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Five Competitive

Forces That Shape


Strategy
Presented by:

Daraz Shaikh
Farhat Nasim
Hatim Ali
Bisma Zia

INTRODUCTION
In 1979, Harvard Business Review published

Five Competitive Forces That Shape


Strategy
By a young economist and associate

professor, Michael E. Porter.


It was his first HBR article, and it started a

revolution in thestrategy field.

Threat of New Entry


One of the forces that shape strategy
New entrants to an industry puts pressure on

the costs and rate of investment necessary to


compete.
Depends on the heights of the entry barriers

that are present and on the reaction entrants


gets from incumbents.

Barrier To Entry
Supply side economies of scale
Deter entry by forcing entrants to either come into

industry on a large scale which requires dislodging


competitors or to accept a cost advantage

Demand side benefits of scale:


Discourage entry by limiting the willingness of

customers to buy from a new corner by reducing


the price new comer can command.

Barriers To Entry
Customer switching cost:
The larger the switching cost the harder it will
be for entrant to gain customer.
Capital requirement:
Need to invest large financial resources in
order to compete can deter new entrants.

Barriers To Entry
Incumbency advantages:
Incumbents may have cost or quality which
results in how to produce more efficiently not
available to potential rival entrants.
Unequal access to distribution channel:
The new entrants must secure distribution of
its product. The more limited distribution
channels are, the tougher entry it will be.

Barriers To Entry
Restrictive government policy:
Govt: policy can hinder new entry by licensing

requirements and restrictions on foreign


investment.

Daraz Shaikh

Power Of Suppliers
They capture more value by charging higher prices,

limiting quality or services.


Example Microsoft:
A supplier group is powerful if:
It is more concentrated than the industry it sells to.
Does not depend heavily on the industry for its
revenues.
Industry facing Switching cost
Suppliers Offer differentiated products
No substitutes
Can threaten to integrate forward

Power of Buyers
Capture value by forcing down prices,

demanding better quality etc.


Customer group have negotiating leverage if
Few buyers
Undifferentiated products
Switching costs
Costs threaten to integrate backward

Threat Of Substitutes
Substitute performs same or similar function

as industry product by different means.


Example: Movie theatre and an arcade

fighting for competing for teenagers looking


for entertainment.
Threat of substitute is high if it offers

attractive trade off to industrys product. The


buyers cost of switching to the substitute is
low

Rivalry among existing customers


It takes many familiar forms:
Price Discounting
New Product Introductions
Advertising Campaigns (Cola wars, Lipton &
Tapal)
Service Improvements
High rivalry limits profit potential

Rivalry Intensifies
When competitors are numerous or
Competitors are roughly equal in size
When industry growth is slow
Exit barriers are high
Firms are less aware of the competitors

moves.

Price Competition occurs when:


Identical products
High fixed costs and marginal costs are low
Perishable products

Zero Sum Competition


One firm gain is other firms loss
Positive sum actually increase overall

profitability of business.

Farhat
FACTORS NOT FORCES

Factors not forces

It determine the firms long Term growth


Economic value is created by the company
In this Scenario, how much companies

retained by the industry and bargained away


from the customer
Some times it is important to avoid some pits
falls in order to retain business

Industry growth rate


Fast growing industries are always attractive
Excess growth opens the doors for

competitors
Without new entrants high growth rate is not

guarantee profitability
A narrow focus in growth is consider to be the
bad strategy decisions.

Technology and innovation


Advanced technology is some time attractive

for new entrants but some times it is


unattractive due to technology forces.
In most cases switching cost or high barriers
arising from economic of scale

Government
It is not good or bad for industry profitability

The only way see the influence by clearly

analysis
how specific government policies affect the
five competitive forces.
Some time union may raise supplier power.
Political power of Govt

Complementary products and


service
The products gather within the industry
Complement arises when the customer benefits
two products great than sum of other each
product value
Example
When the drive has access to gasoline stations,
roadside assistance and auto insurance

Changes in industry structure


Industry structure proves to be relatively

stable.
Shifts in structure may emanate from out-side
an industry or from within. They can boost the
industrys profit potential or reduce it.\
For example
changes in technology
Change in customer needs

Shifting threat of new


entry
Above seven the barriers can raise lower the

threat of new entry


Example
The expiration of a patent, for instance, may
unleash new

Changing in supplier
power
As the factors underlying the power of

suppliers and buyers change with the


passage of time.
Example
travel agents, who depend on airlines as a

key supplier
When the interner allow them sell the ticket
directly

Shifting threat of
substitution
Advancement of technology new substitute

or shifting price.
Performance comparisons in one direction or
in other
For example
priced above $2,000,making them poor

substitutes for conven-tional ovens. With


technological advances

New bases of rivalry


Rivalry often intensifies naturally over time.
consumer tastes converge. Industry

profitability falls, and weaker competitors are


driven from the business
the nature of rivalry in an industry is altered
by mergers and acquisitions that introduce
new capabilities

Hatim Ali
Implications for strategy

IMPLICATIONS FOR
STRATEGY
Position your company where the forces are

weakest.
Exploiting and anticipating industrial change.
Industrial structure can be shaped in two
ways:
Redividing Profitability
Expanding overall profit

DEFINING THE INDUSTRY


Actual competition is important for good industry

analysis.
Too broadly obscure differences among products,
customers or geographic regions that are
important to competition, strategic positioning
and profitability.
Too narrowly overlooks commonalities across
related products which are crucial to competitive
advantage.
The five competitive forces holds a key in defining
the relevant industry in which a company
competes.

COMPETITION AND VALUE


In a world of more open competition and

relentless change, it is more important than


ever to think structurally about competition.
Understanding industry structure is equally
important for investors as for managers.
The five competitive forces reveal whether an
industry is truly attractive, and they help
investors anticipate positive or negative shift
and allows to take advantage of undue
pessimism or optimism.