porter's 5 forces_sm2
TRANSCRIPT
-
8/8/2019 Porter's 5 Forces_SM2
1/25
-
8/8/2019 Porter's 5 Forces_SM2
2/25
Essence of strategy formulation is coping withcompetition.
Competition in an industry is rooted in its underlyingeconomics.
Competition in an industry depends on 5 basic forces.
Strategists goal to best defend the companyagainst these competitive forces.
Introduction
-
8/8/2019 Porter's 5 Forces_SM2
3/25
Forces governing competition in an
industry
-
8/8/2019 Porter's 5 Forces_SM2
4/25
Seriousness of threat of entry depends on:
Barriers present
Reaction from the existing players
Threat of Entry
-
8/8/2019 Porter's 5 Forces_SM2
5/25
The 6 major sources of barriers to entry:
1. Economies of Scale: deter new entrants by forcingthem to come in on a large scale or suffer costdisadvantage.
2. Product Differentiation: creates barrier by forcing
entrants to spend heavily to overcome customerloyalty.
3. Capital Requirement
Threat of Entry
-
8/8/2019 Porter's 5 Forces_SM2
6/25
4. Cost disadvantages independent of size: occurs dueto experience, govt. subsidies, favorable location,technology, prices, raw materials.
5. Access to distribution channels: barrier by limitingthe wholesale or retail channels available to the new
entrants.6. Government Regulations
Threat of Entry
-
8/8/2019 Porter's 5 Forces_SM2
7/25
Suppliers can exert bargaining power by:
Raising prices
Reducing quality
Buyers can exert bargaining power by:
Forcing down prices
Demanding high quality or more service
Both of the above reduces the industry profits.
Powerful Suppliers and Buyers
-
8/8/2019 Porter's 5 Forces_SM2
8/25
Supplier Group is powerful when:
Dominated by few players.
Product is unique and high switching costs.
Poses a threat of forward integration in industrysbusiness.
Industry is not an important customer.
Powerful Suppliers and Buyers
-
8/8/2019 Porter's 5 Forces_SM2
9/25
Buyer Group is powerful when:
Purchases in large volumes.
The products they purchase are standard.
Backward integration.
Product constitutes small fraction of buyers cost. Earns low profits.
Powerful Suppliers and Buyers
-
8/8/2019 Porter's 5 Forces_SM2
10/25
A company can improve its strategic posture by findingsuppliers or buyers who possess the least power toinfluence it adversely.
Strategic Action
-
8/8/2019 Porter's 5 Forces_SM2
11/25
Threat can be avoided by:
Upgrading the quality
Product differentiation
Substitute products that get most attentionstrategically:
Improving price- performance trade off
Produced by high profit earning industries
Substitute Products
-
8/8/2019 Porter's 5 Forces_SM2
12/25
Competitors are of same size and power.
Industry growth is slow.
The product lacks differentiation.
Exit barriers are high.
Jockeying for Position
-
8/8/2019 Porter's 5 Forces_SM2
13/25
Product differentiation
Focus on selling in fastest growing segments.
Avoid confrontation with competitors having highexit costs.
Strategies for reducing rivalry
-
8/8/2019 Porter's 5 Forces_SM2
14/25
Assess the forces affecting competition in theindustry and their underlying causes.
Identify companys crucial strengths and weaknesses.
Devise plan of action:
Positioning the company
Influencing the balance
Exploiting industry change
Formulation of Strategy
-
8/8/2019 Porter's 5 Forces_SM2
15/25
Knowledge of companies capabilities and the causesof competitive forces.
Find out where company should confrontcompetition and where it should avoid.
Positioning the Company
-
8/8/2019 Porter's 5 Forces_SM2
16/25
Balance of forces is partly external and partly incompanys control.
Company can devise a strategy that is meant to alterthe causes of competition.
Influencing the Balance
-
8/8/2019 Porter's 5 Forces_SM2
17/25
Industry trends keep on changing which can reduceor increase the competition.
By analyzing the competitive forces, a company canspot an opportunity and set up a diversificationstrategy for itself.
Exploiting Industry Change
-
8/8/2019 Porter's 5 Forces_SM2
18/25
Example: TATA NANO
-
8/8/2019 Porter's 5 Forces_SM2
19/25
Threat of new entrants isinfluenced by
Overall
Rating:LOW
Factors Tata NANO
Advantages
Threat of new
entrants
Entry Deterring Price Yes, The Price is Rs130,000.
Low
Retaliation by TATA in
case of competition
Yes, because of large
resources.
Low
High Entry Costs Yes,TATA spent Rs17oo* crore as initialinvestment + 4 yearson research
Medium because ofreverse engineeringprocess andavailability ofresources.
Experience HIGH because of itsparentexperience(TATAMotor)
Low
Other Cost advantages Yes** Low
-
8/8/2019 Porter's 5 Forces_SM2
20/25
Bargaining Power of Buyers is
influenced by
OverallRating:LOWFactors Tata NANO
Advantages
Buyer Power
Differentiation Price , Durability ,Brand equity
Low
Concentration Large number ofconsumers
Low
Profitability Easy Availability ofloans
Low
Quality Car has passed thefull frontal crash andside impact crashPassed Govt. Test ofemission, noise andvibration
Low
-
8/8/2019 Porter's 5 Forces_SM2
21/25
Bargaining Power of
Suppliers is influenced by
Factors Supplier Power
Concentration High Low
Organization/cartel No Low
Diversification of
supplier products
No Low
Overall
Rating:LOW
-
8/8/2019 Porter's 5 Forces_SM2
22/25
Threat of Substitute product
is influenced byFactors Threat of substituteAvailability Same category -NO low
Other Category
substitutes
Yes, but, minimal
extent e,g. High endbikes and other carmodels likeReva,Alto
Medium
Time Lag inavailability of samecategory product
High Low
Quality of substitute Quality influencesthe customer.
Low in short term
OverallRatingLow
-
8/8/2019 Porter's 5 Forces_SM2
23/25
Rivalry among Existingcompetitors is influenced by
Factors Rivalry amongexisting
competitors
Brand Image Brand equityinfluences thecustomer
Low among samecategory
No. of Competitors Negligible in shortterm
low
Size of payoff Depends on Volume Low
Switching costs Medium ascustomers canswitch to otherproducts
Medium
Origin ofcompetitors
Diverse High
Overall
RatingMedium
-
8/8/2019 Porter's 5 Forces_SM2
24/25
The key to growth is:
To stake out a position less vulnerable to attack fromcompetitors.
This can be achieved by:
Solidifying relationships with favorable customers
Product differentiation
Backward or forward integration
Innovation
Conclusion
-
8/8/2019 Porter's 5 Forces_SM2
25/25
Thank You