Strategy Flashcards
What is Porters 5 Forces
Porter’s Five Forces is a framework developed to help analyse the competitive dynamics of an industry.
It provides a systematic way of assessing the attractiveness and profitability of an industry by examining five key forces that shape competition
What are the 5 Forces
Industry rivalry: This force assesses the level of competition among existing companies in the industry. Factors such as the number of competitors, their size, and their strategies determine the intensity of rivalry. High rivalry can lead to price wars and reduced profitability, while low rivalry gives companies more control over prices and profitability.
Threat of new entrants: How easy or difficult is it for new companies to enter the industry? This force considers the likelihood of new companies entering the industry. Factors such as barriers to entry, economies of scale, capital requirements, and regulations impact the threat of new entrants. Higher barriers make it more difficult for new players to enter, reducing competition for existing companies.
Power of suppliers: How much power do the companies’ suppliers have? This force examines the influence suppliers have over companies in the industry. Suppliers with more power can dictate terms, prices, and availability of key inputs. Factors like the concentration of suppliers, uniqueness of their products or services, and their ability to forward integrate can affect their power. Strong supplier power can negatively impact the profitability of companies.
Power of buyers: How much power do the companies’ customers have? This force assesses the influence customers have over companies in the industry. Buyers with more power can demand lower prices, higher quality, or better terms. Factors such as buyer concentration, their switching costs, and access to information influence their power. Strong buyer power can reduce the profitability of companies.
Threat of substitutes: re there alternative products or services that customers could choose instead? This force considers the availability of alternative products or services that can fulfill the same customer needs. If there are many substitutes, companies face the risk of customers switching to those alternatives. The availability, price-performance ratio, and customer loyalty to substitutes determine the threat they pose.
What is Porters 5 Forces used for?
Porter’s Five Forces Model helps managers and analysts understand the competitive landscape that a company faces and to understand how a company is positioned within it.
How has digitalisation changed Porters Five Forces
Industry rivalry: Digitalization has intensified industry rivalry in many sectors. The ease of online communication and global reach has lowered barriers for new competitors to enter markets. Additionally, digital platforms and e-commerce have increased price transparency and facilitated comparison shopping, making it easier for customers to switch between brands. This has led to increased competition and pressure on companies to differentiate themselves through digital marketing, personalized experiences, and innovation.
Threat of new entrants: Digitalization has reduced barriers to entry in various industries. The availability of low-cost cloud computing, e-commerce platforms, and digital marketing tools has made it easier for startups and small businesses to compete with established players. Digital technologies have also enabled disruptive business models, such as sharing economy platforms and direct-to-consumer online channels, which can challenge traditional industry structures and incumbents.
Power of suppliers: Digitalization has both empowered and challenged suppliers. On one hand, digital platforms and online marketplaces have given suppliers increased access to global markets and reduced their reliance on traditional distribution channels. Suppliers can now reach customers directly, bypassing intermediaries. On the other hand, the rise of e-procurement and digital supply chain management has enabled buyers to gain more visibility into supplier options, prices, and performance. This can increase their bargaining power and put pressure on suppliers to provide competitive pricing and value-added services.
Power of buyers: Digitalization has empowered buyers by providing them with more information, options, and control. Online platforms and price comparison websites have made it easier for buyers to research and compare products, prices, and reviews. This increased transparency has enhanced buyer bargaining power. Additionally, the growth of social media and online communities has given customers a platform to voice their opinions and influence purchasing decisions, putting pressure on companies to prioritize customer satisfaction and engagement.
Threat of substitutes: Digitalization has significantly expanded the availability and variety of substitute products and services. The internet and digital platforms have enabled the development of digital goods and services that can replace or complement traditional offerings. For example, streaming services have disrupted the entertainment industry, digital books have challenged traditional publishing, and online learning platforms have transformed education. Digitalization has also facilitated the rise of platform-based ecosystems, where customers can access multiple services within a single platform, further increasing the availability of substitutes.
How can organisation shift market forces in their favour? What various strategies can they employ?
industry rivalry: Organizations can differentiate their products or services through unique value propositions, branding, innovation, and superior customer experiences. By offering something distinct, they can reduce direct competition and increase customer loyalty. Additionally, organizations can pursue strategic alliances, mergers, or acquisitions to consolidate their market position and reduce rivalry.
Threat of new entrants: Organizations can create barriers to entry by leveraging economies of scale, building strong brand recognition, securing patents or intellectual property rights, establishing distribution networks, or forming strategic partnerships. These actions can increase the cost or difficulty for new entrants to compete effectively.
Power of suppliers: Organizations can negotiate favourable contracts, establish long-term relationships with suppliers, and diversify their supplier base to reduce dependence on individual suppliers. They can also invest in vertical integration, backward integration (controlling supply sources), or forward integration (controlling distribution channels) to gain more control over the supply chain.
Power of buyers: Organizations can enhance customer loyalty and reduce buyer power by delivering exceptional customer service, implementing loyalty programs, providing added value through personalized experiences or rewards, and building strong relationships with key customers. Additionally, organizations can create switching costs or establish long-term contracts to discourage customers from switching to competitors.
Threat of substitutes: Organizations can invest in research and development to create unique, proprietary products or services that have no direct substitutes. They can also focus on continuous innovation to stay ahead of potential substitutes. Furthermore, organizations can educate customers about the unique benefits and value they offer compared to substitutes, emphasizing their differentiation.
What is Coopetition
Arised from Brandenburger and Nalebuff (1995), refers to the concept that firms within an industry can simultaneously cooperate and compete with each other.
What does it mean for Coopetition?
In Porter’s model firms occupy one of the forces.
However, in reality organisations fulfil multiple roles so Porter’s five forces do not fully describe the industry.
Coopetition recognizes that firms can benefit from collaborating with competitors in certain areas while also competing in other aspects of their business. It acknowledges that cooperation can create a larger pie by expanding the overall market or value available for all participating firms. It involves collaborative efforts that result in the growth of the industry, market, or customer base, leading to increased opportunities and benefits for the firms involved.
When firms cooperate, they can combine resources, expertise, and capabilities to develop new products, services, or solutions that attract more customers or meet emerging needs. This collaborative effort can stimulate market demand, attract new customers, or create entirely new market segments.
By working together, firms can leverage complementary strengths, share costs and risks, access new markets or distribution channels, or innovate more effectively. These cooperative activities contribute to expanding the overall size of the market or value available to all participants, hence creating a larger pie.
Give an example of Cooperation in the industry
Insurance industry - providing consumers with a platform to compare different insurance options and prices. While these websites can be seen as substitutes for traditional insurance companies, there are opportunities for cooperation.
Partnerships with Insurance Companies: Comparison websites can collaborate with insurance companies to expand their offerings and provide a broader range of insurance options to consumers. They can form partnerships or affiliations with specific insurance providers, allowing them to include those providers’ products in their comparison listings. This cooperation benefits both parties as it increases the visibility of insurance companies and enhances the offerings of the comparison website.
Revenue-sharing and Referral Agreements: Comparison websites and insurance companies can establish revenue-sharing or referral agreements. When consumers purchase insurance through the website, the website receives a commission or referral fee from the insurance company. This mutually beneficial arrangement incentivizes both parties to cooperate and drive customer traffic and conversions.
Data Sharing and Market Insights: Comparison websites generate a vast amount of data on consumer preferences, trends, and purchasing behaviors. Insurance companies can collaborate with these websites to gain access to such data and obtain valuable market insights. This information can help insurance companies refine their products, pricing, and marketing strategies.
By collaborating in these ways, comparison websites and insurance companies can leverage each other’s strengths and resources. Comparison websites can provide a convenient platform for consumers to compare insurance options, while insurance companies can benefit from increased visibility and access to a wider customer base. This type of cooperation acknowledges that even though comparison websites may serve as substitutes for traditional insurance companies, there are areas where collaboration can generate mutual benefits and enhance the overall customer experience.
What is Porters competitive strategies?
Porter’s 3 generic competitive strategies (1980), provide a framework for organizations to determine their position and competitive approach in the market. The three generic strategies are:
Cost Leadership: This strategy focuses on becoming the lowest-cost producer in the industry while maintaining acceptable quality. By achieving cost advantages through economies of scale, efficient operations, and cost control, organizations can offer products or services at lower prices than competitors.
Differentiation: The differentiation strategy involves creating unique and distinctive products or services that are valued by customers. Organizations pursuing differentiation aim to provide superior features, quality, innovation, customer service, or branding compared to competitors. This allows them to command premium prices and build customer loyalty.
Cost Focus: The cost focus strategy narrows the organization’s target market to a specific segment or niche and aims to achieve cost leadership within that focused market segment. By understanding the unique needs and cost sensitivity of the target customers, organizations can tailor their products or services to deliver cost-effective solutions that meet their specific requirements.
What does Porter say about positioning in the 3 genertic strategies?
Porter advises against being stuck in the middle, which refers to organizations that do not pursue a clear and distinct competitive strategy. Being stuck in the middle means attempting to simultaneously pursue both cost leadership and differentiation without excelling in either. Such organizations may struggle to achieve a sustainable competitive advantage and may face challenges in meeting customer expectations or achieving cost efficiencies.
To achieve success, organizations should choose and align themselves with one of the three generic competitive strategies—cost leadership, differentiation, or focus. This strategic choice enables them to develop a clear value proposition, align their resources and capabilities, and establish a competitive position that sets them apart from competitors.
Pros and Cons of operating in a cooperative style environment?
Pros:
Enhanced Collaboration: Cooperation fosters collaboration among individuals or organizations, leading to the sharing of knowledge, ideas, and resources. This can result in innovative solutions, improved decision-making, and increased productivity.
Synergy and Complementary Strengths: Cooperation allows individuals or organizations to leverage their respective strengths and expertise. By combining resources and capabilities, they can achieve synergistic effects and accomplish more collectively than they could individually.
Cost and Risk Sharing: Cooperating parties can pool their financial resources, share costs, and distribute risks. This can enable them to undertake projects or initiatives that might be too costly or risky for them to pursue alone.
Access to New Markets or Customers: Cooperation can provide access to new markets, customer bases, or distribution channels. By partnering with others, organizations can expand their reach and tap into new opportunities.
Learning and Skill Development: Cooperative environments offer opportunities for learning from others, acquiring new skills, and expanding knowledge. Collaborating with different individuals or organizations exposes participants to diverse perspectives and experiences, fostering personal and professional growth.
Cons:
Complex Decision-Making: Cooperation often involves multiple stakeholders with different interests and perspectives. This can make decision-making more complex and time-consuming, requiring consensus-building and compromise.
Potential for Conflict: Cooperation may lead to conflicts arising from differences in goals, values, or approaches. Disagreements on resource allocation, decision-making authority, or the direction of the cooperative effort can strain relationships and hinder progress.
Dependence on Others: Operating in a cooperative style environment means relying on the commitments and contributions of others. If one party fails to fulfill its obligations or withdraws from the cooperation, it can disrupt the plans or initiatives of others involved.
Reduced Autonomy: Cooperative arrangements often involve sharing control or decision-making authority. This can result in a loss of autonomy for individual parties, requiring them to compromise or align their actions with the collective interests of the cooperation.
Potential for Free Riding: In some cooperative settings, there is a risk of free riding, where one or more parties benefit from the cooperation without contributing proportionally. This can create a sense of inequity and lead to frustration or dissatisfaction among those making significant contributions.
