SESSION FIVE FORCES-6 Flashcards
What are Porter’s Five Forces?
- THREAT OF NEW ENTRANTS
- POWER OF SUPPLIERS
- POWER OF BUYERS
- THREAT OF SUBSTITUTES
- EXISTING COMPETITION
What is the fundamental equation of Porter’s Five Forces?
Profit = Price - Cost
What is the Porter’s Five Forces Framework?
Porter created what he calls “frameworks” to help firms maximize value.
“if you’re going to have higher profitability, you’ve got to have a higher price or a lower cost.”
What are Threat of New Entrants?
- New entrants bring new capacity and
desire to gain market share that puts
pressure on prices, costs and rate of
investment needed to compete.
What are Barriers to Entry?
Entry barriers protect an industry from newcomers who would add new
capacity and seek to gain market share.
*Low entry barrier = high threat of entry = low profitability
*High entry barrier = low threat of entry = high profitability
BARRIERS TO ENTRY:
Supply-side economies of scale…
- Firms derive lower costs because of larger volumes
More volume = lower cost = harder to compete with
BARRIERS TO ENTRY:
Demand-side benefits of scale…
- the value of a product or service increases in accordance with the
number of users of that product or service
More users = more value = harder to compete with
BARRIERS TO ENTRY:
High customer switching costs…
– Fixed costs when changing suppliers
BARRIERS TO ENTRY:
High Capital requirements…
- Need to invest large resources to enter and to compete
BARRIERS TO ENTRY:
Incumbency advantages…
– Incumbents will always have cost or quality advantages over new entrants
– Unequal access to distribution channels and prime locations
– Proprietary technology or patents
– Well-established brands
BARRIERS TO ENTRY:
Restrictive government policy…
– May hinder or aid new entrants
– Permits, tariffs, high taxes, patents
What are the power of suppliers?
Powerful Suppliers capture more of
the value for themselves by
charging higher prices or insist on
more favorable terms, shifting
costs to industry participants
What is the bargaining power of suppliers?
- More concentrated than industry it sells to
- Does not depend heavily on one industry/product for revenues
- Industry faces switching costs in changing suppliers
- Supplier offers products that are differentiated
- No substitute for what supplier provides
- Supplier can integrate forward into the industry
What is the power of buyers?
Powerful buyers capture
more value by forcing down prices,
demanding better quality or more
service, play industry participants off one another at expense of profitability.
BUYERS’ NEGOTIATING LEVERAGE:
Buyers are powerful if…
*Buyers are concentrated - there are a few buyers with significant market share
*Buyers purchase a significant proportion of output - distribution of purchases or if the product is standardized
*Buyers possess a credible backward
integration threat - can threaten to buy
producing firm or rival
BUYERS’ NEGOTIATING LEVERAGE:
Buyers are weak if…
- Producers threaten forward integration - producer can take over own distribution/retailing
- Significant buyer switching costs - products not standardized and buyer cannot easily switch to another product
- Buyers are fragmented (many, different) - no buyer has any particular influence on product or price
- Producers supply critical portions of buyers’ input - distribution of purchases
What are threat of substitutes?
Substitutes:
* Products or services that
meet same or similar
function as industry’s
product by different means
- always present but easy to
overlook
HIGH THREAT OF SUBSTITUTE IF….
- It offers attractive price-performance trade-off
- Cost of switching is low
What is rivalry among existing competition?
If rivalry is intense, companies
compete away the value they
create, passing it on to buyers in
lower prices or dissipating it in
higher costs of competing.
May take many forms: price
discounting, new product
introductions, advertising
campaigns and service
improvements
Intensity of rivalry is
greatest if…
- Competitors are numerous or are
roughly equal in size and power - Industry growth is low
- Exit barriers are high
- Rivals have aspirations for
leadership beyond economic
performance
Price competition is deadly and most liable to occur if…
- Products or services or rivals are
nearly identical and there are few
switching costs - Fixed costs are high and marginal
costs are low - Capacity must be expanded in large
increments to be efficient and to
lower costs - Product is perishable
Rivalry should lead to:
Positive Sum
Competition:
When each competitor aims to serve needs of different customer segments with different mixes of price, products, services, features of brand identities.
How do we apply the Five Forces in our
strategies?
- Positioning the company to
cope with current competitive landscape:
- As defense against competitive forces
- Finding a position where forces are weakest
- Exploiting Industry Change
- Industry changes bring the opportunity to spot promising new strategic positions.
3.Shaping Industry Structure
- A firm can lead its industry toward new ways of competing that alter five forces for the better.
- Defining the industry
- Five forces will help define the relevant industry where a firm competes
What is an internal assessment?
Identifying and evaluating a firm’s strengths and weaknesses in all the functional areas of business
What is the internal assessment tool: resource-based view (RBV)?
Resources can be:
* physical resources
* human resources
* organizational resources
If a resource is VRIO, then it is a
source of competitive advantage
What is the VRIO Framework?
Value
Rarity
Imitability
Organization
What is the profitability in the industry driven by?
The fundamental attractiveness of the
industry, that is the PROFITABILITY in the industry is driven by the five forces
What is the value chain?
The firm is a collection of activities – or a
value chain – finding sources of
differentiation or low cost, leading to a
competitive advantage.
The sequence of activities your company performs to design, produce,
sell, deliver, and support its products is called the value chain.
Why is it called value chain?
By analyzing a company’s
strategically relevant activities
you find sources of competitive
advantage, that is, the specific
activities that result in higher
prices or lower costs – VALUE!
What are the 5 Primary Activities?
Primary Activities: There are five primary activities and they include all the
actions that go into the creation of a business’ offering.
Inbound Logistics
Operations
Outbound Logistics
Marketing and Sales
Services
What is Primary Activity: Inbound Logistics?
*Inbound Logistics: This is how materials and resources are obtained from suppliers before the final product or service can be developed.
What is Primary Activity: Operations?
*Operations: Operations are how the materials and resources are produced, resulting in a final product or service.
What is Primary Activity: Outbound Logistics?
*Outbound Logistics: Once a product or service is finished, it needs to be distributed.
What is Primary Activity: Marketing and Sales?
*Marketing and Sales: This is how your product or service is presented and sold to your target market.
What is Primary Activity: Service?
*Service: This is the support a business provides for the customer which
can include support and training for the product, warranties, and
guarantees.
What are the 4 Secondary Activities?
Infrastructure
Human Resources
Technology and Development
Procurement
What is Secondary Activity: Infrastructure?
*Infrastructure: Management, financial, and legal systems a business
has in place to make business decisions and effectively manage
resources.
What is Secondary Activity: Human Resources?
*Human Resources: Human resource management encompasses all the processes and systems involved in
managing employees and hiring new staff
What is Secondary Activity: Technology and Development?
Technology and Development: Technology development helps a
business innovate.
What is Secondary Activity: Procurement?
Procurement: This is how the resources and materials for a product are
sourced and suppliers are found.
What are the Steps in Value Chain Analysis?
- Determine the business’ primary and support activities. Compare it to other comparable firms in the industry and to competitors.
- Analyze the value and cost of the activities.
–Determine how each activity provides value to customers and the business as a whole.
–After the value analysis is complete, take a look at the cost of the activities. Is the activity labor intensive? How much does X raw material cost? This where areas for improvement can be identified.
- Identify opportunities to gain a
competitive advantage.
*See where the business is excelling and where improvements need to be made operationally.
*Gives businesses a clear idea of how to
adjust their actions and processes to
provide the most value and increase
profit margins for the company.
What is a Business Model Canvas?
A business model describes the rationale of how an organization creates, delivers, and captures value.
What are the 9 building blocks of a Business Model Canvas?
Customer segments
Value propositions
Channels
Customer relationships
Revenue Streams
Key Resources
Key Activities
Key Partnerships
Cost Structure
What is building block: Customer segments?
The different groups of people we aim to reach and serve
Mass Market – One large group of
customers with similar needs: FMCGs,
Telecom
Niche Market –Specific, specialized
segments: Luxury goods, Vegan Products
Segmented – Segments with slightly
different needs: cars, phones, clothes
Diversified – Unrelated customer
segments with different needs: Amazon
Multi-sided markets- Inter-dependent
customer segments: credit card, banks
What is building block: Value propositions?
Describes the bundle of products and services that create value for a specific customer segment.
Newness – Iphone, Apple
Performance - PCs
Customization – clothes, cars
Getting the job done - airplanes
Design – Fashion, watches, cars
Brand/Status- phones, watches
Price – low cost airlines
Cost reduction - software
Risk Reduction – insurance
Accessibility – Mutual funds, Jets
Convenience – on-line shopping
What is building block: Channels?
How a company communicates and reaches its customer segments to deliver the value proposition
What is building block: Customer Relationships?
Describes the types of relationships a company establishes with specific customer segments
Personal Assistance – Call-center, email
Dedicated Personal Assistance – Private
banking
Self-service – Supermarkets
Automated Services – banks, on-line
bookings
Communities- Pharmaceuticals
Co-creation – YouTube
What is building block: Revenue Streams?
Represents the “cash” a company generates from each customer segment
What is building block: Key Resources?
Describes the most important assets required to make a business model work.
What key resources do our
value propositions require?
Physical: Buildings, equipment,
vehicles, machines
Intellectual: Patents, intellectual
property, copyrights,
partnerships, customer database
Human: People and skills
Financial: Cash, credit lines
What is building block: Key Activities?
Describes the most important things a company must do to make its business model work.
Production – Designing, making and
delivering a product
Problem-Solving – Coming up with
solutions to solve customer
problems (Consulting, hospitals)
Platform/Network – Use of
network, software, platform or
brand in the business model
(software, credit cards)
What is building block: Key Partnerships?
Describes the network of suppliers and partners that make the business model work.
What is building block: Cost Structure?
Describes all the costs incurred to make the business model work.
What are the 5 major key success factors?
- Strategic Focus: an organization’s leadership and strategy
- People: An organization’s employees are an essential part
of the organization and determine its overall success
*Operations: The normal functioning of its business
processes - Marketing: The process of promoting an organization’s
brand, products, and services to improve its profitability - Finances: relates to all aspects of an organization’s financial
wellbeing
