Customers &
competitors
FIRM' S INDUSTRY
First strategic deicision
Vulnerably to UNSEEN competitors
Not obvious!
Start: customer oriented view (no
based on the product offered)
Fragmented industry
NUMEBER/SIZE
COMPETITORS
SAME SIZES
DIFFERENTIATED:
loyalty
STANDARD PRODUCTS
STANDARDIZE:
sales, rebates
Buyer power
Supplier power
LOW
SWITCHING
COSTS
New entrants
RIVALRY aka WAR
substitutes
Promotions,
discounts, price
wars
SLOW GROWTH
IN DEMAND
To use more:
drop prices
UNUSED CAPACITY
FIXED COSTS , PERISHABLE PRODUCTS, HIGH STORAGE COSTS
Steep discounts
Investment in
special equipment
HIGH EXIT BARRIERS
Labor or gov
agreements
Emotional ties
Buyers' switching costs
Buyer Demand
BARGAINING POWER
Concentration/size
of BUYERS
BACKWARD INTEGRATION
B are struggling
financially
BUYER POWER : lower prices/ better quality
Product is a significant
proportion of buyer''s costs
PRICE SENSITIVITY: the more, the more power . Tend to increase when
5 FORCES:THREAT & OPPORTUNITIES
STEPS: 1.SPECIFIC FACTORS
STEP 2: STRENGTH OF EACH FORCE
SHAPE the profit-making POTENTIAL of
the average firm in an industry
Large volumes
purchase
Doesn't affect
buyers' performance
Doesn't save
buyers money
NUMBER
SUPPLIER
POWER
SIZE
FORWARD
INTEGRATION Ex. Google in smartphones
BARRIERS TO ENTRY
signalling
EXPERIENCE
ECONOMIES
LEARNING
SCALE
Patents &
proprietary
technology
Better locations
COST ADVANTAGES
THREAT: NEW
ENTRANTS
EXTERNAL ENVIRONMENT
Ec. Of scope (
bundling)
ANXIOUS TO GAIN
MARKET SHARE & BRING NEW
PRODUCTION
CAPACITY
Preferential access to
CRITICAL RESOURCES
CAPITAL
REQUIREMENTS
NETWORK EFFECTS
The higher the start up costs,
the lower entrants
Firms that already spent on
R&D in similar products
Increases the
SWITCHING COSTS for customers
Restrict the market
GOV. POLICY
RESTRICTIONS
RIVALRY ≠
SUBSTITUTE
THREAT:
SUBSTITUTIONS
DOWNWARD
PRESSURE on price
AWARENESS &
AVAILABILITY
PRICE &
PERFORMANCE
Result of 5 forces analysis:
industry's STRUCTURE and nature of competitive INTERACTION
Rating HIGH or LOW on
all forces is RARE
5 FORCES are
subject to changes
AVARAGE
PROFITABILITY OF
THE INDUSTRY
INDUSTRY
ATTRACTIVENESS
STEP 2: ESTIMATE OVERALL
ATTRACTIVENESS OF THE INDUSTRY
POWER OVER
BUYERS and SUPPLIERS
ATTRACTIVE ones : firms have created
BARRIERS TO ENTRY
MINIMIZED THREAT
OF SUBSTITUTES
TRADITIONAL: 5 forcesmost attractive ones
LIMITATION: executives have to choose
markets BEFORE ENTERING
Most attractive(5 forces
prospective) is the LEAST
ATTRACTIVE for new entrants
TO enter you have to
CIRCUMVENT BARRIERS TO
ENTER
NEW THINKING
Where to compete DEPENDS
ON THE UNIQUE VALUE
THEY CAN OFFER (don't mimic incumbents)
COMPLEMENTARY
PRODUCTS
AKA Ecosystems: products that
can eb used in TANDEM with those of another industry
NEW
PRODUCTS/PROCESSES
TECHNOLOGICAL
CHANGE
EARLY ADOPTERS:
greater market share
Can lower BARRIERS TO ENTRY
INCREASE: customers income (LOW PRICE SENSITIVITY)
and industry GROWTH RATE
ECONOMIC GROWTH
Changes in DEMAND for
products (especially expensive
items requiring LOANS)
INTEREST RATES
Impact the prices
for IMPORTS
EXCHANGE RATES
GENERAL
ENVIRONMENT
EFFECTS ON PROFITABILITY
DIFFICULT PLANNING
THESE 3 CATEGORIES SHAPE AND
CHANGE THE 5 FORCES FACTORS
INFLATION
ECONOMIC
CONDITIONS macroeconomic forces
DECREASE
ECONOMIC
GROWTH
DEMOGRAPHIC
FORCES
INCREASE RIVALRY AND
THREAT OF SUBSTITUTES
Number of people,avg age,
distribution, gender, ethnicity
Shortages of key inputs
ECOLOGICAL
ENVIRONMENT
Fluctuations in
COST OF ENERGY
GREEN INITIATIVES
GLOBAL FORCES
COMUNICATION &
TRANSPORTATION
TECHNOLOGIES
POLITICAL, LEGAL,
REGULATORY FORCES
SOCIAL/CULTURAL
FORCES (affect all the others)
ECONOMIC GROWTH & RISING
STANDARD OF LIVING
OPPORTUNITIES
& THREATS
Society's cultural
VALUES & NORMS
FIRMS LOBBY GOV
TO INFLUENCE THE LAWMAKERS
RAISE COST OF ENTRY:
licenses, insurances
Less entrants