HOW COMPETITIVE FORCES

SHAPE STRATEGY
By Michael E. Porter
 Forces governing competition in an industry
• The nature and degree of competition in an industry hinge on five forces:-
 The threat of entry
 The bargaining power of customers The collective strength
of these forces
 The bargaining power of suppliers determines the ultimate
 The threat of substitute products profit potential of an
industry
 The jockeying among current competition
 Power Suppliers & Buyers
• The power of each important supplier or buyer group depends on a number
of characteristics of its market situation and on the relatives importance of
its sales or purchase to the industry compared with its overall business.
 A supplier group is powerful if:
• Dominated by few companies/ or supply unique product
• No obligation to compete with other products.
• Poses credible threat of forward integration/ or industry is not important customers

 A buyer group is powerful if:

• Involves bulk buying/ buys standard products
• It earns low profits, which create great incentive to lower its purchasing cost.
 Threat of Entry
 New entrants to an industry bring new
capacity, the desire to gain market share,
and often substantial resources.
 Companies diversifying through
acquisition into the industry from other
markets often leverage their resources to
causes a shake-up, as Philip Morris did
with Miller beer.
 There are six major sources of barriers to
entry (On next slide).
 Substitute Products
 By placing a ceiling on prices it can charge,
substitute products or services limit the potential
of an industry. Unless it can upgrade the quality of
the product or differentiate it somehow (as via
marketing), the industry will suffer in earnings
and possibly in growth.
 Substitutes not only limit profits in normal times;
they also reduce the bonanza an industry can reap
in boom times.
 Jockeying for position
 Rivalry among existing competitions takes the familiar form of jockeying for
position– using tactics like price competition product, introduction, and
advertising slugfests.
 Intense rivalry is related to the presence of a number of factors;
1) Competition are numerous or are roughly equal in size and power.
2) Industry growth is slow, precipitating fights for market share that involve
expansion-minded members.
3) Exit barriers are high.
4) The rivals are diverse in strategies, origins, and “personalities”.
Formulation strategy
Plan of action

Positioning of Influencing the Exploiting

company balance industry change
 Positioning:
 The Company either builds defence against existing competitive forces
Or
 Chooses a portion where these forces are weakest.

Where company should confront competition and where it should avoid it.

Reason for Success of Dr. Pepper

Sound Industry Analysis + Knowledge Of Corporate Strengths = Superior Strategy
 Influencing the Balance
Rather than merely coping with the forces, alter their causes.
Examples:
• Innovations in marketing to raise brand identification
• Differentiating the product
• Capital Investment in facilities
• Vertical Integration

Exploiting Industry Change

Evolution brings changes.
• Growth rate of a product changes with time.
• Product differentiation declines as the company matures.
• Adoption of diversification strategies.
 Multifaceted Rivalry
 Looking beyond Product, national boundary and ranks of one’s competition.
 Exploit new markets
 Competitors of tomorrow
References:
How competitive forces shape strategy by Michael E. Porter
Harvard Business Review, Mar-Apr 1979