MNGT 486 (Kocur) - The Five Competitive Forces that Shape Strategy

Who is the author?

Michael E. Porter

What are Porter's Five Forces?

1. Threat of New Entrants

2. Bargaining Power of Suppliers

3. Bargaining Power of Buyers

4. Threat of Substitute Products or Services

5. Rivalry Among Existing Competitors

What does a high threat of new entrants do to industry profitability?

It puts downward pressure on prices and margins by increasing competition.

What increases supplier bargaining power?

- Few suppliers

- High switching costs

- Unique or critical inputs

- Supplier concentration

What increases buyer bargaining power?

- Large volume purchases

- Standardized products

- Low switching costs

- Buyers are concentrated

What makes the threat of substitutes stronger?

- Better price-performance alternatives

- Low switching costs

- High availability of substitutes

What intensifies rivalry among competitors?

- Many similar-sized competitors

- Slow industry growth

- High fixed costs

- Low product differentiation

Why is industry structure more important than firm behavior?

Because it determines the long-term profitability potential of the industry.

How can firms defend against powerful suppliers?

- Diversify supplier base

- Develop substitute inputs

- Vertical integration

- Increase buyer importance

What is the strategic value of Porter's Five Forces?

It helps firms assess industry attractiveness and shape strategies to improve profitability.

Dimensions of defining an industry

1. Scope of products and services (think in terms of 5 forces)

2. Geographic Scope (are the rivals, buyers, suppliers, substitutes... the same?)

Typical Steps in Industry Analysis

1. Define the relevant industry

2. Identify the participants and segment them into groups (who are the players in the 5 forces?)

3. Assess the underlying drivers of each competitive force to determine which ones are strong and which ones are weak and why.

4. Determine overall industry structure and test the analysis for consistency

5. Analyze recent and likely future changes in each force

6. Identify aspects of industry structure that might be influenced by competitors, by new entrants, or by your company.

2 ways to shape industry structure

1. Redividing profitability

2. Expanding the profit pool

In-class Overview

A narrow view of competition discounts other "forces" that drive profitability in a given industry.

Are threats of substitutes inside or outside of your industry?

Outside

Are threats of new entrants inside or outside of your industry?

Inside

Is the bargaining power of suppliers inside or outside of your industry?

Outside

Is the bargaining power of the buyer inside or outside of your industry?

inside

Is the rivalry between existing competitors inside or outside of your industry?

both inside and outside

Key Takeaways

1. Rivalry among competing firm in the strongest of the 5 forces

2. Bargaining power goes both ways (buyer/supplier)

3. Threat of substitutes does not mean a duplicate product or service

4. Protection against new entrants is difficult (sometimes)

Example of "Rivalry among competing firm in the strongest of the 5 forces"

Verizon, AT&T, Sprint, T-Mobile (all the same industry)

Example of "Bargaining power goes both ways (buyer/supplier)"

Supplier can gain advantage with small number, buyers can get power if number of choices is larger

Example of "Threat of substitutes does not mean a duplicate product or service"

Starbucks substitute doesn't mean Dunkin... it means choosing something beyond coffee/specialty drinks entirely

Example of "Protection against new entrants is difficult (sometimes)"

Netflix couldn't stop Hulu, Disney+, HBO, Apple. You need to be different.

Critiques

1. Five forces is a static framework in a dynamic world

- Porter's model assumes relatively stable industry boundaries.

- The framework less adaptable to fast-changing industries

2. Underemphasis on collab and complementor

- Porter overlooks the strategic value of cooperation.