PORTER’S GENERIC STRATEGIES AND FIVE FORCES By: Kavita, Chris, and Jake WHAT IS IT? • Michael Porter • Is this profitable? • Where is the power? • What is my current competitive position? FIVE FORCES • Is this an attractive market or industry for us to compete in? GENERIC STRATEGIES • How can we best compete for customers in this market/industry? GENERIC STRATEGIES • Market Scope asks How broad or narrow is our target market? • Source For Competitive Advantage asks Will you compete for competitive advantage by lower price or product uniqueness? GENERIC STRATEGIES GENERIC STRATEGIES • Differentiation Strategy Organization’s resources and attention are directed toward making its products appear different from those of the competition (ex: Coke, Pepsi) • Market scope = Broad • Source of competitive advantage = Unique product GENERIC STRATEGIES • Cost Leadership Organization’s resources and attention are directed toward minimizing costs to operate more efficiently than the competition (ex: Wal-Mart) • Market scope = Broad • Source of competitive advantage = Low price GENERIC STRATEGIES • Focused Differentiation Concentrates on a particular market segment and tries to offer the most unique product in that segment • Market scope = Narrow • Source for competitive advantage = Unique product • Focused Cost Leadership Concentrates on a particular market segment and tries to be the provider with the lowest costs in that segment • Market scope = Narrow • Source for competitive advantage = Low price GENERIC STRATEGIES • Differentiation Strategy (in depth) • Seeks advantage though uniqueness Done by: • Certain look (ex: Polo Ralph Lauren, American Apparel, Roots) • Lifestyle advertising (ex: Coca Cola, Pepsi, Much Music) ____________________________________________________________ • Goal is to attract consumers who will be loyal and ignore the competitions’ products • This strategy requires organizational strengths in marketing, research and development, and creativity. Differentiation’s success is dependent upon the consumers’ continuing perceptions of quality and uniqueness. GENERIC STRATEGIES • Cost Leadership Strategy (in depth) • Your goal is to have the lowest prices available to receive the largest profit Done by: • Continually improving operating efficiencies of production, distribution, and other organizational systems. _________________________________________________ • Requires tight cost and managerial controls as well as products that are easy to manufacture and distribute • Perfect example is Wal-Mart GENERIC STRATEGIES • Focus Strategies (in depth) • Concentrate on a special market segment with the objective to serve it better than anyone else • Focus organizational resources and attention on a particular customer , geographical region, or product/service line • Seek the competitive advantage in that singular segment through product differentiation or cost leadership • Example = WestJet COMPETITIVE RIVALRY • Number of competitors • Quality differences • • Can other companies offer equally attractive products? Other (product) differences • Who holds the power? • Switching costs • Can other companies do what you do? • Customer loyalty • Will your customers stay or go? • Costs of leaving the market • Fixed costs/value added • Brand identity • Diversity of rivals • Industry growth • Corporate stakes COMPETITIVE RIVALRY • Rivalry drives profits to zero • Varies across industries • Industry concentration • Companies can choose from various rival strategies to win a competitive advantage • There are many characteristics to determine the intensity of rivalry BUYER POWER Buyer Power depends on the following: • Number of customers • Size of each order • Differences between competitors • Price sensitivity • Ability to substitute • Cost of changing • Monopsony: multiple suppliers and one buyer SUPPLIER POWER • How easy it is for suppliers to drive up prices • Less suppliers = more power for the suppliers THREAT OF NEW ENTRY • Profitable markets that yield high returns will attract new firms • New companies= decrease profits Types: • Time and cost of entry • Experience is needed • Investment cost • Training is available • Technology protection • Economies of scale • Barriers to entry • Specialized Assets • Brand identity • Access to distribution HIGH VS. LOW INDUSTRY PROFITS High industry profits associated with: • Weak suppliers • High entry barriers • Few substitutes • Little rivalry Low industry profits associated with: • Strong suppliers • Low entry barriers • Many substitutes • Intense rivalry BARRIERS TO ENTRY • Examples of Barriers to Entry: -Patents -Copy Rights • Most attractive market segment is one in which entry barriers are high and exit barriers are low • Governments creates barriers too –permits, grants, restrictions ..etc. ENTERING AND EXITING A MARKET Easy to enter if: Difficult to Enter if there is: • Access to distribution channels • Little Brand Identity • Common technology • Patents • Difficulty in brand switching • Restricted distribution channels Easy to Exit if there are: Difficult to Exit if there are: • Low exit cost • Independent businesses • Assets are easy to sell • Hard to sell assets • High exit costs • Interrelated Businesses BRAND IDENTITY • Consumers will believe that a product with a well-known name is better than products with a less well-known name • New firms won’t join if there is a big name brand ECONOMICS OF SCALE • This has to do with the MES which is the Minimum Efficient Scale • Unit cost for production are at a minimum ex. the most cost efficient level of production • If MES for firms in an industry is known, then we can determine the amount of market share necessary for low cost entry • Creates a barrier: The greater the difference between industry MES and entry unit cost, the greater the barrier to entry. SPECIALIZED ASSETS • Extent to which the firms assets can be utilized to produce a different product • Expensive assets/ equipment • Provides a barrier for two reason: 1. when a firm already holds specialized assets, new companies don’t bother in joining the market segment because it would be intense rivalry (not a lot of profit) 2. Potential entrants do not want to make huge investments in highly specialized assets -hard to sell if venture fails OTHERS…. • Time and cost of entry: -is it expensive to enter the market? Does it require a lot of time to enter? ______________________________________________________________________________ • Access to distribution: -is there a company that already has the distribution rights? -A lack of access will make it difficult for newcomers to enter the market ______________________________________________________________________________ • Training is available: -do your employees need to be specially trained? Can they get the training somewhere? Ex- CPR training OTHERS… • Experience is needed: -do you already have to have experience in the field to join the market? --------------------------------------------------------------------------------------------------------------------------• Investment Cost: -High cost will deter entry -High capital requirements might mean that only large businesses can compete THREAT OF SUBSTITUTES • Refers to products in other industries • Substitution is easy=weakens your power • Ex: Instead of THREAT OF SUBSTITUTES • Threat of Substitute exists when a products demand is affected by the price change of substitute products • Price elasticity: as more substitutes become available, demand becomes more elastic since buyers have more options • A close substitute product constrains the ability of firms in an industry to raise prices • Substitute performance: price and performance of the substitute can match the industry’s product • Cost of Change: if it is low cost to switch then you is in serious trouble