HBR
See also: HBR
Core Argument:
- Competition goes beyond direct rivals - it includes 4 other forces that shape industry structure
- Understanding these forces reveals opportunities and threats
The 5 Forces:
- Threat of New Entrants
- Controlled by entry barriers: economies of scale, brand identity, capital needs, access to distribution
- High barriers + strong retaliation = low threat
- Supplier Power
- Strong when: concentrated, unique products, not dependent on industry
- Can squeeze profits by raising prices/reducing quality
- Buyer Power
- Strong when: concentrated buyers, standard products, price sensitivity
- Can force down prices and demand better service
- Substitute Products
- Set ceiling on prices
- Threaten profits by limiting potential returns
- Most dangerous when improving price-performance trade-off
- Industry Rivalry
- Intense when: many competitors, slow growth, high fixed costs
- Takes form of price wars, advertising battles, product launches
Strategic Implications:
- Position
- Find where forces are weakest
- Build defenses against competitive forces
- Example: Dr Pepper avoiding direct competition with Coke/Pepsi
- Influence
- Take offensive moves to alter competitive forces
- Shape industry structure to your advantage
- Exploit
- Spot and capitalize on industry changes before rivals
- Use changes in competitive forces to identify strategic opportunities
Porter’s Five Forces Framework
See also: image
- Rivalry Among Existing Competitors
- Number of competitors
- Diversity of competitors
- Industry concentration
- Industry growth
- Quality differences
- Brand loyalty
- Barriers to exit
- Switching costs
- Threat of New Entrants
- Barriers to entry
- Economies of scale
- Brand loyalty
- Capital requirements
- Cumulative experience
- Government policies
- Access to distribution channels
- Switching costs
- Bargaining Power of Suppliers
- Number and size of suppliers
- Uniqueness of each supplier’s product
- Focal company’s ability to substitute
- Bargaining Power of Buyers
- Number of customers
- Size of each customer order
- Differences between competitors
- Price sensitivity
- Buyer’s ability to substitute
- Buyer’s information availability
- Switching costs
- Threat of Substitute Products
- Number of substitute products available
- Buyer propensity to substitute
- Relative price performance of substitute
- Perceived level of product differentiation
- Switching costs