Class 2 Flashcards
Porters 5 forces consist of?
Suppliers
Rivalry
Potential Entrants
Buyers
Substitutes
Porter’s five forces are used to identify and analyze an industry’s competitive forces.
Rivalry is high when
- Low concentration (CR4: <40%; 40%-70%; >70%)
- Industry growth rate is weak – saturated
- Little product differentiation
- High excess capacity
- High exit barriers
- Easy to compare prices; High diversity of competitors, etc.
Threat to entry is high (barrier to entry is low) when:
- Low capital requirements (Tesla)
- Low brand loyalty, reputation, and switching costs (Apple -> Android)
- Easy access to distribution channels
- Existing customers or distributors are not locked in long-term
contracts and free to switch - No legal and regulatory barriers
- Little retaliation by established firms
- No network externalities (network effects – Instagram)
Buyers price sensitivity and bargaining power is high when:
High price senitivity when:
* % of cost
* Low product differentitaion
* Intense competition among buyers
* Low importance of the item
Relative bargaining power is high when:
* Very few buyers
* Low switching costs
* Buyers have easy access to information
* Buyers can easily vertically integrate
Suppliers bargaining power is high when:
Relative bargaining power is high when:
* Very few suppliers
* Suppliers have many alternative customers
to serve
* High switching costs for the producer
* Suppliers have easy access to information
* Suppliers can easily vertically integrate
Threat of substitutes and complements:
Threat of substitutes is high when:
* Good availability of substitutes
* Good price-performance of the substitutes
The bargaining power of complementor
Porters 5 Forces - Implication to Strategy
Position your company where the forces are weakest
Exploit changes in the forces
Reshape the forces in your favor
* Neutralize supplier power: standardize parts
* Counter buyer power: expand services so leaving for a rival is harder
* Temper price wars with rivals: differentiate products
* Scare the new entrants: cutting prices
* Temper threat of substitutes: offer better value through wider accessibility
Porters 5 Caveats
- It’s relatively easy to understand, but applying it correctly requires practice and calibration
- It tells us what the structure of an industry looks like at a specific point in time
- While one can speculate about how each force may evolve over time, the framework itself tells us little about how the industry will evolve in the long term
- More important than memorizing the forces is to develop a mindset of how to analyze an industry in a systematic way
Industry Lifecycle
Introduction
Growth
Maturity
Decline
- Industries have different lifecycle durations
- Organizations need to be aware of the stage they are currently in and prepare themselves for
the next stage - The transition between stages can be anticipated but it is not an exact science…
- To break the charm companies should create a minimum product for a specific niche
- Going from the introduction stage into the growth stage, organizations must try to set the
industry standard themselves - Going from the growth to the maturity stage, organizations must develop (or acquire) the
capabilities necessary to achieve industry dominance
Industry Lifecycle - Introduction
- High levels of exploration in search for a radical innovation
- High product uncertainty
* What exactly is the customer need we are trying to satisfy?
* What product characteristics will be most valued?
* What will the standard be? - High market uncertainty
* What will de demand be?
* Who will be our competitors?
* What will the structure of the industry look like?
Industry Lifecycle - Growth
- Exploration paid off!
- A radical innovation materializes
- We have a better sense of the customer needs we are serving
- Industry standards become clear - High expansion
- Growing demand for the product
- High investment in production, distribution, marketing capabilities - High competition
- Imitation!
- But… we are growing so much, we don’t feel it!
Industry Lifecycle - Maturity
- STOP!
* Demand slows down; nearing industry saturation
* Stable market share - High competitive pressure
* Imitation occurs very fast; products become commoditized
* Some competitors go out of business
* Lots of mergers and acquisitions - Focus on exploitation and on incremental innovations
* Market segmentation: targeting different groups of customers
* Customer loyalty and retention
* Cost control, productivity, efficiency
Industry Lifecycle - Decline
- Revenue declines
- Further consolidation is common
- The end of viability of the incumbent business model
