Five Competitive

Forces That Shape

Strategy
Presented by:
Daraz Shaikh
Farhat Nasim
Hatim Ali
Bisma Zia
INTRODUCTION
In 1979, Harvard Business Review published
Five Competitive Forces That Shape
Strategy

By a young economist and associate

professor, Michael E. Porter.

It was his first HBR article, and it started a

revolution in thestrategy field.
Threat of New Entry
One of the forces that shape strategy

New entrants to an industry puts pressure on

the costs and rate of investment necessary to
compete.

Depends on the heights of the entry barriers

that are present and on the reaction entrants
gets from incumbents.
Barrier To Entry
Supply side economies of scale
Deter entry by forcing entrants to either come into
industry on a large scale which requires dislodging
competitors or to accept a cost advantage

Demand side benefits of scale:

Discourage entry by limiting the willingness of
customers to buy from a new corner by reducing
the price new comer can command.
Barriers To Entry
Customer switching cost:
The larger the switching cost the harder it will
be for entrant to gain customer.

Capital requirement:
Need to invest large financial resources in
order to compete can deter new entrants.
Barriers To Entry
Incumbency advantages:
Incumbents may have cost or quality which
results in how to produce more efficiently not
available to potential rival entrants.

Unequal access to distribution channel:

The new entrants must secure distribution of
its product. The more limited distribution
channels are, the tougher entry it will be.
Barriers To Entry
Restrictive government policy:

Govt: policy can hinder new entry by licensing

requirements and restrictions on foreign
investment.
Daraz Shaikh
Power Of Suppliers
They capture more value by charging higher prices,
limiting quality or services.
Example Microsoft:
A supplier group is powerful if:
It is more concentrated than the industry it sells to.
Does not depend heavily on the industry for its
revenues.
Industry facing Switching cost
Suppliers Offer differentiated products
No substitutes
Can threaten to integrate forward
Power of Buyers
Capture value by forcing down prices,
demanding better quality etc.
Customer group have negotiating leverage if
Few buyers
Undifferentiated products
Switching costs
Costs threaten to integrate backward
Threat Of Substitutes
Substitute performs same or similar function
as industry product by different means.

Example: Movie theatre and an arcade

fighting for competing for teenagers looking
for entertainment.

Threat of substitute is high if it offers

attractive trade off to industrys product. The
buyers cost of switching to the substitute is
low
Rivalry among existing customers
It takes many familiar forms:
Price Discounting
New Product Introductions
Advertising Campaigns (Cola wars, Lipton &
Tapal)
Service Improvements
High rivalry limits profit potential
Rivalry Intensifies
When competitors are numerous or
Competitors are roughly equal in size
When industry growth is slow
Exit barriers are high
Firms are less aware of the competitors
moves.
Price Competition occurs when:
Identical products
High fixed costs and marginal costs are low
Perishable products
Zero Sum Competition
One firm gain is other firms loss
Positive sum actually increase overall
profitability of business.
 Farhat
FACTORS NOT FORCES
Factors not forces

It determine the firms long Term growth

Economic value is created by the company
In this Scenario, how much companies
retained by the industry and bargained away
from the customer
Some times it is important to avoid some pits
falls in order to retain business
Industry growth rate

Fast growing industries are always attractive

Excess growth opens the doors for

competitors

Without new entrants high growth rate is not

guarantee profitability
A narrow focus in growth is consider to be the
bad strategy decisions.
Technology and innovation

Advanced technology is some time attractive

for new entrants but some times it is
unattractive due to technology forces.
In most cases switching cost or high barriers
arising from economic of scale
Government

It is not good or bad for industry profitability

The only way see the influence by clearly

analysis
how specific government policies affect the
five competitive forces.
Some time union may raise supplier power.
Political power of Govt
Complementary products and
service
The products gather within the industry
Complement arises when the customer benefits
two products great than sum of other each
product value
Example
When the drive has access to gasoline stations,
roadside assistance and auto insurance
Changes in industry structure
Industry structure proves to be relatively
stable.
Shifts in structure may emanate from out-side
an industry or from within. They can boost the
industrys profit potential or reduce it.\
For example
changes in technology
Change in customer needs
Shifting threat of new
entry
Above seven the barriers can raise lower the
threat of new entry
Example
The expiration of a patent, for instance, may
unleash new
Changing in supplier
power
As the factors underlying the power of
suppliers and buyers change with the
passage of time.
Example

travel agents, who depend on airlines as a

key supplier
When the interner allow them sell the ticket
directly
Shifting threat of
substitution
Advancement of technology new substitute or
shifting price.
Performance comparisons in one direction or
in other

For example
priced above $2,000,making them poor
substitutes for conven-tional ovens. With
technological advances
New bases of rivalry
Rivalry often intensifies naturally over time.
consumer tastes converge. Industry
profitability falls, and weaker competitors are
driven from the business
the nature of rivalry in an industry is altered
by mergers and acquisitions that introduce
new capabilities
 Hatim Ali
Implications for strategy
IMPLICATIONS FOR
STRATEGY
Position your company where the forces are
weakest.
Exploiting and anticipating industrial change.
Industrial structure can be shaped in two
ways:
Redividing Profitability
Expanding overall profit
DEFINING THE INDUSTRY
Actual competition is important for good industry
analysis.
Too broadly obscure differences among products,
customers or geographic regions that are
important to competition, strategic positioning
and profitability.
Too narrowly overlooks commonalities across
related products which are crucial to competitive
advantage.
The five competitive forces holds a key in defining
the relevant industry in which a company
competes.
COMPETITION AND VALUE
In a world of more open competition and
relentless change, it is more important than
ever to think structurally about competition.
Understanding industry structure is equally
important for investors as for managers.
The five competitive forces reveal whether an
industry is truly attractive, and they help
investors anticipate positive or negative shift
and allows to take advantage of undue
pessimism or optimism.