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20 July 2015
Notes and transcriptions of Lectures and Presentations in Strategic Management.
Michael Porter the image that you see here is from Harvard University Porter is the developer of modern thinking about competitive strategy in different industries late 70s.
He developed three models that help us with the thinking about strategy.
This lecture looks at the five forces model, following lectures look at the value chain and generic strategies.
At the centre of the model is industry rivalry or competition within the industry. This is the First Force we will look at.
How competitive is the market? Think about McDonald’s… how many other fast food chains arm is McDonald's competing with. In the UK there's Burger King, some smaller chains and lots of takeaway restaurants with similar pricing bands.
So there is plenty of competition. It's a very competitive marketplace and you have to distinguish yourself with high-quality low-cost or service as McDonald's offer very quick service and low cost products.
Lets apply McDonalds to the Five Force model.
The Second competitive force to analyse is the threat of new entrants. How many companies are seeking to break into the fast food chain industry? In reality it doesn't happen very often on the global scale that McDonalds compete. Not many seek to compete this way because the cost is just too great to compete with fastfood giants that already exist.
The Third competitive force is the threat of substitute products. This means other places that your customers might go to get what you offer not necessarily hamburgers but food it's a substitute for hamburgers so they could go to Domino’s pizza or other fast food outlet or even a regular restaurant. These would all theoretically be substitute products for McDonald's offerings.
Companies need to consider these competitors too so they can think about competitive pricing and features that make people select fast food over other types of restaurants or outlets.
The Fourth force is the bargaining power of buyers in the case of McDonald's that's you and me we have a choice of what we eat in they're plenty of other fast food restaurants we could go to
for example if the line is too long at McDonald's and there is another similar fast food outlet across the street offering similarly priced tasty fast food we like, we can go across the street end eat there. There's no cost to us to do this. We have the buying power and given so many options in the fast food market, we can exercise that power easily.
The fifth competitive force is the bargaining power of suppliers. That is the company supporting the products and services that support the production of McDonalds and ensure you can get a standard product worldwide. This includes the corporation being able to source and purchase the raw materials, the uniforms, cleaning supplies and healthcare etc. to make the McDonald's organization run. Just suppose there are only two companies that McDonald's can buy these goods and services from, then the supplier power is high and suppliers can potentially raise the price of the McDonald's has to pay because they cannot operate without that company.
Alternatively, f the uniform manufacturer decides to increase cost and there are a lot of companies that sell uniforms McDonald's can switch suppliers without losing a lot of business so in that case the bargaining power is very low.
There's one other thing about this model that we haven't talked about government regulation.
This wasn't actually part of Porter's five force model originally but it is generally held among strategists that there is a sixth force that acts upon competition end industry and changes the model.
It isn't one of Porter's original ideas but clearly laws governing how industries and companies within those industries behave and what they are allowed to do, will have an effect on the competitive arena in which firms operate. THINK POINT: pause here and try to think of an industry which is subject to legal restrictions on its operation, or which is subject to specific laws describing what it can produce.
At this point, there are a couple of terms I'd like to talk about before we go over the five force model again.
These concern entry barriers end switching costs.
Entry barriers are something that you can set up that makes it unattractive for competitors to come into your market. This is used to reduce the force of the threat of new entrants to think about the major energy company in your country. Energy is a utility and if there is only one major supplier generating electricity, everybody has to get their electric through them. That's a big entry barrier.
If a company did happen to have the wherewithal to open an electric company for example a solar company, it would require massive infrastructure for you to be successful. So therefore there are very high entry barriers to getting into that market.
THINK POINT: note down some industries you know about which have low or high entry barriers.
Here are some examples. 1. To open a bar you need a license to sell alcohol, which is difficult to get in most countries and impossible in some islamic states. This creates a high entry barrier. 2. Suppose you want to open an online megastore like Amazon you might like to call it Amaze-Me or something like that to compete with Amazon. To be competitive and gain competitive advantage you would need to have real brand name recognition and a loyal customer base. Also it would be critical to have the infrastructure and the supply chain that helps get your goods and services to people. This is a huge infrastructure, very expensive to set up. Therefore the megastore online market is very prohibitive for a new entrant.
Lets think about substitute products and switching costs.
Switching costs are way to prevent your customers from using their buying power for substitute products.
To keep your customers from moving away from your offering. You can offer them deals and memberships or have them sign contracts so that they are stuck with you for an agreed-upon term of time. You can make it worth their while by offering a range of incentives e.g. airlines have frequent flier programmes that buiild points towards free flights.
THINK POINT: note other methods that de-incentivise customers from switching to substitute products.
Examples could be:the contracts that you sign with your cell phone or maybe your cable TV that locked you in so that people couldn't easily switch from that particular company until the contract ran out.
So to increase the cost of switching companies and the value to customer of staying with the company, companies issue deals & incentives for staying with that company. Loyalty programs memberships end contracts for example.
There are many ways to have companies fight the threats to new entrance and substitute products and the bargaining powers of suppliers end buyers. Check this link
A full Industry Analysis.
Let's look at an example then you do one of your own in Workbook or diaro which you can look back on later when we review all of these Strategic Management lectures.
The cell/mobile phone industry
The intra-industry rivalry is very competitive.
Pricing plans are complex making it difficult for customers to work out the best tariff. This has recently been noted by the European Union in Europe as anti competitive.
Phone companies try to lure customers by celebrity endorsements this is a very competitive industry. Firms people compete on cost and on differentiation …each company tries to offer features that the other may not have.
The threat of new entrants is based on cost prohibitiveness. It takes a lot of capital to compete with the large companies already doing business in the cell phone industry so the threat of new entrants is very low.
The threat of substitutes. The substitute product for a telephone are perhaps using a landline, or writing a letter or Skype/ email /computer communication or maybe notebooks or messaging through an iPad or SmartTablet. But really there is not a viable alternative to the portability a mobile or cell phone gives.
So, in this market the threat of substitute products is still low because those things don't really offer the flexibility end ease that your cell phone does.
Switching costs: Until 2004 you couldn't take your phone number with you. This was a big switching cost but now you can switch when you like although, you might have to pay a penalty if you do it early.
The bargaining power of suppliers is another force to consider.
The parts that go into making a cell phone chips batteries Sim cards are readily available. There are many manufactures for all of these parts and the supply for them is very easy to come by. So the bargaining power of suppliers is low.
Another example of industry competitiveness analysis.
If you were advising a company to think about entering the self-help app market with a new app that helps people quit smoking. Just assume this….. even though its the kind of service that if you're successful your customers going to eventually leave you because they don't need your service anymore.. though there are more customers of course that will come to you if your service is credible and works.
There are a lot of apps for people quitting smoking so the intra industry rivalry is high. In terms of entrants to the market….how hard is it to write an app that's gonna help people quit smoking this is low entrant level so therefore high on the scale of competition. The industry will be competitive yet cheap to enter as anyone who can hire a programmer and come up with the content can enter the market if they wish.
The threat of substitute products is medicine/drugs from the doctors or pharmacy, plus nicotine patches or taking a class to help someone quit This competitive force is actually low because it's very convenient to have the app on the phone going to these other substitute products might be prohibitive just because of convenience.
However the bargaining power of buyers is super high there 15 apps at least on the Appstore and they're all free. So this adds to the level of competitiveness in the market.
Users can switch to any app they like at anytime.
In summary Porters Five Forces allows strategists a way in to understanding the level of competitiveness in any given industry by analysing the level of strength of each of specific forces acting upon the industry.
15:49 on 20 July 2015