1. The 5 Competitive Forces
That Shape Strategy

2. 1)Opening :
1-1
Introduction
1-2
Issue
Mooi
1-3
New forces
Hon
Bimel
Content
2)2 Forces :
2-1
Rivalry among existing competitors
2-2
Bargaining power of buyers
3)2 Forces :
3-1
Threat of new entrants
3-2
Bargaining power of suppliers
4)1 Force :
4-1
Threat of substitute products or services
Sunita 5)Conclusion

3. 1)Opening :
1-1
Introduction
1-2
Issue
1-3
New forces
Content
2)2 Forces :
2-1
Rivalry among existing competitors
2-2
Bargaining power of buyers
3)2 Forces :
3-1
Threat of new entrants
3-2
Bargaining power of suppliers
4)1 Force :
4-1
Threat of substitute products or services
5)Conclusion

4. Economist Michael E. Porter identified………
Image : Extracted from Google
Source : Harvard Business Review / January 2008 / hbr.org

5. Introduction – Importance of The 5 Forces
…..vital in successful Strategic Management !
Measure and monitor
strategy effectiveness
Industry analysis :
1) Industry relevance
2) Industry players
3) 5 forces
4) Industry structure
5) Future changes
Strategize :
* Competitive advantage
* Cost advantage
* Market dominance
* New product development
* Contraction / Diversification
* Price leadership
* Global
* Re-engineering
* Downsizing
* De-layering
* Restructuring
How to deal with competition?
What strategy
to use?
Basic knowledge
of business strategy
& forces that influence
the decision making

6. Issue – Limitations of 5 Forces
Economic turbulence
Bargaining
power
of buyers
Soft factors:
Skills
Culture
Intangible assets
Reputation
Rivalry
among
existing
competitors
Bargaining
power
of
suppliers
5 Forces
Threat of
substitute
products or
service
Threat of
new
entrants
Impact of IT
Definition of
competitors
& customers

7. Emerging of New Forces
Organization Reinvention
Customers’ Expectations
Information Technology

8. Content
1)Opening :
1-1
Introduction
1-2
Issue
1-3
New forces
2)2 Forces :
2-1
Rivalry among existing competitors
2-2
Bargaining power of buyers
3)2 Forces :
3-1
Threat of new entrants
3-2
Bargaining power of suppliers
4)1 Force :
4-1
Threat of substitute products or services
5)Conclusion

9. Rivalry Among Existing Competitor (1)

Rivalry happen when:



A firm is challenged by competitor action
A company recognize opportunity to improve
market position
Normally result in lower profitability


Action will invite competitive response
Depend on the intensity and basis of
competing

10. Rivalry Among Existing Competitor (2)

Rivalry can increase profitability and
expand market if:

Each competitors aim to serve different needs
and market segment with different mixes of
price
 products
 service
 features


Better in meeting the customer needs

11. Rivalry Among Existing Competitor (3)

Rivalry is intensified if:









Competitors are roughly equal in size
Industry growth is slow
Exit barrier is high
High fixed cost
Low differentiation in product
Aspiration for leadership
Cannot read each other signal well
Normally intensifies over time
Alter by mergers and acquisitions and
innovation

12. Rivalry Among Existing Competitor (4)

Basis of competition:





Price – reduce profit
Product features
Support service
Delivery time
Brand image
• Less likely to reduce profit
• Improve value and increase
barrier to entry

13. Rivalry Among Existing Competitor (5)

Price competition occur if:




Product are nearly identical & less switching
cost
Fixed cost is high
To improve efficiency of production
Product is perishable

14. Rivalry Among Existing Competitor (6)

15. The Power of Buyer (1)

The aim is to maximize profit



Capture more value by forcing down price
Demanding better quality
Demanding greater level of service

Power will change with time

Strategically, the firm must able to choose
to whom it buy from

16. The Power of Buyer (2)

A buyer has negotiating leverage if:






There are few buyers
Buyer volume is big
Products are standardized or undifferentiated
Few / little switching cost
Ability of backward integration
IT / Internet

17. The Power of Buyer (3)

A buyer is price sensitive if:




Product purchased represent a significant
fraction of its cost or price/total purchase is
high
Buyer earn low profit
Quality of buyer’s product is little affected by
product purchased
Product purchased has little effect on buyer’s
other cost

18. The Power of Buyer (Example)
• SCA
sold 1 billions baby diapers a year
• Purchase large volume of raw material from suppliers
• Raw materials are common in industry
• Less switching cost
SCA has good bargaining power
• Profit margin is low, sell by volume. Save 1sen in a
product will save RM10 million/ year.
• about 70% of the cost is from raw material
SCA is very sensitive to raw material pricing

19. 1)Opening :
1-1
Introduction
1-2
Issue
1-3
New forces
Content
2)2 Forces :
2-1
Rivalry among existing competitors
2-2
Bargaining power of buyers
3)2 Forces :
3-1
Threat of new entrants
3-2
Bargaining power of suppliers
4)1 Force :
4-1
Threat of substitute products or services
5)Conclusion

20. Threats of New Entrants

The easier it is for new companies to enter the
industry, the more cutthroat competition there
will be. Factors that can limit the threat of new
entrants are:






Existing loyalty to major brands
Incentives for using a particular buyer
High fixed costs
Scarcity of resources
High costs of switching companies
Government restrictions or legislation

21. Starbucks Fight against Threats of
New Entrants (1)

Past



Products within the industry were greatly
differentiated
Leasing of property, construction of roasting
plants.
Specialized equipment for brewing the coffee.
Threat Level : Low

22. Starbucks Fight against Threats of
New Entrants (2)

Present



Ambience of the store
Social responsibility of the company
Brand Identification
Threat Level: Moderate Low

23. Suppliers Power

If one supplier has a large enough impact to
affect a company's margins and volumes,
then it holds substantial power.





There are very few suppliers of a particular product
There are no substitutes
Switching to another (competitive) product is very
costly
The product is extremely important to buyers
The supplying industry has a higher profitability than
the buying industry

24. Starbucks Defense against Suppliers
Power (1)

Past


Quality of Arabica Beans gives farmers
(suppliers) of these beans an upper hand.
Suppliers upper hand on specialized equipment
production for coffee making appliances.
Suppliers Power: Extreme Low

25. Starbucks Defense against Suppliers
Power (2)

Present




Farmers Compensation through Fair-Trade
Certified Coffee; conscious customers pull.
Bigger market target compared to before
(McDonald, Denny’s)
Introduction of Longterm Contract of coffee
beans supplies.
Suppliers still have upper hand on specialized
equipment production for coffee making
appliances.
Threat Level: Moderate Low

26. 1)Opening :
1-1
Introduction
1-2
Issue
1-3
New forces
Content
2)2 Forces :
2-1
Rivalry among existing competitors
2-2
Bargaining power of buyers
3)2 Forces :
3-1
Threat of new entrants
3-2
Bargaining power of suppliers
4)1 Force :
4-1
Threat of substitute products or services
5)Conclusion

27. The Power of Substitutes
Products or Services (1)



Threats of Substitute in the Porter’s theory actually means
goods and services that does similar functions
This allows the customer to shift loyalty to another product
based on:=
• Preference to the substitute
• Relative price performance of the substitute
• Buyers switching costs
• Perceived level of product differentiation
Example : = The price of aluminum beverage cans is
constrained by the price of glass bottles, steel cans, and plastic
containers. These containers are substitutes. In terms of
Services, there is also the cable TV and the state owned TV.
MAS and Air Asia.

28. The Power of Substitutes
Products or Services (2)




When there is one product successful, it also leads to the
creation of other products that can perform the same
functions as the product of the same industry.
A close substitute product constrains the ability of firms in
an industry to raise prices.
When there are substitutes, it puts a cap to the profits an
industry can obtain. It places a ceiling or limit to the a firm
wishes to charge. The more attractive the substitutes are,
the tighter it is for an industry to mark up prices
This does not only apply to normal economical times,
but also even when the economy is doing well and thriving.

29. The Power of Substitutes
Products or Services (3)

Porter also mentions that if one industry wishes
to follow suit producing products with similar
function, attention should be given to :
1. Products that enjoy steady price-performance tread offs
with the industry’s product
2. Would entail minimum switching costs for a buyer.
3. Are produced by industry earning high profits

Porter recommends that by doing advertising,
product quality improvement, marketing, R&D
and product distribution, an industry can improve
its collective position against the substitute.

30. The Power of Substitutes
Products or Services (4)
Porter’s opinion is that to strategize product on price,
quality, after sales service and location in order to
create value and to reduce another product from looking
“attractive”. In other words, Porter’s theory is to create a
difference or be different. By being distinctive, you are
able to win over your customer though there are dozens
of products with similar functions in the market.
Example: Google
Excite, Lycos, Alta
and other search engines like Yahoo,
Vista Etc

31. The Power of Substitutes
Products or Services (5)



Sample Case 1 : To help smokers in India, herbal cigarettes
(Nirdosh) was introduced. However it is not that popular
among smokers.
Nicotine Patch another substitute, however not popular.
Cigarettes have an emotional value to smokers.

32. The Power of Substitutes
Products or Services (6)




Sample Case 2: Pharma Industry has substitute s but
doesn’t face threat because the industry depends on several
organic chemicals.
Very competitive and fragmented industry in most
countries.
Suppliers have low bargaining power.
The industry can switch from one supplier to another
without incurring high costs.

33. Conclusion

Today IT/ digitalization, unstable economy condition
or needs, government laws, globalisation, customer
expectation and organization reinvention have become
powerful forces and will continue to do so in the coming
years. Porters model doesn’t clearly or touches much on
those.

We also find that Michael Porter simplified economic
theory in which the law of economy existed long ago, for
example Bargaining power of supplier is actually the supply
and demand theory.

Porters model IS NOT INVALID but can be the basic for
strategy development, management technique and
theories. An industry must do a careful market
observations and internal and external factors,
understand the limitations from this model and study
where their company intends to go in future.

34. References




Thurlby, B.(1998). Competitive forces are also subject to
change., Management Decision Journal, Vol. 36: 19-24.
Ireland, R.D, Hoskisson, R.E, and Hitt, M.A. (2009). The
Management of Strategy Concept, 8th Edition, Mason: South
Western.
Porter, M.E (2008). How competitive forces shape
strategy, Harvard Business Review.
Metts, G(2007). Measuring the effectiveness of managerial
action in SMEs; An empirical analysis of management's
response to industry competitive forces, Management
Research News, Vol 30. No. 12. pp 892-914

35. References (Cont.)



Hernández-Espallardo, Delgado-Ballester (2009). Product
innovation in small manufacturers, market orientation and
the industry's five competitive forces; Empirical evidence
from Spain, European Journal of Innovation Management,
Vol. 12. No.4. pp 470-491
Thurlby, Bob (1998). Competitive forces are also subject to
change, Management Decision Journal,Vol 36 No.1.
pp 19-24
Higbee, Z., Yee Liaw, C., Ting, C., Tjho, K., Ton, Michelle.
The Future of Starbucks