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Strategy Formulation & Implementation Session 6 & 7

Strategic Analysis Frameworks SWOT is a very basic tool

Ansoff Matrix is focussed on products and markets BCG Matrix has severe limitations with the

increasing complexity of business. No consideration

Prof Lalit Kumar Pahwa FLAME School of Business01 Oct 2010

of PEST factors P - Political

E Economic

S Social

T Technological

No alignment with Organisation competencies

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Strategic Analysis Frameworks

Five Forces Model developed by Michael

Porter in 1979 is inclusive , emergent, andfocussed on competitive advantage

Prof Lalit Kumar Pahwa FLAME School of Business01 Oct 2010

Strategy Maps developed by Robert Kaplan

and David Norton also inclusive, deliberate,

useful in a grand or corporate strategydevelopment

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Porters Five Forces Model underlying principle

In essence, the job of the strategist is to understand and

cope with competition. Often, however, managers definecompetition too narrowly, as if it occurred only among

todays direct competitors. Yet competition for profits

Prof Lalit Kumar Pahwa FLAME School of Business01 Oct 2010 3

goes beyond established industry rivals to include four

other competitive forces as well: - customers, suppliers,

potential entrants, and substitute products.

The extended rivalry that results from all five forces

defines an industrys structure and shapes the nature of

competitive interaction within an industry.

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Porters Five Forces that shape industry competition

Rivalry

Threat ofnew

entrants


amongstexisting

competitors

Bargainingpower ofBuyers

Threat ofsubstituteproducts

Bargainingpower ofsuppliers

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Porters Five Forces Model The Porter's 5 Forces tool is a simple but powerful tool

for understanding where power lies in a business

situation. It helps in understanding, both the strengthof current competitive position, and the strength of a

position a company is looking to move into.


The model is inclusive it considers forces outside the

immediate vicinity that impact the competitive

landscape and hence the organisation

The model is emergent it has the flexibility to

analyse and reshape strategy as these forces change

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Porters Five Forces Model

Understanding the competitive forces, and their

underlying causes, reveals the roots of an industryscurrent profitability

The model provides a framework for anticipating and


influencing competition (and profitability) over time. Understanding industry structure is essential to

effective strategic positioning.

With a clear understanding of where power lies, onecan take fair advantage of a situation of strength,

improve a situation of weakness, and avoid taking

wrong steps

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Porters Five Forces Model

The model is focussed on Competitive Advantage

Competitive Advantage is the central theme ofPorters five forces model.

The configuration of five forces differs by industry


and the intensity of their impact on an organisation Defending against the competitive forces and

shaping them in a companys favor are crucial to

strategy.

The strongest of Five forces determines the industry

profitability

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The five forces - examined

Threat ofnew

entrants


va ry amongstexisting

competitors

Bargainingpower of

Buyers



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Rivalry amongst existing competitors

The core force


va ry amongstexistingcompetitors

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Rivalry amongst existing competitors - the core force Rivalry amongst existing competitors is the basic and

in most cases the dominant force at work in a free

market Industry sectors characterised by numerous players

havin similar size have the fiercest com etitive activit


Competitive rivalry manifests in price discounts,

aggressive campaigns, new product introductions,

service improvements

Gaining market-share is the dominant theme

Strategic response is usually reactive it trails

competition

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Rivalry amongst existing competitors High rivalry limits the profits of an industry

Rivalry is very high when the industry growth is low

mature industries

Excess capacities, high exit barriers also result in


Divisions of larger companies may participate in an

industry for image reasons or to offer a full line and

gain market-share in other products while offering

intense competition and price cutting in a non-core

segment

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Rivalry amongst existing competitors An important aspect of rivalry is whether rivals

compete on the same dimensions. When all or many

competitors aim to meet the same needs or competeon the same attributes, the result is zero-sum

competition. Here, one firms gain is often anothers


loss, driving down profitability. Competition on dimensions other than priceon

product features, support services, delivery time, or

brand image, for instanceis less likely to erodeprofitability because it improves customer value and

can support higher prices

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Rivalry amongst existing competitors Examples

Airlines

Automotive cars / two wheelers

Mobile telephony

Consumer durables


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Bargaining power of Buyers

Rivalry


amongstexistingcompetitors

power ofBuyers

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Bargaining power of Buyers Buyers are powerful if they have negotiating leverage

higher than industry participants. They drive down

prices and impact not only the profitability of individualvendors but of the whole industry

Man industrial roducts B2B se ments of the market


show the influence of this force Few large volume buyers, particularly if the procured

item forms a significant fraction of their total cost.

Low entry barriers, high fixed costs, specialised

products catering to a specific industry

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Bargaining power of Buyers Examples

Auto component

Defence

Railwa s


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Bargaining power of suppliers

Rivalry



arga n ng

power ofBuyers

arga n ng

power ofsuppliers

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Bargaining power of Suppliers

Suppliers are more concentrated than the buyers few

suppliers vis--vis many buyers

Monopoly situations, Cartels, specialised products /services, patents, unions


, ,

pricing

Heavy dependence of buyer group on suppliers, high

cost of switching.

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Bargaining power of Suppliers

Examples

Oil (Fuel ) marketing companies

Coal Authority of India Ltd

Power Industr


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Threat of new entrants

Threat ofnew

entrants


Rivalryamongstexisting

competitors Bargainingpower of

Buyers


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New entrants to an industry bring new capacity and a

desire to gain market share that puts pressure on prices

The threat of entry in an industry depends on theheight of entry barriers


The industry is fragmented smaller players

Low technology. Low investment

Low differentiation between competing products

Large and growing market

Low customer switching costs

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Examples

Consumer Durables

Housing / Real Estate

Food & Restaurant business


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Threat of substitutes

Rivalry

Threat ofnew

entrants



Bargaining

power ofBuyers


Bargaining

power ofsuppliers

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Substitutes like other forces can significantly reduce

profitability of an industry and even dramatically eliminate

whole industry sectors

Normally this threat arises from challengers rather than

incumbents


The threat of substitutes is high when :

Industry capacity is less than demand

Cost of products is much higher than what the customer can afford

Government regulation

Technology shifts, environmental reasons

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Examples

Gold and Real Diamond (Expensive) Jewellery

Landline phones or fixed (wired) communication devices


l i & l i i &

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The five forces - revisited

Rivalry

Threat ofnew

entrants



Bargaining

power ofBuyers


Bargaining

power ofsuppliers

St t F l ti & I l t ti S i 6 & 7

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Porters Five Forces - revisited

Industry structure, as manifested in the strength of the five

competitive forces, determines the industrys long-run profit

potential

It determines how the economic value created by the industry

is divided between companies in the industry versus by


customers and suppliers, limited by substitutes, orconstrained by potential new entrants.

By considering all five forces, a strategist keeps overall

structure in mind instead of gravitating to any one element.

The strategists attention remains focused on structural

conditions rather than on fleeting factors

St t F l ti & I l t ti S i 6 & 7

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Porters Five Forces additional factors

High growth does not necessarily mean higher profit. Rapid

growth can make suppliers very strong or make the industry

attractive for many new entrants both will restrictprofitability

High technology or specialised products are no guarantee for


high profits. Mundane technology sectors with cost-sensitivecustomers, and threat of substitutes can keep profitability in

check.

Availability or lack of complementary products or services can

seriously hamper the profitability of an industry


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The five forces some examples

Rivalry

Threat ofnew

entrants

Restaurants

Consumer

durablesAutomotive

- cars, two

wheelers



Bargaining

power ofBuyers


Bargaining

power ofsuppliers

Jewellery

FuelPower

Defence

equipment


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Some simple questions to ask before attempting

to formulate strategy

How attractive is this industry?

As an existing player in the industry, whatshould your strategy be to achieve profitable


If you are not in this marketplace should you

enter?

If yes, what should your strategy be?


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Assignment

Analyse your companys competitive position in the market

using Porters five force model.

Identify the dominant force(s) acting on the company and


competitive position. Assignment to be submitted by Monday 04 Oct 2010

Preferably in .docx or .pptx format.

sfi 2010 -session 6 & 7

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