Porters 5 forces essay assignment

1 Meilich, BUS444

Porter’s 5-Forces Model

Threat of POTENTIAL ENTRY is high when: Product/Service differentiation is low perceived / real uniqueness (brand loyalty

Buyers’ switching costs are (3 types: Monetary, Cognitive, Emotional)

low for the buyers, after purchase! [Mac vs PC] (for the next purchase)

Economies of scale are low Increased efficiency in Volume per Period In: production, R&D, marketing,

distribution, service.

Capital requirements are low plants & equipment, working K, R&D

Incumbents’ proprietary knowledge is low patents, trade secrets

Experience curve effects are low experience curve: labor component, or complex production; Effect of cumulative volume; need be non-transferable

Incumbents’ control of access to raw materials / inputs is

low [e.g., mines]

Incumbents’ control of distribution channels is low

Securing favorable location easy

Incumbents’ access to government subsidies is low Note: These subsidies are assumed not to be available for any new entrants

Expected retaliation low

Government policy: regulation is low

attractive industry = high profit potential => more new entrants => more rivals, more rivalry  build ENTRY BARRIERS

2 Meilich, BUS444

Intensity of RIVALRY is high when: Competitors = firms in the same industry, competing over same customer base

[usually: similar products; utilizing similar production techniques] Number of competitors is

Their size & power is

Diversity of competitors is

many

equal

extensive

mentality differences, hard to cooperate

Industry demand growth rate is low win/lose situation

Product / service differentiation is low easy to compare

Buyers’ switching costs are low switching costs for BUYERS after purchase!

Fixed costs are high need high volume to spread costs/ break even

Capacity increases are in increments that are large Incentive to over-produce -> dumping

Perishability high perishable: produce, fashion, movies, airline

seats

Strategic stakes (opportunities) are high High chance to make big $$ increase willingness to take

risks and fight

Exit barriers are: high too many desperate & inefficient competitors

Specialized assets sunk costs

High cost of exit

strategic inter-relationships needed for other business

Emotional barriers

Government / social restrictions

3 Meilich, BUS444

Power of a BUYERS group is high when: Volume of purchase is (% of industry’s capacity) high relative to the focal industry, not

buyer industry! [whatever each

buyer/decision maker buys]

Percentage of total buyer’s cost spent on the

industry’s product/service is

high = price sensitivity

Product / service differentiation of the industry is low easy to shop and compare

Buyer’s switching costs are low After the purchase

Threat of backward integration by buyers is high [tapered integration]

Buyer’s knowledge about industry’s cost structure is high information = $$

Extent of buyer’s profits is low = price sensitivity

Cost savings from the industry’s product are low Same effect as buyer’s profits

 A ‘strong’ buyer: has either the ability or motivation to extract lower prices from the focal industry.  Important distinction between types of buyers and groups of buyers:

Buyers can be divided into several types [e.g., young vs old, educated vs. not, businesses vs. consumers]; Within each type, we are looking at the typical group – a group therefore may contain a single buyer, or more than one. What’s important is that each group acts as a single decision maker [to buy or not to buy, etc.]. A group of buyers may contain a single person/company, or a collection of persons/companies.

Reduce buyer power by: - make buyer’s business more profitable - diversify buyer base - differentiate, improve quality • Important to identify both the direct buyer and the final customer/consumer

4 Meilich, BUS444

Power of a SUPPLIERS group is high when: Concentration of suppliers relative to industry is (i.e., supplier group is dominated by fewer companies)

high

Availability of substitute supplies is low Substitute! (eg – for cola, sugar vs. high fructose

corn syrup)

Differentiation of the supplier’s products/services is high Uniqueness of raw material / inputs

Switching costs of the focal industry are high For the industry, after purchasing supplies

Threat of forward integration by the supplier is high i.e., supplier moving into the focal industry

Concentration = % of market share held by largest 2, 4, 8, .. firms. • Suppliers of: raw material, components, labor, …  A ‘strong’ supplier: has either the ability or motivation to charge more from, or deliver less to, the focal

industry.  Important distinction between types of suppliers and groups of suppliers:

Suppliers can be divided into several types [look again at your PVCh!]. Within each type, we are looking at the typical group – a group therefore may contain a single supplier, or more than one. What’s important is that each group acts as a single decision maker [to sell or not to sell to our industry, etc.]. A group of suppliers may contain a single person/company, or a collection of persons/companies.

Power of SUBSTITUTES is high when: substitute = any product that satisfies similar need/s, but in a different way

Available substitutes many

(If there are any substitutes -) These substitutes are good/superior

- technological advancement  better price/performance ratio for the substitutes. - Improvements: new technology can make the whole industry obsolete!