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MBA 500: Essentials of Business Management

Porter: Competitive Strategy: Chapter One The Structural Analysis of Industries

Introduction: Introduces the concept of structural analysis as a framework for
understanding the five fundamental forces of competition in an industry.
Forces outside the industry are significant primarily in a relative sense; since
forces usually affect all firms in the industry, the key is found in the differing
abilities of firms to deal with them.
Competition in an industry is rooted in its underlying economic structure and goes
well beyond the behavior of current competitors. The state of competition in an
industry depends on five basic competitive forces:

Industry Competitors: Rivalry among existing firms;

Potential Entrants: Threat of new competition;
Buyers: Bargaining power of buyers;
Substitutes: Threat of substitute products or services; and
Suppliers: Bargaining power of suppliers

The collective strength of these forces determines the ultimate profit potential in
the industry, where profit potential is measured in terms of long run return on
invested capital.
Structural Determinants of the Intensity of Competition - All five competitive
forces jointly determine the intensity of industry competition and profitability, and
the strongest force or forces are governing and become crucial from the point of
view of strategy formulation.
Threat of Entry
Barriers to Entry Major sources of barriers to entry:
o Economies of Scale the decline in unit costs of a product as the absolute
volume per period increases.
o Product Differentiation
o Capital Requirements
o Switching Costs
o Access to Distribution Channels
o Cost Disadvantages Independent of Scale
o Government Policy
Expected Retaliation

MBA 500: Chapter One Outline/Notes

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The Entry Deterring Price

Properties of Entry Barriers
Experience and Scale as Entry Barriers
Intensity of Rivalry Among Existing Competitors: Intense rivalry is the result
of a number of interacting structural factors:

Numerous or Equally Balanced Competitors;

Slow Industry Growth;
High Fixed or Storage Costs;
Lack of Differentiation or Switching Costs;
Capacity Augmented in Large Increments;
Diverse Competitors;
High Strategic Stakes; and
High Exit Barriers

Shifting Rivalry
Exit and Entry Barriers
Pressure from Substitute Products
Bargaining Power of Buyers:
circumstances hold true:

A buyer group is powerful if the following

o It is concentrated or purchases large volumes relative to seller sales;

o The product it purchases from the industry represent a significant fraction
of the buyers costs or purchases;
o The products it purchases from the industry are standard or
o It faces few switching costs;
o It earns low profits;
o Buyers pose a credible threat of backward integration;
o The industrys product is unimportant to the quality of the buyers
products or services; and
o The buyer has full information
Altering Buying Power
Bargaining Power of Suppliers: A supplier group is powerful if the following

MBA 500: Chapter One Outline/Notes

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o It is dominated by a few companies and is more concentrated than the

industry it sells to;
o It is not obliged to contend with other substitute products for sale to the
o The industry is not an important customer of the supplier group;
o The suppliers product is an important input to the buyers business;
o The supplier groups products are differentiated or it has built up
switching costs; and
o The supplier group poses a credible threat of forward integration
Government as a Force in Industry Competition
Structural Analysis and Competitive Strategy: An effective competitive
strategy takes offensive and defensive action in order to create a defendable
position against the five competitive forces.
o Positioning
o Influencing the Balance
o Exploiting Change
o Diversification Strategy
1. The purpose is to create a defendable position.
a. Industry Competitors: Rivalry among existing firms;
Others similar companies are very evident and important competitors for a company. A
company should know who are doing the same business as this company. To know the
business environment is very important.
b. Potential Entrants: Threat of new competition;
The competitors are not only the existing companiesbut also the companies which will
come out in the future. Companies should consider their business with foreseeability.
c. Buyers: Bargaining power of buyers;
Buyers who have the ability to discuss the price are also a big challenge for a company.
They can balance the price in the market. For a company they can narrow the profit
d. Substitutes: Threat of substitute products or services;
The more substitute productsthe more threat. Companies should have creative design
to make their products particularwhich are not easy to be replaced.
e. Suppliers: Bargaining power of suppliers
Suppliers are part of big cost for a company. A company should make itself more
important for a supplierso it can get a lower price to save cost.
2. Porter pointed out that the heart of strategy is positioning. Companies should think
about their competition mode in a new way. Some companies have good strategy because
they are doing things which no company did before. Irregular makes them win.