Industry and Structural Analysis Drivers of Change Five-forces Model of Competition (video)
The threat of the entry of new competitors
Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate will tend towards zero (perfect competition).
The existence of barriers to entry (patents, rights, etc.) The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily. Economies of product differences Brand equity Switching costs or sunk costs Capital requirements Access to distribution Customer loyalty to established brands Absolute cost
Industry profitability; the more profitable the industry the more attractive it will be to new competitors
[edit] The threat of substitute products or services
The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives:
Buyer propensity to substitute Relative price performance of substitute Buyer switching costs Perceived level of product differentiation Number of substitute products available in the market Ease of substitution. Information-based products are more prone to substitution, as online product can easily replace material product. Substandard product Quality depreciation
[edit] The bargaining power of customers (buyers)
The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes.
Buyer concentration to firm concentration ratio Degree of dependency upon existing channels of distribution Bargaining leverage, particularly in industries with high fixed costs Buyer volume Buyer switching costs relative to firm switching costs Buyer information availability Ability to backward integrate Availability of existing substitute products Buyer price sensitivity Differential advantage (uniqueness) of industry products RFM Analysis
[edit] The bargaining power of suppliers
The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm, when there are few substitutes. Suppliers may refuse to work with the firm, or, e.g., charge excessively high prices for unique resources.
Supplier switching costs relative to firm switching costs Degree of differentiation of inputs Impact of inputs on cost or differentiation
Presence of substitute inputs Strength of distribution channel Supplier concentration to firm concentration ratio Employee solidarity (e.g. labor unions) Supplier competition - ability to forward vertically integrate and cut out the BUYER
Ex. If you are making biscuits and there is only one person who sells flour, you have no alternative but to buy it from him.
[edit] The intensity of competitive rivalry
For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry.
Sustainable competitive advantage through innovation Competition between online and offline companies; click-and-mortar -v- slags on a bridge[citation needed] Level of advertising expense Powerful competitive strategy The visibility of proprietary items on the Web[2] used by a company which can intensify competitive pressures on their rivals.
How will competition react to a certain behavior by another firm? Competitive rivalry is likely to be based on dimensions such as price, quality, and innovation. Technological advances protect companies from competition. This applies to products and services. Companies that are successful with introducing new technology, are able to charge higher prices and achieve higher profits, until competitors imitate them. Examples of recent technology advantage in have been mp3 players and mobile telephones. Vertical integration is a strategy to reduce a business' own cost and thereby intensify pressure on its rival. issue in corporate strategy is the selection of industries (lines of business) in which the company should compete; and each line of business should develop its own, industryspecific, five forces analysis. The average Global 1,000 company competes in approximately 52 industries (lines of business).
Strategic Group Mapping