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How Competitive Forces Shape Strategy

This document discusses how competitive forces shape strategy using Porter's five forces framework. It analyzes the threats of new entrants, power of suppliers and buyers, threat of substitute products, and rivalry among existing competitors. These forces collectively determine the intensity of competition in an industry. The document provides examples of factors that influence the strength of each competitive force and suggests companies position themselves in areas where forces are weakest. It also notes the framework helps evaluate how industry changes impact competition over time.

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Reshmi Varma
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128 views

How Competitive Forces Shape Strategy

This document discusses how competitive forces shape strategy using Porter's five forces framework. It analyzes the threats of new entrants, power of suppliers and buyers, threat of substitute products, and rivalry among existing competitors. These forces collectively determine the intensity of competition in an industry. The document provides examples of factors that influence the strength of each competitive force and suggests companies position themselves in areas where forces are weakest. It also notes the framework helps evaluate how industry changes impact competition over time.

Uploaded by

Reshmi Varma
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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How Competitive Forces

Shape Strategy

Presented by - Rachana, Soumya and Reshmi


Introduction

• Forces of competition are not only limited to direct


competitors

• Competition for profits goes beyond established industry rivals


to include four other competitive forces as well

• Five forces collective strength determine the competition in


the market
Threat of Entry of New Competitors into the
Industry

• New entrants may bring new capacity, the desire to gain


market share, and often substantial resources

• The seriousness of the threat of entry depends on the barriers


present and on the reaction from existing competitors that
entrants can expect

• If the barriers to entry are high, newcomers can expect sharp


retaliation from the entrenched competitors
The Six Major Sources of Barriers to Entry

1. Economies of scale – discourages by forcing an aspirant to


come in on a large scale or to accept a cost disadvantage

2. Product differentiation - creates a barrier by forcing


entrants to spend heavily to overcome customer loyalty

3. Capital requirements - create the need to invest large


financial resources in order to compete
The Six Major Sources of Barriers to Entry

4. Cost disadvantages independent of size - due to experience


curves, proprietary technology, access to the best raw
materials, etc

5. Access to distribution channels - that are tied up by existing


competitors which makes it more difficult for new entrants
to get started

6. Government policy – can limit or even foreclose entry by


way of license or/and limits on the access to raw materials
Bargaining Power of Suppliers
A supplier group is more powerful if:
1. It is dominated by a few companies
2. It is more concentrated than the industry it sells to
3. Its product is unique or at least differentiated
4. The supplier has built up switching costs
5. It does not contend with other products for sale to the
industry
6. It poses a credible threat of integrating forward into the
industry’s business
7. The industry is not an important customer of the supplier
group
Bargaining Power of Buyers
A buyer group is more powerful if:
1. It is a concentrated or purchased in large volumes
2. The products it purchases from the industry are standard
and undifferentiated
3. The products it purchases form a component of its products
and represent a significant fraction of its costs
4. It earns low profits, which creates great incentive to lower its
purchasing costs
5. The industry’s product is unimportant to the quality of the
buyers’ products or services
6. The industry’s products do not save the buyer money
7. The buyer poses a credible threat to integrating backward to
make the industry’s product
Threat of Substitute Products
Substitute products and services can have an impact on the
industry because:
• By placing a ceiling on the prices it can charge, substitute
products or services limit the potential of an industry
• Substitutes not only limit profits in normal times but also reduce
the bonanza an industry can reap in boom times
• Substitute products that deserve the most attention strategically
are those that are
i. subject to trends improving their price-performance trade-
off with the industry’s product or;
ii. produced by industries earning high profits
Jockeying for Position(Rivalry among established
firms)
Intense rivalry occurs when:
• Competitors are numerous or are roughly equal
• Industry growth is slow, precipitating fights for market share that
involve expansion
• The product or service lacks differentiation or switching costs
• Fixed costs are high or the product is perishable, creating strong
temptation to cut prices
• Capacity normally is augmented in large increments
• Exit barriers are high
• Rivals are diverse in strategy, origin, and personality
Formulations of Strategy
1. Positioning the company: Strategy can be viewed as
building defense against the competitive forces or as finding
positions in the industry where the competitive forces are
weakest

2. Influencing the Balance: Use tactics that are designed


specifically to reduce the share of profits leaking to other
companies

3. Exploiting and expecting industry change: Industry


evolution is important strategically because we want to
know how these changes are effecting the sources of
competition
Value Outcome
• In a world of more open competition and relentless change, it
is important than ever to think structurally about the
competition

• Awareness of the Five forces can help a company stakeout a


position in its industry that is less vulnerable to others

• Whatever their collective strength is, the corporate strategist’s


goal is to find a position in the industry where his or her
company can best defend itself against these forces or can
influence them in its favor
Avoid the following mistakes during the
Analysis
• Defining the industry too broadly or too narrowly

• Paying equal attention to all the forces rather than digging


deeply into the important one

• Using static analysis that ignores industry trend

• Using the framework to declare an industry attractive or


unattractive rather than using it to guide strategic choices

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