Porter’s Five Forces Model of Competition

Porter’s Five Forces (Industry Rivalry) • Rivalry Among Existing Firms is High due to: – Low Brand Recognition – Low Product Differentiation – Large Number of Firms – Major Firms in the Industry are Similarly Sized – Industry Growth is High – Barriers to Exit / Fixed Costs are High – Variable Costs are Low – Buyer Switching Costs are Low Porter Force 2 - Barriers to Entry - NEXT >> Home - Product Strategy - Strategy Portal - Economy Portal - Terms of Service ©2006 - 2007 Franteractive Inc. All rights reserved.

Porter’s Five Forces (Barriers to Entry) • Threat of New Entrants is Low / Barriers to Entry are High due to: – Large Economies of Scale – High Brand Recognition – High Product Differentiation – Patent Protected Products – High Customer Switching Costs – Government Policy / Regulations / Restrictions, etc. – High Asset Specificity / Superior Complementary Assets such as Plant Infrastructure, Distribution Channels etc. – High Fixed Costs / Cap Ex Porter Force 3 - Buyer Power - NEXT >> Home - Product Strategy - Strategy Portal - Economy Portal - Terms of Service ©2006 - 2007 Franteractive Inc. All rights reserved.

Porter’s Five Forces (Buyer Power) • Bargaining Power of Buyers Increases with: – Monopsony / Small Number of Buyers – Buyer Information – Buyer’s Increased Ability to Integrate Backwards – Standardized Products / Low Switching Costs for Buyers – High Customer Switching Costs – More Open Transactions Reduce Buyers’ Costs of Searching for Products, Increasing their Bargaining Power Porter Force 4 - Supplier Power - NEXT >> Home - Product Strategy - Strategy Portal - Economy Portal - Terms of Service ©2006 - 2007 Franteractive Inc. All rights reserved.

Porter’s Five Forces (Supplier Power) • Bargaining Power of Suppliers Increases with: – Monopoly / Small Number of Suppliers – Supplier’s Threat to Integrate Forward – Differentiated Products / Low Number of Product Substitutes / High Costs to Switch Suppliers – Closed Industry Information: if Information is Open in the Industry, Suppliers have less Bargaining Power Porter Force 5 - Threat of Substitutes - NEXT >> Home - Product Strategy - Strategy Portal - Economy Portal - Terms of Service ©2006 - 2007 Franteractive Inc. All rights reserved.

Porter’s Five Forces (Threat of Substitutes) • Threat of substitutes results in decreased overall industry profitability (i.e., Wine is a substitute to Beer) • The higher the cross-elasticity of demand of a substitute product, the higher is the threat of that substitute product. • Threat of substitutes is higher in an industry with few competitors. • Threat of substitutes is lower in an industry with excess capacity. • Threat of substitutes from a disruptive technology can be very high (i.e., the Internet has emerged as a disruptive medium / product to traditional TV / print media). Application of Porter Five Forces - NEXT >> Home - Product Strategy - Strategy Portal - Economy Portal - Terms of Service ©2006 - 2007 Franteractive Inc. All rights reserved.

SWOT Analysis Strengths Weaknesses Opportunities Threats

In SWOT, strengths and weaknesses are internal factors In SWOT, strengths and weaknesses are internal factors. For example:A strength could be: Your specialist marketing expertise. A new, innovative product or service. Location of your business. Quality processes and procedures. Any other aspect of your business that adds value to your product or service.

A weakness could be: Lack of marketing expertise. Undifferentiated products or services (i.e. in relation to your competitors). Location of your business. Poor quality goods or services. Damaged reputation.

In SWOT, opportunities and threats are external factors In SWOT, opportunities and threats are external factors. For example: An opportunity could be: A developing market such as the Internet. Mergers, joint ventures or strategic alliances. Moving into new market segments that offer improved profits. A new international market. A market vacated by an ineffective competitor.

A threat could be: A new competitor in your home market. Price wars with competitors. A competitor has a new, innovative product or service. Competitors have superior access to channels of distribution. Taxation is introduced on your product or service.