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Working Draft
Forces at Work
&Structure Conduct Performance (SCP)
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"The essence of formulating
competitive strategy isrelating a company toits environment"
Competitive Strategy: Techniques for Analysing Industriesand Competitors, 1980
MICHAEL E. PORTER
WHO DO WE THANK (OR BLAME) FOR THE FORCES ATWORK FRAMEWORK?
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Industrycompetitors
How intense is
the rivalry ?
Suppliers
What is theirbargaining
power?
Buyers
What is theirbargaining
power?
PotentialEntrants
What is thethreat ?
Substitutes
What is the threat?
ELEMENTS OF THE FORCES AT WORK FRAMEWORK
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Industrycompetitors
Daimler-Chrysler,
Ford, GM, Toyota...
Suppliers
Partsmanufacturers,
steel mills, labor
unions...
Buyers
Households,governments,
rental car
companies...
PotentialEntrants
Motorcycleand truck
manufacturers...
Substitutes
Manufacturers and
operators of trains,buses, airplanes,
motorcycles...
NON-EXHAUSTIVEWHO ARE THE PLAYERS IN THE AUTOMOBILEMANUFACTURING INDUSTRY?
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Industrycompetitors
Disney,
Universal,...
Suppliers
Park employees,food suppliers,
construction
companies...
Buyers
Families, travelagencies,
business event
planners...
PotentialEntrants
Regional themeparks, other large
entertainment
companies...
Substitutes
Disney Quest,
Sony virtual reality,other destination-
based resorts...
WHO ARE THE PLAYERS IN THE DESTINATION THEMEPARK INDUSTRY?
NON-EXHAUSTIVE
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STRUCTURAL FACTORS IN INDUSTRY RIVALRY
IndustrycompetitorsSuppliers Buyers
Potential
Entrants
Substitutes
Basis of competition(e.g., quality, price, service)
Industry growth
Product differentiation
Brand identity/loyalty
Switching costs
Fixed cost/value added
Nature of capacity (shortage/excess)
Concentration of production
Exit barriers
Corporate stakes (e.g., strategicimportance, reputation)
Diversity of competitors
Information complexity/transparency
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Bargaining leverage
Buyer concentration vs. firmconcentration
Buyer volume Buyer switching costs Buyer information Ability to backward integrate
Availability of substituteproducts
Price sensitivity
Price/total purchases Product differences
Brand identity/ qualityperception Buyer income/profits Decision makers incentives
IndustrycompetitorsSuppliers Buyers
Potential
Entrants
Substitutes
DETERMINANTS OF BUYER POWER
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Differentiation of inputs
Switching costs of suppliers andcompetitors in the industry
Availability of substitute inputs
Supplier concentration
Importance of volumeto supplier
Cost relative to total purchasesin the industry
Threat of forward integrationrelative to threat of backward
integration by firms in industry
IndustrycompetitorsSuppliers Buyers
Potential
Entrants
Substitutes
DETERMINANTS OF SUPPLIER POWER
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Economies of scale
Proprietary product differences
Brand identity
Switching costs
Capital requirements
Access to distribution Absolute cost advantages
Proprietary learning curve Access to necessary inputs Proprietary, low-cost product
design
Government policies/regulation Expected retaliation
Industrycompetitors
Suppliers Buyers
Potential
Entrants
Substitutes
DETERMINANTS OF BARRIERS TO ENTRY
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Relative price performance
of substitutes Switching costs
Buyer propensity to substitute
Industrycompetitors
Suppliers Buyers
Potential
Entrants
Substitutes
DETERMINANTS OF SUBSTITUTION THREAT
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Overview of the forces at work framework
Examples of forces at work framework
Steps for creating a forces at workframework
PRESENTATION OVERVIEW
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Intense competition Little industry growth
Recent excess capacity
Little product differentiation
No switching cost
Some brand equity
SuppliersLittle supplier power
Low input differentiation
Low switching costs for inputs
Highly dependent on volume
No input impact on differentiation
Low impetus for forwardintegration
New entrants Some barriers to entry Significant economies of scale
in production
High capital requirements
Established brand equities
No significant proprietaryproduct difference
Low barriers for other dairycompanies
Substitutes
Significant threat of substitution Large substitution threat from
unbranded ice cream, other milkproducts
No switching cost to consumer
Buyers
Substantial buyer power Immense distributor concentration
Little buyer switching cost
Product costs passed through toconsumer
FORCES AT WORK IN THE SUPER PREMIUM ICE CREAM INDUSTRY
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Buyers have significantbuying power
Highly concentrated buying
power (top 4 companiesrepresent 67% of market)
Growing preference forturnkey solutions
20% - 40% price reductionsobserved from 1990 to 1994
Product innovation in the railtransportation industry has reducedthe threat of substitutes
High speed rail networks haveoutperformed air travel for shortertrips (under 3 hours)
Urban railway systems preferred inmany regions with road congestion
and pollution
Although increasing, suppliers
bargaining power remains low
Highly fragmented
supply chain Bargaining power is
increasing due to growingupstream integration betweenmanu-facturers and suppliers
Current barriers to entry are highbut are falling due to adoption oftechnical standards
High capital requirements forR&D efforts
Development of modular platformswill reduce R&D costs and willincrease economies of scale
Intense rivalry based largely on
non-price competition
Product differentiation achieved
via technical innovation,integrated systems, andproject financing
Large but infrequent orders
Excess production capacity
FORCES RESHAPING THE ROLLING STOCK INDUSTRY
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Overview of the forces at work framework?
Examples of forces at work framework
Steps for creating a forces at workframework
PRESENTATION OVERVIEW
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Synthesize your findings into
summary messages for eachcategory. Include prioritized
bullet points under each
summarized message
Industrycompetitors
Suppliers
Intensity of rivalry
Substitutes
New
entrants
Buyers
4Define the industry that
you will analyze usingthe framework
1
Create an exhibit lead that
captures the key message of theframework
5
Review exhibit for quality control
purposes6
Create an exhibit thatexplicitly identifies
competitors,
customers, suppliers,
potential new entrantsand substitutes
2
CompetitorsSuppliers
Substitutes
Entrants
Buyers
Review trade press, financial reports, marketresearch, broker reports and interview notes,
organizing key information into the major
categories of forces
3
Six steps for building a forces at work framework
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SITUATION ANALYSISSTRUCTURE-CONDUCT-PERFORMANCE (SCP) FRAMEWORK
Structure Conduct Performance
Rigorousapproach toanalyze industrystructure
Emphasis onconduct as keydeterminant ofeconomic returns
Performancedefined from therational shareholderperspective
$
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Structure
THE ELEMENTS OF THE S-C-P FRAMEWORK INDUSTRY STRUCTURE
Economics of supply Concentration of producers Import competition Diversity of producers Fixed/variable cost structure Capacity utilization Technological opportunities Shape of supply curve Entry/exit barriers
Economics of demand Availability of substitutes Differentiability of products Rate of growth Volatility/cyclicality
Industry chain economics Bargaining power of input
suppliers Bargaining power of
customers
Information market failure Vertical market failure
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THE ELEMENTS OF THE S-C-P FRAMEWORKPLAYERS CONDUCT
Vertical integration Forward/backward integration Vertical joint ventures Long-term contracts
Marketing Pricing Volume Advertising/promotion
New products/R&D Distribution
Capacity change Expansion/contraction Entry/exit Acquisition/merger/ divestiture
Internal efficiency Cost control Logistics Process R&D Organization effectiveness
Cooperation versus Rivalry
ConductStructure
THE ELEMENTS OF THE S C P FRAMEWORK PLAYERS PERFORMANCE
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THE ELEMENTS OF THE S-C-P FRAMEWORK PLAYERS PERFORMANCE
Non-financial Technological progress
Employment objectives Customer value/service
Financial Profitability
EBIT ROS Margins
Value creation EVA ROE TRS
ConductStructure Performance
STATIC VS DYNAMIC SCP
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STATIC VS. DYNAMIC SCP
SCP provides forcing device tospeculate about how expected external
shocks may affect the future of anindustry
Initial impact on SResultant impact on CUltimate impact on PFeedback effects
Actions
Expected
external events
Feedback
Future
PCS
SCP provides MECE organizingframework
Identifies key issuesHighlights information gapsCreates understanding of links between S,
C, and PDescriptive
Today
Historical data
PCS
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