Five Forces Competitive Strategy Learning Objectives Sustainable Competitive Advantage Explain how technology plays a role Describe the resourced based view of competitive advantage Define the five forces and explain how they can impact an industry 2 Sustainable Competitive Adv Firms strive for sustainable competitive advantage financial performance that consistently outperforms industry averages Achieving sustainable competitive advantage is not easy 2 3 The Danger of Relying on Technology Achieving sustainable competitive advantage is more difficult when competition involves technology The fundamental strategic question in the Internet era How can I possibly compete when everyone can copy my technology and the competition is just a click away 2 4 The Danger of Relying on Technology Fast follower problem Exists when savvy rivals watch a pioneer s efforts learn from their successes and missteps then enter the market quickly with a comparable or superior product at a lower cost before the first mover can dominate Technology can be matched quickly Rarely a source of competitive advantage 2 5 The Danger of Relying on Technology Operational effectiveness is critical but not sufficient enough to yield sustainable dominance over the competition Strategic positioning Performing different activities from those of rivals or the same activities in a different way 2 6 Resource based view of competitive advantage Resource based view of competitive advantage The strategic thinking approach suggests that if a firm is to maintain sustainable competitive advantage it must control an exploitable resource or set of resources that have four critical characteristics Valuable Rare Imperfectly imitable Nonsubstitutable 2 7 Powerful Resources Imitation Resistant Value Chains Imitation resistant value chains A way of doing business that competitors struggle to replicate and that frequently involves technology in a key enabling role Five Forces Defines industry structure and how a business competes Value chain Set of interrelated activities that bring products or services to market 2 8 Porter s Five Forces Model 9 Forces vs Profitability Industry structure drives competition and profitability not whether an industry produces a product or service is emerging or mature high tech or low tech regulated or unregulated Compare profit margins textiles vs software soft drinks vs grocers 10 Industry Structure Industry structure shapes the five forces for that industry And thus the competition profitability and resultant strategy Industry structure grows out of a set of economic and technical characteristics that determine the strength of each competitive force 11 Industry Structure Typically one or two forces dominate in an industry and thus force strategy What is the dominant force for Commercial aircraft manufacture Movie theaters Rock bands 12 Threat of Entry New entrants cause what to happen What can new entrants bring to this industry Entry barriers are advantages that incumbents have relative to new entrants If entry barriers are low what happens 13 Entry Barriers Per Porter there are seven forms of Entry Barriers 1 Supply side economies of scale 2 Demand side benefits of scale 3 Customer switching costs 4 Capital requirements 5 Incumbency advantages indep of size 6 Unequal access to distribution channels 7 Restrictive Government policy 14 Supplier Power Powerful suppliers capture more of the value for themselves by charging higher prices limiting quality or services or shifting costs to industry participants Powerful suppliers including suppliers of labor can squeeze profitability out of an industry that is unable to pass on cost increases in its own prices Microsoft for instance has contributed to the erosion of profitability among personal computer makers by raising prices on operating systems What happened with cancer drug suppliers recently 15 Suppliers are Powerful If It is more concentrated than the industry it sells to The supplier group does not depend heavily on the industry for its revenues Industry participants face switching costs in changing suppliers Suppliers offer products that are differentiated patented drugs vs generic There is no substitute for what the supplier group provides airline pilots The supplier group can credibly threaten to integrate forward into the industry Expedia 16 Buyer Power Powerful customers the flip side of powerful suppliers Can capture more value by forcing down prices demanding better quality or more service thereby driving up costs and generally playing industry participants off against one another all at the expense of industry profitability 17 Buyers Have Power If There are few buyers or the buyers buy large volume The industry s products are standardized or undifferentiated music Buyers face few switching costs in changing vendors iTunes vs Rhapsody Buyers can credibly threaten to integrate backward 18 Price Sensitivity Buyer power increases if the buyer s are price sensitive If the product purchased is a significant fraction of your production costs The buyer is strapped for cash or it s industry is low profit Quality of the buyer s product is little affected by the quality of the purchased product compare commercial movie camera The industry s product has little effect on buyer costs no leverage 19 The Threat Of Substitutes A substitute performs the same or a similar function as an industry s product by a different means Videoconferencing is a substitute for travel Plastic is a substitute for aluminum E mail is a substitute for express mail Substitutes are always present but they are easy to overlook because they may appear to be very different from the industry s product To someone searching for a Father s Day gift neckties and power tools may be substitutes 20 Threat of Substitutes When the threat of substitutes is high industry profitability suffers Substitute products or services limit an industry s profit potential by placing a ceiling on prices If an industry does not distance itself from substitutes through product performance marketing or other means it will suffer in terms of profitability and often growth potential 21 The Threat Of A Substitute Is High If It offers an attractive price performance trade off to the industry s product long distance vs cell phone plans The buyer s cost of switching to the substitute is low generic drugs 22 Substitutes and Technology Technology can often cause a significant shift in the availability of substitutes
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