LOS Exam 1: Porters Five Forces

Porter's Positioning

Find ways to mitigate greatest five forces threats

Threat of Substitutes (Definition)

Performs the same or similar function as an industry's product but by a different means.

Product Expense

Power of Buyers Percentage of buyer's budget product consumes. Power high when product high portion of budget. Ex. Home Mortgages

Exit Barriers

Rivalry Among Existing Competitors Costs with exiting the industry. Rivalry fierce when exit barriers high. Ex. Airline industry.

Buyer Switching Costs

Rivalry Among Existing Competitors Fixed costs associated with switching product. Rivalry fierce when switching costs low. Ex. Office supplies

Industry Growth

Rivalry Among Existing Competitors Industry growth or decline. Rivalry fierce if industry declining Ex. Music Industry

Power of Supplier (Definition)

Suppliers can exert bargaining power by raising prices and shifting costs downstream

Threat of Substitutes (Factors)

2 factors: industry producing substitutes profitability, substitute price/performance

Power of Suppliers (Factors)

6 Factors: supplier concentration, substitute availability, supplier forward integration, supplier switching costs, product differentiation, supplier dependence

Rivalry Among Existing Competitors (Factors)

7 Factors: Number of Competitors, Industry Growth, Fixed Cost Percentage, Storage Cost, Product Differentiation, Buyer Switching Costs, Exit Barriers

Threat of Entry (Factors)

7 Factors: Supply-side economies of scale, demand side benefits of scale, customer switching costs, capital requirements, incumbency advantages independent of size, unequal access to distribution channels, restrictive government policy

Power of Buyers (Factors)

7 factors: buyer concentration, product differentiation, buyer integration, buyer product knowledge, product expense, product quality, buyer switching cost

Defend Against Competition

Neutralize unfavorable elements, reinforce favorable position, anticipate industry shifts

Ways to Use 5 Forces Model

Positioning, industry evolution, assess profitability, industry transformation, forecast future prices, defend against competitive forces

Buyer Integration

Power of Buyers Ability to backward integrated product. Power high when backward integration possible. Ex. Coca-Cola and Bottlers

Product Quality

Power of Buyers Amount of impact that the industry's product has on buyer's product. Power high when industry impact is minimal. Ex. Office supplies

Buyer Concentration

Power of Buyers Buyer concentration. Power high when buyers highly concentrated and buy in bulk Ex. Military Operations

Buyer Product Knowledge

Power of Buyers Buyers able to determine production costs. Power high when buyers know actual production costs. Ex. Wine in restaurants

Product Differentation

Power of Buyers Industry products and their unique qualities. Power high when product is undifferentiated. Ex. Overnight Mail Services

Product Differentiation

Power of Suppliers Availability of differentiated products. Power high when products are differentiated Ex. Higher Education Institutions

Substitute Availability

Power of Suppliers Other suppliers able to provide products. Power high when no substitutes available. Ex. Pilots unions and Internet Provides

Supplier Dependence

Power of Suppliers Profit dependence on industry. Power high when industry is a small portion of supplier business. Ex. Hotels (business trips, conferences, and individual customers)

Supplier Forward Integration

Power of Suppliers Supplier able to entry industry on own. Power high when supplier can forward integrate. Ex. Amazon - delivery service

Supplier Concentration

Power of Suppliers Supplier group concentration vs. industry concentration. Power high when suppliers are more concentrated. Ex. Electronic operating systems

Supplier Switching Costs

Power of Suppliers Switching costs associated with changing suppliers. Power high when switching costs high. Ex. CRM software

Number of Competitors

Rivalry Among Existing Competitors Number of competitors within industry. Rivalry fierce if large number. Ex. Corn industry

Fixed Costs

Rivalry Among Existing Competitors Percentage of industry fixed costs and marginal costs low. Rivalry fierce if fixed costs high Ex. Airline industry

Product Differentiation

Rivalry Among Existing Competitors Product qualities. Rivalry fierce when product undifferentiated. Ex. Bulk Retailers (Sams vs. Costco)

Storage Costs

Rivalry Among Existing Competitors Storage costs for the product. Rivalry fierce when storage costs high. Ex. Perishable foods. Need specific storage environment

Porter's Five Forces

Rivalry of Existing Competitors, Threat of New Entrants, Threat of Substitutes, Bargaining Power of Buyers, Bargaining Power of Suppliers

Demand-side benefits of scale

Threat of Entry "Network effects" Willingness to pay increases with number of other interested buyers. Threat high when product undifferentiated ex. Fashion Industry

Unequal Access to Distribution Channels

Threat of Entry Companies must secure distribution channels. Threat high when incumbents don't control distribution channels. Ex. Department Stores

Capital Requirements

Threat of Entry Financial investment necessary to compete. Threat high when capital requirements low Ex. Blogs

Supply-side economies of scale

Threat of Entry Firms that produce large volumes enjoy lower costs per unit. Threat high when economies of scale low. ex. Wheat industry

Customer Switching Costs

Threat of Entry Fixed costs the buyer faces when they change suppliers. Threat high when switching costs low Ex. Office Products

Restrictive Government Policy

Threat of Entry Government can limit entry through license requirements, patent protection, or access to raw materials. Threat high when government doesn't subsidize incumbent, or regulate entry. Ex. Industry brokerages

Incumbency Advantages Independent of Size

Threat of Entry Incumbent companies may have cost of quality advantages not available to potential rivals. Threat high when incumbent lack proprietary knowledge (patents). Ex. Milk

Industry Producing Substitutes Profitability

Threat of Substitutes Industry profitability. Threat high when industry is profitable and competition is eroding Ex. Hospitals

Substitute Price/Performace

Threat of Substitutes Measure substitute price and performance. Threat high when substitute is improving its price/performance relationship. Ex. Free email services

5 Forces Limitations

View other parties only as potential threats, no alliances possible. Only for analyzing industries or markets, not individual companies. Provides no guidance on weight of various factors or forces.

Industry transformation

Identify ways to change product to company's advantage (differentiate product, new economies of scale, consolidate industry, new distribution channels)

Power of Buyer (Definition)

Customers can force competitors to play against each other and force prices down.

Power of Buyers (High)

Bad industry to enter. Buyers have large negotiating power and are not dependent on industry for goods.

Rivalry Among Existing Competitors (Fierce)

Bad industry to enter. Lots of competition and potential lower markets.

Threat of Substitutes (High)

Bad industry to enter. Substitutes available and limit industry's profitable.

Power of Suppliers (High)

Bad industry to enter. Supplier group is powerful and not dependent on industry for success.

Threat of Entry (High)

Bad industry. Easy industry to for new entrants to enter

Access Profitability

Current and future profitability. Analyze market segments, locations, and supply chains

Rivalry Among Existing Competitors (Definition)

Direct competition within industry. Depends on basis of competition and intensity of competition

Threat of Entry (Definition)

Entrants bring new capacity and desire to gain market share. Lower available profitability.

Value of Porters's Five Forces

Factors that affect profitability in the long run, provide framework for anticipating and influencing changes in industry competition

Forecast Future Prices

Forecast future prices, costs and profits when considering market entry or exit

Industry Evolution

anticipate and prepare for changes in the 5 forces