What is Porter’s 5 forces model?
- Porter’s Five Forces is a framework for analysing a company’s competitive environment.
- Five Forces analysis can be used to guide business strategy to increase competitive advantage.
What are the 5 forces in Porter’s Model?
- Competition in the industry (Rivalry)
- Potential of new entrants into the industry
- Power of suppliers
- Power of customers
- Threat of substitute products
What factors affect competition within an industry (Porter 1st Force)?
- Number of competitors
- Diversity of competitors
- Industry concentration
- Industry growth
- Quality differences
- Brand loyalty
- Barriers to exit
- Switching costs
What are the factors that affect the threat of new entrants to the market (Porter’s 2nd Force)?
- Barriers to entry
- Economies of scale
- Brand loyalty
- Capital requirements
- Cumulative experience
- Government policies
- Access to distribution channels
- Switching costs
What are the factors that affect the bargaining power of suppliers (Porter’s 3rd Force)?
- Number and size of suppliers
- Uniqueness of each supplier’s product
- Focal companies ability to substitute
What are the factors that affect bargaining power of buyers (Porter’s 4th Force)?
- Number of customers
- Size of customer orders
- Differences between competitors
- Price sensitivity
- Buyer’s ability to substitute
- Buyer’s information availability
- Switching costs
What are the factors affecting the threat of substitute products (5th Force)?
- Number of substitute products available
- Buyer propensity to substitute
- Relative price performance of substitute
- Perceived level of performance
- Switching costs
Overall, what are the advantages and disadvantages of Porter’s 5 forces model?
Advantages:
- Porter’s ideas are a powerful and have been influential on MBA-trained managers.
- It takes an outside-in perspective on product differentiation, strategic position and focus through tradeoffs.
Disadvantages:
- Porter refrains from innovation and argues it can often be the path of least resistance in a firm.
- Often misused to describe an individual firm as opposed to an industry
- Victim of its own success - the more firms using it the less impactful the framework.
What can be done to ‘push-back’ Porter’s forces?
- Competition in the market - differentiate products
- Threat of new entrants - tie-up distribution channels and make alliances
- Power of suppliers - find alternatives and build a network
Define ‘strong’ forces and ‘weak’ forces
‘Strong’ forces are pain points which give rise to innovations
‘Weak’ forces are opportunities to increase profits (headroom)
What are the ‘old-fashioned’ ways of competing?
- Collusion
- Consolidation
- Integration
- Retaliation
What are the ‘new-fashioned’ ways of competing?
- Market segmentation
- Differentiation advantage
- Ecosystem advantage
- Cost advantage
Outline the four main theories of competitive advantage?
- Porter - reinforce uniqueness and maintain differentiation
- Barney - reinforce core/unique capabilities and spin it into growth opportunities
- Adner - build a unique ecosystem and leverage it
- McGrath - be fast to enter, be ready to exit
What is the VRIO Framework?
VRIO is a framework used to recognise strategic resources within a firm.
Outline the VRIO framework
- Valuable (competitive advantage)
- Rare (compared with competing firms)
- Inimitable (cannot be imitated)
- Organised (has it been fully exploited by the firm?)
List some examples of resources that meet the VRIO criteria?
- Brand
- Enforceable IP
- Firm Relationships
- Location
- Unique firm capabilities
What is agility-based advantage?
Agility based advantage is possible when one redefines success in the direction of surviving rather than optimizing.
