Michael Porters

Five Forces
Model

IDENTIFYING COMPETITIVE
ADVANTAGES

To survive and thrive an organization

must create a competitive
advantage

Competitive advantage a product

or service that an organizations
customers place a greater value on
than similar offerings from a competitor
First-mover advantage occurs when
an organization can significantly impact
its market share by being first to market
with a competitive advantage

IDENTIFYING COMPETITIVE
ADVANTAGES

Organizations watch their competition

through environmental scanning

Environmental scanning the acquisition and

analysis of events and trends in the environment
external to an organization

Three common tools used in industry to

analyze and develop competitive
advantages include:

Porters Five Forces Model

Porters three generic strategies
Value chains

Michael Porter
An industrys profit
potential is largely
determined by the intensity
of competitive rivalry
within that industry.

Porters Five Forces

Buyer Power

Buyer power assessed by analyzing

the ability of buyers to directly impact
the price they are willing to pay for an
item

Ways to reduce buyer power include

Switching costs costs that can make

customers reluctant to switch to another
product or service
Loyalty program rewards customers
based on the amount of business they do
with a particular organization

Power of Buyers
high when
* Customers are concentrated,
concentrated large or
buy in volume .
* The products being purchased are
standard or undifferentiated making
it easy to switch to other suppliers.
* Customers purchases represent a
major portion of the sellers total
revenue.

Supplier Power

Supplier power assessed by the

suppliers ability to directly impact the
price they are charging for supplies
(including materials, labor, and services)

Supply chain consists of all parties

involved in the procurement of a product or
raw material

Power of Suppliers
high when
* A small number of dominant,
highly
concentrated suppliers
exists.
* Few good substitute raw materials
or
suppliers are available.
* The cost of switching raw
materials
or suppliers is high.

Threat of Substitute
Products or Services

Threat of substitute products

or services high when there are
many alternatives to a product or
service and low when there are
few alternatives from which to
choose

Substitute products
competitive strength high when
* The relative price of substitute
products declines .
* Consumers switching costs decline.
decline
* Competitors plan to increase
market penetration or production
capacity.
capacity

Threat of New Entrants

Threat of new entrants high when it is

easy for new competitors to enter a
market and low when there are significant
entry barriers to entering a market

Entry barrier a product or service feature

that customers have come to expect from
organizations in a particular industry and must
be offered by an entering organization to
compete and survive

Barriers to Entry
large capital requirements or
the need to gain economies of
scale quickly.
strong customer loyalty or
strong
brand preferences.
lack of adequate distribution
channels or access to raw
materials.
materials

Rivalry Among Existing

Competitors

Rivalry among existing competitors

high when competition is fierce in a market
and low when competition is more
complacent

Product differentiation occurs when a company

develops unique differences in its products with the intent
to influence demand

Although competition is always more intense

in some industries than in others, the overall
trend is toward increased competition in just
about every industry

Rivalry among
competitors

intensity increases as
* The number of competitors
increases
or they become equal
in size.
size
* Demand for the industrys products
declines or industry growth slows.
slows
* Fixed costs or barriers to leaving
the industry are high.
high

Porters five force model

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Analysis
5 Forces

Analysis

Rivalry among the competitor

Reliance Retail, Aditya Birla Group , Vishal Retails,

Bharti and Walmart, etc

Threat of entrants
FDI policy not favorable for international players.
Domestic conglomerates looking to start retail chains.
International players looking to foray India.
Bargaining power of supplier

The bargaining power of suppliers varies depending

upon the target segment.
The unorganised sector has a dominant position.
There are few players who have a slight edge over
others on account of being established players and
enjoying brand distinction.

Bargaining power of buyers

Consumers are price sensitive..

Availability of more choice.
Unorganized retail

Threat of substitutes

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High Threat of New

Entry

Low Bargaining
Power of Supplier

High Rivalry Amongst

Competitors

High Bargaining
Power of Buyer

Low Threat of
Substitute

RIVAL
INTENSITY

HIGH

THREAT
THREAT OF
OF
ENTRANTS SUBSTITUT
ES
HIGH

LOW

Big Bazaar and 5 Forces:

5 Forces Model for Big

Bazaar

POWER OF
BUYERS

POWER OF
SUPPLIERS

HIGH

LOW

RIVAL

THREAT

INTENSITY

THREAT OF
ENTRANTS

OF SUBSTITUTES

POWER OF
BUYERS

POWER OF
SUPPLIERS

HIGH

HIGH

LOW

HIGH

LOW

High Threat of New

Entry

Low Bargaining
Power of Supplier

High Bargaining
Power of Buyer

High Rivalry Amongst

Competitors

Low Threat of
Substitute

Hom e
C e n tr a l
7%

B ig
B azaar

12%
P a n ta lo o n
D e p t s to r e

42%

13%

23%
O th e rs

Food B azaar

Competitor

In the apparels segment in big bazaar

faces competition from Shoppers Stop,
Trent, pantaloon and Lifestyle.
The Company face competition from the
companies likes RPG (Spencers), Trent
(Star India Bazaar), Reliance fresh and
with Shoppers Stop too indicating their
entry into the hypermarket segment.

Bargaining Power of Buyer

Customers are very sensitive to

crises. In big bazaar prices are
cheep as Consumers are price
sensitive.
Availability of more choice.
Switching cost is nil.

Bargaining Power of
Supplier

The bargaining power of suppliers

varies depending upon the target
segment.
In Big Bazaar the target segment is
the upper and the mediocre
income group.

The unorganized i.e. the mom and pop

stores sector has a dominant position.
There are few players who have a slight
edge over others on account of being
established players and enjoying brand
distinction.
Big Bazaar has an advantage over the
others on enjoying the economies of
scale for bulk buying.

Threat of Substitute

The threat of substitutes is when the

customer has a choice to buy a
product or a service which is not
limited to the same industry or market.
There are different ways to satisfy a
particular need.
This is both an opportunity and a
threat.

Existence of substitutes helps big

bazaar put in place the right
defensive strategies to keep the
current customers and follow
offensive strategies to attract new
customers to you.
Substitutes for Big Bazaar are Star
Bazaar, Spencers, Hyper city etc.

Mom and Pop Stores

R
I
V
A
L
I
N
T
E
N
S
I
T
Y

H
I
G
H

THREAT

THREAT OF
ENTRANTS

OF SUBSTITUTES

POWER OF
BUYERS

POWER OF
SUPPLIERS

HIGH

HIGH

HIGH

HIGH

Portfolio Analysis
Strategy at the time
(1970s) was focused on two
dimensions of the portfolio
grids
Industry Attractiveness
Competitive Position

Structural reasons
whyindustries

some
were profitable
* Firm concentration
* Established cost advantages
* Product differentiation
* Economies of scale

Structural reasons
all represented barriers to
entry in certain industries,
thus allowing those
industries to be more
profitable than others.

THE THREE GENERIC

STRATEGIES
Organizations typically follow one of
CREATING
A BUSINESS
Porters
three generic
strategies
FOCUS
when
entering a new market

Generic Strategies

Low-cost
leadership

Differentiati
on

Prof.Sushil\IITD\Session-VI

Focus

32

PORTERS GENERIC STRATEGIES

Competitive Advantage
Lower Cost

Broad
Target

1. Cost Leadership

Differentiation
2. Differentiation

Competitive Score
Narrow
Target

3 A. Cost Focus

3 B. Differentiation
Focus

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33

Cost Leadership

Parle G Biscuits
Big Bazar
MTNLs Dolphin
Vichare Courier
LIC

Differentiation

BMW
Ferrari
Mercedes
Audi

Focus

Indus Ind Bank NRI Clients

Deustsche Bank Corporate Finance
Maharashtra Co-op Bank Lower
Middle Class Customers
Citi Bank Credit Cards
AXIS Bank New Products like
Prepaid Cards, Multi Currency Cards

REQUIREMENTS FOR GENERIC

COMPETITIVE STRATEGIES
Generic
Strategy

Commodity Required Common Organizational

Skills and Resources Requirements

Overall cost

Sustained capital investment

leadership
reports

Frequent, detailed control

access to capital

Process engineering skills

responsibilities
Intense supervision of labour
Products designed for ease
Low-cost distribution system

Tight cost control

Structured organization

and

Incentives based on
meeting strict quantitative
targets in manufacture

Differentiation
Strong marketing abilities
Strong coordination
Product engineering
among functions in R&D,
Creative flare
product development, and
marketing

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REQUIREMENTS FOR GENERIC COMPETITIVE

STRATEGIES
CONTD
Strong capability in basic
research

Focus

above policies

Subjective measurement and

incentives instead of
quantitative measures
Corporate reputation for Amenities to attract highly
quality or technological
skilled labour, scientists, or
leadership
creative people
Long tradition in the industry
or unique combination of skills
drawn from other businesses
Strong cooperation from
channels
Combination of the above
Combination of the
policies directed at the
particular strategic target

directed at the regular strategic

target

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38

RISKS OF THE GENERIC STRATEGIES

Risks of Cost Leadership

Risks of Differentiation

Risk of Focus

Cost of leadership is not

Differentiation is not
The focus strategy is
sustained
initiated
sustained:
Competitors imitate
The target segment

Competitors imitate:
Bases for differentiation
becomes structurally
unattractive

Technology changes
becomes less imported to Structure erodes

Other bases for cost

buyers Demand disappears
leadership erode
Proximity in differentiation Cost proximity is lost
Broadly targeted
is lost
competitors overwhelm
the segment:
The segments differences
from other segments narrow
The advantages of a broad
line increase
Cost focusers achieve
Differentiation focusers
New Focusers sub-segments
even lower cost in segments
achieve even greater
the industry
differentiation in segments

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39

Michael Porters Five

Generic Strategies

Cost leadership

emphasizes producing standardized

products at a very low per-unit cost
for consumers who are price-sensitive

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Inc. publishing as Prentice Hall

5-40

Michael Porters Five

Generic Strategies

Type 1

low-cost strategy
that offers
products or
services to a wide
range of
customers at the
lowest price
available on the
market

Type 2

best-value
strategy that
offers products or
services to a wide
range of
customers at the
best price-value
available on the
market

Copyright 2013 Pearson Education,

Inc. publishing as Prentice Hall

5-41

Michael Porters Five

Generic Strategies

Differentiation

strategy aimed at producing products

and services considered unique
industry-wide and directed at
consumers who are relatively priceinsensitive

Copyright 2013 Pearson Education,

Inc. publishing as Prentice Hall

5-42

Michael Porters Five

Generic Strategies

Type 4

low-cost focus
strategy that
offers products or
services to a niche
group of
customers at the
lowest price
available on the
market

Type 5

best-value focus
strategy that
offers products or
services to a small
range of
customers at the
best price-value
available on the
market

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Inc. publishing as Prentice Hall

5-43

Cost Leadership Strategies

To employ a cost leadership

strategy successfully, a firm must
ensure that its total costs across
its overall value chain are lower
than competitors total costs

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Inc. publishing as Prentice Hall

5-44

Differentiation Strategies

Differentiation strategy should be

pursued only after a careful study
of buyers needs and preferences
to determine the feasibility of
incorporating one or more
differentiating features into a
unique product that features the
desired attributes
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Inc. publishing as Prentice Hall

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Differentiation

When there are many ways to

differentiate the product
When buyer needs and uses are
diverse
When few rival firms are following a
similar differentiation approach
When technological change is fast
paced
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Inc. publishing as Prentice Hall

5-46

Focus Strategies

Successful focus strategy depends

on an industry segment that is of
sufficient size, has good growth
potential, and is not crucial to the
success of other major competitors
Most effective when consumers
have distinctive preferences
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Inc. publishing as Prentice Hall

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Focus Strategy Guidelines

When the target market niche is large,

profitable, and growing
When industry leaders do not consider the
niche to be crucial to their own success
When the industry has many different
niches and segments
When few, if any, other rivals are
attempting to specialize in the same
target segment
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Inc. publishing as Prentice Hall

5-48

Value Creation

Once an organization chooses its

strategy, it can use tools such as the
value chain to determine the success
or failure of its chosen strategy

Business process a standardized set of

activities that accomplish a specific task,
such as processing a customers order
Value chain views an organization as a
series of processes, each of which adds
value to the product or service for each
customer

Value Creation

Combining Porters Five Forces and

three generic strategies create
business strategies for each
segment

Value Creation

Value Chain

Value Creation

Value chains with Porters Five Forces