Forces governing competition in an industry: The nature and degree of competition in an industry hinge on five forces:- The threat of entry The bargaining power of customers The bargaining power of suppliers The threat of substitute products The jockeying among current competition

1. How competitive forces
shape strategy?
-Michael E. Porter
Harvard Business Review(March-April 1979)

2. Forces governing competition in an industry:
The nature and degree of competition in an industry hinge on five forces:-
 The threat of entry
 The bargaining power of customers
 The bargaining power of suppliers
 The threat of substitute products
 The jockeying among current competition
The collective
strength of these
forces determines
the ultimate profit
potential of an
industry.

3. The threat of entry
The seriousness of the threat of entry depends on the barriers present and the
reaction from existing competitors that the entrant can expect. There are six major
sources of barriers:-
 Economies of scale
 Product Differentiation
 Capital Requirements
 Cost Disadvantages independent of size
 Access of distribution channels
 Government Policy

4. Powerful suppliers and buyers
Suppliers can exert bargaining power on participants in an industry by raising prices or reducing
the quality of purchased goods and services. Powerful suppliers can thereby squeeze
profitability out of an industry unable to recover cost increase in its own prices.
A supplier group is powerful if :
 Product is unique
 Dominated by a few companies and more concentrated than the industry it sells to.
Customers likewise can force down prices, demand higher quality or more service, and play
competitors off against each other- all at the expense of industry profits.
A buyer group is powerful if :
 Purchases in large volume
 The product it purchases are standard

5. Substitute Products
A substitute product is a product from another industry that offers similar
benefits to the consumer as the product produced by the firms within the
industry.
 The more attractive the price performance trade off offered by the substitute
products, the firmer is the lid placed on the industry’s profit potential.
 Limit profits in normal times.
Substitute products that deserve the most attention:
 Subject to trends improving their price performance trade-off.
 Produced by industries earning high profits.

6. Jockeying for position
Rivalry among existing competitors take the family form of jockeying for
position. Intense rivalry can be due to :
 Competitors are numerous or roughly equal in size and power.
 Industry growth is slow.
 Product and services lack differentiation.
 Fixed costs are high or the product is perishable.
 Capacity is normally augmented in large increments.
 Exit barriers are high.
 Rivals are diverse in strategies, origins and personalities.

7. Formulation Strategy
Plan of action
Positioning of
company A.K.A
‘Defense’
Influencing
balance of
forces
‘Offence’
Anticipating
shifts and
exploiting
change.

8. Positioning:
 The company either builds defense against existing competitive forces
Or
chooses a portion where these forces are weakest.
 Where company should confront competition
And
Where it should avoid it.
Strength Competitive force
Low cost Producers Powerful buyers
Reasons for success of Dr. Pepper
Sound industry analysis + Knowledge of corporate strengths= Superior Strategy
 Brand Identification(Narrow Flavor line).
 Cost Advantage(Piggybacking on existing bottlers, Low material costs).
 Customer loyalty.
 Excellent service and other efforts.

9. Influencing the Balance
Rather than merely coping with the forces, alter their causes.
Examples:
 Innovations in marketing to raise brand identification.
 Differentiating the product.
 Capital Investments in facilities.
 Vertical integration.
Exploiting industry change
 Affecting the most important source of Competition.
 Eg ; Vertical Integration – minicomputer industry
 Eg ; Solar Power

10. Multifaceted rivalry
 Looking beyond Product, national boundary and ranks of one’s competition.
 Exploit new markets.
 Competitors of tomorrow.