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Business strategiesBusiness strategies

- Growth strategies- Growth strategies

ByBy

K Hari Krishnan. BE.,MBA.,K Hari Krishnan. BE.,MBA.,

VIT Business SchoolVIT Business SchoolEmail : [email protected] : [email protected]

27.12.2006 Session 1


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Five Competitive Forces

Threat ofNew

Entrants

Rivalry AmongExisting

Competitors

Bargaining Powerof Customers

Bargaining Powerof Suppliers

Threat ofSubstitutes


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Threat of

Substitute

Products

Threat of

Substitute

Products

Threat ofNew

Entrants

Threat of

New Entrants

Threat of

New Entrants

Rivalry Among

Competing Firms

in Industry

Rivalry Among

Competing Firms

in Industry

Bargaining

Power of

Buyers

Bargaining

Power of

Buyers

Bargaining

Power of

Suppliers

Bargaining

Power of

Suppliers

Porters Five Forces

Model of Competition

Porters Five Forces



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The purpose ofThe purpose of

Five-Forces AnalysisFive-Forces Analysis

The five forces are environmental forcesThe five forces are environmental forces

that impact on a companys ability tothat impact on a companys ability tocompete in a given market.compete in a given market.

The purpose of five-forces analysis is toThe purpose of five-forces analysis is to

diagnose the principal competitive pressuresdiagnose the principal competitive pressures

in a market and assess how strong andin a market and assess how strong and

important each one is.important each one is.


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Threat ofNew

Entrants

Threat ofNew

Entrants

Threat of

New Entrants

Threat of

New Entrants

Porters Five Forces


Porters Five Forces



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Threat of New EntrantsThreat of New Entrants

Barriers to

Entry

Barriers to

Entry

Expected RetaliationExpected Retaliation

Government PolicyGovernment Policy

Economies of ScaleEconomies of Scale

Product DifferentiationProduct Differentiation

Capital RequirementsCapital Requirements

Switching CostsSwitching Costs

Access to Distribution ChannelsAccess to Distribution Channels

Cost Disadvantages IndependentCost Disadvantages Independent

of Scaleof Scale


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Bargaining

Power of

Suppliers

Bargaining

Power of

Suppliers

Threat ofNew

Entrants

Threat of

New Entrants

Threat of

New Entrants

Porters Five Forces


Porters Five Forces



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Bargaining Power of SuppliersBargaining Power of Suppliers

Suppliers exert power

in the industry by:

Suppliers exert power

in the industry by:

* Threatening to raise* Threatening to raise

prices or to reduce qualityprices or to reduce quality

Powerful suppliers

can squeeze industry

profitability if firms

are unable to recover

cost increases

Powerful suppliers

can squeeze industry

profitability if firms

are unable to recover

cost increases

Suppliers are likely to be powerful if:Suppliers are likely to be powerful if:

Supplier industry is dominated by aSupplier industry is dominated by afew firmsfew firms

Suppliers products have few substitutesSuppliers products have few substitutes

Buyer is not an important customer toBuyer is not an important customer tosuppliersupplier

Suppliers product is an importantSuppliers product is an importantinput to buyers productinput to buyers product

Suppliers products are differentiatedSuppliers products are differentiated

Suppliers products have highSuppliers products have highswitching costsswitching costs

Supplier poses credible threat ofSupplier poses credible threat of

forward integrationforward integration


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Bargaining

Power of

Buyers

Bargaining

Power of

Buyers

Threat ofNew

Entrants

Threat of

New Entrants

Threat of

New Entrants

Bargaining

Power of

Suppliers

Bargaining

Power of

Suppliers

Porters Five Forces


Porters Five Forces



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Bargaining Power of BuyersBargaining Power of Buyers

Buyers compete

with the supplying

industry by:

Buyers compete

with the supplying

industry by:

*Bargaining down prices*Bargaining down prices

* Forcing higher quality* Forcing higher quality

* Playing firms off of* Playing firms off of

each othereach other

Buyer groups are likely to be powerful if:Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases areBuyers are concentrated or purchases are

large relative to sellers saleslarge relative to sellers sales

Purchase accounts for a significantPurchase accounts for a significantfraction of suppliers salesfraction of suppliers sales

Products are undifferentiatedProducts are undifferentiated

Buyers face few switching costsBuyers face few switching costs

Buyers industry earns low profitsBuyers industry earns low profitsBuyer presents a credible threat ofBuyer presents a credible threat of

backward integrationbackward integration

Product unimportant to qualityProduct unimportant to quality

Buyer has full informationBuyer has full information


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Threat of

Substitute

Products

Threat of

Substitute

Products

Threat ofNew

Entrants

Threat of

New Entrants

Threat of

New Entrants

Bargaining

Power of

Buyers

Bargaining

Power of

Buyers

Bargaining

Power of

Suppliers

Bargaining

Power of

Suppliers

Porters Five Forces


Porters Five Forces



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Threat of Substitute ProductsThreat of Substitute Products

Products

with similar

function limitthe prices

firms can

charge

Products

with similar

functionlimitthe prices

firms can

charge

Keys to evaluate substitute products:Keys to evaluate substitute products:

Products with improvingProducts with improving

price/performance tradeoffsprice/performance tradeoffs

relative to present industryrelative to present industryproductsproducts

Example:Example:

Electronic security systems inElectronic security systems inplace of security guardsplace of security guards

Fax machines in place ofFax machines in place of

overnight mail deliveryovernight mail delivery


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Threat of

Substitute

Products

Threat of

Substitute

Products

Threat ofNew

Entrants

Threat of

New Entrants

Threat of

New Entrants

Rivalry Among

Competing Firms

in Industry

Rivalry Among

Competing Firms

in Industry

Bargaining

Power of

Buyers

Bargaining

Power of

Buyers

Bargaining

Power of

Suppliers

Bargaining

Power of

Suppliers

Porters Five Forces


Porters Five Forces



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Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:Intense rivalry often plays out in the following ways:

Jockeying for strategic positionJockeying for strategic position

Using price competitionUsing price competition

Staging advertising battlesStaging advertising battles

Making new product introductionsMaking new product introductions

Increasing consumer warranties or serviceIncreasing consumer warranties or service

Occurs when a firm is pressured or sees an opportunityOccurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse offPrice competition often leaves the entire industry worse off

Advertising battles may increase total industry demand, butAdvertising battles may increase total industry demand, but

may be costly to smaller competitorsmay be costly to smaller competitors


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CutthroatCutthroatcompetitioncompetition is more likely to occur when:is more likely to occur when:

Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

Numerous or equally balanced competitorsNumerous or equally balanced competitors

Slow growth industrySlow growth industry

High fixed costsHigh fixed costs

Lack of differentiation or switching costsLack of differentiation or switching costs

High storage costsHigh storage costs

Capacity added in large incrementsCapacity added in large increments

High strategic stakesHigh strategic stakes

High exit barriersHigh exit barriers

Diverse competitorsDiverse competitors


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The Five Forces are UniqueThe Five Forces are Unique

to Your Industryto Your Industry

Five-Forces Analysis is a framework forFive-Forces Analysis is a framework for

analyzing a particular industry.analyzing a particular industry. Yet, the five forces affect all the other businessesYet, the five forces affect all the other businesses

in that industry.in that industry.


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GrowthGrowth

InternalInternal

ExternalExternal

LicensingLicensing FranchisingFranchising

Strategic AllianceStrategic Alliance

Joint ventureJoint venture

Merger & AcquisitionsMerger & Acquisitions

Green field venturesGreen field ventures


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Concentration growthConcentration growth

If a companys current product lines have real growth potential.If a companys current product lines have real growth potential. Growing firms in a growing industry tend to choose theseGrowing firms in a growing industry tend to choose these

strategiesstrategies

VerticalVertical Forward integrationForward integration Assuming a function previously provided by distributorsAssuming a function previously provided by distributors

Backward integrationBackward integration Assuming a function previously provided by a supplierAssuming a function previously provided by a supplier

HorizontalHorizontal Extending product variants and scope of operations into other territoriesExtending product variants and scope of operations into other territories


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Concentric growthConcentric growth

Related diversificationRelated diversification Entering into related businesses opportunities forEntering into related businesses opportunities for

Transferring competitively valuable expertise,Transferring competitively valuable expertise,

technological know-how and other capabilities from onetechnological know-how and other capabilities from one

business to another.business to another.

Combining related activities to reduced costCombining related activities to reduced cost

Achieving economies of scopeAchieving economies of scope

Exploiting well known common brand name / contactExploiting well known common brand name / contact

Achieving synergy 1+ 2 > 3Achieving synergy 1+ 2 > 3

Examples Rolls royce Aircraft , Automobiles engExamples Rolls royce Aircraft , Automobiles eng

GE electrical appliances , captive power gensets, energyGE electrical appliances , captive power gensets, energy

generation / diesel locomotivesgeneration / diesel locomotives


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Conglomerate growthConglomerate growth

Un-related diversificationUn-related diversification Diversifying into an industry unrelated to its current one.Diversifying into an industry unrelated to its current one.

Future growth given importanceFuture growth given importance

To spread the business riskTo spread the business risk Ex TATA : steel / Automobile / IT / Tea / FMCG / LifeEx TATA : steel / Automobile / IT / Tea / FMCG / Life

Style / Publishing / Power & energyStyle / Publishing / Power & energy

ITC Cigarettes / FMCG/ PackagingITC Cigarettes / FMCG/ Packaging

King fisher Hard Drinks / AirlinesKing fisher Hard Drinks / Airlines Wipro FMCG/ IT / ElectricalsWipro FMCG/ IT / Electricals

Godreg Machine tools / FMCGGodreg Machine tools / FMCG


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Turn AroundTurn Around

Turn around management refers to theTurn around management refers to the

management measures that reverse themanagement measures that reverse the

negative trends in the performance indicatorsnegative trends in the performance indicators

of the company (ie) turn a sick company backof the company (ie) turn a sick company back

to a healthy one.to a healthy one.


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Indicators for the need of Turn aroundIndicators for the need of Turn around

Persistence negative cash flowPersistence negative cash flow

Declining Market ShareDeclining Market Share

Deterioration in physical facilitiesDeterioration in physical facilities


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Elements that contribute to a Turn aroundElements that contribute to a Turn around

Changes in Top managementChanges in Top management

To initiate credibility actionTo initiate credibility action

Neutralizing external pressureNeutralizing external pressure Initial control / cost controlInitial control / cost control

Revenue generation thru liquidation of Non-Revenue generation thru liquidation of Non-

performing assetsperforming assets Better co-ordinationBetter co-ordination


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