PORTER’S GENERIC STRATEGIES AND
FIVE FORCES
By: Kavita, Chris, and Jake
WHAT IS IT?
•
Michael Porter
•
Is this profitable?
•
Where is the power?
•
What is my current competitive
position?
FIVE FORCES
• Is this an attractive market or industry for us to compete in?
GENERIC STRATEGIES
• How can we best compete for customers in this market/industry?
GENERIC STRATEGIES
• Market Scope asks
How broad or narrow is our target market?
• Source For Competitive Advantage asks
Will you compete for competitive advantage by lower price or product
uniqueness?
GENERIC STRATEGIES
GENERIC STRATEGIES
• Differentiation Strategy
Organization’s resources and attention are directed toward making its
products appear different from those of the competition (ex: Coke,
Pepsi)
• Market scope = Broad
• Source of competitive advantage = Unique product
GENERIC STRATEGIES
• Cost Leadership
Organization’s resources and attention are directed toward minimizing
costs to operate more efficiently than the competition (ex: Wal-Mart)
• Market scope = Broad
• Source of competitive advantage = Low price
GENERIC STRATEGIES
• Focused Differentiation
Concentrates on a particular market segment and tries to offer the
most unique product in that segment
• Market scope = Narrow
• Source for competitive advantage = Unique product
• Focused Cost Leadership
Concentrates on a particular market segment and tries to be the
provider with the lowest costs in that segment
• Market scope = Narrow
• Source for competitive advantage = Low price
GENERIC STRATEGIES
• Differentiation Strategy (in depth)
•
Seeks advantage though uniqueness
Done by:
•
Certain look (ex: Polo Ralph Lauren, American Apparel, Roots)
•
Lifestyle advertising (ex: Coca Cola, Pepsi, Much Music)
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• Goal is to attract consumers who will be loyal and ignore the competitions’
products
• This strategy requires organizational strengths in marketing, research and
development, and creativity. Differentiation’s success is dependent upon the
consumers’ continuing perceptions of quality and uniqueness.
GENERIC STRATEGIES
• Cost Leadership Strategy (in depth)
•
Your goal is to have the lowest prices available to receive the largest
profit
Done by:
•
Continually improving operating efficiencies of production, distribution,
and other organizational systems.
_________________________________________________
•
Requires tight cost and managerial controls as well as products that
are easy to manufacture and distribute
•
Perfect example is Wal-Mart
GENERIC STRATEGIES
• Focus Strategies (in depth)
•
Concentrate on a special market segment with the objective to serve it
better than anyone else
•
Focus organizational resources and attention on a particular customer
, geographical region, or product/service line
•
Seek the competitive advantage in that singular segment through
product differentiation or cost leadership
•
Example = WestJet
COMPETITIVE RIVALRY
•
Number of competitors
•
Quality differences
•
•
Can other companies offer equally
attractive products?
Other (product) differences
•
Who holds the power?
•
Switching costs
•
Can other companies do what you do?
•
Customer loyalty
•
Will your customers stay or go?
•
Costs of leaving the market
•
Fixed costs/value added
•
Brand identity
•
Diversity of rivals
•
Industry growth
•
Corporate stakes
COMPETITIVE RIVALRY
•
Rivalry drives profits to zero
•
Varies across industries
•
Industry concentration
•
Companies can choose from various
rival strategies to win a competitive
advantage
•
There are many characteristics to
determine the intensity of rivalry
BUYER POWER
Buyer Power depends on the following:
•
Number of customers
•
Size of each order
•
Differences between competitors
•
Price sensitivity
•
Ability to substitute
•
Cost of changing
•
Monopsony: multiple suppliers and
one buyer
SUPPLIER POWER
•
How easy it is for suppliers to drive up
prices
•
Less suppliers = more power for the
suppliers
THREAT OF NEW ENTRY
• Profitable markets that yield high returns will
attract new firms
• New companies= decrease profits
Types:
• Time and cost of entry
• Experience is needed
• Investment cost
• Training is available
• Technology protection
• Economies of scale
• Barriers to entry
• Specialized Assets
• Brand identity
• Access to distribution
HIGH VS. LOW INDUSTRY PROFITS
High industry profits associated with:
• Weak suppliers
• High entry barriers
• Few substitutes
• Little rivalry
Low industry profits associated with:
• Strong suppliers
• Low entry barriers
• Many substitutes
• Intense rivalry
BARRIERS TO ENTRY
•
Examples of Barriers to Entry:
-Patents
-Copy Rights
•
Most attractive market segment is one in which entry barriers are high and exit barriers are
low
•
Governments creates barriers too –permits, grants, restrictions ..etc.
ENTERING AND EXITING A MARKET
Easy to enter if:
Difficult to Enter if there is:
• Access to distribution channels
• Little Brand Identity
• Common technology
• Patents
• Difficulty in brand switching
• Restricted distribution channels
Easy to Exit if there are:
Difficult to Exit if there are:
• Low exit cost
• Independent businesses
• Assets are easy to sell
• Hard to sell assets
• High exit costs
• Interrelated Businesses
BRAND IDENTITY
•
Consumers will believe that a product with a well-known name is better than products with a
less well-known name
•
New firms won’t join if there is a big name brand
ECONOMICS OF SCALE
•
This has to do with the MES which is the Minimum Efficient Scale
•
Unit cost for production are at a minimum ex. the most cost efficient level of production
•
If MES for firms in an industry is known, then we can determine the amount of market share
necessary for low cost entry
•
Creates a barrier:
The greater the difference between industry MES and entry unit cost, the greater the barrier to
entry.
SPECIALIZED ASSETS
•
Extent to which the firms assets can be utilized to produce a different product
•
Expensive assets/ equipment
•
Provides a barrier for two reason:
1. when a firm already holds specialized assets, new companies don’t bother in joining the
market segment because it would be intense rivalry (not a lot of profit)
2. Potential entrants do not want to make huge investments in highly specialized assets
-hard to sell if venture fails
OTHERS….
•
Time and cost of entry:
-is it expensive to enter the market? Does it require a lot of time to enter?
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•
Access to distribution:
-is there a company that already has the distribution rights?
-A lack of access will make it difficult for newcomers to enter the market
______________________________________________________________________________
•
Training is available:
-do your employees need to be specially trained? Can they get the training somewhere?
Ex- CPR training
OTHERS…
•
Experience is needed:
-do you already have to have experience in the field to join the market?
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Investment Cost:
-High cost will deter entry
-High capital requirements might mean that only large businesses can compete
THREAT OF SUBSTITUTES
•
Refers to products in other industries
•
Substitution is easy=weakens your power
•
Ex:
Instead of
THREAT OF SUBSTITUTES
•
Threat of Substitute exists when a products demand is affected by the price change of
substitute products
•
Price elasticity: as more substitutes become available, demand becomes more elastic since
buyers have more options
•
A close substitute product constrains the ability of firms in an industry to raise prices
•
Substitute performance: price and performance of the substitute can match the industry’s
product
•
Cost of Change: if it is low cost to switch then you is in serious trouble