Chapter 16 - Strategic Elements of Competitive Advantage

o Michael Porter developed a ___________ on competition

five forces model

Industry

group of firms that produce products that are close substitutes for each other

(Porter's Force 1: Threat of New Entrants: Barriers to Entry) Advantages independent of scale economies

Examples include proprietary technology, well-established brands, prime locations, and access to distribution channels

Porter's Five Forces

Threat of New Entrants Supplier Bargaining Power Internal Competition (Rivalry) Threat of Substitutes Customer Bargaining Power

If threat of entry increases

profitability drops because price decreases and costs increase

if buyer power increases

profitability drops because price decreases and costs increase

if rivalry increases

profitability drops because price decreases and costs increase

(Porter's Force 1: Threat of New Entrants: Barriers to Entry) Government policy

Are there regulations in place that restrict competitive entry?

Porter's Force 3: Bargaining Power of Buyers

Buyers=manufacturers and retailers, not consumers Buyers seek to pay the lowest possible price Buyers become powerful when: - They purchase in larger (enhances supplier dependence on buyer) - Products are standardized - Buyer has a lot of information - Buyer is willing and able to achieve backward integration

Porter's Force 2: Threat of Substitute Products

Functional similarity (e.g., tax preparation software is a substitute for a professional tax preparer such as H&R Block). Some goods have more substitutes than others. Some goods don't have substitutes (e.g., prescription drugs). Substitutes put a cap on industry profitability

Porter's Force 5: Rivalry Among Competitors

How to assess the intensity of rivalry? - The number of competitors and their sizes - Slow growth provokes battles over market share - High exit barriers prevent companies from leaving the industry - Rivals are irrationally committed to the business; that is, financial performance is not the overriding goal

Competitive Advantage

Measured relative to industry rivals Competitive advantage exists when there is a match between a firm's distinctive competencies and the factors critical for success within its industry. Porter's generic strategies to achieve competitive advantages: Low cost Differentiation (products or services perceived to be unique and valued by consumers, often accompanied with a premium price) Recall Value = Benefits / Price

if supplier power increases

profitability drops because costs increase

Porter's Force 4: Bargaining Power of Suppliers

Powerful suppliers will charge higher prices or insist on more favorable terms. The power of suppliers includes labor (i.e., your employees) Leverage accrues when: - Suppliers are larger and few in number - Supplier's products are critical (the industry needs them more than they need the industry) - Supplier's products are highly differentiated - Supplier's products are carrying switching costs - Supplier is willing and able to achieve forward integration

(Porter's Force 1: Threat of New Entrants: Barriers to Entry) Capital requirements

Required investment for manufacturing, R&D, advertising, field sales and service, etc.

(Porter's Force 1: Threat of New Entrants: Barriers to Entry) Product differentiation

The extent of a product's perceived uniqueness

(Porter's Force 1: Threat of New Entrants: Barriers to Entry) Switching costs

Will customers incur any switching costs in moving from one supplier to another? High switching costs causes higher barrier to entry.

if substitutes increase

profitability drops because price decreases

(Porter's Five Forces Model) buyers

bargaining power of buyers

(Porter's Five Forces Model) suppliers

bargaining power of suppliers

(Porter's Force 1: Threat of New Entrants: Barriers to Entry) Existing firms with significant ________ make new entrants difficult to compete

economies of scale

(Porter's Five Forces Model) the industry

rivalry among existing firms

(Porter's Five Forces Model) substitutes

threat of substitute products

(Porter's Five Forces Model) potential entrants

treat of new entrants