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Porter's 5 Force Model

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Porter's 5 Force Model

  2. 2. INTRODUCTION • 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.
  3. 3. PORTER’s FIVE FORCEs MODEL Potential entrants Threat of new entrants Bargaining power Industry competitors of suppliers Suppliers Buyers Rivalry among Bargaining power existing firms of buyers Threat of substitutes Substitute products
  4. 4. PORTER’s FIVE FORCEs MODEL Threat of Threat of New New Entrants Entrants
  5. 5. Threat of New Entrants Economies of Scale Barriers to Product Differentiation Entry Capital Requirements Customer Switching Costs Access to Distribution Channels Government Policy Expected Retaliation
  6. 6. PORTER’s FIVE FORCEs MODEL Threat of Threat of New New Entrants Entrants Bargaining Power of Suppliers
  7. 7. Bargaining Power of Suppliers Suppliers are likely to be powerful if: Suppliers exert power in the Supplier industry is dominated by a few firms industry by: Suppliers’ products have few substitutes * Threatening to raise prices or to reduce Buyer is not an important customer to quality supplier Powerful suppliers Suppliers’ product is an important input to can squeeze buyers’ product industry profitability if firms Suppliers’ products are differentiated are unable to Suppliers’ products have high switching recover cost costs increases
  8. 8. PORTER’s FIVE FORCEs MODEL Threat of Threat of New New Entrants Entrants Bargaining Bargaining Power of Power of Suppliers Buyers
  9. 9. Bargaining Power of Buyers Buyer groups are likely to be powerful if: Buyers compete with Buyers are concentrated the supplying industry by: Purchase accounts for a significant fraction of supplier’s sales Products are undifferentiated * Bargaining down prices Buyers face few switching costs * Forcing higher quality Buyer presents a credible threat of backward * Playing firms off of integration each other Buyer has full information
  10. 10. PORTER’s FIVE FORCEs MODEL Threat of Threat of New New Entrants Entrants Bargaining Bargaining Power of Power of Suppliers Buyers Threat of Substitute Products
  11. 11. Threat of Substitute Products Keys to evaluate substitute products: Products with improving price/performance tradeoffs relative to present industry Products with products similar function limit the prices firms can Example: charge Electronic security systems in place of security guards Fax machines in place of overnight mail delivery
  12. 12. PORTER’s FIVE FORCEs MODEL Threat of Threat of New New Entrants Entrants Bargaining Bargaining Rivalry Among Power of Power of Competing Firms in Suppliers Buyers Industry Threat of Substitute Products
  13. 13. Rivalry Among Existing Competitors Intense rivalry often plays out in the following ways: Using price competition Staging advertising battles Increasing consumer warranties or service Making new product introductions Occurs when a firm is pressured or sees an opportunity Price competition often leaves the entire industry worse off Advertising battles may increase total industry demand, but may be costly to smaller competitors
  14. 14. Coca-cola • Traditional competition:  Prices of Pepsi, local brands  Market share  Promotional actions of competition • New entrants:  New “look-a-like” manufacturers • Substitute products:  Fashionable new drinks, milk drinks, coffee, beer, ...
  15. 15. Coca-cola • Suppliers:  Price and availability of ingredients on world market  Quality speed safety, traceability, flexibility of supply chain • Buyers/consumers:  High as a result of intense competition both among branded and unbranded products.  Combined purchase power of shops, bars, supermarkets
  16. 16. Competitive Advantage • The Competitive Advantage model of Porter learns that competitive strategy is about taking offensive or defensive action to create a defendable position in an industry, in order to cope successfully with competitive forces. • Companies can combat the pressure of the five forces and create competitive advantages. • There are 2 basics types of Competitive Advantage :  Cost leadership (low cost)  Differentiation
  17. 17. Strengths of five forces model:  The model is strong tool for competitive analysis at industry level.  It provides useful input for performing a SWOT analysis.
  18. 18. Limitations • Inside-out strategy is ignored (core competence) • It does not cope with synergies and interdependencies within the portfolio of large corporations (parenting advantage) • The environments which are characterized by rapid, systemic and radical change require more flexible, dynamic or emergent approaches to strategy formulation (disruptive innovation) • Sometimes it may be possible to create completely new markets instead of selecting from existing ones (blue ocean strategy)

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