FORCES DRIVING INDUSTRY COMPETITION PORTER S FIVE FORCE ANALYSIS POTENTIAL ENTRANTS Threat of new entrants Bargaining power of suppliers INDUSTRY COMPETITORS SUPPLIERS BUYERS Threat of substitute products or services Rivalry Among Existing Firms Bargaining power of buyers SUBSTITUTES EXAMPLE: GAMETRONICS PORTER S FIVE FORCE ANALYSIS POTENTIAL ENTRANTS Software developers SUPPLIERS Labour, Human Capital, Programmers INDUSTRY COMPETITORS GAMETRONICS (OEM ) Buyers Nintendo & Sega SUBSTITUTES Computer & Web Technological change EXAMPLE: NINTENDO PORTER S FIVE FORCE ANALYSIS POTENTIAL ENTRANTS Sony, Microsoft, Apple Nokia, Motorola?? SUPPLIERS Many Small programmers INDUSTRY COMPETITORS GAMETRONICS (OEM ) Buyers Gamers, Parents, Other? SUBSTITUTES Computer & Web Technological change BUSA 4800 Mgmt Policy 1
POTENTIAL ENTRANTS Barriers to Entry: 1. Economies of scale and scope 2. Product Differentiation 3. Capital Requirements 4. Patents and the Learning Curve 5. Access to distribution channels 6. Government Policy SUPPLIERS Supplier power is strong when: Only a few companies supply input Input is unique or switching costs are high No close substitutes Credible threat of forward integration Industry not a significant customer of supplier group BUYERS Are powerful if: A concentrated group or buy in large volume The industry s product is homogeneous The product is a significant ifi % of buyer s cost The product is unimportant to quality of buyer s final good or service The product does not offer buyer cost advantage Threat of backward integration BUSA 4800 Mgmt Policy 2
SUBSTITUTES Place ceiling on Prices Are of concern: The greater the price/quality trade-off Produced by industries earning high margins Produced by industries that have high level of competition internally Are constantly changing due to R & D, trends RIVALRY Factors influencing intensity : Many equal sized firms Mature industry or slow growth Homogeneous product Low switching costs Excess capacity Exit Barriers GENERIC STRATEGIES Porter describes strategy as actions that create defendable positions. Defensive: Take Tk market kt structure t as given match its strengths and weaknesses Offensive: alter the competitive environment BUSA 4800 Mgmt Policy 3
THREE GENERIC STRATEGIES 1. COST LEADERSHIP 2. DIFFERENTIATION 3. FOCUS OR NICHE STRATEGY COST LEADERSHIP the lowest per-unit (i.e., average) cost in the industry profits will be low but higher than competitors having lowest cost among a few rivals where each firm enjoys pricing power and high profits. Cost leadership is independent of market structure. COST LEADERSHIP Defendable Strategy: It defends the firm against powerful buyers. It defends against powerful suppliers by yproviding flexibility to absorb an increase in input costs Cost leadership provides entry barriers Economies of scale requires entry with substantial capacity to produce, and this means the cost of entry may be prohibitive BUSA 4800 Mgmt Policy 4
COST LEADERSHIP Requirements: Large up-front capital investment in new technology Continued capital investment Process innovation Intensive monitoring of labour frequently have an incentive-based pay structure Tight control of overhead. DIFFERENTIATION Approaches to differentiation: Different design Brand image Number of features New technology A differentiation strategy may mean differentiating along 2 or more of these dimensions. DIFFERENTIATION Defendable strategy: Insulates a firm by creating brand loyalty Lowers the price elasticity of demand Creates barriers and reduces substitutes. This leads to higher margins, which reduces the need for a lowcost advantage. Higher margins give the firm room to deal with powerful suppliers. Mitigates buyer power - fewer alternatives. BUSA 4800 Mgmt Policy 5
DIFFERENTIATION Requirements: Exclusivity Strong marketing skills. Product innovation as opposed to process innovation. Applied R&D. Customer support. Less emphasis on incentive based pay structure. FOCUS OR NICHE STRATEGY Focus on a buyer group, product segment, or geographical market. The focus or niche strategy is built on serving a particular target (customer, product, or location) very well. A focus strategy means achieving either a low cost advantage or differentiation in a narrow part of the market. STUCK IN THE MIDDLE Failure to develop a strategy in one of these 3 directions Lack the market share, capital, and overhead control to be a cost leader lack the industry wide differentiation necessary to create margins implies low profits Classic examples of this problem are large, international airline companies Depending on capabilities and resources, must gravitate toward either low cost or focus or differentiation BUSA 4800 Mgmt Policy 6
RISKS Cost leadership risks: Innovations nullify past inventions and learning Requires continual capital investment Attention to cost can blind firms to changes in product requirements. Cost increases narrow price differentials between competitors Differentiation risks : Cost difference between low cost and differentiating firms becomes too large Buyers trade-off features, service, or image for price. Buyers need for differentiation falls. Imitation decreases perceived differentiation. VALUE CHAIN SUPPORT ACTIVITIES FIRM INFRASTRUCTURE (e.g., Finance, Planning) HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT M. Porter 20 VALUE CHAIN INBOUND OPERATIONS LOGISTICS (Manufacturing) OUTBOUND LOGISTICS MARKETING AFTER-SALE AND SALES SERVICE PRIMARY ACTIVITIES M. Porter 21 BUSA 4800 Mgmt Policy 7
VALUE CHAIN SUPPORT ACTIVITIES FIRM INFRASTRUCTURE (e.g., Finance, Planning) HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT INBOUND OPERATIONS LOGISTICS (Manufacturing) PROCUREMENT OUTBOUND LOGISTICS MARKETING AFTER-SALE AND SALES SERVICE M A R G I N PRIMARY ACTIVITIES M. Porter 22 January-21-10 SUPPLY CHAIN MCDONALD S Inputs Raw Food products Factories Distributors Regional Office Outlets Franchise Corporate 23 BUSA 4800 Mgmt Policy 8