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Five Forces Competitive Approach 1
Five Forces Competitive Approach 1
APPROACH
TO COMPETITIVE
STRUCTURE
Developed by
Professor Michael
Porter at the
Harvard Business Fig. 10.1 The Five Forces Model
School (1980).
POTENTIAL
ENTRANTS
Treat of entry
Power of Power
suppliers of buyers
INDUSTRY
SUPPLIERS COMPETITORS BUYERS
Rivalry among existing
fiirms
Treat of substitutes
SUBSTITUTES
The five forces model is much more
complete than the set of textbook models, but it
also mush less rigorous. It allows for dozens of
different types of market structure but does not
provide absolutely clearpredictions with regard
to the outcome of those structures. Indeed, its
value lies not in providing predictions for every
conceivable type of industry, but rather in
giving executives through checklist which they
can use to identify the most important features
of competition in their industry. These salient
features provide a starting point from which
firms can begin to develop a competitive
strategy.
FIVE FORCES APPROACH
The intensity of rivalry amongst firms is not a variable which can easily
be measured in a quantitative way. Neverthless, in some industries rivalry
is said to be intense, even ‘cut-throat’, while in others relations between
firms are said to be ‘gentleman’, or ‘polite’ or orderly.
FACTORS WHICH DETERMINE THE DEGREE OF RIVALRY
Industry Growth
• It is a key factor. If growth of the industry as a whole is rapid,
each firm will be able to grow without needing to take market
share away from its rivals and managerial time will be devoted
to keeping up with industry growth, rather than attacking
rivals. On the other hand, if an industry is growing slowly or
declining, growth for one firm can only be at the expense of
others and rivalry will be intense.
Intermittent Over-Capacity
• If an industry experiences periods of over-capacity, either
because demand fluctuates or beacuse economies of scale
require that additions to capacity are very large, rivalry will
tend to become more intense.
FACTORS WHICH DETERMINE THE DEGREE OF RIVALRY
Product differences, brand identity and switching costs for customers
• If an industry’s products are identical and there is no brand identity
and customers can change from one supplier to another without
incurring costs then customers will be very sensitive to price and the
demand for each firm’s product will be very highly elastic, as in
perfect competition.
Diversity of Competitors
• If rivals within an industry share objectives and goals and have
similar ‘corporate cultures’ and relationships with their parent
companies, then they will tend to think in similar ways, be able to
predict how each other will respond and agree on a impliciit set of
‘rules of game’.
FACTORS WHICH DETERMINE THE DEGREE OF RIVALRY
Corporate Stakes
• Rivalry will tend to be more intense if success in the industry
is of particular importance for the firms involved, either
because of its potential contribution to their profits, or
because it has some ategic value to them.
Capital Requirements
• In some industries, very large amounts of capital have to be
acquired if entry is to take place. Entry will often be
regarded as risky venture and investors will require high
returns in order to pursuade them to take that risk.
FACTORS OF THE THREAT OF NEW ENTRANTS
• PROPRIETATECHNOLOGY.
• ACCESS TO INPUTS.
• PROPRIETARY LEARNING EFFECTS.
• FAVOURABLE LOCATIONS.
Expected Retaliation
• In many industries the reaction of the established firms to
new entry is a key factor determining the entrant’s success.
If they are accommodating, an entrant has a greater
chanceof success. On thye ther hand, if they retaliate
aggressively through price-cutting ofr promotional
campaigns, the entrant will only be able to survive if it some
very strong advantages to compensate for its inexperinece
in the industry.
Government Policy
• In some industries, in some countries, government policy
stes up barriers to entry. At the extreme these involve
industrial licensing, wehere a firm has to have government
permission before setting up in an industry.
03 FIVE FORCES APPROACH
Price Sensitivity
• It is essentially the same concept as elasticity of demand,
although in the Poorter analysis no attempt is made to
quantify it.
Bargaining Leverage
• The extent to which buyers can exert bargaining leverage
also depends upon a fairly extensive list of factors.
Differentiation of Inputs
• If firms in an industry are dependent upon the
partilar variants of an input produced by indiviadual
suppliers, those suppliers will be relatively powerful.
• Neither of these factors is significant in caravans or
feedstock
Supplier Concentration
• Higher levels of concentration amongst suppliers will
tend to enhance their power, especially if suppliers
are more concentrated than buyers.