Five forces (industry structure) model Chapter 5 Five forces (industry structure) model

4.Five forces model Topic 3.The growth strategies Exam Suggested reading 1.The strategic planning process Intro to the Integrating case study Chapter 1-2 Case 1 :The ABC Cheese Factory 2.Portfolio model Page 202-209 Chapter 3 Case 2 :Abbotsleigh Citrus 3.The growth strategies Page 209-212 Chapter 4 Case 3 :Degrees South 4.Five forces model Page 212-217 Chapter 5 Case 4 : A retail meat market Question No 1 5.Competitive generic strategies Page 228-237 Chapter 6 Case 5 : A retail meat market Question no 2 6.Competitive market position and related strategies Chapter 8 Case 6 : A retail meat market Question No 3 7.Strategic alliance and network Chapter 9 Exam -

Factors affecting industry attractiveness Attractiveness can be judged from both outside and within an industry. Relevant questions include: How profitable is it likely to be in both the short and long term? How well the industry factors match the business’s characteristics and resources. How easy will it be for the business to capture and keep a significant and sufficient loyal customer base? Is the business more or less dominant than its direct competitors? Shopping Robot

Porter’s five forces (industry attractiveness) model Threat of new entrants Bargaining power of buyers Bargaining power of suppliers Threat of substitutes Intensity of rivalry between existing competitors

Porter’s five forces model applied An application of the model used to analyse the Australian pharmaceutical industry can be found at the Pharmaceutical Professionals website - http://www.pharmaceuticaljobs.com Click on ‘Healthcare Articles’ and find the article Competitive Strategy in the Pharmaceutical Industry (viewed June 2007)

Intensity of rivalry If competitive rivalry is high, it is more difficult and costly for individual businesses to achieve sales and profit objectives. If competitive rivalry is lower (competitors are reasonably content to share the market between themselves), it is easier and needs less effort and resources to achieve sales and profit objectives (provided they are seen as reasonable by the competitors). Cola

Factors influencing competitive rivalry The number of competitors. The relative dominance of competitors. The attitude or corporate commitment of competitors. The level of differentiation within the industry. The cost structures within the industry. The existence of high exit barriers. The stage of the product or industry life cycle. Low buyer switching costs. The perishability of the product.

Countering competitive rivalry The impact of competitive rivalry can be reduced by using strategies relating to: Quality, Price, Performance, Service, Strong differentiation, Warranties, Image, Promotions and sponsorships, Loyalty programmes. 10.Strategic alliances with retailers and distributors. 11. Being proactive rather than reactive. 12. Horizontally integrate by buying weaker competitors. 13. If growth is slow, seek new markets or segments that are growing faster. 14. If all else fails, sell out. Toyota

Countering competitive rivalry Market structure will impact on rivalry. Less differentiation means more rivalry. Competitors in undifferentiated market structures often try to create intangible, but real to the consumer, differences to artificially segment the market. The non-dairy spreads (margarine) market is a good example of this. China cars

Threat of new entrants Entry barriers are factors that make it more difficult for new businesses to enter the industry or market. Industries with high entry barriers require substantial resources or expertise to enter. This limits the number of competitors to a few large firms, e.g., airline and heavy manufacturing industries. Industries with low entry barriers tend to have larger numbers of smaller firms, as the resource and expertise requirements are easy to obtain, e.g., tourism, hospitality and many service industries. India

New entrants and attractiveness Low entry barriers make industries more attractive to potential entrants, but less attractive to existing competitors. High entry barriers make industries less attractive to potential entrants, but more attractive to existing competitors.

Entry barriers can be created by: High capital, expertise or technology requirements. Regulatory policies or legislation, which places added costs or conditions on the industry. Tariff and international trade barriers. Cost advantages held by existing competitors. 5. Strong patents held by existing competitors. 6.Brand image resulting in high levels of customer loyalty for existing competitors. 7.Access to distribution channels.

Countering barriers to entry The impact of barriers to entry can be reduced by using strategies relating to: innovation - new or different patents; forward or backward integration; better research leading to better identification of customer needs; creating a strong point of differentiation linked to your new brand. 5. lobbying governments to change policies and legislation; 6. leapfrogging production or technology to cheaper or more efficient methods; 7. strategic alliances that increase power and resources, lower costs, or overcome the barriers.

Threat of substitutes Some industries or markets will experience competition from substitutes as well as direct competitors. This will lead to added competitive costs and lower stability. Profit margins will be affected as prices are likely to reflect increased elasticity of demand. Substitutes may be: Direct substitutes - products that perform basically the same function for the customer. Indirect substitutes - products that customers choose between to spend discretionary income.

Threat of substitutes will increase the intensity of competition when: Customers switching costs are low. Changing macro-environmental factors make the substitute more attractive to customers. The price performance trade-off of the substitute is not significant in customer’s minds.

Countering the threat of substitutes The impact of substitutes can be reduced by using strategies relating to: loyalty programmes provide added value to your offering to offset any savings offered by the substitute increase research into customers needs, buying decision processes and preferences Industry-based promotions. 5. increase differentiation 6. improve support to distributors 7. decrease the impact of the substitute’s point of value differentiation 8. diversification into the substitute.

Bargaining power of suppliers When suppliers have more bargaining power than buyers, they can: set higher prices for their products. restrict products or services to competitors with whom they have a stronger relationship. Both scenarios will increase cost structures, make supply acquisition more difficult, and decrease industry attractiveness.

Bargaining power of suppliers is increased when: there are few suppliers and many buyers. individual suppliers have a strong differential advantage or significant patents. the buyers’ (industry competitors) switching costs are high. the supplier’s product is an important part of the buyer’s products, represents a large part of the buyer’s cost structure, or significantly affects the buyer’s product quality. buyers are not important due to small order sizes. the suppliers may forward integrate and become new competitors.

Countering supplier power The impact of high supplier power can be reduced by using strategies such as: a better supply chain management. developing a better understanding of suppliers costs and operations. developing partnerships or strategic alliances with selected suppliers. 4. forming strategic alliances with competitors to create buying groups. 5. redesigning products so substitute materials or ingredients may be used. 6. sourcing from new geographic locations. 7. backward integration.

Bargaining power of buyers Buyers may be consumers, but are more likely to be members of the distribution chain. When buyers have more bargaining power than suppliers, they can: set (restrict) the price the seller can charge, lowering profit margins. restrict their purchases to the ranges that provide them with the best profit margins, reducing the ability of suppliers to maintain a varied product range. Both scenarios will reduce price potential and profitability, restrict variety, and reduce the supplier’s investment in new product development. Trade

Bargaining power of buyers is increased when: There are few, or large, buyers who purchase a large percentage of the industry’s product. Smaller suppliers are of less significance or interest to the buyer due to limited capacity. The buyers (consumers) have low switching costs, or are able and willing to buy substitute products. The buyers pose a threat of backward integration. The industry’s products have little differentiation. The industry’s products do not save the buyer money, or represent a minor part of the buyer’s purchases.

Countering buyer power The impact of high buyer power can be reduced by using strategies relating to: value adding in forms of additional service or convenience. developing a strong ‘pull’ strategy so end users will demand your product. forming strategic selling group alliances to reduce marketing and selling costs. 4. seeking new buyers and markets. 5. removing the middle man and sell directly to end users. 6. if the product is commodity in nature, try branding it anyway. 7. forward integration.

Limitations of the five forces model Analysis is becoming more difficult as business activity is becoming increasingly dynamic and changing rapidly compared to when the model was first developed. Good industry analysis needs focus on a greater variety of factors than just the five Porter identified. As with all analysis models, it cannot be used in isolation, but provides one part of the total analysis needed to make successful strategic decisions.