Porter's 5 forces
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Porter's 5 forces

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Sudeep B. Chandramana

Sudeep B. Chandramana
HoD, Department of Management Studies,
MACFAST, Tiruvalla, Kerala - 689 101

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Porter's 5 forces Porter's 5 forces Presentation Transcript

  • The External Environment:Opportunities, Threats, IndustryCompetition, and CompetitorAnalysis
  • Political/LegalEconomicTechnologicalGlobalDemographicSocio-culturalCompetitiveCompetitiveEnvironmentEnvironmentIndustryEnvironmentComponents of the General Environment
  • SWOT Analysis• Strengths• Weaknesses• Opportunities• Threats
  • The purpose of SWOT Analysis• It is an easy-to-use tool for developingan overview of a company’s strategicsituation– It forms a basis for matching yourcompany’s strategy to its situation
  • SWOT is the starting point• It provides an overview of the strategicsituation.• It provides the “raw material” to do moreextensive internal and external analysis.
  • Opportunities• An OPPORTUNITY is a chance for firmgrowth or progress due to a favorablejuncture of circumstances in thebusiness environment.• Possible Opportunities:– Emerging customer needs– Quality Improvements– Expanding global markets– Vertical Integration
  • Threats• A THREAT is a factor in yourcompany’s external environment thatposes a danger to its well-being.• Possible Threats:– New entry by competitors– Changing demographics/shifting demand– Emergence of cheaper technologies– Regulatory requirements
  • Opportunities and Threats form abasis for EXTERNAL analysis• By examining opportunities, you candiscover untapped markets, and newproducts or technologies, or identifypotential avenues for diversification.• By examining threats, you can identifyunfavorable market shifts or changes intechnology, and create a defensiveposture aimed at preserving yourcompetitive position.
  • The purpose ofFive-Forces Analysis• The five forces are environmentalforces that impact on a company’sability to compete in a given market.• The purpose of five-forces analysis is todiagnose the principal competitivepressures in a market and assess howstrong and important each one is.
  • Threat ofNewEntrantsThreat ofNewEntrantsPorter’s Five ForcesModel of Competition
  • Threat of New EntrantsBarriers toEntryExpected RetaliationExpected RetaliationGovernment PolicyGovernment PolicyEconomies of ScaleEconomies of ScaleProduct DifferentiationProduct DifferentiationCapital RequirementsCapital RequirementsSwitching CostsSwitching CostsAccess to Distribution ChannelsAccess to Distribution ChannelsCost Disadvantages IndependentCost Disadvantages Independentof Scaleof Scale
  • BargainingPower ofSuppliersThreat ofNewEntrantsThreat ofNewEntrantsPorter’s Five ForcesModel of Competition
  • Bargaining Power of SuppliersSuppliers exert powerin the industry by:* Threatening to raiseprices or to reduce qualityPowerful supplierscan squeeze industryprofitability if firmsare unable to recovercost increasesSuppliers are likely to be powerful if:Suppliers are likely to be powerful if:Supplier industry is dominated by aSupplier industry is dominated by afew firmsfew firmsSuppliers’ products have few substitutesSuppliers’ products have few substitutesBuyer is not an important customer toBuyer is not an important customer tosuppliersupplierSuppliers’ product is an importantSuppliers’ product is an importantinput to buyers’ productinput to buyers’ productSuppliers’ products are differentiatedSuppliers’ products are differentiatedSuppliers’ products have highSuppliers’ products have highswitching costsswitching costsSupplier poses credible threat ofSupplier poses credible threat offorward integrationforward integration
  • BargainingPower ofBuyersThreat ofNewEntrantsThreat ofNewEntrantsBargainingPower ofSuppliersPorter’s Five ForcesModel of Competition
  • Bargaining Power of BuyersBuyers competewith the supplyingindustry by:* Bargaining down prices* Forcing higher quality* Playing firms off ofeach otherBuyer groups are likely to be powerful if:Buyer groups are likely to be powerful if:Buyers are concentrated or purchasesBuyers are concentrated or purchasesare large relative to seller’s salesare large relative to seller’s salesPurchase accounts for a significantPurchase accounts for a significantfraction of supplier’s salesfraction of supplier’s salesProducts are undifferentiatedProducts are undifferentiatedBuyers face few switching costsBuyers face few switching costsBuyers’ industry earns low profitsBuyers’ industry earns low profitsBuyer presents a credible threat ofBuyer presents a credible threat ofbackward integrationbackward integrationProduct unimportant to qualityProduct unimportant to qualityBuyer has full informationBuyer has full information
  • Threat ofSubstituteProductsThreat ofNewEntrantsThreat ofNewEntrantsBargainingPower ofBuyersBargainingPower ofSuppliersPorter’s Five ForcesModel of Competition
  • Threat of Substitute ProductsProductswith similarfunctionlimit theprices firmscan chargeKeys to evaluate substitute products:Keys to evaluate substitute products:Products with improvingProducts with improvingprice/performance tradeoffsprice/performance tradeoffsrelative to present industryrelative to present industryproductsproductsExample:Example:Electronic security systems inElectronic security systems inplace of security guardsplace of security guardsFax machines in place of mailFax machines in place of maildeliverydelivery
  • Threat ofSubstituteProductsThreat ofNewEntrantsThreat ofNewEntrantsRivalry AmongCompeting Firmsin IndustryBargainingPower ofBuyersBargainingPower ofSuppliersPorter’s Five ForcesModel of Competition
  • Rivalry Among Existing CompetitorsIntense rivalry often plays out in the following ways:Intense rivalry often plays out in the following ways:Jockeying for strategic positionJockeying for strategic positionUsing price competitionUsing price competitionStaging advertising battlesStaging advertising battlesMaking new product introductionsMaking new product introductionsIncreasing consumer warranties or serviceIncreasing consumer warranties or serviceOccurs when a firm is pressured or sees an opportunityOccurs when a firm is pressured or sees an opportunityPrice competition often leaves the entire industry worse offPrice competition often leaves the entire industry worse offAdvertising battles may increase total industry demand, butAdvertising battles may increase total industry demand, butmay be costly to smaller competitorsmay be costly to smaller competitors
  • Cut-throatCut-throat competitioncompetition is more likely to occur when:is more likely to occur when:Rivalry Among Existing CompetitorsNumerous or equally balanced competitorsNumerous or equally balanced competitorsSlow growth industrySlow growth industryHigh fixed costsHigh fixed costsLack of differentiation or switching costsLack of differentiation or switching costsHigh storage costsHigh storage costsCapacity added in large incrementsCapacity added in large incrementsHigh strategic stakesHigh strategic stakesHigh exit barriersHigh exit barriersDiverse competitorsDiverse competitors
  • The Five Forces are Unique toYour Industry• Five-Forces Analysis is a framework foranalyzing a particular industry.– Yet, the five forces affect all the otherbusinesses in that industry.
  • Competitor AnalysisThe follow-up to Industry Analysis isThe follow-up to Industry Analysis iseffective analysis of a firm’seffective analysis of a firm’s CompetitorsCompetitorsCompetitiveCompetitiveEnvironmentEnvironmentIndustryEnvironment
  • Competitor AnalysisAssumptionsAssumptionsWhat assumptions do ourcompetitors hold about the futureof industry and themselves?Current StrategyCurrent StrategyDoes our current strategy supportchanges in the competitiveenvironment?Future ObjectivesFuture ObjectivesHow do our goals compare to ourcompetitors’ goals?CapabilitiesCapabilitiesHow do our capabilities compareto our competitors?ResponseWhat will ourcompetitors do in thefuture?Where do we have acompetitiveadvantage?How will this changeour relationship withour competition?
  • Future ObjectivesHow do our goalscompare to ourcompetitors’ goals?Where will emphasis beplaced in the future?What is the attitudetoward risk?What Drives thecompetitor?Competitor Analysis
  • What is the competitor doing?What can the competitor do?Future ObjectivesHow do our goalscompare to ourcompetitors’ goals?Where will emphasis beplaced in the future?What is the attitudetoward risk?Current StrategyHow are we currentlycompeting?Does this strategysupport changes in thecompetitive structure?Competitor Analysis
  • What does the competitor believeabout itself and the industry?Future ObjectivesHow do our goalscompare to ourcompetitors’ goals?Where will emphasis beplaced in the future?What is the attitudetoward risk?Current StrategyHow are we currentlycompeting?Does this strategysupport changes in thecompetition structure?Do we assume the futurewill be volatile?Are we assuming stablecompetitive conditions?What assumptions do ourcompetitors hold about theindustry and themselves?AssumptionsCompetitor Analysis
  • What are the competitor’scapabilities?Future ObjectivesHow do our goalscompare to ourcompetitors’ goals?Where will emphasis beplaced in the future?What is the attitudetoward risk?Current StrategyHow are we currentlycompeting?Does this strategysupport changes in thecompetition structure?Do we assume the futurewill be volatile?Are we operating undera status quo?What assumptions do ourcompetitors hold about theindustry and themselves?AssumptionsWhat are my competitors’strengths and weaknesses?How do our capabilitiescompare to ourcompetitors?CapabilitiesCapabilitiesCompetitor Analysis
  • Future ObjectivesHow do our goalscompare to ourcompetitors’ goals?Where will emphasis beplaced in the future?What is the attitudetoward risk?Current StrategyHow are we currentlycompeting?Does this strategysupport changes in thecompetition structure?Do we assume the futurewill be volatile?Are we operating undera status quo?What assumptions do ourcompetitors hold about theindustry and themselves?AssumptionsResponseWhat will our competitorsdo in the future?Where do we have acompetitive advantage?How will this change ourrelationship with ourcompetition?CapabilitiesWhat are my competitors’strengths and weaknesses?How do our capabilitiescompare to ourcompetitors?Competitor Analysis