Amruth Pavan Davuluri

140101017
Section A

Forces of competition are not only limited to

direct competitors.

Competition for profits goes beyond established

industry rivals to include four other competitive
forces as well

Five forces collective strength determine the

competition in the market

New entrants may bring new capacity, the

desire to gain market share, and often
substantial resources
The seriousness of the threat of entry depends on
the barriers present and on the reaction from
existing competitors that entrants can expect
If the barriers to entry are high and newcomers
can expect sharp retaliation from the entrenched
competitors.

1.

2.

3.

Economies of scale which force a new aspirant

to come in on a large scale or to accept a cost
disadvantage.
Product differentiation which creates a barrier by
forcing entrants to spend heavily to overcome
customer loyalty.
Capital requirements which create the need to
invest large financial resources in order to
compete.

4.

5.

6.

Cost disadvantages independent of size due to

experience curves, proprietary technology,
access to the best raw materials, etc.
Access to distribution channels that are tied up
by existing competitors which makes it more
difficult for new entrants to get started.
Government policy which can limit or even
foreclose entry by controlling such items as
license requirements and limits on the access to
raw materials.

A supplier group is more powerful if:

1. It

is dominated by a few companies

2. It is more concentrated than the industry it sells to
3. Its product is unique or at least differentiated
4. The supplier has built up switching costs
5. It does not contend with other products for sale to
the industry
6. It poses a credible threat of integrating forward
into the industrys business
7. The industry is not an important customer of the
supplier group

A buyer group is more powerful if:

1. It is a concentrated or purchased in large volumes
2. The products it purchases from the industry are standard
and undifferentiated
3. The products it purchases form a component of its
products and represent a significant fraction of its costs
4. It earns low profits, which creates great incentive to
lower its purchasing costs
5. The industrys product is unimportant to the quality of
the buyers products or services
6. The industrys products do not save the buyer money
7. The buyer poses a credible threat to integrating
backward to make the industrys product

Substitute products and services can have an

impact on the industry because:
By placing a ceiling on the prices it can charge,
substitute products or services limit the potential
of an industry
Substitutes not only limit profits in normal times
but also reduce the bonanza an industry can reap
in boom times
Substitute products that deserve the most
attention strategically are those that are
a. subject to trends improving their priceperformance trade-off with the industrys
product or
b. produced by industries earning high profits

Intense rivalry occurs when:

Competitors are numerous or are roughly equal

Industry growth is slow, precipitating fights for
market share that involve expansion
The product or service lacks differentiation or
switching costs
Fixed costs are high or the product is perishable,
creating strong temptation to cut prices
Capacity normally is augmented in large
increments
Exit barriers are high
Rivals are diverse in strategy, origin, and
personality

1.

2.

3.

Positioning the company: Strategy can be

viewed as building defense against the
competitive forces or as finding positions in the
industry where the competitive forces are
weakest
Exploiting and expecting industry change:
Industry evolution is important strategically
because we want to know how these changes
are effecting the sources of competition
Shaping the Industry Structure: Use tactics
that are designed specifically to reduce the
share of profits leaking to other companies

In a world of more open competition and

relentless change, it is important than ever to
think structurally about the competition
Awareness of the Five forces can help a
company stakeout a position in its industry
that is less vulnerable to others
Whatever their collective strength is, the
corporate strategists goal is to find a position
in the industry where his or her company can
best defend itself against these forces or can
influence them in its favor

Defining the industry too broadly or too

narrowly
Paying equal attention to all the forces rather
than digging deeply into the important one
Using static analysis that ignores industry
trend
Using the framework to declare an industry
attractive or unattractive rather than using it
to guide strategic choices