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Saturday, May 1, 2010

Strategic Planning - Porter's 5 Forces - Industry Analysis (Part 1 of 5)

Michael Porter provides a framework that industry is being influenced by five forces.  A Strategic Financial Leader can utilize this model to better understand industry and develop an edge over the competition.

"The competition is alive and hungry - continue to relentlessly move the business forward"

The five forces are the following:

I.   Rivalry
II. Threat of Substitutes
III. Buyer Power
IV. Supplier Power
V.  Barriers to Entry / Threat of Entry

Rivalry acts in way that elicits a response from other companies intensifies the competition.  In pursuing an advantage over rivals the following are competitive moves:

  • Change Prices - raise or lower to gain a temporary advantage
  • Improve product differentiation - improving features, and innovations in the manufacturing process and product.
  • Creatively using channels of distribution - using vertical integration or distribution channel that is novel to the industry.
Intensity of rivalry is influenced by the following industry characteristics:
  1. A large number of firms - more firms competing for the same customer and resources
  2. Slow market growth - compete for market share 
  3. High fixed costs - company must produce at capacity to lower unit costs
  4. High storage costs - products must be sold as soon as possible
  5. Low switching costs - customers have ability to switch freely
  6. Low levels of product differentiation - commodity competing on price
  7. Strategic stakes are high - when losing or gaining market share
  8. High exit barriers - more costly to divest
  9. A diversity of rivals - varying cultures, histories, and philosophies can make an industry unstable.
  10. Industry shake out - a large number of firms will create a shake out.  The surviving firms will have to grow faster than the market.