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The five competitive forces that shape strategy - Coggle Diagram
The five competitive forces that shape strategy
Idea in practice
Exploit changes in the forces
Reshape forces in favor
Customer power
: expand services (increase switching costs)
Established rivals
: counter price wars with heavy investments in differentiated products
Supplier power
: standardize parts specifications (lower switching costs)
New entrants
: Increase barriers to entry eg. R&D costs
Threat of substitutes
:better value through wider product accessibility (locations)
Position company where forces are weakest
Forces that shape competition
Threat
of new entrants
(surmount barriers without nullifying profitability due to heavy investment)
expected retaliation
(profit potential VS cost of capital)
resources to fight back eg. excess cash, unused borrowing, available productive capacity, distribution channels clout, customers
previous response
likely to cut prices (market share, high fixed costs)
slow industry growth
entry barriers
(relative to entrants' capabilities)
demand-side benefits of scale
(network effects)
WTP increases with more buyers due to trust, "network"
customer switching costs (FC)
alter specifications, retrain, modify processes or info sys
eg. ERP
supply-side economies of scale
better supplier terms
more efficient technology
spread out fixed costs
capital requirements
unrecoverable = harder to finance eg. up-front advertising, R&D
may be funded by investors if industry returns expected to remain attractive
unequal access to distribution channels
government policy
restrictive
eg. licensing requirements, foreign investment restrictions, regulated industries, expansive patenting rules, environmental or safety regulations
supportive eg. subsidies funding basic research (reduce scale economies)
incumbency advantages independent of size
cost
quality
Bargaining power of suppliers
(higher prices, limit quality or services, shift costs to industry participants)
differentiated products (distinctive, non-generic)
switching costs in changing suppliers (specialised equipment, learning operations, production line location)
no substitute
dependence on industry for revenues (less need to protect industry through reasonable pricing, lobbying, R&D)
credible forward integration threat
concentration relative to buyer industry
(Monopoly VS fragmentation)
low switching costs of supplier
Bargaining power of buyers
(forcing down prices, better quality or more service which increases costs, play industry participants against one another)
few buyers or large purchasing volume relative to single vendor
price-sensitive
low profit, strapped for cash, cost pressure
significant fraction of cost structure or budget
quality of buyer's product little affected by industry's product
little effect on buyer's other costs
undifferentiated products
switching costs
credible backward integration threat
high fixed costs, low marginal costs eg. telecomunications, offshore drilling, bulk chemicals
consumer needs can be more intangible, harder to quantify
intermediate customers significant bargaining power when influence downstream customers purchasing decisions
Rivalry among existing competitors
intensity
Basis
Threat of substitutes
(similar function, different means)
Industry analysis in practice
Competitive forces strength affects prices, costs, investments
balance sheet
income statement
Industry as overall systemic terms
today's profitability constraints
shifts in one competitive force trigger reactions in others
Underpinnings of competition, root causes of profitability
Buyer sensitivity
Buyer's total cost / industry product
Entry barriers
Percentage of industry sales to fill plant or operate efficient scale logistical network
Buyer switching cost
Profitability structural underpinnings (time horizon)
temporary, cyclical VS structural
average profitability over period (depending on industry)
Factors, not forces
Government
Complementary products and services
Technology and innovation
Changes in industry structure
Implications for strategy
Positioning the company
Exploiting the industry change
Shaping industry structure
Typical steps in industry analysis
Assess underlying competitive force drivers
(strength, reason)
Determine overall industry structure,
test analysis for consistency
Controlling forces for profitability
Consistency of industry analysis with actual long-run profitability
Reasons for profitability level
Positioning of more-profitable players in relation to five forces
Identify participants,
segment into groups
suppliers, supplier group
competitors
buyers, buyer groups
substitutes
potential entrants
Analyse recent, likely future force changes
(positive, negative)
Define the relevant industry
Geographic scope of competition
Products
Identify aspects of industry structure potentially influenced (competitors, new entrants, own company)
Common pitfalls
Confusing effect (price sensitivity) with cause (buyer economics)
Static analysis ignoring industry trends
Equal attention to all forces
Confusing cyclical or transient changes
with true structural changes
List instead of rigorous analysis
Using framework for industry attractiveness instead of strategic choices
Too broad or narrow industry definition
Competition and value
detect, manage threats
uncover opportunities in competitive forces differences
distinguish short-term blips from industrial changes for investment decisions