competitive forces shapes strategy

8/7/2019 competitive forces shapes strategy

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Group Members

Hafiz Ehtisham Ali l1s10mbam2031Tauseef Ahmad l1s10mbam2013Ali Raza Shamsi l1s09mbam2099Waleed Shahzad Chawla l1s10mbam2001Sajab Khan l1s10mbam2181Salman Ahmad l1s10mbam0206Mirza Furqan Baig l1s10mbam0032


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THE FIVECOMPETITIVEFORCES THAT

SHAPE

STRATEGY


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INTRODUCTION

Intense forces:-airline, textile

Benign forces:-software, soft drinks

Understanding competitive forces:-


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Presentation Portions

F orces that shape competitionThreats of substitutes and rivalry among existingcompetitorsF actors, not forcesChanges in industry structureImplications for strategyPosition of the companyDefining the relevant industry


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TauseefTauseef Ahmad Ahmad


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FORCES THAT SHAPE COMPETITIONFORCES THAT SHAPE COMPETITION


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THREATS OF ENTRYTHREATS OF ENTRY

N ew entrants to an industry bring new capacity and desire to gainmarket share that puts pressure on prices, cost, and the rate of

investment necessary to compete.

The threats of entry puts a cap on the profit potential of an industry.

The threats of entry in an industry depends in the height of entry barriers that are present and on the reaction entrants can expectfrom incumbents.


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BARRIERS TO ENTRY BARRIERS TO ENTRY

Entry barriers are advantages that incumbents have relative tonew entrants.

SupplySupply--sideside economieseconomies of of scalescale..DemandDemand sideside benefits benefits of of scalescale..CustomersCustomers switchingswitching costscosts..CapitalCapital requirementsrequirements. .IncumbencyIncumbency advantagesadvantages independentindependent of of sizesize..

unequalunequal accessaccess toto distributiondistribution channelschannelsRestrictiveRestrictive governmentgovernment policy policy. .


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THE POWER OF SUPPLIERSTHE POWER OF SUPPLIERS

P owerful suppliers capture more of the value for themselves bycharging higher prices, limiting quality or services, or shifting costs

to industry participants.A supplier group is powerful if :-

ItIt isis moremore concentratedconcentrated thanthan thethe industryindustry itit sellsell toto..TheThe supplier supplier groupgroup doesdoes notnot dependdepend heavilyheavily onon thethe industryindustry for for itsits revenuesrevenues..IndustryIndustry participants participants faceface switchingswitching costscosts inin changingchanging supplierssuppliers. .


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THE POWER OF BUYERSTHE POWER OF BUYERSP owerful customers can capture more value by forcing down

prices, demanding better quality or more services and generally playing industry participants off against one another, all theexpense of industry profitability.A customer group has negotiating leverage if:-

ThereThere areare fewfew buyers, buyers, or or eacheach oneone purchase purchase inin volumesvolumes thatthat areare largelarge relativerelativetoto thethe sizesize of of aa singlesingle vendor vendor..TheThe industryindustry products products areare standardizedstandardized or or undifferentiatedundifferentiated. .

BuyersBuyers faceface fewfew switchingswitching costscosts inin changingchanging vendorsvendors..SuppliersSuppliers offer offer products products thatthat areare differentiateddifferentiated. .


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THE POWER OF BUYERSTHE POWER OF BUYERS

A buyer group is price sensitive if:A buyer group is price sensitive if:- -

The product it purchases from the industry represents aThe product it purchases from the industry represents asignificant fraction of its cost structure or procurement budget.significant fraction of its cost structure or procurement budget.The quality of buyers products or service is little affected by theThe quality of buyers products or service is little affected by theindustrys product.industrys product.

The industry product has a little effect on the buyers other The industry product has a little effect on the buyers other costs.costs.


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HafizHafiz EhtishamEhtisham Ali Ali


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The threats of substituteThe threats of substitute

The threat of a substitute is high if:-

It offer an attractive price performance tradeIt offer an attractive price performance trade- -off tooff to

the industrys product.the industrys product.The buyers cost of switching to the substitute isThe buyers cost of switching to the substitute islow.low.


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Rivalry among existing competitorsRivalry among existing competitors

The intensity of rivalry is greatest if:The intensity of rivalry is greatest if:- -

Competitors are numerous or are roughly equal in size and power.Competitors are numerous or are roughly equal in size and power.Industry growth is slow.Industry growth is slow.Exist barriers are high.Exist barriers are high.Rivals are highly committed to the business and have aspirationsRivals are highly committed to the business and have aspirationsfor leadership.for leadership.


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Rivalry among existing competitorsRivalry among existing competitors

P rice competition is most liable to occur if:-

P roducts or services of rivals are nearly identical andP roducts or services of rivals are nearly identical andthere are few switching costs for buyers.there are few switching costs for buyers.Fixed costs are high and marginal costs are low.Fixed costs are high and marginal costs are low.

Capacity must be expanded in large increments to beCapacity must be expanded in large increments to beefficient.efficient.The product is perishable.The product is perishable.


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ALI RAZA ALI RAZA


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F actors not forcesF actors not forces

Industry growth rate:Industry growth rate:- - A common mistake is to assume that fast A common mistake is to assume that fast- -growinggrowingindustries are always attractive.industries are always attractive.

F ast growth can put suppliers in a powerful position, andF ast growth can put suppliers in a powerful position, andhigh growth with low entry barriers with draw inhigh growth with low entry barriers with draw inentrants.entrants.

Technology and innovation:Technology and innovation:- -advance technology or innovations are not by themselvesadvance technology or innovations are not by themselvesenough to make an industry structurally attractive.enough to make an industry structurally attractive.


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F actors, Not forcesF actors, Not forces

GovernmentGovernment: :--governmentgovernment isis notnot best best understoodunderstood asas aa sixthsixth forceforce because because governmentgovernmentinvolvementinvolvement isis neither neither inherentlyinherently goodgood nor nor bad bad for for industryindustry profitability profitability. .

governmentgovernment operatesoperates atat multiplemultiple levelslevels andand throughthrough manymany differentdifferent policies, policies, eacheachof of whichwhich willwill affectaffect structurestructure inin differentdifferent waysways..

C omplementaryC omplementary productsproducts andand servicesservices: :--ComplementsComplements areare products products or or servicesservices usedused together together withwith anan industry'sindustry's product product..ComplementsComplements arisesarises whenwhen thethe customer customer benefits benefits of of twotwo products products combinecombine isisgreater greater thanthan thethe sumsum of of eacheach product product valuevalue inin isolationisolation. .ComplementsComplements cancan be be importantimportant whenwhen theythey affectaffect thethe overalloverall demanddemand for for ananindustrysindustrys product product..


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WaleedWaleed ChawlaChawla


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Changes in industry structure

Shift in structure may emanate from outside and industry or

from within they can boost the industry profit potential or alsoreduce it they may be caused by changes in technologychanges in customer needs or other events.


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Shifting threatShifting threat of new entrantsof new entrantsF irm in an industry try to keep the number of new entrants low byerecting barriers to new entry.(Barrier) to entry is a condition that creates a disincentive for a new

firm to enter an industry. e.g.capitalcapital requirement requirement government andgovernment and legallegal barriersbarriers

e.g. such as wall Mart, K Mart begin to adopt newe.g. such as wall Mart, K Mart begin to adopt newprocurements, distributions and inventory controlprocurements, distributions and inventory control

technologies with large fix costs including automatedtechnologies with large fix costs including automateddistribution centers, bardistribution centers, bar- -coding and point of sale terminals.coding and point of sale terminals.These investments increased economic of scale and madeThese investments increased economic of scale and madeit more difficult for small retailers to enter the business.it more difficult for small retailers to enter the business.


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c hangingc hanging power of supplierspower of suppliersSuppliers can suppress the profitability of the industries to whichthey sell by raising prices and reducing the quality of component they required.If supplier reduces quality of component the quality of finishedgoods also suffers and manufacturer will eventually have to low itsprice.F actors that have an impact on ability of suppliers to exert

pressured on buyers.Suppliers c on c entration

When there are only few suppliers that supply a critical product to alarge number of buyers the supplier has an advantage

Swit c hing c ostIt is a fixed cost that buyers encountered when switching orchanging from one supplier to other and if switching cost arehigh a buyer will be less likely to switch supplier.


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c hangingc hanging power of power of buyerbuyerBuyer can also suppress the profitability of the industries which theypurchase by demanding price concession or increase in qualitye.g. automobile industry is dominated by a handful of largecompetition that buy products from thousand of suppliers indifferent industries this allows the automakers to suppress theprofitability of the industries from which they buy the demanding

price reductionsB uyers group c on c entrationB uyers group c on c entration

When there are only a few large buyer and they buy from a largenumber of suppliers they can pressure the supplier to lower cost.

Threat of ba ck wardThreat of ba ck ward integrationintegrationThe power of buyer enhanced if there is a credible threat that buyermight enter the suppliers industry.


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Shifting threatShifting threat of of substitutessubstitutes: :

The most common reason is the substitutes become more orless threatening overtime is that advances in technologycreates new substitutes or shift price performance comparison

in one direction or the other.Earliest microwave ovens were large and priced about 2000dollars making them poor substitutes for conventional ovenswith technological advances, they become serious substitutes.


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New basis of rivalry:

New basis of rivalry:

In most industries the major determinant of industry profitability isthe level of competition among existing firms

The nature of rivalry in an industry is altered by mergers andacquisitions that introduces new capabilities and also ways of competing. Or technology innovation can reshape rivalry.

In some industries, companies turns to merger and consolidation

not to improve cost and quality but to attempt to stop intensecompetition.


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SajabSajab khankhan


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Strategy:Strategy:TheThe objectiveobjective of of aa strategicstrategic planplan isis toto set set thethe directiondirection of of aa businessbusiness andand createcreate itsitsshapeshape soso that that thethe productsproducts andand servicesservices it it

providesprovides meet meet thethe overalloverall businessbusinessobjectivesobjectives. .

Strategy Implementation:Strategy Implementation:

A process by which strategies and A process by which strategies andpolicies are put into action through thepolicies are put into action through thedevelopment of programs, budgets,development of programs, budgets,and procedures.and procedures.


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Why I need:Why I need: A A strategy,strategy, simplysimply defined,defined, isis aa plan,plan, oror seriesseriesof of plans,plans, forfor obtainingobtaining aa specificspecific goalgoal nothingnothingmore,more, nothingnothing lessless

The implementation is aggregated Gap :The implementation is aggregated Gap :StructureStructureSystemSystemCultureCultureEthicsEthicsLeadershipsLeaderships

Which is more important Which is more important


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Strategy makes at initial StagesStrategy makes at initial Stagesfor an organizationfor an organization

Developing strategyDeveloping strategyCompany strength & weaknessCompany strength & weaknessCreate a new industry structure who is the most Create a new industry structure who is the most

favorablefavorable

Average profitability Average profitabilityNormally there are three steps taken it Normally there are three steps taken it


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SalmanSalman Ahmad Ahmad


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Position of the company:Position of the company:

Positioning opportunitiesPositioning opportunities

Built the regulate standardBuilt the regulate standardProvide the best carriage servicesProvide the best carriage services

Economic dependence on theEconomic dependence on the

product product


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Exploiting Industrial change:Exploiting Industrial change:

New strategy positionNew strategy position

Exchange of promotion of new artistsExchange of promotion of new artists

Structural change open up new needsStructural change open up new needs

and new ways to serve existingand new ways to serve existingneedsneeds


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Shaping Industry structure:Shaping Industry structure:Redividing profitability in favor of incumbentsRedividing profitability in favor of incumbents

Expanding the profit Expanding the profit

Currently constrain industry profitabilityCurrently constrain industry profitability

Strong management Strong management


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MirzaMirza F urqanF urqan BaigBaig


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Defining the relevant industries

The industry in which competition actually takesplace is important for good industry analysis, not to

mention for developing strategy and setting

business unit boundariesMany strategy errors emanate from mistaking

the relevant industry.

Defining it too broadly or too narrowly.


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Defining it too broadly obscures differences amongproducts, customers or geo and graphic regions

that are important to competition, strategicpositioning and profitability.

Defining the industry too narrowly overlooks

commonalities and linkages across related productsor geographic markets that are crucial tocompetitive advantage.

Strategists must be sensitive to thepossibility that industry boundaries

can shift.


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The boundaries of an industry consist of twodimensions.

Scope of products or servicese.g. is motor oil used in cars, part of the same

industry, as motor oil used in heavy trucks andstationary engines, or are these different industries?


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Geographic scope

Most industries are present in many parts of the world.However, is competition contained with each state, or is itrational? Does competition take place within regions suchas Europe or North America, or is there a single globalindustry?


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The five forces are the basic tool to resolvethese questions.

If industry structure for two products is the sameor very similar (that is, if they have the same

buyers, suppliers, barriers to entry, and so forth),then the products are best treated as being part of the same industry.

If the industry structure differs markedly,however, the two products may be best understood as separate industry.


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In lubricants, the oil used in cars is similar or even

identical to the oil used in trucks,But the similarity largely ends there.

Automotive motor oil is soldto fragmented , generally unsophisticatedcustomersthrough powerful channels,

using extensive advertising.


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Truck and power generation lubricants are soldto different buyersusing a separate supply chain.

Industry structure (buyers power, barriers to entry,and so forth) is substantially different.

Automotive oil is thus a distinct industry from oilfor truck and stationary engine uses.

Industry profitability will differ in these two cases,and lubricant company will need a separatestrategy for competing each area.


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If an industry has a similar structurethe presumption is that competition is global.

A single global strategy is needed.

If an industry has different structures in different geographic regions, however, each region may willbe a distinct industry.


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A rule of thumb is that where the differencesin any one force are large, and where thedifferences involve more than one force,distinct industries may well be present.


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In the early days of the personal computer

industry, for instance, IBM tried to make up for itslate entry by offering an open architecture that would set industry standards and attract complementary makers of application software andperipherals.

In the process, it give ownership of the criticalcomponents of the PC __ the operating systems and the

microprocessor___ to Microsoft and Intel.


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By standardizing PCs, it encouraged price based

rivalry and shifted power of suppliers.Consequently, IBM became the temporarilydominant firm in an industry with unattractivestructure.


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ConclusionExpanding the profit poolOverall demand growsIndustry s quality level is highintrinsic costs are reduced

e.g. soft drink producers rationalized their bottler networks to makeefficient and effective , both the soft drink companies and thebottler benefited.

The most successful companies are those that expand the industryprofit pool in ways by keeping view the competitive forces that allow

them to share disproportionately in the benefits.


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THANK YOU


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competitive forces shapes strategy

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