PORTERS FIVE FORCES

REVISION NOTES

Improving

product

differentiation

improving

features,

Porters Five Forces:

What is this? A tool used to assess the attractiveness of an industry Used at strategic business unit (SBU) level not for whole organisation due to diverse nature of different operations and markets within a company for instance, Airlines: Longhaul vs Domestic ights and Consumer base: leisure, business etc What does it do? Helps identify sources of competition Forces arent separate from each other Helps to better understand the industrys context The

implementing innovations in the manufacturing process and in the product itself. Creatively using channels of distribution using vertical

integration or using a distribution channel that is novel to the industry. For example, with high-end jewelry stores reluctant to carry its watches, Timex moved into drugstores and other nontraditional outlets and cornered the low to mid-price watch market. intensity of rivalry is inuenced by the following industry

characteristics: 1. A larger number of rms increases rivalry because more rms must compete for the same customers and resources. The rivalry intensies if the rms have similar market share, leading to a struggle for market leadership. 2. Slow market growth causes rms to ght for market share. In a growing market, rms are able to improve revenues simply because of the expanding market. 3. High xed costs result in an economy of scale effect that increases rivalry. When total costs are mostly xed costs, the rm must produce near capacity to attain the lowest unit costs. Since the rm must sell this large quantity of product, high levels of production lead to a ght for market share and results in increased rivalry. 4. Low switching costs increases rivalry. When a customer can freely switch from one product to another there is a greater struggle to capture customers. 5. Low levels of product differentiation is associated with higher levels of rivalry. Brand identication, on the other hand, tends to constrain rivalry.

Competitive Rivalry
The CR indicates the percent of market share held by the four largest rms When only a few rms hold a large market share, the competitive landscape is less competitive (closer to a monopoly). A low concentration ratio indicates that the industry is characterized by many rivals, none of which has a signicant market share. These fragmented markets are said to be competitive. High xed costs, sizes of companies and industry growth rates impact competitive rivalrly. In pursuing an advantage over its rivals, a rm can choose from several competitive moves: Changing prices - raising or lowering prices to gain a temporary advantage.

 6. High exit barriers place high cost on abandoning the product. The rm must compete. High exit barriers cause a rm to remain in an industry, even when the venture is not protable. A common exit barrier is asset specicity. When the plant and equipment required for manufacturing a product is highly specialized and cant be sold to other buyers.

Reduces the demand for a particular class of products as consumers decide to buy alternatives Product for product substitution e.g email instead of post Complimentor products eg. Butter and bread

Buyer Power
Concentration of buyers if its high, buyer power is strong If the product accounts for high percentage of buyers total purchases, they are more likely to shop around and squeeze rms for cheaper prices Cost of switching to another supplier if it is low, theres more pressure on the rm

Threat of new entrants

Capital requirement of entry the cost will vary according to technology and scale. Dot.com businesses would be easier to set up they just lease a building and launch their site. However, entrance into the fuel or power industry would be harder and more expensive. Access to supply channels In many industries manufacturers have had control over supply and/or distribution as sometimes they directly own the suppliers(vertical integration) or have high supplier loyalty. This can be overcome by bypassing distributors and selling directly to customers online(Amazon) Customer loyalty Experience gives advantages in terms of costs and consumer/ supplier loyalty Expected retaliation e.g. Kellogs cereal big player would be hard to compete against Leglislation e.g. Patents, regulation of markets

Supplier Power
If suppliers have a wide range of customers they wont be as concerned to lose the rms business If switching costs are high rms will nd it harder to get cheaper goods Suppliers competing with buyers directly
I Easy to exit if there are:

Markets are easy to enter if there is:

Common technology Little brand franchise Access to distribution channels Low scale threshold Patented or proprietary know-how Difficulty in brand switching Restricted distribution channels High scale threshold Low exit costs

Salable assets ndependent businesses

Difficult to exit if there are:

Difficult to enter if there is:

Specialized assets High exit costs Interrelated businesses

Threat of Substitutes
E.g. The price of aluminum beverage cans is constrained by the price of glass bottles, steel cans, and plastic containers. These containers are substitutes, yet they are not rivals in the aluminum can industry.

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GEOGRAPHY SKILLS: REVISION

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