?
characteristics?
EXTERNAL CONTEXT OF STRATEGY

An internal analysis is
just half of what is
Internal
needed to build
Strengths strategy
Weaknesses The SWOT and more
Capabilities complicated
frameworks help us
Relationships understand the full
Etc. picture
THE COLA WARS (TIMELINE)
Coca-Cola Pepsi

Coca-Cola invented 1886

1950 Beat Coke

1960 Pepsi Generation

1970 Pepsi Challenge

Kick Pepsi's can 1980 Foster entrepreneurial

Diet Coke spirit of Pepsis people
New Coke
1990

Repair Coke and restore 2000 Diversify beyond

Stock price soft-drinks
Diversify product line
FIVE-FORCES ANALYSIS

1. The five forces are environmental forces that impact on a

companys ability to compete in a given market.

2. The purpose of five-forces analysis is to diagnose the principal

competitive pressures in a market and assess how strong and
important each one is.
PORTERS FIVE FORCES MODEL OF COMPETITION

Threat of
Threat
Newof New
Entrants
Entrants
THREAT OF NEW ENTRANTS

Economies of Scale

Product Differentiation
Barriers to
Entry Capital Requirements

Switching Costs

Access to Distribution Channels

Government Policy

Expected Retaliation
PORTERS FIVE FORCES MODEL OF COMPETITION

Threat of
Threat
Newof New
Entrants
Entrants

Bargaining
Power of
Suppliers
BARGAINING POWER OF SUPPLIERS

Suppliers are likely to be powerful if:

Supplier industry is dominated by a few firms

Suppliers exert power
in the industry by:
Suppliers products have few substitutes
* Threatening to raise
prices or to reduce quality Buyer is not an important customer to supplier

Powerful suppliers can

squeeze industry Suppliers product is an important input to
buyers product
profitability if firms are
unable to recover cost
Suppliers products are differentiated
increases
Suppliers products have high switching costs

Supplier poses credible threat of forward

integration
SUPPLIER POWER
Diamond supply Diamond
Percent Retailers

Others 50

When firms in the supply

industry can dictate
terms, they can extract
greater profits

DeBeers 50
PORTERS FIVE FORCES MODEL OF COMPETITION

Threat of
Threat
Newof New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers
BARGAINING POWER OF BUYERS

Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases are large

relative to sellers sales Buyers compete with the
supplying industry by:
Purchase accounts for a significant fraction of
suppliers sales

Products are undifferentiated * Bargaining down prices

Buyers face few switching costs * Forcing higher quality

Buyers industry earns low profits * Playing firms off of

each other
Buyer presents a credible threat of backward
integration

Product unimportant to quality

Buyer has full information

 ILLUSTRATIVE
BUYER POWER
Industry A Industry B
Suppliers Buyers Suppliers Buyers

In industries
characterized with
many suppliers
and few buyers,
buyers often
capture a greater
Profits Profits share of profits
PORTERS FIVE FORCES MODEL OF COMPETITION

Threat of
Threat
Newof New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers

Threat of
Substitute
Products
THREAT OF SUBSTITUTE PRODUCTS

Keys to evaluate substitute products:

Products with Products with improving

similar function price/performance tradeoffs relative to
limit the prices present industry products
firms can charge

Example:

Electronic security systems in place of

security guards

Fax machines in place of overnight mail

delivery
THREAT OF SUBSTITUTES
Soft drinks Movie rentals

Block buster

Coke Pepsi

Bottled water Hollywood video

Cable TV
CAUSES OF RIVARLY
Barriers to Entry
Barriers to Exit
In addition to entry
and exit barriers,
many factors drive
rivalry
History of price wars

Level of fixed costs

Industry
concentration

Market growth
Strong brands Few other opportunities
Proprietary technology Sunk investments Etc.
Start-up costs Etc.,
Etc.,
PORTERS FIVE FORCES MODEL OF COMPETITION

Threat of
Threat
Newof New
Entrants
Entrants

Bargaining Rivalry Among Bargaining

Power of Competing Firms in Power of
Suppliers Industry Buyers

Threat of
Substitute
Products
RIVALRY AMONG EXISTING COMPETITORS

Intense rivalry often plays out in the following ways:

Jockeying for strategic position

Using price competition

Staging advertising battles

Increasing consumer warranties or service

Making new product introductions

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse off

Advertising battles may increase total industry demand, but may be costly to
smaller competitors
RIVALRY AMONG EXISTING COMPETITORS

Cutthroat competition is more likely to occur when:

Numerous or equally balanced competitors

Slow growth industry
High fixed costs
Lack of differentiation or switching costs
Diverse competitors
High strategic stakes
High exit barriers
IMPACT OF COMPLEMENTOR
Complementor: Three Examples

Any factor that makes it more attractive Hot dogs

for suppliers to supply an industry on
favorable terms or that makes it more + More sales
attractive for buyers to purchase
Buns
products or services from an industry
at prices higher than it would pay on Music
absence the complementor
+ More attractive offering

MP3 player

Delta plane
orders

+
Lower costs from Boeing
American
Airlines
plane orders
References

Strategic Management and Business

Policy, Kazmi Azhar
New Delhi/McGraw Hill.
Strategic Management
Fred R. David PHI Learning
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