Chapter 5

Five forces (industry structure) model

Topic Suggested reading

1.The strategic planning processIntro to the Integrating case study

Chapter 1-2

Case 1 :The ABC Cheese Factory2.Portfolio model

Page 202-209Chapter 3

Case 2 :Abbotsleigh Citrus3.The growth strategies

Page 209-212Chapter 4

Case 3 :Degrees South4.Five forces model

Page 212-217Chapter 5

Case 4 : A retail meat market Question No 15.Competitive generic strategies

Page 228-237Chapter 6

Case 5 : A retail meat market Question no 26.Competitive market position and related strategies

Page 228-237Chapter 8

Case 6 : A retail meat market Question No 37.Strategic alliance and network

Page 228-237Chapter 9

Exam -

Factors affecting industry attractiveness Attractiveness can be judged from both outside and within an

industry. Relevant questions include:

1. How profitable is it likely to be in both the short and long term? 2. How well the industry factors match the business’s

characteristics and resources. 3. How easy will it be for the business to capture and keep a

significant and sufficient loyal customer base?4. Is the business more or less dominant than its direct

competitors?

RobotShopping

Porter’s five forces (industry attractiveness) model

Threat of

new entrants

Bargaining power of

buyers

Bargaining power of

suppliers

Threat of substitutes

Intensity of rivalry

between existing

competitors

Five

Porter’s five forces model applied

An application of the model used to analyse the Australian pharmaceutical industry can be found at the Pharmaceutical

Professionals website -

http://www.pharmaceuticaljobs.com

Click on ‘Healthcare Articles’ and find the article Competitive Strategy in the Pharmaceutical Industry (viewed June 2007)

Intensity of rivalry

1. If competitive rivalry is high, it is more difficult and costly for individual businesses to achieve sales and profit objectives.

2. If competitive rivalry is lower (competitors are reasonably content to share the market between themselves), it is easier and needs less effort and resources to achieve sales and profit objectives (provided they are seen as reasonable by the competitors).

Cola

Factors influencing competitive rivalry

1. The number of competitors.2. The relative dominance of competitors.3. The attitude or corporate commitment of

competitors. 4. The level of differentiation within the industry. 5. The cost structures within the industry. 6. The existence of high exit barriers. 7. The stage of the product or industry life cycle. 8. Low buyer switching costs. 9. The perishability of the product.

Countering competitive rivalry

The impact of competitive rivalry can be reduced by using strategies relating to:

1. Quality, 2. Price, 3. Performance, 4. Service, 5. Strong differentiation, 6. Warranties,7. Image, 8. Promotions and

sponsorships,9. Loyalty programmes.

10.Strategic alliances with retailers and distributors.

11. Being proactive rather than reactive.12. Horizontally integrate by buying

weaker competitors.13. If growth is slow, seek new markets

or segments that are growing faster. 14. If all else fails, sell out.

Toyota

Countering competitive rivalry

1. Market structure will impact on rivalry. Less differentiation means more rivalry.

2. Competitors in undifferentiated market structures often try to create intangible, but real to the consumer, differences to artificially segment the market.

3. The non-dairy spreads (margarine) market is a good example of this.

China

cars

Threat of new entrants

1. Entry barriers are factors that make it more difficult for new businesses to enter the industry or market.

2. Industries with high entry barriers require substantial resources or expertise to enter. This limits the number of competitors to a few large firms, e.g., airline and heavy manufacturing industries.

3. Industries with low entry barriers tend to have larger numbers of smaller firms, as the resource and expertise requirements are easy to obtain, e.g., tourism, hospitality and many service industries.

India

New entrants and attractiveness

1. Low entry barriers make industries more attractive to potential entrants, but less attractive to existing competitors.

2. High entry barriers make industries less attractive to potential entrants, but more attractive to existing competitors.

Entry barrierscan be created by:

1. High capital, expertise or technology requirements.

2. Regulatory policies or legislation, which places added costs or conditions on the industry.

3. Tariff and international trade barriers.

4. Cost advantages held by existing competitors.

5. Strong patents held by existing competitors.

6.Brand image resulting in high levels of customer loyalty for existing competitors.

7.Access to distribution channels.

Countering barriers to entry The impact of barriers to entry can be reduced

by using strategies relating to:

1. innovation - new or different patents;

2. forward or backward integration;

3. better research leading to better identification of customer needs;

4. creating a strong point of differentiation linked to your new brand.

5. lobbying governments to change policies and legislation;

6. leapfrogging production or technology to cheaper or more efficient methods;

7. strategic alliances that increase power and resources, lower costs, or overcome the barriers.

Threat of substitutes1. Some industries or markets will experience competition from

substitutes as well as direct competitors. 2. This will lead to added competitive costs and lower stability. 3. Profit margins will be affected as prices are likely to reflect

increased elasticity of demand.

Substitutes may be:

4. Direct substitutes - products that perform basically the same function for the customer.

5. Indirect substitutes - products that customers choose between to spend discretionary income.

Threat of substitutes will increase the intensity of competition when:

1. Customers switching costs are low.2. Changing macro-environmental factors make the

substitute more attractive to customers.3. The price performance trade-off of the substitute is not

significant in customer’s minds.

Countering the threat of substitutes The impact of substitutes can be reduced by

using strategies relating to:

1. loyalty programmes 2. provide added value to your

offering to offset any savings offered by the substitute

3. increase research into customers needs, buying decision processes and preferences

4. Industry-based promotions.

5. increase differentiation 6. improve support to distributors 7. decrease the impact of the

substitute’s point of value differentiation

8. diversification into the substitute.

Bargaining power of suppliers

1. set higher prices for their products. 2. restrict products or services to competitors with whom they

have a stronger relationship.

When suppliers have more bargaining power than

buyers, they can:

Both scenarios will increase cost structures, make supply

acquisition more difficult, and decrease industry attractiveness.

Bargaining power of suppliers is increased when:

1. there are few suppliers and many buyers.2. individual suppliers have a strong differential advantage or

significant patents. 3. the buyers’ (industry competitors) switching costs are high.4. the supplier’s product is an important part of the buyer’s products,

represents a large part of the buyer’s cost structure, or significantly affects the buyer’s product quality.

5. buyers are not important due to small order sizes.6. the suppliers may forward integrate and become new competitors.

Countering supplier power The impact of high supplier power can be

reduced by using strategies such as:

1. a better supply chain management.

2. developing a better understanding of suppliers costs and operations.

3. developing partnerships or strategic alliances with selected suppliers.

4. forming strategic alliances with competitors to create buying groups.

5. redesigning products so substitute materials or ingredients may be used.

6. sourcing from new geographic locations.

7. backward integration.

Bargaining power of buyers

1. set (restrict) the price the seller can charge, lowering profit margins.

2. restrict their purchases to the ranges that provide them with the best profit margins, reducing the ability of suppliers to maintain a varied product range.

Buyers may be consumers, but are more likely to be

members of the distribution chain. When buyers have more bargaining power than suppliers, they can:

Both scenarios will reduce price potential and profitability,

restrict variety, and reduce the supplier’s investment in

new product development.

Trade

Bargaining power of buyers is increased when:

1. There are few, or large, buyers who purchase a large percentage of the industry’s product.

2. Smaller suppliers are of less significance or interest to the buyer due to limited capacity.

3. The buyers (consumers) have low switching costs, or are able and willing to buy substitute products.

4. The buyers pose a threat of backward integration. 5. The industry’s products have little differentiation. 6. The industry’s products do not save the buyer money, or

represent a minor part of the buyer’s purchases.

Countering buyer power The impact of high buyer power can be reduced

by using strategies relating to:

1. value adding in forms of additional service or convenience.

2. developing a strong ‘pull’ strategy so end users will demand your product.

3. forming strategic selling group alliances to reduce marketing and selling costs.

4. seeking new buyers and markets.

5. removing the middle man and sell directly to end users.

6. if the product is commodity in nature, try branding it anyway.

7. forward integration.

Limitations of the five forces model

1. Analysis is becoming more difficult as business activity is becoming increasingly dynamic and changing rapidly compared to when the model was first developed.

2. Good industry analysis needs focus on a greater variety of factors than just the five Porter identified.

3. As with all analysis models, it cannot be used in isolation, but provides one part of the total analysis needed to make successful strategic decisions.