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PowerPoint Diagram Pack

Porters Five Forces


Developed by Michael Porter, Porters Five Forces is a classic business framework for evaluating the attractiveness of a particular industry by analyzing 5 forces. It is useful to utilize Porters Five Forces in conjunction with a SWOT analysis of the industry.
4. Suppliers Suppliers negotiation power

1. Potential new competitors Threat by new competitors

2. Competitors in the industry Rivalry among existing companies

5. Customers Buyers negotiation power

3. Substitution products Threat by substitution products

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Porters Five Forces Introduction


What It Is Porters five forces constitutes a framework for analysing a companys environment (or industry structure): Porter first structured the framework in his 1980 book Competitive Strategy. Porter assumes that competition in an industry depends on five basic forces:
Potential Entrants
Threat of new entrants Bargaining power of suppliers

Why We Use It Assess attractiveness on the basis of competition in an industry. Highlight areas in which industry trends may pose opportunities or threats. Analyze where the company stands vis-a-vis the underlying causes of each competitive force. To understand/diagnose levels of return. Strengths & Limitations Strengths:
Buyers
Rivalry Among Existing Firms
Threat of substitute products or services

Industry Competitors

Bargaining power of buyers

Suppliers

Quite comprehensive framework. Good starting point to understand key drivers and trends.

Substitutes
Source: M.E. Porter, Competitive Strategy, 1980, p. 4 Free Press.

Limitations: THIS IS A PARTIAL PREVIEW Very often used strictly qualitatively.

You can preview the full PowerPoint document and The collective strength of these forces determines download it at http://learnppt.com/powerpoint/ the ultimate profit potential and allocation in the
industry.

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Porters Five Forces Framework Diagram


1. Potential new competitors Threat by new competitors

4. Suppliers Suppliers negotiation power

2. Competitors in the industry Rivalry among existing companies

5. Customers Buyers negotiation power

THIS IS A PARTIAL PREVIEW 3. Substitution You can preview the full PowerPoint document and Threat by download it at http://learnppt.com/powerpoint/
substitution products products

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Porters Five Forces Potential Insight & Output


Several important economic and technical characteristics of an industry are critical to the strengths of each competitive force:
Threat of New Entrants
Barriers to entry: Economies of scale (including shared resources) Product differentiation (proprietary) Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy Expected reaction of incumbent

Competitive Advantage Lower Cost Cost Leadership Cost Focus Differentiation Differentiation Differentiation Focus

Competitive Scope

Broad Narrow

Bargaining Power of Suppliers A supplier group is powerful when: It is dominated by a few companies and is more concentrated than the industry it sells to. There are no substitute products. The industry is not an important customer. Its products are important to the industry. Products are differentiated or suppliers have built up switching costs. It poses a credible threat of forward integration.

Intensity of Rivalry
Intense rivalry results from: 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 High exit barriers

Bargaining Power of Buyers A buyer group is powerful when: It is concentrated or purchases large volumes relative to seller sales. The products represent a significant fraction of the buyers costs or purchases. The products are standard or undifferentiated. It faces few switching costs. It earns low profits. It poses a credible threat of backward integration. The bought product is unimportant. It has full information.

Exit Barriers L H

Pressure from Substitute Products THIS IS A PARTIAL PREVIEW Search for products that can perform the same function. Assess buyers propensity to substitute. Focus on those that: Are improving their price performance trade-off compared with the industries products. Require low switching costs. Are produced by industries earning high profits.

Entry Barriers

L H

Low, stable returns High, stable returns

YouLow, risky preview the full PowerPoint document and can returns download it at http://learnppt.com/powerpoint/
High, risky returns

Take offensive or defensive actions to create a defensible position against the forces: Positioning the firm so its capabilities provide the best defense Influencing the balance of forces through strategic moves Anticipating shifts in the factors underlying the forces and responding to them

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The publishing industry has seen only modest increases in sales in recent years
EXAMPLE

Total U.S. printed media revenues, 1989-1999 Includes both consumer and advertising spending
$ Billions
140 120 100 80 60 40 20 0

Total revenues CAGR 1989-1994 4.6% 1994-1999E 5.7%

Newspapers Books Magazines


89 90 91 92 93 94

95E 96E 97E 98E 99E THIS IS A PARTIAL PREVIEW

Newspaper and magazine revenue growth has been driven by price increases, as circulation has been flat to falling Newspapers and magazines share of total advertisers spending has also fallen from 32% to 28% over the last five years Book publishers have seen growth in book unit volumes, with stable prices: Books remain a popular source for access to fiction and non-fiction despite a growing number of substitutes Recent growth of discount stores has helped increase sales

The internet provides an innovative new distribution medium that magazines and newspapers can Source: download it at http://learnppt.com/powerpoint/ use to recover readers and lure advertisers. Veronis, Suhler & Associates; S&P Industry Survey
Note: Magazine and newspaper spending includes both advertising and consumer spending

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The stock market, unsure of publishings future role, is not rewarding print-focused players
EXAMPLE

Value of $100 invested in March 1985


450 400 350 300 250 200 150 100 50 0
S&P 500 Newspapers Books Magazines

The Wall Street appeal of online involvement could help publishers who proactively use the new distribution medium

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maa-90

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THIS IS A PARTIAL PREVIEW

Publishing companies must to transition to full media companies, expanding beyond print to download it at http://learnppt.com/powerpoint/ distribute their products to be seen as long-term competitors.
Source: Note: Compustat All dividends reinvested. Indices track independent, pure play print media companies in each print segment Questions & feedback? Email me dave@learnppt.com The diagrams in this pack are to be used by the original buyer only. 6

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Leaders in the PC business have changed as quickly as the need for computing power
EXAMPLE

U.S. Unit Market Share

U.S. Unit Market Share of top 10 competitors (quarterly changes in market share)
CompanyX CompanyX CompanyX CompanyX CompanyX CompanyX

70% 60% 50% 40% 30%

CompanyX CompanyX

20% CompanyX 10% 0% 1Q 1993 CompanyX 2Q 1993 3Q 1993

THIS IS 1993 4Q A PARTIAL PREVIEW 1Q 1994 2Q 1994

3Q 1994

4Q 1994

New entrants and industry consolidation are forcing competitors to continually redefine their download it at http://learnppt.com/powerpoint/ business strategies.

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Gross margins have declined as the PC becomes a commodity product


EXAMPLE

Average PC makers revenue spending


$1.00
70 60 50 40 30 20 10

Top PC makers gross margin, 1989-1994


% Gross margin

$0.76

$0.04 $0.13 $0.02 Revenue Cost of goods R&D Mktg. & distribution $0.05

0 1989

1990

1991

1992

1993

1994

SG&A THIS IS Operating A PARTIAL PREVIEW profit

Taiwanese hardware manufacturers, such as Acer, have experienced 25% compound annual revenue download it at http://learnppt.com/powerpoint/ growth since 1986 by being the lowest cost suppliers to the top PC makers worldwide.

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Several factors determine the bargaining power of buyers


A buyer group is powerful when: It is concentrated or purchases large volumes relative to seller sales Its purchases from the industry represent a significant fraction of the buyers costs or purchases It purchases standard or undifferentiated products Brand identification is low Its switching costs are low Its profits are low It poses a credible threat of backward integration Its purchases from the industry is unimportant for the quality of its products or services It possesses full information

THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download itmayhttp://learnppt.com/powerpoint/ at change over time and alter buyer power. These factors learnppt.com

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Bookstores are the only channel with the ability to exert pressure on publishers
EXAMPLE

Publishers

Primarily newspapers and magazines Direct Distribution (subscription) Convenience Stores & Newsstands Other retail outlets Schools & Universities

Primarily books Bookstores U.S. Retail Market Share, 1994 1. Barnes & Nobles 17.3% 2. Borders-Walden 16.1% 3. Crown Books 3.2% 4. Books-a-Million 1.8% Total retail market of $9.4 billion 38.4%

These large national stores played a central role in boosting book sales to record levels in 1994, but put pricing pressure on publishers For newspapers and magazines THIS IS A PARTIAL PREVIEW the customer-base is more fragmented Limited bandwidth will slow book publishers ability to distribute products on-line, but could bypass download it at http://learnppt.com/powerpoint/ bookstores through Internet-based mail-order services and other creative services.

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Distinct distribution channels serve the two major different end-user segments
EXAMPLE

Channels
Direct Sales

Definitions
Those sales made by a manufacturers sales force, agent, or representative Provide customized value-added solutions for clients Offer unique, tangible solutions off-the-shelf to targeted customers The traditional computer dealer channel. Do not add unique value to the system but do offer some value in the form of support, training, or other services Large, well-merchandized store fronts , with most revenue generated by computer-related sales Typically offer a wide range of products, including computer-related equipment Offer a wide range of electronic merchandise, including computerrelated items Retailers and resellers focusing on office supplies of A THIS IS sale PARTIAL PREVIEW Third-party computer sales that use telephone to perform all levels Direct telephone sales from manufacturers not using third parties

Typical buyer

Value-added channels

System Integrators (SI) Value-Added Resellers (VAR) Dealers

Business

Computer Superstores Mass Merchants Consumer Electronic Stores

Mainstream channels

Office Stores Mail Order Direct Response

You can preview the full PowerPoint document and download it has increased the strength of the mainstream Massive increase of home PC usage at http://learnppt.com/powerpoint/ channel,
especially retailers.
Source: IDC and Merrin Information Services, Inc.

Home users

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Porters Five Forces Framework Diagram Template


Porters Five Forces Template
INDUSTRY COMPETITIVE ASSESSMENT COMPETITIVE STRATEGY

New Entrants
Bullet point 1 Bullet point 2 Bullet point 3 Bullet point 4

Competitive Advantage Lower Cost Differentiation Differentiation

Suppliers
Bullet point 1 Bullet point 2 Bullet point 3 Bullet point 4

Internal Rivalry
Bullet point 1 Bullet point 2 Bullet point 3 Bullet point 4

Buyers
Bullet point 1 Bullet point 2 Bullet point 3 Bullet point 4
Competitive Scope
Broad

Cost Leadership

Narrow

Cost Focus

Differentiation Focus

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Bullet point 3 Bullet point 4

Substitutes

THIS IS A PARTIAL PREVIEW

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END OF PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/

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