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SAN BEDA COLLEGE ALABANG

SAN BEDA COLLEGE ALABANG
SAN BEDA COLLEGE ALABANG
SAN BEDA COLLEGE ALABANG
“Awareness of competitive forces can help a company stake out a position in its industry
“Awareness of competitive forces can help a company stake out a position in its industry

“Awareness of competitive forces can help a

company stake out a position in its industry that is less vulnerable to attack.”

Michael E. Porter Competitive Strategy

 Was not developed for IS use  Breaks an industry into logical parts, analyzes
 Was not developed for IS use  Breaks an industry into logical parts, analyzes

Was not developed for IS use

Breaks an industry into logical parts, analyzes them and puts them back together.

Avoids viewing the industry too narrowly.

 Provides an understanding of the structure of an industry’s business environment.  Provides an
 Provides an understanding of the structure of an industry’s business environment.  Provides an

Provides an understanding of the structure of

an industry’s business environment.

Provides an understanding of competitive

threats into an industry.

 Two Key Questions  How structurally attractive is the industry?  What is the
 Two Key Questions  How structurally attractive is the industry?  What is the

Two Key Questions

How structurally attractive is the industry?

What is the company’s relative position within

the industry?

 Why do we need to care?  The collective strength of the industry forces
 Why do we need to care?  The collective strength of the industry forces

Why do we need to care?

The collective strength of the industry forces determines the ultimate profit potential of an

industry.

 Why do we need to care? (c0n’t)  The strongest competitive forces are of
 Why do we need to care? (c0n’t)  The strongest competitive forces are of

Why do we need to care? (c0n’t)

The strongest competitive forces are of greatest importance in formulating competitive

strategies

 Why do we need to care? (c0n’t)  Every industry has an underlying structure,
 Why do we need to care? (c0n’t)  Every industry has an underlying structure,

Why do we need to care? (c0n’t)

Every industry has an underlying structure, or a set of fundamental economic and technical

characteristics that gives rise to these

competitive forces.

 Why do we need to care? (c0n’t)  This view of competition pertains to
 Why do we need to care? (c0n’t)  This view of competition pertains to

Why do we need to care? (c0n’t)

This view of competition pertains to industries selling products and those dealing in services.

 Why do we need to care? (c0n’t)  A few characteristics are often key
 Why do we need to care? (c0n’t)  A few characteristics are often key

Why do we need to care? (c0n’t)

A few characteristics are often key to the strength of each competitive force.

 Key industry analysis factors  Collecting the data.  Determining which data is important.
 Key industry analysis factors  Collecting the data.  Determining which data is important.

Key industry analysis factors

Collecting the data.

Determining which data is important.

Selecting an appropriate overall approach.

Deciding on the logical starting point.

 Basic objectives  To create effective links with buyers and suppliers.  To build
 Basic objectives  To create effective links with buyers and suppliers.  To build

Basic objectives

To create effective links with buyers and suppliers.

To build barriers to new entrants and substitute products.

Source : Developed from Michael E. Porter, Competitive Strategy (NewYork: Free Press, 1980).
Source : Developed from Michael E. Porter, Competitive Strategy (NewYork: Free Press, 1980).
Source : Developed from Michael E. Porter, Competitive Strategy (NewYork: Free Press, 1980).

Source: Developed from Michael E. Porter, Competitive Strategy (NewYork: Free Press, 1980).

 Michael E Porter proposes that managers should view the organizational environments in terms of
 Michael E Porter proposes that managers should view the organizational environments in terms of

Michael E Porter proposes that managers should view the organizational environments in terms of five competitive forces:

The threat of new entrants

Competitive rivalry

The threat of substitute products

The power of buyers

The power of suppliers

 New entrants  An existing company or a start-up that has not previously competed
 New entrants  An existing company or a start-up that has not previously competed

New entrants

An existing company or a start-up that has not previously competed with the SBU in its

geographic market.

It can also be an existing company that through a

shift in business strategy begins to compete with

the SBU.

 The threat of new entrants  The extent to which new competitors can easily
 The threat of new entrants  The extent to which new competitors can easily

The threat of new entrants

The extent to which new competitors can easily enter a market or market segment.

Entrance is easier for market requiring a small amount of capital to open and more difficult when

it takes a tremendous investment in plant,

equipment and distribution systems

 The threat of new entrants ( con’t )  The internet has reduced the
 The threat of new entrants ( con’t )  The internet has reduced the

The threat of new entrants (con’t)

The internet has reduced the costs and other barriers of entry into many market segments so

the threat has increased for many firms.

 Possible barriers to entry  Economies of scale.  Strong, established cost advantages. 
 Possible barriers to entry  Economies of scale.  Strong, established cost advantages. 

Possible barriers to entry

Economies of scale.

Strong, established cost advantages.

Strong, established brands.

Proprietary product differences.

Major switching costs.

 Possible barriers to entry ( con’t )  Limited or restrained access to distribution.
 Possible barriers to entry ( con’t )  Limited or restrained access to distribution.

Possible barriers to entry (con’t)

Limited or restrained access to distribution.

Large capital expenditure requirements.

Government policy.

Definite strong competitor retaliation.

 Competitive rivalry  The nature of the competitive relationship between firms in the industry.
 Competitive rivalry  The nature of the competitive relationship between firms in the industry.

Competitive rivalry

The nature of the competitive relationship

between firms in the industry.

Large firms, dominant in the field, engage in price

wars, comparative advertising and new-product introductions.

Small establishments, in contrast, do not generally engage in such practices.

 Rivalry likelihood?  Profit margins.  Industry growth rate and potential.  A lack
 Rivalry likelihood?  Profit margins.  Industry growth rate and potential.  A lack

Rivalry likelihood?

Profit margins.

Industry growth rate and potential.

A lack of capacity to satisfy the market.

Fixed costs.

Competitor concentration and balance.

 Rivalry likelihood?  Diversity of competitors.  Existing brand identity.  Switching costs. 
 Rivalry likelihood?  Diversity of competitors.  Existing brand identity.  Switching costs. 

Rivalry likelihood?

Diversity of competitors.

Existing brand identity.

Switching costs.

Exit barriers.

 Substitute products / service  An alternative to doing business with the SBU. 
 Substitute products / service  An alternative to doing business with the SBU. 

Substitute products / service

An alternative to doing business with the SBU.

This depends on the willingness of the buyers to substitute, the relative price/performance of the substitute and/or the level of the switching cost.

 The threat of substitute products  The extent to which alternative products or services
 The threat of substitute products  The extent to which alternative products or services

The threat of substitute products

The extent to which alternative products or services may take the place of or diminish the

need for existing products and/or services.

 Substitute threats  Buyer propensity to substitute.  Relative price/performance of substitutes. 
 Substitute threats  Buyer propensity to substitute.  Relative price/performance of substitutes. 

Substitute threats

Buyer propensity to substitute.

Relative price/performance of substitutes.

Switching costs.

 The power of buyers  The extent to which buyers of the products or
 The power of buyers  The extent to which buyers of the products or

The power of buyers

The extent to which buyers of the products or services in an industry have the ability to influence

the suppliers.

 A buyer has power if:  It has large, concentrated buying power that enables
 A buyer has power if:  It has large, concentrated buying power that enables

A buyer has power if:

It has large, concentrated buying power that enables it to gain volume discounts and/or special

terms or services.

What it is buying is standard or undifferentiated and there are multiple alternative sources.

It earns low profit margins so it has great incentive to lower its purchasing costs.

 A buyer has power if: ( con’t )  It has a strong potential
 A buyer has power if: ( con’t )  It has a strong potential

A buyer has power if: (con’t)

It has a strong potential to backward integrate.

The product is unimportant to the quality of the buyers’ products or services.

 The power of suppliers  The extent to which suppliers have the ability to
 The power of suppliers  The extent to which suppliers have the ability to

The power of suppliers

The extent to which suppliers have the ability to influence potential buyers.

The power of the supplier depends on the product being offered. The more restricted the service or

product, the more power to the supplier.

 Suppliers have power if:  There is domination of supply by a few companies.
 Suppliers have power if:  There is domination of supply by a few companies.

Suppliers have power if:

There is domination of supply by a few companies.

Its product is unique or at least differentiated.

It has built up switching costs.

 Suppliers have power if: ( con’t )  It provides benefits through geographic proximity
 Suppliers have power if: ( con’t )  It provides benefits through geographic proximity

Suppliers have power if: (con’t)

It provides benefits through geographic proximity to its customers.

It poses a definite threat to forward integrate into its customers’ business.

A long time working relationship provides unique capabilities.

 Tips:  To incorrectly define the industry can cause major problems in doing the
 Tips:  To incorrectly define the industry can cause major problems in doing the

Tips:

To incorrectly define the industry can cause major problems in doing the analysis.

You must identify the specific market being evaluated.

Your analysis company is the Strategic Business Unit.

 Tips: ( con’t )  Identify rivals by name for majors, by category for
 Tips: ( con’t )  Identify rivals by name for majors, by category for

Tips: (con’t)

Identify rivals by name for majors, by category for minor rivals if needed to present the best possible

profile of rivals.

Be sure to address the power implications of both

customers and suppliers. Power buys them what?

 Tips: ( con’t )  Identify buyers and suppliers by categories versus companies. 
 Tips: ( con’t )  Identify buyers and suppliers by categories versus companies. 

Tips: (con’t)

Identify buyers and suppliers by categories versus companies.

Summarize your Porter Model analysis.

 Type of market structure influences how a firm behaves:  Pricing  Supply 
 Type of market structure influences how a firm behaves:  Pricing  Supply 

Type of market structure influences how a firm behaves:

Pricing Supply

Barriers to Entry

Efficiency

Competition

 Degree of competition in the industry  High levels of competition – Perfect competition
 Degree of competition in the industry  High levels of competition – Perfect competition

Degree of competition in the industry

High levels of competition Perfect competition

Limited competition Monopoly Degrees of competition in between

 Determinants of market structure  Number and size of firms that make up the
 Determinants of market structure  Number and size of firms that make up the

Determinants of market structure

Number and size of firms that make up the industry

Freedom of entry and exit

Nature of the product homogenous (identical), differentiated

Control over supply/output

Control over price

 Perfect Competition:  One extreme of the market structure spectrum  Free entry and
 Perfect Competition:  One extreme of the market structure spectrum  Free entry and

Perfect Competition:

One extreme of the market structure spectrum

Free entry and exit to industry Homogenous product identical so no consumer preference

Large number of buyers and sellers no individual

seller can influence price

 Perfect Competition:  Sellers are price takers – have to accept the market price
 Perfect Competition:  Sellers are price takers – have to accept the market price

Perfect Competition:

Sellers are price takers have to accept the market price Perfect information/knowledge available to buyers and sellers

Each producer supplies a very small proportion of total industry output

 Perfect Competition  What happens in a competitive environment? ▪ New idea – Firm
 Perfect Competition  What happens in a competitive environment? ▪ New idea – Firm

Perfect Competition

What happens in a competitive environment?

New idea Firm makes short term abnormal profit

Other firms enter the industry to take advantage of abnormal profit

Supply increases price falls

Long run normal profit made

Choice for consumer

Price sufficient for normal profit to be made

 Imperfect or Monopolistic Competition  Where the conditions of perfect competition do not hold,
 Imperfect or Monopolistic Competition  Where the conditions of perfect competition do not hold,

Imperfect or Monopolistic Competition

Where the conditions of perfect competition do not hold, ‘imperfect competition’ will exist

Varying degrees of imperfection give rise to varying market structures

Monopolistic competition is one of these not to be confused with monopoly!

 Imperfect or Monopolistic Competition  Many buyers and sellers  Products differentiated  Relatively
 Imperfect or Monopolistic Competition  Many buyers and sellers  Products differentiated  Relatively

Imperfect or Monopolistic Competition

Many buyers and sellers

Products differentiated

Relatively free entry and exit

Each firm may have a tiny ‘monopoly’ because of the differentiation of their product

 Imperfect or Monopolistic Competition  May have some element of control over price due
 Imperfect or Monopolistic Competition  May have some element of control over price due

Imperfect or Monopolistic Competition

May have some element of control over price due to the fact that they are able to differentiate their product in some way from their rivals products

are therefore close, but not perfect, substitutes

Consumer and producer knowledge imperfect

 Oligopoly  Competition amongst the few  May be a large number of firms
 Oligopoly  Competition amongst the few  May be a large number of firms

Oligopoly

Competition amongst the few

May be a large number of firms in the industry but the industry is dominated by a small number of very large producers

 Oligopoly  Industry dominated by small number of large firms  Many firms may
 Oligopoly  Industry dominated by small number of large firms  Many firms may

Oligopoly

Industry dominated by small number of large firms

Many firms may make up the industry

High barriers to entry

 Oligopoly  Non – price competition may be prevalent  Price stability within the
 Oligopoly  Non – price competition may be prevalent  Price stability within the

Oligopoly

Nonprice competition may be prevalent

Price stability within the market - kinked demand curve

Potential for collusion?

Abnormal profits

High degree of interdependence between firms Behaviour of firms affected by what they believe their rivals might do interdependence of firms

 Oligopoly  Goods could be homogenous or highly differentiated  Branding and brand loyalty
 Oligopoly  Goods could be homogenous or highly differentiated  Branding and brand loyalty

Oligopoly

Goods could be homogenous or highly differentiated

Branding and brand loyalty may be a potent source of competitive advantage

 Oligopoly Kinked Demand Curve Price PhP5 D = elastic Kinked D Curve D =
 Oligopoly Kinked Demand Curve Price PhP5 D = elastic Kinked D Curve D =
 Oligopoly Kinked Demand Curve Price PhP5 D = elastic Kinked D Curve D =
 Oligopoly
Kinked Demand Curve
Price
PhP5
D = elastic
Kinked D Curve
D = Inelastic
Quantity
100
 Duopoly:  Industry dominated by two large firms  Possibility of price leader emerging
 Duopoly:  Industry dominated by two large firms  Possibility of price leader emerging

Duopoly:

Industry dominated by two large firms

Possibility of price leader emerging rival will follow price leaders pricing decisions

High barriers to entry

Abnormal profits likely

Highly interdependent

 Monopoly:  Origins ▪ Through growth of the firm ▪ Through amalgamation, merger or
 Monopoly:  Origins ▪ Through growth of the firm ▪ Through amalgamation, merger or

Monopoly:

Origins

Through growth of the firm

Through amalgamation, merger or takeover

Through acquiring patent or license

Through legal means Royal charter, nationalisation, wholly owned plc

 Monopoly:  Pure monopoly – industry is the firm!  Actual monopoly – where
 Monopoly:  Pure monopoly – industry is the firm!  Actual monopoly – where

Monopoly:

Pure monopoly industry is the firm!

Actual monopoly where firm has >25% market

share

Natural Monopoly high fixed costs electricity

 Monopoly:  Monopoly power ▪ Refers to cases where firms influence the market in
 Monopoly:  Monopoly power ▪ Refers to cases where firms influence the market in

Monopoly:

Monopoly power

Refers to cases where firms influence the market in

some way through their behaviour determined by the

degree of concentration in the industry

Influencing prices

Influencing output

Erecting barriers to entry

Pricing strategies to prevent or stifle competition

May not pursue profit maximisation encourages unwanted entrants to the market

Sometimes seen as a case of market failure

 Monopoly:  High barriers to entry  Firm controls price OR output/supply  Abnormal
 Monopoly:  High barriers to entry  Firm controls price OR output/supply  Abnormal

Monopoly:

High barriers to entry

Firm controls price OR output/supply Abnormal profits in long run

Possibility of price discrimination

Consumer choice limited