The Five Competitive Forces That Shape Strategy
The Five Competitive Forces That Shape Strategy
Competition for industry profits goes beyond the direct competitors in the business. It included four other competitive forces as well:
• Customers
• Suppliers
• Potential entrants
• Substitute products
This extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within the industry. Industry structure drives profitability, not products or services, or mature or emerging etc. Understanding industry structure is essential to effective strategy.
The strongest competitive force (among the five) determines profitability within the industry, though it is not always obvious what that is. Industry structure grows out of a set of economic and technical characteristics that determine the strength of each force.
• Aircraft Manufacturing – industry rivalry fierce; new entrants, substitute products, power of suppliers not so much
• Movie theatres – production houses strong; substitute products abound;
Threat of Entry
The threat of entry puts pressure on prices, costs and the rate of investment necessary to compete. This puts pressure on profitability. Competitors must hold down prices or boost investment to deter new entrants.
Barriers to Entry
1. Supply-side economies of scale: Occurs when firms that produce larger volumes enjoy lower cost per unit, because they can spread high fixed costs over a large number of units, or have more efficient technology, or can command better terms from suppliers.
2. Demand – side economies of Scale: Network effects. The desire of a consumer to buy a product increases with the number of other buyers that buy the product.
3. Customer Switching Costs: There may be costs to switching suppliers, such as retooling costs, retraining costs. ERP software has high switching costs, as does autoparts industries.
4. Capital Requirements: Need to invest large financial
Competition for industry profits goes beyond the direct competitors in the business. It included four other competitive forces as well:
• Customers
• Suppliers
• Potential entrants
• Substitute products
This extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within the industry. Industry structure drives profitability, not products or services, or mature or emerging etc. Understanding industry structure is essential to effective strategy.
The strongest competitive force (among the five) determines profitability within the industry, though it is not always obvious what that is. Industry structure grows out of a set of economic and technical characteristics that determine the strength of each force.
• Aircraft Manufacturing – industry rivalry fierce; new entrants, substitute products, power of suppliers not so much
• Movie theatres – production houses strong; substitute products abound;
Threat of Entry
The threat of entry puts pressure on prices, costs and the rate of investment necessary to compete. This puts pressure on profitability. Competitors must hold down prices or boost investment to deter new entrants.
Barriers to Entry
1. Supply-side economies of scale: Occurs when firms that produce larger volumes enjoy lower cost per unit, because they can spread high fixed costs over a large number of units, or have more efficient technology, or can command better terms from suppliers.
2. Demand – side economies of Scale: Network effects. The desire of a consumer to buy a product increases with the number of other buyers that buy the product.
3. Customer Switching Costs: There may be costs to switching suppliers, such as retooling costs, retraining costs. ERP software has high switching costs, as does autoparts industries.
4. Capital Requirements: Need to invest large financial