THE FIVE COMPETITIVE FORCES THAT SHAPE STRATEGY MICHAEL E PORTER HARVARD BUSINESS SCHOOL

JOB OF A STRATEGIST

• • • • • • UNDERSTAND AND COPE WITH COMPETITION NOT ONLY DIRECT COMPETITION DRIVERS OF PROFITABILITY SAME ACROSS INDUSTRIES INTENSE FORCES-DRIVE DOWN PROFITABILITY BENIGN FORCES-DRIVE UP INDUSTRY STRUCTURE DECIDES THE FORCES

SHAPING STRATEGY

• • • THE FIVE COMPETITIVE FORCES • POTENTIAL ENTRANTS • SUPPLIERS • • • CUSTOMERS SUBSTITUTE PRODUCTS EXISTING COMPETITION DEFENDING & SHAPING THE C.F

KEY C.F SHAPES STRATEGY FORMULATION

POTENTIAL ENTRANTS –THREAT OF ENTRY

• NEW ENTRANTS • ADD ADDITIONAL CAPACITY • PUT A CAP ON PROFIT BY DRIVING DOWN PRICES

BARRIERS TO ENTRY • • • • • • • • SUPPLY SIDE (INTEL) DEMAND SIDE (IBM, e-BAY) CUSTOMER SWITHCING COSTS (SAP) CAPITAL REQUIREMENTS INCUMBANCY ADVANTAGES INDEPENDENT OF SIZE UNEQUAL ACCESS TO DISTRBN CHANNELS-Eg: LOW COST AIRLINES RESTRICTIVE GOVT.POLICY

EXPECTED RETALIATION (Retail Associations in India)

POWER OF SUPPLIERS

• • • • MORE POWERFUL CAPTURE MORE VALUE (MICROSOFT) SUPPLIER DEPENDENCY (BLOOMBERG) DIFFERENTIATED PRODUCTS HIGH CUSTOMER SWITCHING COSTS

POWER OF BUYERS

• • • • FEW BUYERS HIGH VOLUMES Eg;BSNL STANDARDISED PRODUCTS LOW/MINIMUM SWITHCING COSTS POSSIBILITY OF BACKWARD INTERGARTION BY CUSTOMERS

THREATS OF SUBSTITUTES

• • • ALTERNATE CHEAPER PRODUCTS/ SERVICES ATTRACTIVE PRICE PERFORMANCE TRADE OFF SWITHCING COSTS TO NEW SUBSTITUTE LOW

RIVALRY AMONG EXISTING COMPETITORS • • • • • NUMEROUS COMPETITORS OF EQUIVALENT SIZE SLOW GROWTH RATE HIGH EXIT BARRIERS HIGHLY COMMITTED RIVALS HIGH PRICE COMPETITION

VISIBLE INDUSTRY ATTRIBUTES

• • • • INDUSTRY GROWTH RATE TECHNOLOGY AND INNOVATION GOVERNMENT COMPLEMENTARY PRODUCTS AND SERVICES (Eg: Microsoft, Antivirus bundled PC)

CHANGES IN INDUSTRY STRUCTURE

• • • • • INDUSTRY DEVELOPMENTS DICTATE CHANGE SHIFTING THREAT OF NEW ENTRY (Eg;PATENT EXPIRY FOR DRUGS) CHANGING SUPPLIER OR BUYER POWER (BIG BAZAR) SHIFTING THREAT OF SUBSTITUTION (Eg:PENDRIVE) NEW BASES OF RIVALRY

IMPLICATIONS FOR STRATEGY

• • • • • • FIVE FORCES REVEAL MOST SIGNIFICANT OF THE INDUSTRY ASPECTS SWOT ANALYSIS SHAPING THE FORCES POSITIONING THE COMPANY EXPLOITING INDUSTRY CHANGE (Apple i tunes) SHAPING INDUSTRY STRUCTURE • REDIVIDING PROFITABILITY • EXPNADING PROFIT POOL

DEFINING INDUSTRY

• • SCOPE OF PRODUCTS/ SERVICES GEOGRAPHICAL SCOPE

TYPICAL STEPS IN INDUSTRY ANALYSIS • • • • • DEFINE THE RELEVANT INDUSTRY IDENTIFY PARTICIPANTS ASSESS DRIVERS OF COMPETITIVE FORCES DETERMINE OVERALL INDUSTRY STRUCTURE TEST ANALYSIS FOR CONSISTENCY

TYPICAL STEPS IN INDUSTRY ANALYSIS (Contd..) • • • ANALYSE RECENT AND LIKELY FUTURE CHANGES • POSITIVE / NEGATIVE INDUSTRY ASPECTS INFLUENCED BY OTHER FORCES COMMON PITFALLS

COMPETITION AND VALUE

• • • • UNCOVERING OPPORTUNITIES THINKING STRUCTURALLY ABOUT COMPETITION ATTRACTION TO THE INDUSTRY CREATE TRUE ECONOMIC VALUE THAN “ PLEASSING THE WALL STREET”

THANK YOU

SLIDES BY P. RAJU IYER