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Analyzing Competitive Forces Using Michael Porter’s “Five Forces” Analysis

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First, let’s look at the model

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Then, define each of the model’s “Five Forces”

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We’ll then see Porter’s 3 Recommended Strategies to Outperform Competitors …and finally, what is meant by “Strategic Fit”
Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

• The Analysis provides a framework to analyze the forces that reduce the profits of an industry. • The Analysis focuses on whether or not a force is sufficiently strong to reduce or eliminate the profit of an industry. • The Model has the following limitations:
– It doesn’t account for the magnitude of demand – The model focuses on an industry as a whole – not on individual firms – The industry and the markets must be well defined

“Five Forces” - Explained

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• The stronger these forces are, the more likely the profits will be less for the particular industry.
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Michael Porter’s “Five Forces” Analysis Model
Potential Entrants Threat of New Entrants Industry Competitors Rivalry among existing firms Threat of Substitute Products and /or Services Substitutes

Industry Suppliers

Bargaining Power of Suppliers

Bargaining Power of Buyers Buyers

Adapted from M.E. Porter, Competitive Strategy, Free Press, 1980.

Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

Intensity of Rivalry among existing companies
• • • • • • • • Numerous or equally balanced competitors Slow industry growth High fixed or storage costs Lack of differentiation or switching costs Capacity augmented in large increments Diverse competitors High strategic stakes High exit barriers
Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

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Threat of Potential Entrants
• Barriers to entry caused by:
– – – – – – Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scales
• • • • • Proprietary technology, R&D and/or patents Favorable access to raw materials Learning curve Government subsidies Favorable locations
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– Government policy

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Bargaining Power of Buyers
• • • • • • Buyer purchases large volumes relative to the seller sales Buyer purchases are a significant portion of the buyer’s total costs The product it purchases from the industry are standard or undifferentiated Face few switching costs Product is unimportant to the quality of the buyers’ products or services Buyer has full information
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Threat of Substitute Products and Services
• Relative Price of substitute • Relative Quality of substitute • Switching costs to buyers

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Bargaining Power of Suppliers
• • • • • • • Few suppliers – supplier concentration Not obliged to contend with other substituted products Industry is not an important customer of the supplier group Suppliers product is an important input to the buyers business The supplier groups products are differentiated or it has built up switching costs The supplier group poses a credible threat of forward integration The supplier group poses a credible threat of backward integration
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1. Overall cost leadership: – Produce same/better quality at less cost than anyone else. – Enjoy greater profits. – Or, in a price war – stay in profitably with reduced prices. 2. Differentiation: equating products with desirable quality standards. 3. Market Niche Segmentation: focusing on a section or group of an industry or market, a segment of a product line or a geographical segment.
Source: "What Is Strategy?" by Michael E. Porter, Harvard Business Review, Volume 74, Number 6, pp 61 - 78. Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

Porter Recommends 3 Generic Strategies to Outperform Competitors

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Strategic Positioning – 3 Ways
• Variety based Positioning - can be based on producing a subset of an industry's products or services. • Needs-based positioning - serving the needs of a particular customer group. • Accessed-based positioning segmenting customers who are accessible in different ways.

Source: "What Is Strategy?" by Michael E. Porter, Harvard Business Review, Volume 74, Number 6, pp 61 - 78.

Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

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Strategic Fit Sustains Competitive Advantage
“Strategy is creating fit among a company's activities. The success of a strategy depends on doing many things well -- not just a few -- and integrating among them. If there is no fit among activities, there is no distinctive strategy and little sustainability.”

Source: "What Is Strategy?" by Michael E. Porter, Harvard Business Review, Volume 74, Number 6, pp 61 - 78. Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

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Strategic Fit Sustains Competitive Advantage
• Strategic fit among many activities is fundamental not only to competitive advantage but also to the sustainability of that advantage. • It is harder for a rival to match an array of interlocked activities than it is merely to imitate a particular salesforce approach, match a process technology, or replicate a set of product features. • Positions built on activity systems are more sustainable than those built on individual activities. • Finally, fit among a company's activities creates pressures and incentives to improve operational effectiveness, which makes imitation even harder.
Source: "What Is Strategy?" by Michael E. Porter, Harvard Business Review, Volume 74, Number 6, pp 61 - 78. Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

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Strategic Fit Sustains Competitive Advantage (Cont’d)
• Fit means that poor performance in one activity will degrade the performance in others, so that weaknesses are exposed and more prone to get attention. Conversely, improvements in one activity will pay dividends in others. • Companies with strong fit among their activities are rarely inviting targets. Their superiority in strategy and in execution only compounds their advantages and raises the hurdle for imitators.

Source: "What Is Strategy?" by Michael E. Porter, Harvard Business Review, Volume 74, Number 6, pp 61 - 78. Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

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For more information
• See the Competitive Intelligence Center’s Toolbox (in the drop down menu) and Library sections • Visit the Society for Competitive Intelligence Web Site http://www.scip.org • Contact Affinity Matrix, L.L.C. at bill@affinitymatrix.com
Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.

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Additional Recommended Reading:
“Strategic and Competitive Analysis”, Methods and Techniques for analyzing business intelligence, by Craig S. Fleisher and Babette E. Bensoussan, Prentice Hall, 2003. “Proven Strategies in Competitive Intelligence”, John E. Prescott and Stephen Miller, John Wiley & Sons, 2001 "What Is Strategy?" by Michael E. Porter, Harvard Business Review, Volume 74, Number 6, pp 61 - 78. “Competitive Strategy”, By Michael E. Porter Free Press, 1980

Copyright 2001-2003 The Competitive Intelligence Center, All rights reserved.