Porter's Five Forces
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Transcript of Porter's Five Forces
Alternative Strategies
Forward Integration
Gaining ownership or increased control over distributors or retailers
Tandy Corporation opens new Radio Shack stores
Backward Integration
Seeking ownership or increased control over a firm’s suppliers
K-Mart purchases manufacturing facility for shoes
Horizontal Integration
Seeking ownership or increased control over competition
Merck, the world’s largest drug company, acquires Medco, the world’s largest marketer of discount prescription drugs
STRATEGY DEFINITION EXAMPLE
Alternative Strategies
Market Penetration
Seeking increased market share for present products or services in present markets through greater marketing efforts
Walt Disney pays Nancy Kerrigan $1million for appearances
Market Development
Introducing present product or services into new geographic area
Corning, Inc. becomes one of Russia’s first major suppliers of optical fiber
Product Development
Seeking increased sales by improving present products or services or developing new ones
Rayovac develops an alkaline battery recharger
STRATEGY DEFINITION EXAMPLE
Alternative Strategies
Concentric Diversification
Adding new, but related, products or services
Sonoco Products Co., a maker of industrial packages, acquired Engraph, Inc., a maker of consumer packages
Conglomerate Diversification
Adding new, unrelated products or services
Seagram acquires 13.1 percent of Time Warner
Horizontal Diversification
Adding new, unrelated products or services for present customers
Stratus Computer, a maker of fault-tolerant computers, acquires Shared Financial Systems, a software maker
STRATEGY DEFINITION EXAMPLE
Alternative Strategies
Joint Venture
Two or more sponsoring firms forming a separate organization for cooperative purposes
Home Shopping Network and Sumitomo offer television shopping in Japan
Retrenchment Regrouping through cost & asset reduction to reverse declining sales/profits
U.S. Surgical declares bankruptcy
Divestiture Selling a division or part of an organization
Ryder System, a truck-leasing co, divests its aviation business
Liquidation Selling all of a co’s assets, in parts, for their tangible worth
The Bank of Credit and Commerce Int’l (BCCI) liquidates
STRATEGY DEFINITION EXAMPLE
Strategic Analysis Products – Markets Market/Product Expansion Grid
Current Product
New Product
Current Markets
Market Penetration Strategy
Product Development Strategy
New Markets
Market Development Strategy
Diversification Strategy
M
A
R
K
E
T
S
P R O D U C T S
Market Analysis / Coors
HIGH(H) MEDIUM(M) LOW(L)
H China; India
M Brazil; Czech Republic
L Korea; Germany
H Poland
M Romania
L
L
O
W
R
I
S
K
H
I
G
H
MARKET ATTRACTIVENESS
Strategic Management Productivity Tree
T
Task Technical
P
Staff Performance
P
Efficiency Effectiveness
Adaptive
Plant/Office, Facilities, Methods, STDS
MGMT Plan Organize Direct Control
Knowledge, Skills, Ability
Communications Motivation
Job Design Staff Leadership
Feedback - Information
Strategic Management The Firm: Core Competencies
• Technology Operating System
• Management System
• Knowledge-Base Skills / Abilities
• Organizational Dynamics, Culture, Climate, Motivations
Work Sheet: Internal Assessment of Firms
Four Characteristics Resources-Capabilities Important in Sustaining Competitive Advantage
1.Durability
2.Transparency
3.Transferability
4.Replicability
Internal Assessment of Firms • Durability
– Rate at which firms underlying resources and capabilities depreciate or become obsolete
• Transparency – Speed with which other firms can understand the
relationship of resources and capabilities supporting a successful firm’s strategy. Capability that requires a complex pattern of various resources and is more difficult to comprehend than a capability based on a single key resource.
Internal Assessment of Firms • Transferability
– Ability of competitors to gather the resources necessary to support a competitive challenge. (e.g., Duplicating the primary source of Rocky Mountain spring water may be difficult. Also, brand names may be impossible to transfer with out purchase or a license.)
• Replicability – Ability of competitors to use resources and capabilities to
duplicate a firm’s success. (e.g., a brand manager from a P&G competitor may fail to identify least visible coordination mechanisms or fail to note behaviors of another company’s brand manager may conflict with company’s culture.)
Basic Principles of Organizations 1. The organization plan should be developed from the
point of view of the activities required to achieve the objectives of the enterprise.
2. Group the activities according to the natural likings of the activities and the usual combinations of abilities and interests of the team members.
3. Assign persons to natural groupings according to their abilities and interests.
4. Personal responsibilities, authorities and relationships should be clearly understood and completely accepted not only by the individual but also by all persons affected.
5. Delegation of authority and the freedom to act should be clearly and appropriately defined and be adequate for the responsibilities assigned.
Basic Principles of Organizations 6. As many as possible of the decisions affecting specific
operations and requiring approval before action should be made only one organization step (level) above the person putting the decision into effect.
7. No person should report to more than one superior. (However, an individual may be assigned by his or her superior to serve or assist another organization unit and receive directions within the assigned sphere of service.
8. (Span of Control) The number of persons reporting to a superior should be few enough so that he or she can give each person adequate attention and still have time for responsibilities other than direction and supervision such as investigations, planning, etc…
Basic Principles of Organizations 9. Recognize and make good use of the informal
organization: I.e., the natural groupings of persons based on friendships and like interests. Watch that cliques or “gangs” do not handicap the official organization.
10. Titles should be appropriate and consistent. 11. Keep the organization plan flexible and sensitive to
changing conditions.
“Pure Project” Dedicated Task Force Organization
General Manager
Marketing
Network
Engineering
Manufacturing
Project Manager Other Operations
• Is a separate project organization with most or all personnel needed on the project working under the direct control of the project manager?
• Used for major or special projects: I.e., “skunk works”
• Hybrid matrix = a project organization with some functions directly controlled and others controlled through a matrix
Matrix Project Management
Within this category are three types of matrix organizations which primarily differ in the relative amount of influence/decision-making
power between functional discipline managers and the project management organization. Matrix management generally increases conflict as functional managers and project management often stress
different project aspects and goals.
General Manager
Project Manager A
Project Manager B
Marketing Network Engineering Manufacturing
p e r s o n n e l
p e r s o n n e l
p e r s o n n e l
p e r s o n n e l
Matrix Project Management: Descriptions
• Strong or Project Matrix – Here, a project management orientation predominates: a full-
fledged project office with support staff may exist
• Balanced or “Classical” Matrix – Balanced influence between functional managers and project
managers characterizes this arrangement. The full-time project manager has expert power and formal position power. A high level of conflict is often evident.
• Weak or Functional Matrix – Functional managers exert a stronger influence than the project
manager who is really a coordinator and can be part or full-time. Team members may only be liaisons, linking the project to the functional department.
Matrix Management and The Team Member
Ground Rules for Behavior •Keep both bosses informed. •As soon as a conflict emerges (or before), get the bosses together for a meeting and get one to change his or her priorities. •Do not make the mistake of telling each boss what he or she want to hear—You will get squeezed. •Try to work out an agreement in writing that spells out your responsibilities and reporting relationships.
Team Member
Project Manager
Functional Manager
The Problem of Two or More
Bosses
Influence Project Management Weakest Project Organization
•Influence project management occurs in a standard functional or hierarchical management organization. •A “project activator” (often staff member) is asked to coordinate a project. This is frequently part-time and with no formal authority. The “activator” merely works through the “influence” of the general manager’s position (“the division manager asked that I do this for him/her.”)
General Manager Project Activator
Marketing Network Engineering Manufacturing
p e r s o n n e l
p e r s o n n e l
p e r s o n n e l
p e r s o n n e l
Matrix Project Management General Manager
Project Manager A
Project Manager B
p e r s o n n e l
p e r s o n n e l
p e r s o n n e l
p e r s o n n e l
Strategic Management Firm-Industry Value Chain—A Model
Inbound Logistics
Operations, R&D, Technology, Manufacturing, Staff
Outbound Logistics
Marketing, Advertising, Sales
Service
Elements of Industry Structure: Porter’s Five-Forces
B u y e r s
S u p p l i e r s
Industry Competitors
Intensity of Rivalry
Bargaining Power
of Buyers
Bargaining Power
of Suppliers
New Entrants Threat of New Entrants
Threat of Substitutes
Substitutes
Adapted from Michael E. Porter, “Competitive Advantage,”
New York, The Free Press, 1985. Reprinted by Permission.
Porter’s Five-Forces: Described
• Barriers to Entry – Economies of Scale — Product Differentiation – Brand Identification — Switching Costs – Access to Distribution Channels — Capital Requirements – Access to Latest Technology — Experience and Learning Effects
• Government Action – Industry Protection — Industry Regulation – Consistency of Policies — Custom Duties – Foreign Exchange — Foreign Ownership – Capital Movements Among Countries – Assistance Provided to Competitors
Adapted from Michael E. Porter, “Competitive Advantage,”
New York, The Free Press, 1985. Reprinted by Permission.
Porter’s Five-Forces: Described
• Rivalry Among Competitors – Concentration and Balance Among Companies – Industry Growth — Fixed (or Storage) Costs – Product Differentiation — Switching Costs – Intermittent Capacity Increasing – Corporate Strategic Stakes
• Barriers to Exit – Asset Specialization – One-Time Cost of Exit – Strategic Interrelationships with other Businesses – Emotional Barriers – Government and Social Restrictions
Adapted from Michael E. Porter, “Competitive Advantage,”
New York, The Free Press, 1985. Reprinted by Permission.
Porter’s Five-Forces: Described
• Power of Suppliers – Number of Important Suppliers – Availability of Substitutes for the Suppliers’ Products – Differentiation or Switching Cost of Suppliers’ Products – Suppliers’ Threat of Forward Integration – Suppliers’ Contribution to Quality or Service of the Industry Products – Total Industry Cost Contributed by Suppliers – Importance of the Industry to Suppliers’ Profit
Adapted from Michael E. Porter, “Competitive Advantage,”
New York, The Free Press, 1985. Reprinted by Permission.
Porter’s Five-Forces: Described
• Power of Buyers – Number of Important Buyers – Availability of Substitutes for the Industry Products – Buyers’ Switching Costs – Buyers’ threat of Backward Integration – Industry Threat of Forward Integration – Contribution to Quality or Service of Buyers’ Products – Total Buyers’ Cost Contributed by the Industry – Buyers’ Profitability
• Availability of Substitutes – Availability of Close Substitutes – User’s Switching Costs – Substitute Producer’s Profitability and Aggressiveness – Substitute Price-Value
Adapted from Michael E. Porter, “Competitive Advantage,”
New York, The Free Press, 1985. Reprinted by Permission.
Porter’s Five Forces: As Applied to the Pharmaceutical Industry in the early 1990’s
B u y e r s
S u p p l i e r s
Industry Competitors
Intensity of Rivalry—
Attractive
Very Attractive
New Entrants Very Attractive
Mildly Unattractive
Substitutes
Adapted from Michael E. Porter, “Competitive Advantage,”
New York, The Free Press, 1985. Reprinted by Permission.
Mildly Unattractive
Porter’s Five-Forces: The Pharmaceutical Industry--Applied
• Barriers to Entry (Very Attractive) – Steep R&D experience curve effects – Large economies of scale bariers in R&D and sales force – Critical mass in R&D and marketing require global scale – Significant R&D and marketing costs – High risk inherent in the drug development process – Increasing threat of new entrants coming from biotechnology
companies
• Bargaining Power of Suppliers (Very Attractive) – Mostly commodities – Individual scientists may have some personal leverage
Porter’s Five-Forces: The Pharmaceutical Industry--Applied
• Bargaining Power of Buyers (Mildly Unattractive) – Traditional purchasing process highly price insensitive: the
consumer (the patient) did not buy and the buyer (the physician) did not pay
– Large power of buyers—plan sponsors and cost containment orgs—influence decisions to prescribe less expensive drugs
– Mail order pharmacies obtain large discounts on volume drugs – Large aggregate buyers—hospital suppliers, large distributors,
gov’t institutions—progressively replace the role of individual customers
– Important influence of the government in the regulation of the buying process
Porter’s Five-Forces: The Pharmaceutical Industry--Applied
• Threat of Substitutes (Mildly Unattractive) – Generic and “me-too” drugs weakening branded, proprietary drugs – More than half of the drug patent is spent in product development
and approval processes – Technological development makes imitation easier – Consumer aversion to chemical substances erodes appeal for
pharmaceutical drugs
Porter’s Five-Forces: The Pharmaceutical Industry--Applied
• Intensity of Rivalry (Attractive) – Global competition concentrated among fifteen large companies – Most companies focus on certain types of disease therapy – Competition among incumbents limited by patent protection – Competition based on price and product differentiation – Government intervention and growth of “me-too” drugs increase
rivalry – Strategic alliances establish collaborative agreements among
industry players – Very profitable industry, however with declining margins
• Summary Assessment of Industry Attractiveness
Porter’s Five-Forces: The Pharmaceutical Industry--Applied
Attractive
Strategic Management External Factors Diagram
Global Micro
STRATEGIC MANAGEMENT
FIRM
Availability of Substitutes
Global Macro
Industry Value Chain
Strategic Alternatives
Strategic Management External Factors Diagram--Elaboration
• Global Micro – Industry Structure — Government action – Competition — Suppliers – Buyers — Resources: Labor / Unions
• Global Macro – Economic – Social / Demographics – Political-Legal: Taxes / Regulations – Technological: Product / Process
Strategic Management External Factors Diagram--Elaboration
• Strategic Alternatives – Cost vs. Product Differentiation — Integration: – Simplification: Product / Process Forward, Backward, Horizontal – Joint Venture / Alliance — Retrenchment – Divestiture / Liquidation
• Industry Value Chain – Inbound Logistics – Operations – R&D / Technology / Manufacturing – Outbound Logistics – Marketing – Sales / Advertising – Service
The Drucker Model Answer to 3 Key Questions
Mission Statement
• 8 Business Objectives (Drucker) – Market — Human Resources – Innovation — Financial Resources – Profit — Material Resources – Societal — Productivity
Strategic Planning is
a Continuous Process
Product Life Cycle
TIME -- Years
Cum
ulat
ive
Sale
s Phase I
Innovation Introduction
Phase II
Accelerated Growth
Phase III
Maintenance
Phase IV Discontinuance
Strategic Management Business Portfolio Matrix
Star Business (Invest Cash)
Problem Child (Draw)
Cash Cow Dog
(But – Exceptions)
Relative Market Share
(Firm vs. largest competitor)
Industry
Attractiveness Growth Rate
Average Rate of Growth
HIGH
HIGH
LOW
LOW
Poker Analogy – Where to Bet Technology Portfolio Matrix
Bet (Cash)
Draw
Cash In Fold
Relative Technological Position
(Firm vs. largest competitor)
Industry
Technology Importance to
Product / Service
HIGH
HIGH
LOW
LOW
Strategic Management R&D Model
Pure Research
Applied Research
Product/ Service
Configur-ation
Pilot Intro
Full Scale Ops
RESEARCH DEVELOPMENT
INNOVATION
RADICAL
INCREMENTAL
STRATEGIC MANAGEMENT MODEL PORTFOLIO MANAGEMENT
RESOURCE ALLOCATION
CASE II
IRR
II
FUNDS
DEFICIT
I
SURPLUS
FUNDS
PROGRAMS
PROJECTS INVESTMENTS $
DEMAND
FOR FUNDS
CASE I
IRR
INTERNAL
SUPPLY
FUND
PRODUCT LIFE CYCLE MODEL SALES AND COSTS
CU
MU
LATIVE
CO
STS
CU
MU
LATIVE
SALES
RESEARCH
DEVELOPMENT
INNOVATION
PHASE I
INTRODUCTION
TIME - YEARS
PHASE II
ACCELERATED
GROWTH
COST
PHASE IV
DISCONTINUANCE
PHASE III
MAINTENANCE
SALES
BE ANNUAL
BE PRODUCT