lecture 7 - industry analysis (2)

8/8/2019 Lecture 7 - Industry Analysis (2)

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Industry Structural Analysis:Industry Structural Analysis:

The Five Forces model.The Five Forces model.

Lecture SevenLecture Seven


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The Aims of this SessionThe Aims of this Session

Explore means ofinterpreting the businessExplore means ofinterpreting the business

environment.environment.

Examine the 5 Forces that make up PortersExamine the 5 Forces that make up Portersmodelofindustry analysis.modelofindustry analysis.

Link to the drivers emergingfrom theLink to the drivers emergingfrom the

Environmental Analysis.Environmental Analysis.


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Industry AnalysisIndustry Analysis

Buildingon the themes explored in the EnvironmentalBuildingon the themes explored in the EnvironmentalAnalysis the focus is narrowed to the Industry inwhichAnalysis the focus is narrowed to the Industry inwhichthe business operates.the business operates.

In manyways this focus is more common as it relatesIn manyways this focus is more common as it relatesto the more dayto the more day--toto--day aspects ofmanagement.day aspects ofmanagement.

However, from a strategic perspective industry analysisHowever, from a strategic perspective industry analysisis looking at the present but also theway that theis looking at the present but also theway that the

industry is shaping.industry is shaping. At the heart ofthe analysis is the Balance ofPower inAt the heart ofthe analysis is the Balance ofPower in

each ofthe forces.each ofthe forces.

Is the Business in a weakor strongposition?Is the Business in a weakor strongposition?


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Potentialentrants

Threat of

entrants

BuyersSuppliers

Bargaining

power

Bargaining

power

Substitutes

Threat of

substitutes

COMPETITIVE

RIVALRY

Source: Adapted from M.E. Porter, Competitive Strategy, Free Press, 1980, p.4. Copyright by the Free Press, a division of Macmillian Publishing Co., Inc. Reproduced with

permission

Five forces analysis

P E

E T

S

L


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FIVE FORCES ANALYSIS (1)FIVE FORCES ANALYSIS (1)

The threat of entry ...The threat of entry ...

Dependent on barriers to entry such as:Dependent on barriers to entry such as:

economies of scaleeconomies of scale

capital requirements of entrycapital requirements of entry access todistribution channelsaccess todistribution channels

cost advantages independent of sizecost advantages independent of size

(e.g. the experience curve)(e.g. the experience curve)

expected retaliationexpected retaliation

legislation or government actionlegislation or government action

differentiationdifferentiation


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Buyer power is likely to be highwhen:Buyer power is likely to be highwhen:

there is a concentration of buyersthere is a concentration of buyers

there are many smalloperators in the supplyingthere are many smalloperators in the supplying

industryindustry there are alternative sources of supplythere are alternative sources of supply

components or materials are a high percentage ofcomponents or materials are a high percentage of

cost to the buyer leading to shopping aroundcost to the buyer leading to shopping around

switching costs are lowswitching costs are low

there is a threat of backward integrationthere is a threat of backward integration


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Supplier power is high when:Supplier power is high when:

there is a concentration of suppliersthere is a concentration of suppliers

switching costs are highswitching costs are high the supplier brand is powerfulthe supplier brand is powerful

integration forward by the supplier is possibleintegration forward by the supplier is possible

customers are fragmented and bargainingcustomers are fragmented and bargainingpower lowpower low


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Threat of substitutesThreat of substitutes

Substitutes take different forms:Substitutes take different forms:

product substitutionproduct substitution substitution of needsubstitution of need

generic substitutiongeneric substitution

doingwithoutdoingwithout


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Competitive Rivalry is highwhen:Competitive Rivalry is highwhen:

entry is likelyentry is likely

substitutes threatensubstitutes threaten

buyers or suppliers exercise controlbuyers or suppliers exercise control competitors are in balancecompetitors are in balance

there is slowmarket growththere is slowmarket growth

global customers increase competitionglobal customers increase competition

there are high fixed costs in an industrythere are high fixed costs in an industry

markets are undifferentiatedmarkets are undifferentiated

there are high exit barriersthere are high exit barriers


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FIVE FORCES ANALYSIS: KEYFIVE FORCES ANALYSIS: KEY

QUESTIONS AND IMPLICATIONSQUESTIONS AND IMPLICATIONS

What are theWhat are the key forceskey forcesat work in the competitiveat work in the competitive

environment?environment?

Are thereAre there underlyingforcesunderlyingforcesdriving competitive forces?driving competitive forces?

Will competitiveWill competitiveforcesforceschange?change?

What are theWhat are the strengths andweaknessesstrengths andweaknessesof competitors inof competitors in

relation to the competitive forces?relation to the competitive forces?

CanCan competitive strategycompetitive strategyinfluence competitive forces (e.g.influence competitive forces (e.g.

by building barriers to entryor reducing competitiveby building barriers to entryor reducing competitive

rivalry)?rivalry)?


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Considerations in using the Five ForcesConsiderations in using the Five Forces

The focus should be at theThe focus should be at the SBUSBU level not thelevel not the

corporatecorporate

Understand

Understandconnectionsconnectionsbetween forcesbetween forces

It is dangerous to consider the forces asIt is dangerous to consider the forces as separateseparate

from each otherfrom each other

Behaviour may come from

Behaviour may come from disruptingdisruptingthe forcesthe forces

The model should not be seen as aThe model should not be seen as a staticstaticpicturepicture

Are there more forces?Are there more forces?


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Potentialentrants

Threat of

entrants

BuyersSuppliers

Bargaining

power

Bargaining

power

Substitutes

Threat of

substitutes

COMPETITIVE

RIVALRY

Source: Adapted from M.E. Porter, Competitive Strategy, Free Press, 1980, p.4. Copyright by the Free Press, a division of Macmillian Publishing Co., Inc. Reproduced with permission

Extended Five forces analysis

The Environment

lecture 7 - industry analysis (2)

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