Presentation on theme: "Porter’s model of 5 competitive forces is one of the most often"— Presentation transcript:
1 Porter’s model of 5 competitive forces is one of the most often Intra- Industry RivalryStrategic Business UnitHow strong is the rivalry among existing players? Does only one player dominate?BargainingPower of the BuyersHow strong is the position of the buyers? Can we sell in large volumes? Do we need to discount heavily?How easy or hard it is for new entrants to start and compete? Any barriers to their entry?Potential New EntrantsHow easy or hard it is fora new product or service to replace what already exists?Substitute Products and ServicesPower of SuppliersHow strong is the position of the suppliers? Are there many? Few? Monopoly?Porter’s model of 5 competitive forces is one of the most oftenused business strategy toolsSource:Michael E. Porter “Forces Governing Competition inIndustry (Harvard BusinessReview, Mar.-Apr. 1979)
2 Porter’s Five Competitive Forces That Shape Strategy Porter’s Competitive ForcesMichael Porter on why America needs an economic strategy
4 Generic Strategies and Industry Forces Cost LeadershipDifferentiationFocusEntry BarriersAbility 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 PowerAbility 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 PowerBetter 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 SubstitutesCan 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.RivalryBetter able to compete on price.Brand loyalty to keep customers from rivals.Rivals cannot meet differentiation-focused customer needs.4
5 Applying the Porter Competitive Model to Wal-Mart Intra-Industry RivalrySBU: Wal-MartRivals: Kmart, Target,Toys R Us, Specialty StoresBargainingPower of BuyersPowerof SuppliersSubstituteProductsand ServicesPotentialNew EntrantsConsumers in Small Town U.S.A.Consumers in the Metropolitans Areas in the U.S.Canadian and Mexican ConsumersOther Foreign ConsumersMail OrderHome Shopping NetworkElectronic ShoppingU.S. Product ManufacturersForeign ManufacturersLocal GovernmentsI/T Product and Service SuppliersForeign General Merchandisers or DiscountersEstablished Retailer Shifting Strategy to Discounting or MegastoresTelemarketingBuying ClubsDoor-to-door Sales
7 Intra-Industry Rivalry Strategic Business Unit Porter Competitive Model Education Industry: U.S. UniversitiesPotentialNew EntrantsForeign UniversitiesDistance LearningMotorola UniversityPhoenix, DeVry, NationalBargainingPowerof SuppliersBargainingPower of BuyersIntra-Industry RivalryStrategic Business UnitFaculty and StaffEquipment, Service, SuppliersAlumniFoundations, BusinessGovernmentStudentsParentsBusinessEmployersLegislatorsSubstituteProductsand ServicesBooks and VideotapesComputer-Based TrainingTraining CompaniesConsulting Firms
8 Porter’s Model and the Role of the Government: The government plays an important role in Porter’s diamond model. Like everybody else, Porter argues that there are some things that governments do that they shouldn't, and other things that they do not do but should. He says, "Government’s proper role is as a catalyst and challenger; it is to encourage - or even push - companies to raise their aspirations and move to higher levels of competitive performance …"Governments can influence all four of Porter’s determinants through a variety of actions such asSubsidies to firms, either directly (money) or indirectly (through infrastructure).Tax codes applicable to corporation, business or property ownership.Educational policies that affect the skill level of workers.They should focus on specialized factor creation. (How can they do this?)They should enforce tough standards. (This prescription may seem counterintuitive. What is his rationale? Maybe to establish high technical and product standards including environmental regulations.)The problem, of course, is through these actions, it becomes clear which industries they are choosing to help innovate. What methods do they use to choose? What happens if they pick the wrong industries?
9 CriticismsAlthough Porter theory is renowned, it has a number of critics.Porter developed this paper based on case studies and these tend to only apply to developed economies.Porter argues that only outward-FDI is valuable in creating competitive advantage, and inbound-FDI does not increase domestic competition significantly because the domestic firms lack the capability to defend their own markets and face a process of market-share erosion and decline. However, there seems to be little empirical evidence to support that claim.The Porter model does not adequately address the role of MNCs. There seems to be ample evidence that the diamond is influenced by factors outside the home country.