Porters 5 forces class presentation

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Porters 5 forces class presentation

  1. 1. The 5 Competitive Forces That Shape Strategy
  2. 2. <ul><li>Opening : </li></ul><ul><li>1-1 Introduction </li></ul><ul><li>1-2 Issue </li></ul><ul><li>1-3 New forces </li></ul><ul><li>2 Forces : </li></ul><ul><li>2-1 Rivalry among existing competitors </li></ul><ul><li>2-2 Bargaining power of buyers </li></ul><ul><li>2 Forces : </li></ul><ul><li>3-1 Threat of new entrants </li></ul><ul><li>3-2 Bargaining power of suppliers </li></ul><ul><li>1 Force : </li></ul><ul><li>4-1 Threat of substitute products or services </li></ul><ul><li>5) Conclusion </li></ul>Mooi Hon Bimel Sunita Content
  3. 3. <ul><li>Opening : </li></ul><ul><li>1-1 Introduction </li></ul><ul><li>1-2 Issue </li></ul><ul><li>1-3 New forces </li></ul><ul><li>2 Forces : </li></ul><ul><li>2-1 Rivalry among existing competitors </li></ul><ul><li>2-2 Bargaining power of buyers </li></ul><ul><li>2 Forces : </li></ul><ul><li>3-1 Threat of new entrants </li></ul><ul><li>3-2 Bargaining power of suppliers </li></ul><ul><li>1 Force : </li></ul><ul><li>4-1 Threat of substitute products or services </li></ul><ul><li>5) Conclusion </li></ul>Content
  4. 4. Economist Michael E. Porter identified……… Image : Extracted from Google Source : Harvard Business Review / January 2008 / hbr.org
  5. 5. Introduction – Importance of The 5 Forces How to deal with competition? Strategize : * Competitive advantage * Cost advantage * Market dominance * New product development * Contraction / Diversification * Price leadership * Global * Re-engineering * Downsizing * De-layering * Restructuring Measure and monitor strategy effectiveness What strategy to use? Basic knowledge of business strategy & forces that influence the decision making … ..vital in successful Strategic Management ! <ul><li>Industry analysis : </li></ul><ul><li>Industry relevance </li></ul><ul><li>Industry players </li></ul><ul><li>5 forces </li></ul><ul><li>Industry structure </li></ul><ul><li>Future changes </li></ul>
  6. 6. Issue – Limitations of 5 Forces Rivalry among existing competitors Threat of substitute products or service Threat of new entrants Bargaining power of suppliers Bargaining power of buyers 5 Forces Soft factors: Skills Culture Intangible assets Reputation Definition of competitors & customers Impact of IT Economic turbulence
  7. 7. Emerging of New Forces Organization Reinvention Customers’ Expectations Information Technology
  8. 8. <ul><li>Opening : </li></ul><ul><li>1-1 Introduction </li></ul><ul><li>1-2 Issue </li></ul><ul><li>1-3 New forces </li></ul><ul><li>2 Forces : </li></ul><ul><li>2-1 Rivalry among existing competitors </li></ul><ul><li>2-2 Bargaining power of buyers </li></ul><ul><li>2 Forces : </li></ul><ul><li>3-1 Threat of new entrants </li></ul><ul><li>3-2 Bargaining power of suppliers </li></ul><ul><li>1 Force : </li></ul><ul><li>4-1 Threat of substitute products or services </li></ul><ul><li>5) Conclusion </li></ul>Content
  9. 9. Rivalry Among Existing Competitor (1) <ul><li>Rivalry happen when: </li></ul><ul><ul><li>A firm is challenged by competitor action </li></ul></ul><ul><ul><li>A company recognize opportunity to improve market position </li></ul></ul><ul><li>Normally result in lower profitability </li></ul><ul><ul><li>Action will invite competitive response </li></ul></ul><ul><ul><li>Depend on the intensity and basis of competing </li></ul></ul>
  10. 10. Rivalry Among Existing Competitor (2) <ul><li>Rivalry can increase profitability and expand market if: </li></ul><ul><ul><li>Each competitors aim to serve different needs and market segment with different mixes of </li></ul></ul><ul><ul><ul><li>price </li></ul></ul></ul><ul><ul><ul><li>products </li></ul></ul></ul><ul><ul><ul><li>service </li></ul></ul></ul><ul><ul><ul><li>features </li></ul></ul></ul><ul><ul><li>Better in meeting the customer needs </li></ul></ul>
  11. 11. Rivalry Among Existing Competitor (3) <ul><li>Rivalry is intensified if: </li></ul><ul><ul><li>Competitors are roughly equal in size </li></ul></ul><ul><ul><li>Industry growth is slow </li></ul></ul><ul><ul><li>Exit barrier is high </li></ul></ul><ul><ul><li>High fixed cost </li></ul></ul><ul><ul><li>Low differentiation in product </li></ul></ul><ul><ul><li>Aspiration for leadership </li></ul></ul><ul><ul><li>Cannot read each other signal well </li></ul></ul><ul><li>Normally intensifies over time </li></ul><ul><li>Alter by mergers and acquisitions and innovation </li></ul>
  12. 12. Rivalry Among Existing Competitor (4) <ul><li>Basis of competition: </li></ul><ul><ul><li>Price – reduce profit </li></ul></ul><ul><ul><li>Product features </li></ul></ul><ul><ul><li>Support service </li></ul></ul><ul><ul><li>Delivery time </li></ul></ul><ul><ul><li>Brand image </li></ul></ul><ul><li>Less likely to reduce profit </li></ul><ul><li>Improve value and increase barrier to entry </li></ul>
  13. 13. Rivalry Among Existing Competitor (5) <ul><li>Price competition occur if: </li></ul><ul><ul><li>Product are nearly identical & less switching cost </li></ul></ul><ul><ul><li>Fixed cost is high </li></ul></ul><ul><ul><li>To improve efficiency of production </li></ul></ul><ul><ul><li>Product is perishable </li></ul></ul>
  14. 14. Rivalry Among Existing Competitor (6)
  15. 15. The Power of Buyer (1) <ul><li>The aim is to maximize profit </li></ul><ul><ul><li>Capture more value by forcing down price </li></ul></ul><ul><ul><li>Demanding better quality </li></ul></ul><ul><ul><li>Demanding greater level of service </li></ul></ul><ul><li>Power will change with time </li></ul><ul><li>Strategically, the firm must able to choose to whom it buy from </li></ul>
  16. 16. The Power of Buyer (2) <ul><li>A buyer has negotiating leverage if: </li></ul><ul><ul><li>There are few buyers </li></ul></ul><ul><ul><li>Buyer volume is big </li></ul></ul><ul><ul><li>Products are standardized or undifferentiated </li></ul></ul><ul><ul><li>Few / little switching cost </li></ul></ul><ul><ul><li>Ability of backward integration </li></ul></ul><ul><ul><li>IT / Internet </li></ul></ul>
  17. 17. The Power of Buyer (3) <ul><li>A buyer is price sensitive if: </li></ul><ul><ul><li>Product purchased represent a significant fraction of its cost or price/total purchase is high </li></ul></ul><ul><ul><li>Buyer earn low profit </li></ul></ul><ul><ul><li>Quality of buyer’s product is little affected by product purchased </li></ul></ul><ul><ul><li>Product purchased has little effect on buyer’s other cost </li></ul></ul>
  18. 18. The Power of Buyer (Example) <ul><li>SCA sold 1 billions baby diapers a year </li></ul><ul><li>Purchase large volume of raw material from suppliers </li></ul><ul><li>Raw materials are common in industry </li></ul><ul><li>Less switching cost </li></ul><ul><ul><ul><li>SCA has good bargaining power </li></ul></ul></ul><ul><li>Profit margin is low, sell by volume. Save 1sen in a product will save RM10 million/ year. </li></ul><ul><li>about 70% of the cost is from raw material </li></ul><ul><li>SCA is very sensitive to raw material pricing </li></ul>
  19. 19. <ul><li>Opening : </li></ul><ul><li>1-1 Introduction </li></ul><ul><li>1-2 Issue </li></ul><ul><li>1-3 New forces </li></ul><ul><li>2 Forces : </li></ul><ul><li>2-1 Rivalry among existing competitors </li></ul><ul><li>2-2 Bargaining power of buyers </li></ul><ul><li>2 Forces : </li></ul><ul><li>3-1 Threat of new entrants </li></ul><ul><li>3-2 Bargaining power of suppliers </li></ul><ul><li>1 Force : </li></ul><ul><li>4-1 Threat of substitute products or services </li></ul><ul><li>5) Conclusion </li></ul>Content
  20. 20. Threats of New Entrants <ul><li>The easier it is for new companies to enter the industry, the more cutthroat competition there will be. Factors that can limit the threat of new entrants are: </li></ul><ul><ul><li>Existing loyalty to major brands </li></ul></ul><ul><ul><li>Incentives for using a particular buyer </li></ul></ul><ul><ul><li>High fixed costs </li></ul></ul><ul><ul><li>Scarcity of resources </li></ul></ul><ul><ul><li>High costs of switching companies </li></ul></ul><ul><ul><li>Government restrictions or legislation </li></ul></ul>
  21. 21. Starbucks Fight against Threats of New Entrants (1) <ul><li>Past </li></ul><ul><ul><li>Products within the industry were greatly differentiated </li></ul></ul><ul><ul><li>Leasing of property, construction of roasting plants. </li></ul></ul><ul><ul><li>Specialized equipment for brewing the coffee. </li></ul></ul><ul><li> Threat Level : Low </li></ul>
  22. 22. Starbucks Fight against Threats of New Entrants (2) <ul><li>Present </li></ul><ul><ul><li>Ambience of the store </li></ul></ul><ul><ul><li>Social responsibility of the company </li></ul></ul><ul><ul><li>Brand Identification </li></ul></ul><ul><li>Threat Level: Moderate Low </li></ul>
  23. 23. Suppliers Power <ul><li>If one supplier has a large enough impact to affect a company's margins and volumes, then it holds substantial power. </li></ul><ul><ul><li>There are very few suppliers of a particular product </li></ul></ul><ul><ul><li>There are no substitutes </li></ul></ul><ul><ul><li>Switching to another (competitive) product is very costly </li></ul></ul><ul><ul><li>The product is extremely important to buyers </li></ul></ul><ul><ul><li>The supplying industry has a higher profitability than the buying industry </li></ul></ul>
  24. 24. Starbucks Defense against Suppliers Power (1) <ul><li>Past </li></ul><ul><ul><li>Quality of Arabica Beans gives farmers (suppliers) of these beans an upper hand. </li></ul></ul><ul><ul><li>Suppliers upper hand on specialized equipment production for coffee making appliances. </li></ul></ul><ul><li>Suppliers Power: Extreme Low </li></ul>
  25. 25. Starbucks Defense against Suppliers Power (2) <ul><li>Present </li></ul><ul><ul><li>Farmers Compensation through Fair-Trade Certified Coffee; conscious customers pull. </li></ul></ul><ul><ul><li>Bigger market target compared to before (McDonald, Denny’s) </li></ul></ul><ul><ul><li>Introduction of Longterm Contract of coffee beans supplies. </li></ul></ul><ul><ul><li>Suppliers still have upper hand on specialized equipment production for coffee making appliances. </li></ul></ul><ul><li>Threat Level: Moderate Low </li></ul>
  26. 26. <ul><li>Opening : </li></ul><ul><li>1-1 Introduction </li></ul><ul><li>1-2 Issue </li></ul><ul><li>1-3 New forces </li></ul><ul><li>2 Forces : </li></ul><ul><li>2-1 Rivalry among existing competitors </li></ul><ul><li>2-2 Bargaining power of buyers </li></ul><ul><li>2 Forces : </li></ul><ul><li>3-1 Threat of new entrants </li></ul><ul><li>3-2 Bargaining power of suppliers </li></ul><ul><li>1 Force : </li></ul><ul><li>4-1 Threat of substitute products or services </li></ul><ul><li>5) Conclusion </li></ul>Content
  27. 27. The Power of Substitutes Products or Services (1) <ul><li>Threats of Substitute in the Porter’s theory actually means goods and services that does similar functions </li></ul><ul><li>This allows the customer to shift loyalty to another product based on:= </li></ul><ul><ul><li>Preference to the substitute </li></ul></ul><ul><ul><li>Relative price performance of the substitute </li></ul></ul><ul><ul><li>Buyers switching costs </li></ul></ul><ul><ul><li>Perceived level of product differentiation </li></ul></ul><ul><li>Example : = The price of aluminum beverage cans is constrained by the price of glass bottles, steel cans, and plastic containers. These containers are substitutes. In terms of Services, there is also the cable TV and the state owned TV. MAS and Air Asia. </li></ul>
  28. 28. The Power of Substitutes Products or Services (2) <ul><li>When there is one product successful, it also leads to the creation of other products that can perform the same functions as the product of the same industry. </li></ul><ul><li>A close substitute product constrains the ability of firms in an industry to raise prices. </li></ul><ul><li>When there are substitutes, it puts a cap to the profits an industry can obtain. It places a ceiling or limit to the a firm wishes to charge. The more attractive the substitutes are, the tighter it is for an industry to mark up prices </li></ul><ul><li>This does not only apply to normal economical times , but also even when the economy is doing well and thriving. </li></ul>
  29. 29. The Power of Substitutes Products or Services (3) <ul><li>Porter also mentions that if one industry wishes to follow suit producing products with similar function, attention should be given to : </li></ul><ul><li>1 . Products that enjoy steady price-performance tread offs with the industry’s product </li></ul><ul><li>2. Would entail minimum switching costs for a buyer. </li></ul><ul><li>3. Are produced by industry earning high profits </li></ul><ul><li>Porter recommends that by doing advertising, product quality improvement, marketing, R&D and product distribution, an industry can improve its collective position against the substitute . </li></ul>
  30. 30. Porter’s opinion is that to strategize product on price, quality, after sales service and location in order to create value and to reduce another product from looking “attractive”. In other words, Porter’s theory is to create a difference or be different. By being distinctive, you are able to win over your customer though there are dozens of products with similar functions in the market. Example: Google and other search engines like Yahoo, Excite, Lycos, Alta Vista Etc The Power of Substitutes Products or Services (4)
  31. 31. The Power of Substitutes Products or Services (5) <ul><li>Sample Case 1 : To help smokers in India, herbal cigarettes (Nirdosh) was introduced. However it is not that popular among smokers. </li></ul><ul><li>Nicotine Patch another substitute, however not popular. </li></ul><ul><li>Cigarettes have an emotional value to smokers. </li></ul>
  32. 32. The Power of Substitutes Products or Services (6) <ul><li>Sample Case 2: Pharma Industry has substitute s but doesn’t face threat because the industry depends on several organic chemicals. </li></ul><ul><li>Very competitive and fragmented industry in most countries. </li></ul><ul><li>Suppliers have low bargaining power. </li></ul><ul><li>The industry can switch from one supplier to another without incurring high costs. </li></ul>
  33. 33. Conclusion <ul><li>Today IT/ digitalization, unstable economy condition or needs, government laws, globalisation, customer expectation and organization reinvention have become powerful forces and will continue to do so in the coming years. Porters model doesn’t clearly or touches much on those. </li></ul><ul><li>We also find that Michael Porter simplified economic theory in which the law of economy existed long ago, for example Bargaining power of supplier is actually the supply and demand theory. </li></ul><ul><li>Porters model IS NOT INVALID but can be the basic for strategy development, management technique and theories. An industry must do a careful market observations and internal and external factors, understand the limitations from this model and study where their company intends to go in future. </li></ul>
  34. 34. References <ul><li>Thurlby, B.(1998). Competitive forces are also subject to change., Management Decision Journal , Vol. 36: 19-24. </li></ul><ul><li>  Ireland, R.D, Hoskisson, R.E, and Hitt, M.A. (2009). The Management of Strategy Concept, 8 th Edition, Mason: South Western. </li></ul><ul><li>  Porter, M.E (2008). How competitive forces shape strategy, Harvard Business Review. </li></ul><ul><li>Metts, G(2007). Measuring the effectiveness of managerial action in SMEs; An empirical analysis of management's response to industry competitive forces, Management Research News, Vol 30. No. 12. pp 892-914 </li></ul>
  35. 35. References (Cont.) <ul><li>Hernández-Espallardo, Delgado-Ballester (2009). Product innovation in small manufacturers, market orientation and the industry's five competitive forces; Empirical evidence from Spain, European Journal of Innovation Management, Vol. 12. No.4. pp 470-491 </li></ul><ul><li>Thurlby, Bob (1998). Competitive forces are also subject to change, Management Decision Journal, Vol 36 No.1. </li></ul><ul><li>pp 19-24 </li></ul><ul><li>Higbee, Z., Yee Liaw, C., Ting, C., Tjho, K., Ton, Michelle. The Future of Starbucks </li></ul>

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