Company’s macroenvironment. Q1. what are the industry’s dominant economic features?. Market size growth rate the number & sizes of buyers and sellers the geographic boundaries of the market The degree of product differentiation the speed of product innovation
the number & sizes of buyers and sellers
the geographic boundaries of the market
The degree of product differentiation
the speed of product innovation
the extent of vertical integration.
The extent of scale economies& experience/learning curve effects.
Each time cumulative volume doubles, value added costs (including administration, marketing, distribution, and manufacturing) fall by a constant percentage.
The company can gain a cost advantage with largest cumulative production volume.Learning/experience curve effects
Michael E. Porter
Tool for diagnosing the principal competitive pressure
Build the model of competition in 3 steps
· Step1: For each of the five forces, identify the different parties involve
· Step2: Evaluate how strong the pressures stemming form each forces are
· Step3: Determine whether the strength of the five forces is helpful to earning profits
· when one firm deploys a strategy that produces good results, its rivals respond with offensive and defensive countermoves of their own.
· competitive battle among rivals can assume many forms that extend well beyond lively price competition.
The intensity of rivalry varies from industry to industry and depends of many identifiable factors
Buyer demand is growing or falling off slowly
Sellers find themselves with excess capacity
Buyer costs to switch brands are low
Products are commodities
Firms have high fixed and storage costs
Competitors are numerous/similar(size, strength)
Rivals have diverse objectives/strategies/origin
Rivals have high exit barriers
Buyer demand is growing rapidly
Buyer costs to switch brands are high
Products are strongly differentiated
Customer loyalty is high
Fixed and storage costs are low
Sales are concentrated among a few sellers
Rivals are homogeneous
Exit barriers are low
Barriers to entry
Expected reaction of existing firms
The size of the barriers and expected reaction is a huge determinant of any potential new firms ability to survive in the marketCompetitive Threat of new entrants
Threat of entry can easily fluctuate as factors change
If this is high, firms will be less deterred to enter the market
Usually attracts larger, established firms with sufficient resources in related markets to enter
Potential entrants & capabilities –
Large existing companies with a strong brand image may be able to enter some markets easily
The bigger the pool of potential entrants with the capabilities to enter the market, the stronger the threat of entryfactors affecting threat of entry
Good substitutes are available
They are attractively priced
Consumers have low costs in switching to substitute
Whether a substitute product is a threat can be determined by; sales growth comparison, addition of capacity and profit increasesCompetitive pressure of substitutes
: the relative ability of parties in a situation to exert influence over each other.
Suppliers with Bargaining Power
: can erode industry profitability.
Supplier products are in short supply.
Supplier products are differentiated.
Supplier products are critical to industry.
High costs in purchasing alternatives.
No good substitutes.
Suppliers are not dependant on industry.
Suppliers industry is concentrated.Factors Determining the Strength of Suppliers’ Bargaining Power.
A large entity of suppliers.
The item is available from many suppliers.
Low costs for finding alternatives.
Industry members account for a big fraction of suppliers’ sales.
No suppliers with large market shares.
Possibility for industry members to integrate into the supply business. (self-manufacturer)
= price elasticity
: It is a measure of responsiveness of the quantity of a good or service demanded to changes in its price.
: can limit industry profitability.
Buyer price sensitivity
: limits the profit potential of industry
Low costs in switching to other product.
Products are undifferentiated.
Large number of buyers. Few relation with industry.
Buyers demand is weak.
Buyers are well-informed.
Buyers with ability to integrate into the business of sellers.
Buyers with ability to postpone purchase
Buyers are price-sensitive.Factors Determining the Strength of Buyers’ Bargaining Power.
High costs in switching to competing products.
Sellers’ products are differentiated.
Buyers are small and numerous relative to sellers.
Sufficient supply for satisfying buyers demand.
Limited information about sellers.
Buyers are not price-sensitivity.
competitive forces set the stage for
evaluating whether the strength of the
five competitive forces is conducive to
good profitability.Is the collective strength of the five competitive forces conducive to good profitability?
When all five forces are producing strong competitive pressures, the competitively unattractive industry occurs.
Rivalry among sellers is vigorous.
Low entry barriers.
Competition from substitutes in intense.
Suppliers and buyers can exercise considerable leverage.
When the overall impact of the five
competitive forces is moderate to weak,
the attractive industry occurs.
The members of the industry can expect to earn good profits and a nice return on investment.
2 step: Assessing whether the drivers of change are, individually or collectively, acting to make the industry more or less attractive.
3 step: Determining what strategy changes are needed to prepare for the impacts of the anticipated change.Analyzing industry dynamics
Diffusion of technical know-how across companies and countries
Improvements in efficiency in adjacent markets
Reductions in uncertainty and business risk
Regulatory influences and government policy changes
Changing societal concerns, attitudes, and lifestylesIdentifying an industry’s drivers of change
Overall, are the factors driving change causing demand for the industry’s product to increase or decrease?
Is the collective impact of the drivers of change making competition more or less intense?
Will the combined impacts of the change drivers lead to higher to lower industry profitability?
Key Question: whether a new strong force is emerging or whether forces that are strong presently are beginning to weakenAssessing the impact of the factors driving industry change
What strategy adjustments will be needed to deal with the impacts of the changes in industry conditions.Developing a strategy that takes the changes in industry conditions into account
- latest action & announcement
- financial performance
- strength & weakness
- thinking & leadership styleWhat strategic moves are rivals likely to make next?
Craft it’s own strategic moves
Exploit any openingsWhat strategic moves are rivals likely to make next?
On what basis do buyers of the industry’s product choose between the competing brands of sellers?
What resources and competitive capabilities must a company have to be competitively successful?
What shortcomings are almost certain to put a company at a significant competitive disadvantage?What are the key factors for competitive success?
→industry environment is attractive
If an industry profit prospects are below average
→industry environment is not attractive
BUT! This attractiveness or unattractiveness is not same for all industry participants and all potential entrants.
If company decided that industry is attractive, it should invest aggressively to capture the opportunities and to improve its long-term competitive position in the business.
If company decided that industry is unattractive, it should protect its present position, invest cautiously, and try to find opportunities in other industries.