Porter’s 5 Forces- Determining Segment Structural Attractiveness Potential Entrants Suppliers (Supplier Power) Industry Competitors Buyers (Buyer Power) Substitutes (Threat of substitutes)

Threat of Entry Barriers To Entry : )Economies of scale )Product Differentiation of existing firms )Huge capital requirements )Switching costs )Access to distribution channels )Govt. Policy

Bargaining Power of Buyers Buyers compete with the industry by forcing down prices , bargaining for higher quality or more services and playing competition against each other Buyer group is powerful under the following conditions )It is concentrated or purchases large volumes relative to seller sales )The product it purchases from the industry represent a significant fraction of the buyer’s costs )The product it purchases from the industry are standard or undifferentiated: Buyers, sure that they can find alternate suppliers , may play one company against other to extract maximum mileage.

Bargaining Power of Buyers )Faces few switching costs: switching costs, lock the buyer to particular sellers. Lower the cost better for buyer to bargain )Buyers pose a credible threat of backward integration---- if buyers are partially integrated or pose a credible threat of backward integration, they are in a position to demand bargaining concessions. )The industry’s product is unimportant to the quality of the buyer’s product The buyer has full information

Bargaining power of suppliers A supplier group is powerful if the following apply )The supplier’s product is an important input to the buyer’s business )The supplier’s products are differentiated or it has built in switching costs )Supplier poses a serious threat of forward integration )The industry is not an important customer of the supplier group.:== When a supplier sells to a number of industries and a particular industry doesn't represent a significant fraction of sales , suppliers are much more prone to exert power.

Three Generic Strategies Strategic Advantage Uniqueness perceived by customer Low cost position Industrywide Overall cost leadership Differentiation Focus Particular segment

To cope with the 5 competitive forces--- there are 3 generic strategies 1. Overall cost leadership 2. Differentiation 3. Focus

How does low cost help fight the 5 forces )gives the firm a defense against rivalry from competitors , because its lower costs gives the company certain returns. )Defends against powerful buyers because buyers can exert power only to drive down prices to the level of next most efficient competitor. )Defends against powerful suppliers by providing more flexibility to cope with input cost increases. )Defends against new entrants --- entry barriers in terms of scale or cost advantages.

To achieve cost leadership --- upfront capital investment in state-of-the –art equipment/plant is required. e.g --- Texas instruments, DU PONT, Black & Decker, Bic, Kodak etc. Timex has specialised in manufacturing simple low cost watches for the mass market.

Differentiation ---- creating something that is perceived industrywide as unique. Differentiation can take many forms ---- Design / brand image--- Mercedes Technology--- Bose -- speakers and sound system Service--- Maruti Dealer Network – caterpilar, Videocon Quality-- Maytag Rolex watches are handmade of gold and stainless steel and are subjected to strenuous tests of quality and reliability Nikon , HP, Cross

How does differentiation help fight the 5 forces Provides insulation against competitive rivalry because of brand loyalty and resulting lower sensitivity to price Customer loyalty and need for the competitor to overcome uniqueness provides entry barrier –for new entrants Yields higher margins with which to deal with supplier power Mitigates buyer power , since buyers lack comparable alternatives and are therefore less price sensitive.

Focus--- Focusing on a particular buyer group , segment of the product line,, or geographic market The strategy rests on the premise that the firm is able to serve the narrow strategic target very well, more effectively and efficiently then competitors who are competing more broadly.

Focus Differentiation --- Longines makes high jeweled watches to wealthy female consumers Focus Cost – Fiat sells its automobiles only in Italy and selected regions of Europe Focus differentiation- Alpha Romeo sells high –performance cars in the same market (as above)

Risks of Generic Strategies Overall Cost Leadership: Technological change that nullifies past investments or learning--- e.g – cassettes- CD- VCD-DVD Low cost learning by industry newcomers through imitation or through their ability to invest in state-of –the art facilities Inability to see required product or marketing change because of attention placed on cost.

e.g--- Ford Motor company—1920s --- achieved unchallenged cost leadership through limitation of models and varieties (only black colour) , backward integration and highly automated facilities As incomes rose, Americans wanted more style, colours, --- GM (Sloan) gave them what they required. Ford faced enormous costs of strategic readjustment given the rigidities created by heavy investments in cost minimization of an obsolete model.

Risks of Differentiation Cost differential between low-cost competitors and the differentiated firm becomes too great for differentiation to hold brand loyalty. Buyers thus sacrifice some of the features, services or image possessed by the differentiated firm for large cost savings. Imitation narrows perceived differentiation, a common occurrence as industries mature.

Risks of Focus The cost differential between broad range competitors and the focused firm widens to eliminate the cost advantages of serving a narrow target or to offset the differentiation achieved by focus. Differences in desired products or services between the strategic target and the market as a whole narrows. Competitors find submarkets within strategic target and outfocus the focuser.