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8/8/2019 Lecture 7 - Industry Analysis (2)
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Industry Structural Analysis:Industry Structural Analysis:
The Five Forces model.The Five Forces model.
Lecture SevenLecture Seven
8/8/2019 Lecture 7 - Industry Analysis (2)
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The Aims of this SessionThe Aims of this Session
Explore means ofinterpreting the businessExplore means ofinterpreting the business
environment.environment.
Examine the 5 Forces that make up PortersExamine the 5 Forces that make up Portersmodelofindustry analysis.modelofindustry analysis.
Link to the drivers emergingfrom theLink to the drivers emergingfrom the
Environmental Analysis.Environmental Analysis.
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Industry AnalysisIndustry Analysis
Buildingon the themes explored in the EnvironmentalBuildingon the themes explored in the EnvironmentalAnalysis the focus is narrowed to the Industry inwhichAnalysis the focus is narrowed to the Industry inwhichthe business operates.the business operates.
In manyways this focus is more common as it relatesIn manyways this focus is more common as it relatesto the more dayto the more day--toto--day aspects ofmanagement.day aspects ofmanagement.
However, from a strategic perspective industry analysisHowever, from a strategic perspective industry analysisis looking at the present but also theway that theis looking at the present but also theway that the
industry is shaping.industry is shaping. At the heart ofthe analysis is the Balance ofPower inAt the heart ofthe analysis is the Balance ofPower in
each ofthe forces.each ofthe forces.
Is the Business in a weakor strongposition?Is the Business in a weakor strongposition?
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Potentialentrants
Threat of
entrants
BuyersSuppliers
Bargaining
power
Bargaining
power
Substitutes
Threat of
substitutes
COMPETITIVE
RIVALRY
Source: Adapted from M.E. Porter, Competitive Strategy, Free Press, 1980, p.4. Copyright by the Free Press, a division of Macmillian Publishing Co., Inc. Reproduced with
permission
Five forces analysis
P E
E T
S
L
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FIVE FORCES ANALYSIS (1)FIVE FORCES ANALYSIS (1)
The threat of entry ...The threat of entry ...
Dependent on barriers to entry such as:Dependent on barriers to entry such as:
economies of scaleeconomies of scale
capital requirements of entrycapital requirements of entry access todistribution channelsaccess todistribution channels
cost advantages independent of sizecost advantages independent of size
(e.g. the experience curve)(e.g. the experience curve)
expected retaliationexpected retaliation
legislation or government actionlegislation or government action
differentiationdifferentiation
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FIVE FORCES ANALYSIS (2)FIVE FORCES ANALYSIS (2)
Buyer power is likely to be highwhen:Buyer power is likely to be highwhen:
there is a concentration of buyersthere is a concentration of buyers
there are many smalloperators in the supplyingthere are many smalloperators in the supplying
industryindustry there are alternative sources of supplythere are alternative sources of supply
components or materials are a high percentage ofcomponents or materials are a high percentage of
cost to the buyer leading to shopping aroundcost to the buyer leading to shopping around
switching costs are lowswitching costs are low
there is a threat of backward integrationthere is a threat of backward integration
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FIVE FORCES ANALYSIS (3)FIVE FORCES ANALYSIS (3)
Supplier power is high when:Supplier power is high when:
there is a concentration of suppliersthere is a concentration of suppliers
switching costs are highswitching costs are high the supplier brand is powerfulthe supplier brand is powerful
integration forward by the supplier is possibleintegration forward by the supplier is possible
customers are fragmented and bargainingcustomers are fragmented and bargainingpower lowpower low
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FIVE FORCES ANALYSIS (4)FIVE FORCES ANALYSIS (4)
Threat of substitutesThreat of substitutes
Substitutes take different forms:Substitutes take different forms:
product substitutionproduct substitution substitution of needsubstitution of need
generic substitutiongeneric substitution
doingwithoutdoingwithout
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FIVE FORCES ANALYSIS (5)FIVE FORCES ANALYSIS (5)
Competitive Rivalry is highwhen:Competitive Rivalry is highwhen:
entry is likelyentry is likely
substitutes threatensubstitutes threaten
buyers or suppliers exercise controlbuyers or suppliers exercise control competitors are in balancecompetitors are in balance
there is slowmarket growththere is slowmarket growth
global customers increase competitionglobal customers increase competition
there are high fixed costs in an industrythere are high fixed costs in an industry
markets are undifferentiatedmarkets are undifferentiated
there are high exit barriersthere are high exit barriers
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FIVE FORCES ANALYSIS: KEYFIVE FORCES ANALYSIS: KEY
QUESTIONS AND IMPLICATIONSQUESTIONS AND IMPLICATIONS
What are theWhat are the key forceskey forcesat work in the competitiveat work in the competitive
environment?environment?
Are thereAre there underlyingforcesunderlyingforcesdriving competitive forces?driving competitive forces?
Will competitiveWill competitiveforcesforceschange?change?
What are theWhat are the strengths andweaknessesstrengths andweaknessesof competitors inof competitors in
relation to the competitive forces?relation to the competitive forces?
CanCan competitive strategycompetitive strategyinfluence competitive forces (e.g.influence competitive forces (e.g.
by building barriers to entryor reducing competitiveby building barriers to entryor reducing competitive
rivalry)?rivalry)?
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Considerations in using the Five ForcesConsiderations in using the Five Forces
The focus should be at theThe focus should be at the SBUSBU level not thelevel not the
corporatecorporate
Understand
Understandconnectionsconnectionsbetween forcesbetween forces
It is dangerous to consider the forces asIt is dangerous to consider the forces as separateseparate
from each otherfrom each other
Behaviour may come from
Behaviour may come from disruptingdisruptingthe forcesthe forces
The model should not be seen as aThe model should not be seen as a staticstaticpicturepicture
Are there more forces?Are there more forces?
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Potentialentrants
Threat of
entrants
BuyersSuppliers
Bargaining
power
Bargaining
power
Substitutes
Threat of
substitutes
COMPETITIVE
RIVALRY
Source: Adapted from M.E. Porter, Competitive Strategy, Free Press, 1980, p.4. Copyright by the Free Press, a division of Macmillian Publishing Co., Inc. Reproduced with permission
Extended Five forces analysis
The Environment