1. Five Forces Model of Michael Porter2. Blue Ocean Strategy3. Strategic Principles

Group 5 - Outline

Outline

The five competitive forces that shape strategy

Foces that shape competition

Factors, not Forces

Change in industry structure

Implications for strategy

1. The threat of new entrant2. The bargaining power of suppliers3. The bargaing power of buyers4. The threat of substitutes5. Rivalry among existing competitors

I. Forces that shape competition

• New entrants to an industry bring new capacity and a desire to gain market share that put pressure on prices, costs, and

the rate of investment necessary to compete reduce the potential profit in the industry.

• Barriers to entry. Entry barriers are advantages that incumbents have relative to new entrants. There are seven major sources:

1. The threat of new entrant

• Barriers to entry:• 1. Supply-side economies of scale : These economies arise when firms

that produce at larger volumes enjoy lower costs per unit because they can spread fixed costs over more units, employ more efficient technology, or command better terms from suppliers.

1. The threat of new entrant

• Barriers to entry:• 2. Demand-side benefits of scale. These benefits, also known as network

effects, arise in industries where a buyer’s willingness to pay for a company’s product increases with the number of other buyers who also patronize the company.

1. The threat of new entrant

• Barriers to entry:• 3.Customer switching costs. Switching costs are fixed costs that buyers

face when they change suppliers.

1. The threat of new entrant

• Barriers to entry:• 4. Capital requirements. The need to invest large financial

resources in order to compete can deter new entrants.•

• VS

1. The threat of new entrant

• Barriers to entry:• 5. Incumbency advantages independent of size. No matter what their

size, advantages can stem from such sources as proprietary technology, preferential access to the best raw material sources, preemption of the most favorable geographic locations, established brand identities, or cumulative experience that has allowed incumbents to learn how to produce more efficiently.

1. The threat of new entrant

• Barriers to entry:• 6. Unequal access to distribution channels. The new entrant must, of

course, secure distribution of its product or service.• For example:• New food product must displace others from the supermarket shelf via

price breaks, promotions, intense selling efforts, or some other means. it is very costly

1. The threat of new entrant

• Barriers to entry:• 7. Restrictive government policy. Government policy can hinder or aid

new entry directly, as well as amplify (or nullify) the other entry barriers.

1. The threat of new entrant

• Expected retaliation. How potential entrants believe incumbents may react will also influence their decision to enter or stay out of an industry.

• The expected retaliation will be high if:• Incumbents have previously responded vigorously to new

entrants.• Incumbents possess substantial resources to fight back.• Incumbents seem likely to cut prices because they are

committed to retaining market share• Industry growth is slow so newcomers can gain volume

only by taking it from incumbents.

1. The threat of new entrant

• Powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants.

2.The bargaining power of suppliers

It is more concentrated than the industry it sells to.• For example: Microsoft’s near monopoly in operating systems,

coupled with the fragmentation of PC assemblers.• Microsoft becomes very powerful supplier with their partners. 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. There is no substitute for what the supplier group provides.

( Electricity)

Suppliers is powerful if:

• Powerful customers. 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.

3.The bargaing power of buyers

There are few buyers, or each one purchases in volumes that are large relative to the size of a single vendor.

The industry’s products are standardized or undifferentiated. Buyers can credibly threaten to integrate backward and

produce the industry’s product themselves The product it purchases from the industry represents a

significant fraction of its cost structure or procurement budget.

The buyer group earns low profits, The industry’s product has little effect on the buyer’s other

costs. Here, buyers focus on price.

Buyer is more powerful if:

• Substitute performs the same or a similar function as an industry’s product by a different means.

• 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 it will suffer in terms of profitability

4.The threat of substitutes

It offers an attractive price-performance trade-off to the industry’s product. The better the relative value of the substitute, the tighter is the lid on an industry’s profit potential.

The buyer’s cost of switching to the substitute is low.

The threat of a substitute is high if:

• Rivalry among existing competitors takes many familiar forms, including price discounting, new product introductions, advertising campaigns, and service improvements.

• High rivalry limits the profitability of an industry.

Rivalry among existing competitors

• 1.Competitors are numerous or are roughly equal in size and power.

• Ex: instant noodle industry in Vietnam

The intensity of rivalry is greatest if:

• 2.Industry growth is slow. Slow growth precipitates fights for market share.

• 3.Firms cannot read each other’s signals well because of lack of familiarity with one another, diverse approaches to competing, or differing goals.

The intensity of rivalry is greatest if:

• 4. Exit barriers are high. These barriers keep companies in the market even though they may be earning low or negative returns. Excess capacity remains in use, and the profitability of healthy competitors suffers as the sick ones hang on.

The intensity of rivalry is greatest if:

• 5. Price competition is intense (most important factor)

• Price competition transfers profits directly from an industry to its customers.

• Sustained price competition also trains customers to pay less attention to product features and service.

The intensity of rivalry is greatest if:

Industry growth rateTechnology and innovationGovernmentComplementary products and services

II. Factors, not Forces

Shifting threat of new entryChanging supplier or buyer powerShifting threat of substitutionyNew bases of rivalry

III. Change in industry structure

Positioning the companyExploiting industry changeShaping industry structure

IV. Implications for strategy

In today’s head-to-head competition……And overcrowded industries…

How to survive in the bloody “red ocean” of rivals fighting over a shrinking profit pool?

Creating “blue oceans” of uncontested market space ripe for growth.

Creating Blue Oceans

Red Ocean Versus Blue Ocean Strategy

Red Ocean Strategy Blue Ocean Strategy

Compete in existing market space. Create uncontested market space.

Beat the competition. Make the competition irrelevant.

Exploit existing demand. Create and capture new demand.

Make the value-cost trade-off. Break the value-cost trade-off.

Align the whole system of a firm’s activities with its strategic choice of differentiation or low cost.

Align the whole system of a firm’s activities in pursuit of differentiation and low cost.

Value Innovation

Costs

Value

Costs

Value

Value Innovation is Simultaneous pursuit of High value & Low cost

Traditional Companies Blue Ocean Companies

Eliminate

Reduce

Raise

Create

1. Cost savings are made by eliminating and reducing the factors an industry competes on.2. Buyer value is lifted by raising and creating elements the industry has never offered.

Blue oceans are not about technology innovation

Incumbents often create blue ocean within business.

Company and industry are the wrong units of analysis

Creating blue oceans builds brands

Blue Ocean of TH True Milk

TH stands for True Happiness.Pure

Fresh

Modern

Perfect production line

- Our herd of milk cows is looked after carefully.- They live in an environment with music, drink clean water, breathe in the pure air and have daily bath.

Create new niche markets and to be market leader

True Pure Milk Market

Completely new Products

Blue ocean of X-men

Shampoo for women is only for women

Shampoo for men is only for men

To be a men,

let’s use “your own”

shampoo.

If you love your husband,

let him use his

own shampoo

.

Blue ocean of Pho 24

+ Reduce unnecessary ingredients in bowl of pho as sugar, salt…+Increase the safety standards of food hygiene+ Remove chemicals that are harmful to consumers+ Creating new designs to create beautiful space for cafes, franchise.

Blue ocean strategy with products and marketing

Create Uncontested market Space Make the Competition Irrelevant.

Group 5: Heroes VNU Campus

Strategic principle is a memorable and actionable phrase that distills a company’s corporate strategy into its unique essence and communicates it throughout the organization.

1.

•maintain strategic focus

2.

•empower workers to innovate and take risks.

3.

•seize fleeting opportunities

A effective strategic principle lets a company:

4.

• create products and services that meet subtle shifts in customers’ needs

It forces trade-offs between competing resource demands;

It tests the strategic soundness of a particular action;

It sets clear boundaries within which employees must operate while granting them freedom to experiment within those constraints.

Three Defining Attributes

A corporate strategy represents a plan to effectively allocate scarce resources to achieve sustainable competitive advantage.

Managers need to ask themselves: how does my company allocate those resources to create value in a unique way, one that differentiates my company from competitors?

Idea has been expressed in a phrase.Test the principle for its ability to promote and

guide action.

Create a strategic principle

• No strategy is eternal, nor is any strategic principle

• It’s worth revisiting your strategic principle every time you reexamine your strategy, it is likely to change only when there is a significant shift in the basic economics and opportunities of your market caused by, say, legislation or a completely new technology or business model.

When rethink is required