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How competitive forces shape strategy Michael E. Porter - Coggle Diagram
How competitive forces shape strategy
Michael E. Porter
Main idea
"The state of competition in an industry depends on five basic forces. The collective strength of these forces determines the ultimate profit potential of an industry."
The forces may be different for different sectors. For example, a company with a strong position in a market may be unthreatened by new entrants, but may still fall prey to substitute products from technological innovation.
Threat of
new entry
Six major barriers
to entry
2: Product differentiation. Brand identification leads to huge costs in overcoming customer loyalty.
3: Capital requirements. Large numbers required in R&D or other areas may deter entrants.
1: Economies of scale. Large fixed cost to build factories etc
4: Cost disadvantages independent of size. Companies that are already in a market may have cost advantages regardless of size.
5: Access to distribution channels. Partnerships etc.
6: Government policy. The government may limit entry into a market.
Powerful suppliers
and buyers
"Suppliers can exert bargaining power on participants in an industry by raising prices or reducing the quality of purchased goods and services. Powerful supplier can thereby squeeze profitability out of an industry unable to recover cost increases in its own prices."
A supplier group
is powerful if
1: It is dominated by a few companies.
2: Its product is unique or has built up significant switching costs.
3: It is not obliged to content with other products for sale to the industry.
4: It poses a credible threat of integrating forward into the industry's business.
5: The industry is not an important customer of the supplier group.
A buyer group
is powerful if
2: The products it purchases from the industry are standard or undifferentiated.
3: The products it purchases from the industry form a component of its product and represent a significant fraction of its cost.
1: It is concentrated or purchases in large volumes.
4: It earns low profits, which create 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 product does not save the buyer money.
7: The buyers pose a credible threat of integrating backward to make the industry's product.
Substitute
products
The main thing to consider is the price-performance tradeoff incurred by using the substitute. A small performance loss may be acceptable for a large cost reduction.
Most important
substitutes
a: Substitutes that are subject to trends improving their price-performance tradeoff compared to the industry's product.
b: Substitutes produced by industries earning high profits (could lower price while remaining profitable).
Jockying for position
(center piece).
Rivalry is subject to
the following factors.
2: Industry growth is slow leading to fights for market share.
3: The product or service lacks differentiation or switching costs.
1: Competitors are numerous or are roughly equal in size and power.
4: Fixed costs are high or the product is perishable, creating strong temptation to cut prices.
5: Capacity is normally augmented in large increments.
6: Exit barriers are high.Makes companies stay in the market longer, even under tough competition.
7: The rivals are diverse in strategies, origins and "personalities". They have different ideas about how to compete and continually run head-on into each other in the process.
Strategist/marketer's
plan of action
1: Asses the forces impacting market
2: Position company so that its capabilities provide the best defense against the competitive force.
3: Influence the balance of power through strategic moves, improving the company's position.
4: Try to anticipate shifts in the factors underlying the forces and respond accordingly.