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Porter Five Forces Review Assignment

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  • 1. MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATILMichael Eugene Porter (born May 23, 1947)[ is the Bishop William Lawrence UniversityProfessor at Harvard Business School. He is a leading authority on company strategy and thecompetitiveness of nations and regions. Michael Porter’s work is recognized in many governments,corporations and academic circles globally. He chairs Harvard Business Schools program dedicatedfor newlyappointed CEOs of very large corporations.WORK UNDER REVIEW:  Porter, M.E. (1979) "How Competitive Forces Shape Strategy", Harvard Business Review, March/April 1979.  Porter, M.E. (2008) "The Five Competitive Forces That Shape Strategy", Harvard Business Review, January 2008, pp. 79- 93.Porter’sfiveforces”haveshapedagenerationofacademicresearchandbusinesspractice. Porterherereaffirms,up-dates,andextends theclassicwork.Healsoaddressescommonmisunderstandings,providespracticalguidance forusersoftheframework, andoffersadeeper viewofitsimplicationsforstrategy today.REVIEWED BY: NAME : VIPUL PATIL COURSE : PHARMATECH AND HEALTHCARE MANAGEMENT (MPHARM+MBA) DEPARTMENT: PHARM ANALYSIS ROLL NO : 20 YEAR : FIRST YEARINTRODUCTION The Five Forces model of Porter is an outside-in business unit strategy tool that is used to make an analysis of the attractiveness (value...) of an industry structure. It captures the key elements of industry competition. 1. Threat of new entrants 2. Bargaining power of suppliers 3. Bargaining power of Buyers 4. Threat of substitute products 5. Intense rivalry among existing players1|P a g e
  • 2. MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATIL  As differentfromoneanotherasindustriesmight appearon thesurface,the underlyingdrivers ofprofitability arethe same. Buttounderstandindustrycompetitionandprofitability.  Ineach ofthecases, one must analyze theindustry’s underlyingstructureintermsofthe fiveforces.  Understandingthe competitiveforces,andtheirunderlyingcauses,revealstherootsofanindustry’s currentprofitabilitywhileprovidingaframeworkforanticipating and influencingcompetition(and profitability) overtime. We will consider each parameter in details:(1)THREAT ON NEW ENTRANTS:  New entrants bring new capacity.  Have desire for market share.:  Can bring in heavy cash flows and shake up competition.Eg.Pepsi,Microsoft.  it can put cap on profitability.  Incumbents hold down prices or boost investments to deter new entrants.  Brings reaction from incumbents. BARRIERS OF ENTRY:Supply side economies of scale: larger volume enjoys lower cost eg.intel.Demand side benefits of scale:buyer patronize the company products.(networking effects)Customer switching cost: larger the swiching cost harder it will be for entrants to gain customer.Capital requirement:large capital investment can deter new entrantsif particular capital requirement isunrecoverable likehigher to finance expenditure likeadvertisin and R&D.2|P a g e
  • 3. MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATILIncumbency advantages independent of sizes: incumbents have quality advantages over new entrants likepropriety technology, best raw material sources, established brand entities and cumulative experience.Allin turn contribute to efficiency.Unequal access to distribution channels: wholesalers and retailers so committed to incumbent that newentrant have to bypass distribution or create his own.Restrictive government policy: government can encourage new entrants through subsidies or hinderthem by imposing ban or licensing requirements.Expected retaliation:public statement from incumbent’s reaction to new entrant can act as barrier.(2)POWER OF SUPPLIER:  Powerful suppliers capture more value for themselves by charging higher prices, limiting quality or services and shift costs towards industry participants.  They squeeze out profitability of industry.Eg.supplier of labor.SUPPLIER GROUP IS POWERFUL IF:Supplier is more concentrated than industry:egMicrosoft’s monopoly in operating systems.Supplier group doesn’t rely on industry for its revenues: supplier serving much industry will try to extract profitfrom all sides but will reasonable discount if one is large volume buyer.Switching costs: If switching cost from buyer is high then it is difficult to play supplier against oneanother.Supplier which offers differentiated product: There is no substitute for suppliers product pharmaceuticalcompanies over hospitals and pilots union.Forward integration threat: When industry participantsmake too much profit.(3)POWER OF BUYER:  Powerful buyer is flipside of powerful supplier by forcing down prices, demanding better quality or more services.  They play industry participants against one another.  They are powerful if they have negotiating leverage.  They their clout to pressure price reductions.Buyer has negotiating leverage if3|P a g e
  • 4. MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATIL i. Few buyer &large relative purchase wrt single vendor:eg.bulk chemicals ii. Standardized products or undifferentiated: then buyer play against one another. iii. Switching costs: if less buyers change vendors. iv. Backward integration threatenPepsi threaten to make bottles. v. Intermediate buyer: when they can influence end customer purchasing decision.Buyer group is price sensitive if: i. Product has significant fraction in costs structure: Then buyer bargain hard &shop around. ii. The buyer group earns low profits: BUYER UNDER PRESSURE TO TRIM COSTS. iii. Qualityofbuyerislittleaffectedby products or services: If quality is affected by industry then buyer is not price sensitive. iv. Buyer is price insensitive if: 1. If product or services pay many times over by improving performance. 2. If product is more undifferentiated.(4)THREAT OF NEW SUBSTITUTE:  A substitute per- forms the same or a similar function as an industry’s product by a different means E.g.-mail is a substitute for express mail.  Substitutes are always present, but they are easy to overlook because they may appear to be very different from the industry’s product. When the threat of substitutes is high, industry profitability suffers.  They also reduce the bonanza an industry can reap in good times.eg In emerging economies, for example, the surge in demand for wired telephone lines has been capped as many consumers opt to make a mobile tele- phone their first and only phone line.The threat of a substitute is high if:1. The better the relative value of the substitute, the tighter is the lid on an industry’s profit potentialeg.skype has overcome long distance calling being in expensive.2. The buyer’s cost of switching to the substitute is low. Switching from a proprietary, branded drugto a generic drug usually involves minimal costs,3. technological changes or competitive discontinuities in seemingly unrelated businesses can havemajor impacts on industry profitability eg. Improvements in plastic materials, for example, allowedthem to substitute for steel in many automobile components.4|P a g e
  • 5. MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATIL(5)RIVALRYAMONGEXISTINGCOMPETITORS: Rivalry exists in form of including  pricediscounting,  newproductintroductions,  advertisingcampaigns,and  Serviceimprovements. Degree of rivalry depends on intensitywith which they compete &basison which they compete Itheintensityofrivalryamgreatestif: 1. Numerous competitors both in size and power. 2. Slow growth precipitates fight. 3. Exit barriers arehigh. 4. Rivalry is high if goals go beyond economic performance of industry.eg state owned company have goals of employment and prestige.als clashes of personality and ego. 5. Firms cannot read each other’s signals. Rivalry also affects basis of competition. Dimensions whether rivals converge on same dimension or different.PRICE DIMENSION: Destructive to profitability of industry and transfer profit to customers.Diverts attention of customers towards product features and service. Pricecompetition ismostliabletooccurif: 1. Productsidentical &fewswitchingcostsforbuyers. 2. Fixedcostsarehighandmarginal costsare low. 3. Large capacity expansion. 4. Product is perishable OTHER DIMENSION(NON-PRICE RIVALRY ): On product features, supportservices, deliverytime,orbrandimage, Features: o no erosion of profitability. o Improves customer value. o Support higher prices. o Improve value over substitute or raise barrier for new entrant. o POSITIVE SUM COMPETITION. o HIGHER AVERAGE profitability5|P a g e
  • 6. MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATIL o Expand industry. Thus nature of competition is towards positive direction.Limitation on rivalry : Factors not considered IN PORTER FIVE FORCES are o TOO MANY “ME TOO”:every one wants too be in rat race every one wants too devlop same product this factor should be kept in mind wrt rivalry. o SUDDEN CHANGE IN MACRO ENVIORNMENT:cannot be ignored bcoz any change in enviornment can cause all competition among rival TOO BLEED TO DEATH. Eg any hike in crude prices will cause airlines with very bad impact on profitability like kingfisher airlines. o LACK OF BUSSINESS MATURITY:Many rivals can lessen impact of competition by forming allainces and mergers among themselves which we refer as bussiness maturity.FACTORS,NOT FORCES: 1. INDUSTRY GROWTH RATE: fast growth promises more opportunities but narrow focus can cause bad strategy development. 2. TECHNOLOGY &INNOVATION: also acts to make industry attractive or in attractive 3. GOVERNMENT:can support industry eg.patent barrier orconversely by favouring unions & bankruptcy rules. 4. COMPLEMENTARY PRODUCT &SERVICES: combination add to the product value.ADVANTAGES OF PORTER FIVE FORCES: i. The value of Porters model is more that it enables managers to think about the current situation of their industry in a structured, easy-to-understand way as a starting point for further analysis. ii. It helps company to know average profitability of its industry and how it is changing over time. iii. They provide baseline for sizing up companies strengths and weaknesses iv. It tells us where company stands versus buyers,suppliers,entrants,rivals and substitutes. v. It helps in understanding industry structure towards fruitful possibilities for strategic action like  Positioning company.  Shaping industry structure.  Expanding profit pool defining industry.6|P a g e
  • 7. MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATILLIMITATION OF PORTER FIVE FORCES: i. The model is best applicable for analysis of simple market structures, analysis of all five forces gets very difficult in complex industries with multiple interrelations, product groups, by- products and segments. ii. Narrow focus on particular segments of such industries, however, bears the risk of missing important elements. iii. The model assumes relatively static market structures. in today’s dynamic markets. Technological breakthroughs and dynamic market entrants from start-ups or other industries may completely change business models, entry barriers and relationships along the supply chain within short times. iv. Inside-out strategy is ignored (core competence) v. It does not cope with synergies and interdependencies within the portfolio of large corporations (parenting advantage) vi. The environments which are characterized by rapid, systemic and radical change require more flexible, dynamic or emergent approaches to strategy formulation (disruptive innovation) vii. Sometimes it may be possible to create completely new markets instead of selecting from existing ones (blue ocean strategy)7|P a g e
  • 8. MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATILAPPLICABILITY: 1. PHARMA INDUSTRY:8|P a g e
  • 9. MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATILRETAILING INDUSTRY9|P a g e
  • 10. MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATILAVIATION INDUSTRY THE END10 | P a g e
  • 11. MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATIL11 | P a g e

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