What is an industry?
A group of firms producing products that are close substitutes.
(As a strategic thinker, you must understand the unique environment of the industry in which a company competes. Ex.: airlines, restaurants, hotels, computer manufacturing, toy manufacturing, cosmetics, legal services, and many more industries…)
What is a particularity about profitability?
Industries differ in their profitability
What are the elements of Porter’s Model of Five Competitive Forces?
- Threat of new entrants
- Threat of substitute products
- Bargaining power of suppliers
- Bargaining power of buyers
- Rivalry among competing firms
What is rivalry?
(metaphor)
Think of firms competing in an industry as fish in a tank competing for food (market share). Think of different strategies each can use to grab more and what it costs them.
Discuss the intensity of rivalry among competitors
Rivalry is intense when:
- Numerous or equally balanced competitors (Bakeries in Montreal; Coca-Cola vs. PepsiCo globally)
- Lack of differentiation or low switching costs (car rentals)
- Slow industry growth (household cleaning products)
- High fixed costs or high storage costs (restaurants, beauty salons)
- High strategic stakes (Google vs. Microsoft in voice search)
- High exit barriers (high investment in specialized assets, contractual obligations involving penalties, management’s emotional attachment to a particular business or market)
Discuss the threat of new entrants
Its significance is function of two factors:
1. Barriers to entry
- Economies of scale (Amazon: input volume discounts, lower per unit marketing costs)
- Capital requirements (aircraft manufacturing: cost of equipment, up-front advertising etc.)
- Switching costs of customers (SAP software installation in the organizations)
- Access to distribution channels (difficulty for retailers to get into popular shopping malls)
- Cost disadvantages independent of scale (access to raw materials, brand reputation, proprietary technology)
- Government policy (telecommunications services, liquor retailing, subsidized daycare licenses)
2. Expected retaliation from existing firms in the industry
- past competitive reactions, public announcements of intent (Walmart vs. local stores)
Discuss the threat of substitute products
The threat is significant when:
Goods or services outside of a given industry perform the same or similar functions at a competitive price.
Examples:
- Adoption of smartphones and tablets negatively impacted demand for personal computers.
- Energy drinks, juices and bottled water undermined demand for carbonated soft drinks.
- Consumer adoption of specialty coffee caused the drop in demand for canned coffee.
- Availability of on-demand video streaming impacts revenue of movie theaters.
Discuss the bargaining power of suppliers
They are powerful when:
- Few large companies and more concentrated than the industry to which they sell (Intel to PC manufacturers)
- No or few substitutes (Google search to businesses who seek visibility on the web)
- Supplier’s goods are critical to buyer’s success (content providers to Netflix)
- Suppliers’ products are highly differentiated (producers of popular cartoons selling licenses to toy manufacturers)
- Threat of forward integration (supplier bringing buyer’s function in-house: Apple stores).
- Industry firms not significant customer to supplier group (consumer electronics represent only 9% of total semiconductor sales)
Discuss the bargaining power of buyers
They are powerful when:
- They purchase a large portion of industry’s total output (Wal-Mart)
- Product sales accounts for significant portion of seller’s annual revenue (coffee bean suppliers to Starbucks)
- Low switching costs (consumers vs. coffee shops)
- Industry products are undifferentiated or standardized (PC computers)
- Threat of backward integration (buyer bringing supplier’s function in-house (airlines owning oil refineries)
What are some common mistakes in applying Porter’s 5 Forces framework? (Just read this slide)
1. Defining an industry too broadly or too narrowly. Industry should be defined by product and geographic scope (ex. Canadian Mobile Phone Industry).
a. Too broadly (ex. “Telecommunications Industry”) obscures differences among products, customers or geographic regions that are important to competition, strategic positioning and profitability.
b. Too narrowly (ex. Quebec Android Phone Industry): overlooks commonalities and linkages across related products and geographic markets that are crucial to competitive advantage.
2. Confusing products of direct competitors with the “threat of substitutes” force. Substitutes are found outside the industry, not within! (ex. Pepsi is not a substitute for Coke, but Starbucks coffee is.)
3. Focusing too much on labeling the 5 forces (low, medium, high) while overlooking their impact on industry profits, changing trends, as well as strategic actions that firms can take to offset the impact of strong forces.
What are opportunities?
Opportunities
General environment condition that, if exploited, helps a company achieve strategic competitiveness
- Example: When quota was abolished for imports from Bangladesh to Canada, this created an opportunity for Canadian importers and for Bangladesh suppliers.
What is a threat?
Threat
General environment condition that may hinder company’s efforts to achieve strategic competitiveness
- Example: Amazon is often referred to as “Wal-Mart of E-Commerce” which poses a threat to Wal-Mart’s market share and future revenue. In response, Wal-Mart has been aggressively investing in establishing an E-Commerce presence.
