1. STRATEGIC ANALYIS OF BUSINESS
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2. Industry A group of firms producing products that are
close substitutes
Firms that influence one another
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3. 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
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4. THE FIVE FORCE MODEL
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5. The Five Forces of Competition
Threat of New entrants
Suppliers
Buyers
Substitutes
Rivalry
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6. 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
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7. 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
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8. Barriers to Entry (cont’d)
Product differentiation
Product features
Brands
Customer loyalty
Sales outlets
Service
Advertisements
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9. 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
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10. 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
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11. 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
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12. 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
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13. 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
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14. 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
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15. 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
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16. 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
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17. 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
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18. 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
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19. THANK YOU
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