from Competitive Advantage: Creating and Sustaining Porter’s Competitive Forces Model (to determine how attractive is the industry) Threat of New Entrants Bargaining Power Of Suppliers Bargaining Power of Buyers The Firm Existing Competitors Rivalry The Industry Five Competitive Forces – Threats and Opportunities; the forces interact Rivalry among existing competitors – Slow/High Growth industry; Many/Few competitors; Exit barriers (e.g., high switching costs); How vicious are the competitors; threat of retaliation; Threat of New Entrants – Less attractive if easy to enter; raise the barriers; low price leader; established economies of scale; proprietary technology; capital requirements; R&D costs; step learning curve; high up front costs; access to distribution channels; access to raw materials; government policies; Bargaining Power of Buyers – Less attractive if power increases (group buying); consortia; Large buyers such as GM, Nissan, etc. demand JIT, EDI; linkages; lock-in’s?; demand more information and self-serve; Threat of Substitute Products or Services – Less attractive if substitute products or services are easy to find and obtain; commoditization of products and services; UPS/FedEx/USPS/DHL; Intel/AMD; Global competition; low cost differentiation possible; focused differentiation possible; establish Brand loyalty; Bargaining Power of Suppliers – Less attractive if power increases (cartels); linkages; lock-in’s? are suppliers competitors also? Outsourcing; supply chain management; service supply chains; Cisco; Sample industry for discussion – Operating Systems (including open source products), computers, airlines (e.g., Star Alliance), parcel delivery (UPS/FedEx/USPS/DHL), ERP, etc. Threat of Substitute Products or Services from Competitive Advantage: Creating and Sustaining Superior Performance by Michael Porter, The Free Press, 1985.

Porter’s Generic Strategy: Overall Cost Leadership At a given level of quality and large market Economy of scale possible, win on volume Process efficiency, unique access to low cost materials and manpower, vertical integration, cost avoidance, access to capital, skill in process design, efficient outlet channels Risks – matching services, price war, equalizing technology, market consolidation cut cost to match industry average; price accordingly; hope to gain market share; price war can lead to death spiral (deadly embrace); hope low cost producer can sustain longer than competition; access to low cost materials and manpower (off-shoring) and capital are barriers to entry beware of smaller competitors consolidating together to form a larger entity UPS, Amazon.com phone discount companies – slamming lower inventory costs – hospitals discount airlines – JetBlue more self service (on the web?)

Porter’s Generic Strategy: Differentiation Unique service valued by customer – better or different from competitors – brand loyalty Maybe able to charge premium, pass on higher costs, cannot be easily copied, barrier to entry Strong R&D; innovative service; strong marketing and sales to convey the message; reputation is important Risks – imitation; change in taste/need; slow growth Credit card example – fees, rewards, partnerships, online services, other services

Porter’s Generic Strategy: Focus Concentrate on a market segment – niches, specialization to achieve cost or differentiation Enlarge market - globalization Need customer loyalty as barrier to entry Usually low volume – subject to supplier power Higher costs can be passed on – charge premium R&D and marketing important, need to know the market well and substitution is easy Risks – imitation; change in taste/need; large competition can enter segment easily; others might also focus on smaller segment Home Depot vs Lowe vs Expo vs neighborhood hardware stores ultimate – 1:1 marketing – personalization – make them feel special – c

Generic Strategies and Industry Forces Cost Leadership Differentiation Focus Entry Barriers Ability to cut price in retaliation deters potential entrants. Customer loyalty can discourage potential entrants. Focusing develops core competencies that can act as an entry barrier. Buyer Power Ability to offer lower price to powerful buyers. Large buyers have less power to negotiate because of few close alternatives. Large buyers have less power to negotiate because of few alternatives. Supplier Power Better insulated from powerful suppliers. Better able to pass on supplier price increases to customers. Suppliers have power because of low volumes, but a differentiation-focused firm is better able to pass on supplier price increases. Threat of Substitutes Can use low price to defend against substitutes. Customer's become attached to differentiating attributes, reducing threat of substitutes. Specialized products & core competency protect against substitutes. Rivalry Better able to compete on price. Brand loyalty to keep customers from rivals. Rivals cannot meet differentiation-focused customer needs. From QuickMBA.com