1 The Five Forces model and competitive strategies Geoff Leese September 2005 revised September 2006, July 2007, August 2008, August 2009

2 Porter’s five forces model Rivalry with competitors Potential Entrants to market Substitutes Buyers Suppliers Bargaining Power Threat of substitutes Threat of entry

3 n More likely when ä Economies of scale are possible ä Capital requirements of entry are low ä Easy access to distribution channels ä No dominant “player” ä Little expected retaliation ä Little government/legislative intervention ä Low levels of differentiation n Important issues ä What barriers exist? ä What is our position?

4 Buyer power n More likely when ä High concentration of buyers ä Large number of small suppliers ä Little risk/low cost of switching ä Alternative sources of supply –Low differentiation –High levels of competition ä High risk of backward integration

5 Supplier power n More likely when ä High concentration of suppliers ä Cost of switching suppliers is high ä Risk of switching suppliers is high ä Supplier has powerful brand ä Supplier dominates market ä High risk of forward integration

6 Threat of substitutes n Product for Product ä Post replaced by fax replaced by n Substitution of need ä Better quality castings reduces need for machine tools n Generic substitution ä Holiday or a new TV? n Do without!

7 Competitive rivalry (1) n Rivalry between competing organisations n Issues – ä What is it based on? ä Increasing or decreasing? ä How is it affecting us? ä What can we do about it?

8 Competitive Rivalry(2) n Balance of rivalry ä Lots of small, balanced competitors? ä Market domination? n Market growth rates ä Product life cycle? n Global markets? n High fixed costs n High cost of extra capacity n Level of differentiation n High exit barriers n Easy acquisition

9 Collaboration and competition n Collaboration between buyer and seller ä Input and output! n Collaboration to increase buying power ä NISA, SPAR, SURF? n Collaboration to avoid substitution or prevent entry ä Collaborative R&D, marketing boards n Collaboration to gain entry ä Honda/Rover?

10 Key issues n What are the key forces at work in our competitive environment? n Are there underlying forces (SLEPT analysis?) contributing to this? n Is it likely that these forces will change? If so how and why? n How do our competitors stand? n How do WE stand? n What can be done to influence these forces?

11 Critical (Key) Success Factors n CSFs are aspects of strategy where you must provide better value and beat the competition n Competences needed in activities which underpin each critical success factor n Performance standards for these determine how competitive advantage will be achieved n Advantage lost by competitor performance & CSFs changing

12 Identifying Critical Success Factors n These are for an Industry n Ohmae gives 3 areas to consider, the 3 Cs n Customer issues n The competition n The business (or Corporation)

13 Customers n Who are they now & potentially n Segments in the market n Why do they buy from whoever n General issues ä price ä service ä reliability + quality ä tech spec ä brands

14 Competition n Who & who has market dominance & why n Market factors and intensity n Resource comparisons n General issues ä Cost and price comparisons ä Quality and service ä Logistics

15 The Business n What do our competitors actually deliver to customers n What is our biggest cost area n General issues ä Low cost, labour costs, economy of scale ä Output and quality ä People - skills, relationships ä Innovation and technology

16 Competitor Analysis n Who are your competitors n Where are they n How many n What do they compete on n What market share do they have n Is the market segmented n How strongly do they compete n Are there any alliances

17 Strategic alternatives n Growth and expansion n Acquisition n Integration n Divestment

18 Competitive strategies n Porter’s generic strategies ä Cost leadership ä Broad-market differentiation ä Focus Cost ä Focus differentiation

19 Cost leadership (1) n Low level of differentiation n Aim for average customer n Introduce improvements only when customers demands them n Pricing strategies ä Sell at industry average, improve profits ä Sell at below average, improve market share

20 Cost leadership(2) n Needs these strengths ä Access to capital required for significant investment in process technology ä Ability to design products/services that have low production costs ä Exclusive access to low cost materials/components ä Efficient distribution channels

21 Cost leadership(3) n Advantages ä Cost advantage can protect from new entrants ä Pricing at industry average allows price- cutting if necessary n Risks ä Technology may be leapfrogged or copied ä Risk from a number of focussed cost leading enterprises

22 Differentiation(1) n Perceived quality is the key! ä Whether real or not. ä Intrinsic qualities of the product ä Pre/post sales service n Allows premium pricing

23 Differentiation(2) n Typical strengths required ä Access to leading edge R&D ä Highly skilled and creative product development ä Strong sales team ä Corporate reputation for quality and innovation

24 Differentiation(3) n Advantages ä Price increases from powerful suppliers can be passed on to buyers ä Brand loyalty protects from substitution ä Brand loyalty protects against market entry ä Buyers’ cost of switching may be high n Risks ä Imitation is a possible threat ä “Novelty” value short-lived ä Limits to price elasticity ä Customer tastes may change

25 Focused strategies (1) n Focuses on a narrow market segment (niche market) and attempts to obtain competitive advantage on a cost or differentiation basis. n Often generates fierce customer loyalty n Concentrate on core competences

26 Focused strategies(2) n Advantages ä Power of buyers – often sole source of supply ä Brand loyalty helps protect against substitution or market entry ä Easier to stay close to customer and respond quickly to changes in need

27 Focused Strategy (3) n Risks ä Low purchasing quantities hands power to suppliers ä Low production volume brings high unit costs ä Change in consumer taste means that niche markets disappear ä May be easy for cost leaders/big differentiators to adapt their products to compete

28 Stuck in the middle? n Porter argues long term interests are best served by picking a strategy and sticking to it. n How does one then cope with mixed consumer needs, quality and price for example?

29 Summary n Five forces model n Porter’s generic strategies

30 Further reading n The Cambridge University view – follow the link! The Cambridge University view – follow the link! n More explanation – follow the link! More explanation – follow the link! n Bennett chapter 3 n Johnson and Scholes chapters 3 and 6