4 Michael PorterMichael E. Porter is the C. Roland Christensen Professor of Business Administration at Harvard Business School and Director, Institute for Strategy and CompetitivenessHe is the author of many seminal books on competition and strategy, including On Competition, The Competitive Advantage of Nations, Competitive Advantage: Creating and Sustaining Superior Performance, etc
5 21st Century Competitive Landscape Fundamental nature of competition is changing:The pace of change is relentless....and increasingRapid technological changesTraditional industry boundaries are blurring, such as in ...Rapid technology diffusionsDramatic changes in information and communicationComputersTelecommunicationsTelevisionInformationVisual ArtsIncreasing importance of knowledge
6 How Environment Affects Industry and Competition Socio-CulturalDemographicPolitical/LegalIndustry Environment(5 Forces)CompetitiveEnvironmentGlobalEconomicTechnological10
8 The Five Forces Model of Competition Supplier PowerFew concentrated suppliersLow importance of buyer to supplierDifferentiated productsProduct is important to the buyerHigh switching costsScarcity of substitute productsDegree of RivalryDeclining industryUndifferentiated productsNumerous competitorsSwitching costsExit barriersHigh strategic stakesThreat of SubstitutesPrice differencesPerformance of substitutesSwitching costsAppeal of substitutesThreat of EntryCost advantagesGovernment policyEconomies of scaleCapital requirementsBrand identitySwitching costsAccess to distributionExpected retaliationCompetitionIntensityDeterminants of Buyer PowerBargaining leverage Price sensitivityBuyer concentration Price/Total PurchasesBuyer volume Impact on qualityBuyer information Product differencesBuyer switching cost Brand identityDegree of differentiation of products
9 Barriers to Entry Economies of Scale Government policy Switching costs - Bureaucracy, licensing and permit requirements that may be forbidding to new entrants (closed professions)-Regulation / Deregulation of industries (telecoms, power, water etc)Switching costs- Customers may be loyal to existing businesses due to favorable prices, psychological contract, or technology compatibility.
10 Barriers to Entry (cont) Capital RequirementsFacilities, Inventories, Marketing activities (sales, advertisement, distribution), Availability of capitalExpected retaliationResponses by existing competitors may depend on a firm’s present stake in the industry (available business options). Established firms may retaliate through advertizing campaigns, price wars, political lobbying, monopolization of distribution channels (e.g. 3E), battle for the super market selves, slander (e.g. British Airways vs. Virgin) etc.
11 Substitute products Existence of similar products Switching costs For example, digital encyclopedias (Wikipedia, Encarta, Magenta) have posed a threat to traditional paper publishersSwitching costsSwitching costs of industrial customers may involve production redesign and retraining their workforce.Consumers’ preference to substitutesPreferences of consumers are dependent upon prices and performance of substitutes (e.g. e-readers & tablets vs. paper books).
12 Bargaining Power of Suppliers Suppliers exert power in the industry by:Threatening to raiseprices or to reduce qualityBargaining Power of SuppliersSuppliers are powerful if:*Supplier industry is dominated by a few firms (ore suppliers vs. steel customers)*Buyer is not an important customer to supplier*Suppliers’ product is an important input to buyers’ productPowerful suppliers can squeeze client industry profitability if firms are unable to absorbcost increases*Suppliers’ products have high switching costs* E.g. it is very difficult for a PC manufacturer to switch from Microsoft Windows to Linux (suppliers)*Suppliers’ products are differentiatedSuppliers’ goods have few substitutes*The reverse also applies()*Supplier poses credible threat of forward integration, thus competing customers (e.g. establishing super markets)16
13 Bargaining Power of Buyers Buyer groups are powerful if:*Buyers are concentrated, or volume of purchases is large compared to seller’s overall sales*Purchase accounts for a significant fraction of supplier’s sales (Carrefour, Tesco)Buyers compete with supplying industry by:Bargaining down prices*Products are undifferentiated (cement)*Buyers face few switching costs*Buyers’ industry earns low profits*Buyer presents a credible threat of backward/vertical integration (glass producers vs. glass frame manufacturers)*Industrial buyers may be dependent on the technology of suppliersForcing higher qualityPlaying firms off ofeach otherBuyer has full information on supplier’s costs and transactionsThe reverse also applies()18
14 Intensity of Rivalry Among Competitors Industry rivalry increases when:There are numerous or equallybalanced competitorsIndustry growth slows or declinesThere are high fixed costs orhigh storage costs → low profit marginsProducts are undifferentiatedSwitching costs are lowStrategic stakes are high (e.g. energy)High exit barriers prevent competitors from leaving the industry
15 Intensity of Rivalry Rivalry is generally stronger when: Rivals are active in making fresh moves to increase sales and market shareBuyer demand is decliningThe number of rivals is largeRivals are of roughly equal size and capabilityBuyer costs to switch brands are lowOne or more rivals is dissatisfied with their current position and market share and make aggressive moves to improve their market prospectsWhen one or two rivals have powerful strategies and other rivals are scrambling to stay in the gameThe “Weapons” of Competitive RivalryLower pricesMore appealing featuresBetter product performanceHigher qualityStrong brand image and appealBetter customer serviceWider product selectionBigger/better sales networkStronger product innovation capabilitiesLonger warrantiesHigher levels of advertisingRivalryamongCompetingSellersEfforts of rivals to gainbetter market position, higher sales and market share,and competitiveadvantageRivalry is generally weaker when:Firms draw sales and market share away from rivalsBuyer demand is growing rapidlyBuyer costs to switch brands are highgl
16 Interpreting Industry Analyses Low entry barriersSuppliers and buyers have strong positionsUnattractive IndustryStrong threats from substitute productsIntense rivalry among competitorsLow profit potential
17 Interpreting Industry Analyses High entry barriersSuppliers and buyers have undefined positionsAttractive IndustryFew threats from substitute productsModerate rivalry among competitorsHigh profit potential
18 Competitor Analysis Response: Future objectives Response Current strategyResponse:What will our competitors do in the future?Where do we hold an advantage over our competitors?How is our relationship with competitors formed?AssumptionsCapabilities