FIVE FORCES MODEL STRATEGIC GROUPS

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FIVE FORCES MODEL STRATEGIC GROUPS Class
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The structural Analysis of industries

• Objectives
• Identify the key structural features of
  industries that determine the strength of the
  competitive forces and hence profit industries
• Formulating competitive strategy
• Industry structure has a strong influence in
  determining the competitive rules of the game as
  well as the strategies potentially available to
  the firm.

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The structural Analysis of industries

• Knowledge of these underlying sources of
  competitive pressure in order to
• Highlights the critical strengths and weaknesses
  of the company
• Animates its positioning in its industry
• Clarifies the area where the strategic changes
  may yield the greatest payoff
• Highlights the areas where industry trends as
  either opportunities or threats

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The structural Analysis of industries

• The collective strength of these forces
  determines the ultimate profit potential in the
  industry, where profit potential is measured in
  term long run return on invested capital.
• Not all industries have the same potential
• They differ fundamentally in their ultimate
  profit potential as the collective strength of
  the forces differs

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Porters Five Forces Model

• The Five competitive forces
• Entry
• Threat of Substitution
• Bargaining Power of Buyer
• Bargaining Power of Suppliers
• Rivalry among current competitors

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Five Forces Determining Segment Structural
Attractiveness
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Rivalry among existing companies

• Where the competitors in the industry are roughly
  evenly balanced
• During periods of low market growth
• Where exit barriers are high
• Where product differentiation is low
• Where fixed costs are relatively high

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Threat of Rivalry
high rivalry means firms compete
vigorouslyand compete away above average profits
Industry conditions that facilitate rivalry
large numbers of competitors
slow or declining growth
high fixed costs and/or high storage costs
low product differentiation

• industry capacity can only be added in
• large increments
• diverse competition

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Threat of Rivalry

• high strategic stakes
• high exist barriers
• The major sources of exit barriers are
• Specialized assets
• Fixed cost of exit
• Strategic interrelationships
• Emotion Barriers
• Government and social restriction

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Five Forces
Evaluating the Five Forces
Current Rivalry among Existing Firms
Threat Opportunity

Numerous competitors Few competitors Equally
balanced competitors One or a few strong
competitors Industry sales growth
slowing Industry sales growth strong High fixed
or inventory storage costs Low fixed or inventory
storage costs No differentiation or no switching
costs Significant differentiation or switching
costs Large capacity increments required Minimal
capacity increments required Diverse
competitors Similar competitors High strategic
stakes Low strategic stakes High exit
barriers Minimal exit barriers
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The threat of market entry

• Costs of entry are low
• Existing or new distribution channels are open to
  use
• Little competitive retaliation is anticipated
• Differentiation is low
• There are gaps in the market

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Porters Five Forces Model

• Barriers and Profitability

Exit Barrier
Low
High
Low
Entry Barriers
High
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Five Forces
Evaluating the Five Forces
Potential Entrants
Threat Opportunity

No or low economies of scale Significant
economies of scale No other potential cost
disadvantages Cost disadvantages from other
aspects Weak product differentiation Strong
product differentiation Minimal capital
requirements Huge capital requirements Minimal
switching costs Significant switching costs Open
access to distribution channels Controlled access
to distribution channels No government policy
protection Government policy protection
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Threat of Substitutes

• A segment is unattractive there are actual or
  potential
• substitute product
• substitutes fill the same need but in a
  different way

- Coke and Pepsi are rivals, milk is
a substitute for both
substitutes create a price ceiling because
consumers switch to the substitute if prices rise
substitutes will likely come from outside
the industry
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The threat of substitutes

• By making existing technologies redundant
• By incremental product improvement

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Five Forces
Evaluating the Five Forces
Substitute Products
Threat Opportunity

There are few good substitutes There are several
not-so-good substitutes There are no good
substitutes
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Threat of Suppliers

• a segment is unattractive Suppliers are able to
  
• increase prices or reduce quantity supply
• powerful suppliers can squeeze (lower
  profits)
• the focal firm

Industry conditions that facilitate supplier
power
small number of firms in suppliers industry
highly differentiated product
lack of close substitutes for suppliers
products
supplier could integrate forward
focal firm is an insignificant customer of
supplier
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Bargaining power of suppliers

• Suppliers are more concentrated than buyers
• Costs of switching suppliers are high
• Suppliers offerings are highly differentiated

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Five Forces
Evaluating the Five Forces
Bargaining Power of Suppliers
Threat Opportunity

Supplying industry has few companies Supplying
industry has many companies and is more
concentrated and is fragmented Supplier's
products dont have substitutes Supplier's
products do have substitutes Industry isnt an
important customer Industry is an important
customer Supplier's product is an important
input Supplier's product isnt an important
input Supplier's products are differentiated Suppl
ier's products aren't differentiated Significant
switching costs Minimal switching costs in
supplier's products Supplier has ability to
do Supplier doesn't have ability to do what
buying industry does what buying industry does
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Threat of Buyers

• Industry conditions that facilitate buyer power
• - small number of buyers for focal firms output
• lack of a differentiated product
• the products is significant to the buyer
• buyers operate in a competitive marketthey are
  not earning above normal profits
• buyers can vertically integrate backwards
• buyer become more concentrated
• buyers switching costs are low
• buyers are price sensitive
• buyers can integrate upstream
• buyer has full information

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Bargaining power of buyers

• They are more concentrated than sellers
• There are readily available alternative sources
  of supply
• Buyer switching costs are low

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Five Forces
Evaluating the Five Forces
Bargaining Power of Buyers
Threat Opportunity

Buyer purchases large volumes Buyer purchases
small volumes Purchases are significant part
Purchases aren't significant part of buyer's
costs Purchases standard or undifferentiated Purch
ases highly differentiated and unique Buyer faces
few switching costs Buyer faces significant
switching costs Buyer's profits are low Buyer's
profits are strong Buyer can manufacture products
Buyer cant manufacture products Industry's
products aren't important Industry's products are
important to quality of buyer's products to
quality of buyer's products Buyers have full
information Buyers have limited information
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Competitiveness drivers

• There is little differentiation between markets
  offers
• Industry growth rate are low
• High fixed costs need to be recovered
• High suppliers switching costs
• Low entry barriers
• High exit barriers

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Figure 3.6 The product life cycle
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Strategic Groups

• Strategic groups are organisations within an
  industry with similar strategic characteristics,
  following similar strategies or competing on
  similar bases

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Uses of Strategic Group Analysis

• To understand who are the most direct competitors
  of an organisation
• To establish the different bases of competitive
  rivalry within and between the strategic groups
• To assess if an organisation could move from one
  group to another
• Depends on barriers to entry
• To identify opportunities and threats
• Changes in the macro-environment may create
  strategic space

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Figure 3.7 Map of strategic groups in the US
automobile market Note Brands now owned by
large-scale American or European manufacturers