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6 m porter's 5 forces competitive model


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6 m porter's 5 forces competitive model

  1. 1. Makerere University Business School Strategic Management Course ENVIROMENTAL ANALYSIS - COMPLETION
  2. 2. INDUSTRY ANALYSIS • A firm operates in an industry • Need to compare a company’s operations with others – Especially “the best-in-class” rivals • Current level of competition – Technologies – Competitors’ Key Success Factors, among other key issues.
  3. 3. Industry components • Customers • Suppliers • Competitors • Industrial trends – In line with your industry’s life cycle – In line your goals and objectives, your strategy
  4. 4. Customers: • Who are they in terms of characteristics and behaviours? • How manageable are their needs, wants, expectations, tastes and preferences? • Why do they buy/what they value most? • When/how do they buy?  Where do they buy?, etc Do all these trends/factors/developments favor/benefit us (opportunities) or really scare/are against us (threats)?
  5. 5. Suppliers; • Do we have alternative sources of suppliers? • Can we rely on these suppliers to provide our needed inputs in the right quantities ,quality, at the right time and place? • If the answer is yes , those are opportunities. While no shows a threat (s)
  6. 6. • What are their costs? • What are their terms of delivery and/or payment? • How powerful are they? • What is their rate of entry and exit? • Which supplier is the best? Which supplier (s) will give us competitive advantages (opportunities) or not/scare us( threat)?
  7. 7. Competitors; • How many competitors of our size and competence are we facing? Few- opportunity, many-threat • What market share do they hold/how strong are they? Smaller/weaker-opportunity, Big/strong- threat • Cost of the available substitutes? Find out
  8. 8. • What are their competitive behavior? Friendly/cooperative- Opportunity, Un friendly-Threat • What are the entry and exit barriers for these competitors? Easy for new rivals to join but difficult for the current ones to leave the industry-threat, Difficult to enter but easy to exit-favorable/opportunity
  9. 9. • Before joining an industry, a firm should consider; Industry size, structure, profitability, long term attractiveness, life cycle Competitive situation analysis
  10. 10. Level of technology in the industry Competitive position of the firm Ease of entry in the industry
  11. 11. Michael Porter’s model • Michael E. Porter of the Harvard Business School • Suggested five competitive forces model; – Rivalry within the industry – Threat of new entrants – Threat of substitute products – Power of buyers – Power of suppliers
  12. 12. Rivalry determinants • Mutual dependence • Concentration of competitors • Number of competitors • Industry growth rate • Cost structure • Diversification by competitors • Differentiation and switching costs • Exit barriers • Capacity utilisation
  13. 13. Entry barriers • Economies of scale • Product differentiation • Capital requirements • Switching costs • Distribution channels access • Government policies • Expected retaliation
  14. 14. Substitution determinants • Price relativity • Switching costs • Buyer propensity to substitute
  15. 15. Customer power determinants • Intrinsic strength • Buyer volume • Switching costs • Buyer information • Backward integration ability • Substitute products • Price sensitivity • Impact on quality • Brand identity
  16. 16. Supplier power • Importance to supplier • Knowledge of product value to buyer – Brand – Quality • Standardisation and differentiation • Switching costs • Threat of forward integration
  17. 17. Model Basics • Helps managers to identify the opportunities and threats confronting their company (ies). • The stronger the 5 competitive forces, the more serious the threat and vise versa. • Through strategic change you can alter the strengths of such forces
  18. 18. Porter’s Model – Cont. • Need to understand the forces in the industry, their impact/seriousness, how and when they benefit or be against you, and their sources. • Confirm which forces favour your business success (opportunities) or scare your business success (threats)
  19. 19. Limitations • Limited availability of the required information i.e high level of secrecy in government bodies and some business associations • The available information may not be up-to-date, or be irrelevant or even inaccurate • The model ignores other trends like changes in demand, technology used in production, and the market growth/attractiveness