Porter's Five Forces Analysis PDF

A. Porter’s Five Forces 1. Threat of New Entrants This force evaluates how easily new competitors can enter the industry and potentially reduce the profitability of existing firms. - High barriers to entry : protect the established companies - Low barriers: create risk from new competit...

A. Porter’s Five Forces 1. Threat of New Entrants This force evaluates how easily new competitors can enter the industry and potentially reduce the profitability of existing firms. - High barriers to entry : protect the established companies - Low barriers: create risk from new competitors. Key factors influencing the threat of new entrants: Economies of scale : Larger companies benefit from lower costs per unit as production increases, which deters smaller entrants. Brand loyalty: Strong, established brands make it hard for new firms to attract customers. Capital requirements: Industries that need large upfront investments (e.g., heavy machinery, factories) have higher barriers to entry. Government regulation and licensing: Regulatory constraints (e.g., environmental laws, licensing requirements) make entry difficult. Access to distribution channels: Established companies may have exclusive access to distributors or retailers, making it hard for new entrants to gain visibility. Incumbency advantages: Existing firms often have proprietary technology, access to raw materials, or advantageous locations. Example from your lecture: Your slides mention how industries with large capital investments, like oil and gas, create economies of scale, making it hard for new entrants to compete. Example: In the Airbnb case, the platform model disrupted traditional hotels, lowering the barriers for individuals to enter the accommodation market. However, Airbnb’s strong brand and first-mover advantage make it hard for new entrants to displace them 2. Bargaining Power of Suppliers Suppliers have power when they can dictate terms, such as raising prices or limiting the quality of materials, without losing customers. This typically occurs when there are few suppliers, or when suppliers offer a product that is unique and not easily substituted. Key factors affecting supplier power: Concentration of suppliers: If a few suppliers control a large portion of the supply, they can demand higher prices. Uniqueness of inputs: If a supplier provides a rare or highly specialized input, their bargaining power increases. Switching costs: If it’s expensive or difficult to switch suppliers, firms are more reliant on their current suppliers. Supplier integration: Suppliers can gain power by integrating forward into the industry, potentially becoming competitors to the firms they supply. Example: Beyond Meat relies heavily on a few specialized suppliers, making it vulnerable to supplier power. When its contract with Roquette Frères ends, this could affect product consistency and costs.=> bargaining power of suppliers for beyond meat is high but for competitors could be lower 3. Bargaining Power of Buyers Definition: The power customers have to influence pricing and terms Key factors influencing buyer power: Number of buyers relative to sellers: When buyers are few but make large purchases, they have greater negotiating leverage. Buyer information: Well-informed buyers can demand better deals, knowing the true cost structure or competitive offers. Switching costs: If buyers can easily switch between suppliers, they have more bargaining power. Price sensitivity: Buyers who are highly price-sensitive will push for discounts and cheaper options. Example: Airbnb gives significant power to buyers through its wide range of accommodation options and transparent pricing. Its customer reviews and rating system further empower buyers to influence host behaviors and offerings. 4. Threat of Substitutes Substitutes are alternative products or services that fulfill the same customer needs. Definition: The likelihood of customers switching to alternatives The presence of substitutes can limit the profitability of an industry because customers have other options. Key factors influencing the threat of substitutes: Availability of substitutes: If close substitutes exist, firms are forced to compete on price, quality, or other features. Switching costs for buyers: If it’s easy and cheap for customers to switch to a substitute, the threat is higher. Relative price and quality: If a substitute offers a better value or performs the same function at a lower price, customers may switch. Buyer inclination to substitute: Some customers may be more inclined to try substitutes, especially if they are looking for innovation or cost savings. Example: In Beyond Meat’s case, the presence of numerous plant-based competitors and traditional meat substitutes increases the threat, especially when rivals lower their prices 5. Industry Rivalry This force assesses the degree of competition between existing firms in the industry. When rivalry is intense, companies engage in price wars, advertising battles, and innovation races, which can limit profitability. Key factors influencing rivalry: Number and size of competitors: A large number of similar-sized competitors increases rivalry. Industry growth: Slow growth industries experience more rivalry because firms must fight for market share. Product differentiation: If products are highly differentiated, rivalry decreases as firms target different customer preferences. If products are similar, competition is more about price.  Fixed costs and capacity: Firms with high fixed costs will be more aggressive in seeking market share to cover those costs. Excess capacity also increases rivalry. Exit barriers: If it’s hard for firms to leave an industry (due to high exit costs), they may continue competing fiercely, even if the market is declining. Example from your lecture: The lecture mentions how firms with high fixed costs, like airlines, will compete aggressively on price, increasing industry rivalry. Example: Tesla’s entrance into the auto industry intensified rivalry, forcing traditional automakers like Ford, GM, and Volkswagen to aggressively invest in EVs to retain market share Application of Porter’s Five Forces to Exam Cases For your exam, you may be asked to apply these forces to a specific industry or company. For example, the Airbnb case study (from the exam guidelines ) can be analyzed using these forces: Threat of New Entrants: Airbnb disrupted the hospitality industry by lowering entry barriers with its asset-light, platform-based model. Bargaining Power of Suppliers: Airbnb aggregated a large pool of hosts, reducing individual suppliers’ (hosts’) power. Bargaining Power of Buyers: Airbnb increased buyer power by offering a wide range of accommodation options at competitive prices, with easy comparison tools. Threat of Substitutes: Substitutes, like hotels or other vacation rental platforms, push Airbnb to innovate and maintain competitive pricing. Industry Rivalry: Airbnb heightened rivalry in the hospitality industry by intensifying competition with both traditional hotels and other digital platforms. 2. Internal vs. External Sources of Competitive Advantage A. Internal Sources These are the resources and capabilities within a company that give it an edge over competitors. Tangible Resources: Physical assets like manufacturing plants, technology, and finances. Example: Tesla’s Gigafactories allow the company to scale production of EVs and batteries, lowering costs through economies of scale.  Intangible Resources: Non-physical assets like patents, brand reputation, and company culture. Example: Beyond Meat’s intellectual property (e.g., patents on plant-based technology) and strong brand awareness are critical intangible assets. Capabilities: The firm’s ability to combine resources effectively to create value. Example: Airbnb’s ability to match supply and demand on its platform, offering a seamless transaction experience for hosts and guests, is a key capability B. External Sources These are advantages that come from a company’s external environment. Industry Position: A company’s place in the industry, based on market share or customer loyalty. Example: Tesla’s first-mover advantage in the EV market allowed it to capture a significant share and build a strong brand before competitors caught up. Market Conditions: Trends or external factors that benefit a company. Example: Beyond Meat benefits from the growing consumer demand for plant- based foods, which aligns with environmental and health concerns. Partnerships and Alliances: Strategic alliances that provide access to new markets, technologies, or resources. Example: Tesla’s acquisition of SolarCity helped integrate renewable energy solutions, enhancing its value proposition and sustainability mission  C. VRIO FRAMEWORK This framework is used to determine whether a company’s resources provide a sustainable competitive advantage. Value: Does the resource create value for the company? => NO => Competitive Disadvantage Example: Tesla’s proprietary battery technology adds significant value by increasing the range and efficiency of its vehicles. Rarity: Is the resource rare or unique?=>No=>Competitive Parity Example: Airbnb’s global network of hosts offering unique and diverse accommodations is rare and hard to replicate. Imitability: Can competitors easily imitate this resource?=> No=>Temporary Competitive Advantage Example: Beyond Meat’s patented technology for replicating the taste and texture of meat is difficult for competitors to copy directly. Organization: Is the company organized to exploit this resource effectively?=> NO=>Temporzry Competitive Advanatge Example: Tesla’s organizational structure and focus on innovation allow it to fully capitalize on its technological edge and first-mover advantage.  D. SWOT Analysis Strengths: Internal capabilities that provide an advantage. Example: Tesla’s technological innovation and strong brand are major strengths. Weaknesses: Internal limitations that may hinder the company. Example: Beyond Meat’s high cost of goods sold and lack of process innovation are internal weaknesses. Opportunities: External factors the company can exploit. Example: Airbnb’s growth in non-urban travel during the pandemic was a significant opportunity that it capitalized on through a strategic pivot. Threats: External factors that could harm the company. Example: Beyond Meat’s competition from traditional meat companies and plant-based rivals is a major threat E. Cost Leadership VS DiCérenciation Cost Leadership: A company competes by being the lowest-cost producer in the industry. Example: Tesla’s focus on reducing production costs through gigafactories and economies of scale helps it pursue a cost-leadership strategy. Differentiation: Offering unique products or services that justify a premium price. Example: Airbnb’s unique, personalized accommodation offerings differentiate it from traditional hotels, allowing it to charge premium rates in certain locations.