2. THE COMPETITION FOR PROFITS GOES BEYOND ESTABLISHED
INDUSTRY RIVALS TO INCLUDE FOUR OTHER COMPETITIVE
FORCES AS WELL:
3. • One of the forces that shape competition
• New entrants to an industry puts
pressure on prices, costs, and the rate of
investment necessary to compete.
• Depends on the height of entry barriers
that are present and on the reaction
entrants get from incumbents
4. BARRIERS TO ENTRY
Supply-side economies of scale Demand-side benefits of scale
• Deters entry by forcing entrants • Discourage entry by limiting the
to either come into the industry willingness of customers to buy
on a large scale, which requires from a new comer,by reducing the
dislodging entrenched price the new comer can
competitors, or to accept a cost command.
disadvantage.
5. BARRIERS TO ENTRY
Customer switching costs Capital requirements
• The larger the switching costs, the • Need to invest large financial
harder it will be for an entrant to resources in order to compete can
gain customers. deter new entrants.
6. BARRIERS TO ENTRY
Incumbency advantages Unequal access to distribution
independent of size channels
• Incumbents may have cost or • The new entrant must secure
quality which results in how to distribution of its
produce more efficiently not product/service. The more
available to potential rival limited the distribution channels
entrants are, the tougher entry it will be.
7. BARRIERS TO ENTRY
Restrictive government policy
• Government policy can hinder
new entry directly by licensing
requirements and restrictions on
foreign investments.
8. EXPECTED RETALIATION
New comers are likely to fear expected
retaliation if:
• Incumbents have previously responded
vigorously to new entrants
• Incumbents produce substantial
resources to fight back, such as cash,
unused borrowing power, productive
capacity, distributing channels etc.
9. • Capture more value by charging higher
prices, limiting quality or service etc. POWER OF
• A supplier groups is powerful if: SUPPLIERS
– It is more concentrated than the
industry it sells to
– Does not depend heavily on the
industry for its revenue
– Switching cost
– Offer differentiated products
– No substitutes
– Can threaten to integrate forward
10. POWER OF BUYERS
• Capture value by forcing down
prices, demanding better quality etc.
• Customer group have negotiating
leverage if:
– Few buyers
– Undifferentiated products
– Switching costs
– Can threaten to integrate backward
11. POWER OF BUYERS (CONT.)
A buyer group is price sensitive if:
• Product represents a what
fraction of its cost
• Earns how much profit
• How quality of buyer product
affects industry product
• Industry’s cost effect on buyer’s
other cost.
12. RIVALRY AMONG EXISTING COMPETITORS
It takes many familiar forms:
• Price Discounting
• New Product Introductions
• Advertising Campaigns
• Service Improvements
High Rivalry limits profit potential.
13. RIVALRY
INTENSIFIES…
When competitors are
numerous or are
roughly equal in size.
When industry growth
is slow.
Exit barriers are high.
Firms are less aware of
the competitors’ moves.
14. PRICE COMPETITION OCCURS
WHEN:
Identical Products
High fixed costs and marginal costs are low
Perishable product
15. Zero Sum Competition: One firm’s gain is another firm’s loss.
Positive sum could actually increase overall profitability of
the business.
16. FACTORS NOT FORCES
• Industry growth rate: Fast growing industries don’t always mean
its attractive.
• Technology and innovation: These are not always enough for the
industry to flourish.
• Government: Government does play a part on the industry via
the different policies it puts on.
17. Complementary Products and services:
• Complements occur when two goods combined is greater in
value than individually.
• The most common example would be Car and Gas.
• Strategists must analyze all the negatives and the positives of
complements to finds its effect on profitability.
• Presence of complements can affect the threat of substitutes.
18. Changes in industry structure
Shifting threat of new entry
Changing supplier or buyer power
Shifting threat of substitution
New bases of rivalry
19. The implications for strategy:
1)positioning the company
-position your company where the forces are the weakest
2)exploiting and anticipating industry change
3)shaping the industry structure
-use tactics that are designed specifically to reduce the
share of profits leaking to other competitors
20. DEFINING THE INDUSTRY
•where competition actually takes place is important for good industry analysis.
•too broadly obscures differences among products, customers, or geographic regions that are
important to competition, strategic positioning, and porrofitability.
•too narrowly overlooks commonalities and linkages across related products or geographic markets
that are crucial to competitive advantage.
•The boundaries of an industry consist of two primary dimensions: First is the scope of products or
services. The second dimension is geographic scope.
•The five competitive forces holds the key to defining the relevant industry in which a company
competes.
21. Competition and Value
-In a world of more open competition and relentless change, it
is more important than ever to think structurally about
competition
-Understanding industry structure is equally important for
investors as for managers
-The five competitive forces reveal whether an industry is truly
attractive, and they help investors anticipate positive or
negative shifts and allows to take advantage of undue
pessimism or optimism.
22. In conducting the analysis avoid the following
common mistakes:
-Defining the industry too broadly or too narrowly
-Making lists instead of engaging in rigorous analysis
-Paying equal attention to all of the forces rather than digging
deeply into the most important ones.
-Using static analysis that ignores industry trends.
- Using the framework to declare an industry attractive or
unattractive rather than using it to guide strategic choices
