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Managing Competition

Managing Competition

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Published by: Kushagra Bansal on Jun 18, 2012
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06/18/2012

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Module 3 Managing Competition

- Alpi Gupta

Porter’s Five Forces Model of Competition

Michael Porter’s 5 Forces
• Framework for the analysis of the structural factors of competition in an industry • The 5 forces : - determine intrinsic long run industry profitablity (micro-environment) - assessing how attractive is the industry? • explains performance of competitors

Threat of New Entrants

Threat of New Entrants
• Arrival of new entries will  gain market share  accelerate rivalry  profits will decline • High barriers to entry, low risk of new entrants & vice versa • Eg : patents (legal protection), economies of scale, capital cost entry, product diff, price wars

Supplier Power

Supplier Power
• Suppliers are powerful when:  scare resources  small & unimportant customer power  few large suppliers  Lack of substitute resources • High supplier power can:  sell raw materials at a higher price  squeeze industry profits More powerful the buyer, lower is the power of the suppliers & vice versa

Buyer Power
“Customers”

Buyer Power
Buyers bargaining power grows strong when:  they become more organized  switching costs are low  product represents a significant fraction of buyer‘s costs  product remains undifferentiated Defensive approach - to select buyers with least switching power & superior product offers

Threat of substitutes

Threat of substitutes
• Similar kind of product that meets the same need • Produced in a different industry – but satisfy the same customer need • Substitutes can: -- limit the actual price to be charged -- reduces profits

Threat of substitutes depends upon:
• How closely the price & performance matches with actual product ….???? • Willingness of buyers to switch / customer loyalty

Defensive approach: reduction in prices, differentiation

Intensity of Rivalry

Intensity of Rivalry is determined by:
• Number of competitors • Market size & growth prospects • Product differentiation & brand loyalty - greater customer loyalty, less intense competition - lower the degree of product diff., greater the intensity of price competition

Intensity of Rivalry is determined by…. (contd.)
• Power of Buyers & availability of substitutes --- strong buyers & close substitutes promotes intense rivalry • Exit barriers --- difficulty in making an exit from the industry will add to the intensity of competition

Summarizing 5 forces
• High profits are associated with :  weak supplier  Weak buyers  high entry barriers  few possibilities for substitution  less rivalry • Low profits are associated with:  strong suppliers  strong buyers  low entry barriers  many possibilities for substitution  intense rivalry

Reaction patterns “Competitive Equilibrium”
• Competitive equilibrium is unstable when:  Competitors are nearly identical -- less product differentiation. Eg steel  frequent price wars  achieving cost breakthrough  existence of multiple factors

Reaction patterns “Competitive Equilibrium”
• Competitive equilibrium is stable when:  fewer critical competitive variables  to maintain 2 : 1 ratio --- equilibrium between competitors & market share

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