STRATEGIC ANALYIS OF BUSINESS Copyright © 2004 South-Western. All rights reserved.

Industry A group of firms producing products that are close substitutes Firms that influence one another Copyright © 2004 South-Western. All rights reserved.

Strategic Groups Firms using similar competitive strategies with similar strategic dimensions Internal competition between firms in the strategic group is greater than between firms outside that strategic group Strategic Dimensions Extent of technological leadership Product quality Pricing Policies Distribution channels Customer service Copyright © 2004 South-Western. All rights reserved.

THE FIVE FORCE MODEL Copyright © 2004 South-Western. All rights reserved.

The Five Forces of Competition Threat of New entrants Suppliers Buyers Substitutes Rivalry Copyright © 2004 South-Western. All rights reserved.

Threat of New Entrants: Barriers to Entry Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy Expected retaliation Copyright © 2004 South-Western. All rights reserved.

Barriers to Entry Economies of Scale Marginal improvements in efficiency that a firm experiences as it incrementally increases its size Advantages and disadvantages of large-scale and small-scale entry Copyright © 2004 South-Western. All rights reserved.

Barriers to Entry (cont’d) Product differentiation Product features Brands Customer loyalty Sales outlets Service Advertisements Copyright © 2004 South-Western. All rights reserved.

Barriers to Entry (cont’d) Switching Costs One-time costs customers incur when they buy from a different supplier Requirement of new ancillary equipments Retraining employees Product redesign Psychic costs of ending a relationship Copyright © 2004 South-Western. All rights reserved.

Barriers to Entry (cont’d) Access to Distribution Channels Stocking or shelf space Special and discounted prices Cooperative advertising allowances Cost Disadvantages Independent of Scale Proprietary product technology Favorable access to raw materials Desirable locations Experience curve advantages Copyright © 2004 South-Western. All rights reserved.

Barriers to Entry (cont’d) Expected retaliation Responses by existing competitors may depend on their present stake in the industry Possession of substantial resources Illiquid assets High fixed costs and unutilized capacity Slow industry growth Copyright © 2004 South-Western. All rights reserved.

Bargaining Power of Suppliers Supplier power increases when: Suppliers are large and few in number Suitable substitute products are not available Individual buyers are not large customers of suppliers and there are many of them Suppliers’ goods are critical to buyers’ marketplace success Suppliers’ products create high switching costs Suppliers pose a threat to integrate forward into buyers’ industry Copyright © 2004 South-Western. All rights reserved.

Bargaining Power of Buyers Buyer power increase when: Buyers are large and few in number Percentage of the firm’s materials are higher to the total cost of the buyers Buyers’ purchases are a significant portion of a supplier’s annual revenues Buyers can switch to another product without incurring high switching costs Profit earned by them is low Buyers have full information about the firm’s operations Copyright © 2004 South-Western. All rights reserved.

Threat of Substitute Products The threat of substitute products increases when: Buyers face few switching costs The substitute product’s price is lower Substitute product’s quality and performance are equal to or greater Differentiated industry products may reduce this threat Copyright © 2004 South-Western. All rights reserved.

Intensity of Rivalry Among Competitors Industry rivalry increases when: There are numerous or equally balanced competitors Industry growth slows or declines There are high fixed costs or high storage costs There is a lack of differentiation opportunities or low switching costs When the strategic stakes are high When high exit barriers prevent competitors from leaving the industry, like specialized assets, costs of exit, emotional factors Copyright © 2004 South-Western. All rights reserved.

Interpreting Industry Analyses Low entry barriers Suppliers and buyers have strong positions Unattractive Industry Strong threats from substitute products Intense rivalry among competitors Low profit potential Copyright © 2004 South-Western. All rights reserved.

Interpreting Industry Analyses High entry barriers Suppliers and buyers have weak positions Attractive Industry Few threats from substitute products Moderate rivalry among competitors High profit potential Copyright © 2004 South-Western. All rights reserved.

SUMMING UP Analysis of the five forces helps the formulation of strategies by a firm Collective strength of the five forces determine the profit potential of a firm Knowledge of the underlying sources of the five forces enables the identification of the strengths, weaknesses, opportunities and threats by a firm Copyright © 2004 South-Western. All rights reserved.

THANK YOU Copyright © 2004 South-Western. All rights reserved.