10 4 12 Five Forces Profit margin is determined by the forces in the industry Five Forces Model industry strategy tool Technology is the key competitive tool that we have We want to be better than our competitors over a long term Sustainable Competitive Advantage Sustainable Competitive Advantage Very hard to achieve SUSTAINABLE competitive advantage You need something that gives you an edge for a LONG period of time Problem with Technology Technology is a wonderful competitive advantage tool but in most cases if one person can do it so can another iPhone was invented but other similar phones came out months later Fast follower problem don t waste money on R D and wait for someone else to do it and if they are successful quickly follow You can sometimes be the first mover and if you can get a foothold you have first mover competitive advantage iPad first mover and foothold because its still best tablet out there Once you can figure out what s going on in an industry you can have strategic positioning and figure out what is going to give you a competitive advantage Wholefoods is a grocery store but they have taken a strategic position by calling themselves the healthy supermarket They have created this awareness that separates them from other supermarkets Resource based if your industry has a resource that you can get control of Valuable Rare Imperfectly imitable Nonsubstitutable No good substitutes ex oil patent Imitation resistant value chain find a way of doing something that even though your competitors can see they wont be able to replicate ex Wal Mart Five Forces defines an industry structure and how you will compete in that industry 5 FORCES SHAPING INDUSTRY COMPETITION 1 Threat of new entrants how easy or hard is it to get into an industry 2 Bargaining power of suppliers what kind of power do suppliers have over you usually ability to raise prices and you can t do anything about it 3 Threat of substitute products or services ford and chevy aren t substitutes they re rivals Substitute for a car is a train or a bus 4 Bargaining power of buyers 5 Rivalry among existing competitors how intense is the rivalry every industry usually has 1 or 2 dominant forces and the other forces are weak The Industry structure determines competition and profitability The forces of the industry determine the method of competition and profitability of the industry Profit margin on soft drinks is huge Profit margin in grocery stores is very low typically less than 2 Margins are determined by the forces in the industry you wont find a grocery store making 30 it just can t happen every industry usually has 1 or 2 dominant forces and the other forces are weak what is dominate force for commercial aircraft manufacture threat of entry not easy to get into industry weak force suppliers metal glass rubber steel companies can get these things from many places so the supplies don t have a lot of power weak force threat of substitutes for most long haul routes it s airplanes so not many good substitutes Weak force buyer power buyer of commercial aircraft is usually government airline companies Do buyers have power YES because is Boeing tries to raise the price you can call Airbus So strong force rivalry rivalry between Boeing an Airbus is HIGH strong force Movie theater Threat of entry fairly easy to get into business strong force Suppliers studios who give films Sony Universal etc they have a lot of power over the movie theaters totally control them If you have contract with studio they tell you this is the movie you will receive and this is when you will play it and show it for 3 weeks strong force Substitute for going to movies anything because it s entertainment strong force Buyer power don t have power over the movie theater to influence prices If price goes up we will still go to movies weak force Rivalry not really rivalry between movie theaters weak force Rock band Threat of entry easy to enter just get a drummer and a guitarist strong force Suppliers weird one Substitutes diff kinds of music diff forms of entertainment strong force Buyer power used to be that we had power because if price of CD was too high we wouldn t buy it strong force Rivalry high Threat of Entry if someone new comes in sales usually shrink Sometimes they can bring in new things though like new technologies and new ways of doing things Sometimes there are entry barriers which is an advantage for incumbents Entry Barriers Supply side economies of scale Wal mart I m so efficient that it would be so hard for you to jump in and compete with me now no one would wanna jump in with fed ex and UPS customer switching cost to switch from at t to Verizon is low switching cost Years ago though it was high because you lost your phone number capital requirements too expensive to jump into this business gov t policy you may need a license Supplier Power I can raise my price and its at the buyer s expense if Microsoft decides to raise its price of windows dell and other PC s would have no control GM went bankrupt because labor costs were too high GM had to declare bankruptcy to get new labor contracts that were lower So sometimes a supplier of labor can dictate what happens in an industry Cancer drug suppliers can charge whatever they want because they have patent on it They made the prices high If people can t buy them they ll die Suppliers are powerful if There aren t many suppliers There are no substitutes They sell different things Microsoft doesn t just sell its software to dell it sells other things too so it has other sources of revenue The airlines own expedia They went into the travel agency business Buyer Power You have buyer power if the company is resistant to raising the prices for fear of you walking have power if few buyers buys in large quantities walmart few switching costs in changing vendors im a buyer and don t like what you re selling me so ill go into the industry Threat of Substitutes don t confuse rival and substitute cars and buses substitutes ford and Chevy rivals videoconferencing is substitute for travel plastic is sub for aluminum e mail is a sub for express mail for gift store substitutes can be almost anything So sometimes tough to figure out substitute threat of substitutes have to find a way to differentiate yourself if your industry has threat of substitutes threat is high if low switching cost generic drugs Substitutes and Technology plastic for steel in cars digital camera vs film camera vs cell phone
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