MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATIL

Michael Eugene Porter (born May 23, 1947)[  is the Bishop William Lawrence University Professor at Harvard Business School. He is a leading authority on company strategy and the competitiveness of nations and regions. Michael Porter’s work is recognized in many governments, corporations and academic circles globally. He chairs Harvard Business School's program dedicated for newlyappointed CEOs of very large corporations.

WORK UNDER REVIEW:

Porter, M.E. (1979) "How Competitive Forces Shape Strategy", Harvard Business Review, March/April 1979.

Porter, M.E. (2008) "The Five Competitive Forces That Shape Strategy", Harvard Business Review, January 2008, pp. 79-93.Porter’s five forces” have shaped a generation of academic research and business practice. Porter here reaffirms, up- dates, and e xtends the classic work . He also addresses common misunderstandings,provides practical guidance for users of the framework, and offers a deeper view of its implications for strategy today.

REVIEWED BY:

NAME : VIPUL PATILCOURSE : PHARMATECH AND HEALTHCARE MANAGEMENT (MPHARM+MBA) DEPARTMENT : PHARM ANALYSISROLL NO : 20YEAR : FIRST YEAR

INTRODUCTION

The Five Forces model of Porter is an outside-in business unit strategy tool that is used to make an analysis of the attractiveness (value...) of an industry structure.

It captures the key elements of industry competition.

1. Threat of new entrants 2. Bargaining power of suppliers

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MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATIL

3. Bargaining power of Buyers4. Threat of substitute products 5. Intense rivalry among existing players

As different from one another as industries might appear on the surface, the underlying drivers of profitability are the same. But to understand industry competition and profitability.

In each of the cases, one must analyze the industry’s underlying structure in terms of the five forces.

Understanding the competitive forces, and their underlying causes, reveals the roots of an industry’s current profitability while providing a framework for anticipating and influencing competition (and profitability) over time.

We will consider each parameter in details:

(1)THREAT ON NEW ENTRANTS:

New entrants bring new capacity. Have desire for market share.: Can bring in heavy cash flows and shake up competition.Eg.Pepsi,Microsoft. it can put cap on profitability. Incumbents hold down prices or boost investments to deter new entrants. Brings reaction from incumbents.

BARRIERS OF ENTRY:

Supply side economies of scale: larger volume enjoys lower cost eg.intel.

Demand side benefits of scale : buyer patronize the company products.(networking effects)

Customer switching cost : larger the swiching cost harder it will be for entrants to gain customer.

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MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATIL

Capital requirement : large capital investment can deter new entrantsif particular capital requirement is unrecoverable likehigher to finance expenditure likeadvertisin and R&D.

Incumbency advantages independent of sizes : incumbents have quality advantages over new entrants like propriety technology, best raw material sources, established brand entities and cumulative experience. All in turn contribute to efficiency.

Unequal access to distribution channels : wholesalers and retailers so committed to incumbent that new entrant have to bypass distribution or create his own.

Restrictive government policy : government can encourage new entrants through subsidies or hinder them by imposing ban or licensing requirements.

Expected retaliation : public statement from incumbent’s reaction to new entrant can act as barrier.

(2)POWER OF SUPPLIER:

Powerful suppliers capture more value for themselves by charging higher prices, limiting quality or services and shift costs towards industry participants.

They squeeze out profitability of industry. Eg.supplier of labor.

SUPPLIER GROUP IS POWERFUL IF:

Supplier is more concentrated than industry: eg Microsoft’s monopoly in operating systems.

Supplier group doesn’t rely on industry for its revenues: supplier serving much industry will try to extract profit from all sides but will reasonable discount if one is large volume buyer.

Switching costs: If switching cost from buyer is high then it is difficult to play supplier against one another.

Supplier which offers differentiated product: There is no substitute for suppliers product pharmaceutical companies over hospitals and pilots union.

Forward integration threat: When industry participants make too much profit.

(3) POWER OF BUYER:

Powerful buyer is flipside of powerful supplier by forcing down prices, demanding better quality or more services.

They play industry participants against one another. They are powerful if they have negotiating leverage.

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MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATIL

They their clout to pressure price reductions.

Buyer has negotiating leverage if

i. Few buyer &large relative purchase wrt single vendor: eg.bulk chemicalsii. Standardized products or undifferentiated: then buyer play against one another.

iii. Switching costs: if less buyers change vendors.iv. Backward integration threate n Pepsi threaten to make bottles.v. Intermediate buyer: when they can influence end customer purchasing decision.

Buyer group is price sensitive if:

i. Product has significant fraction in costs structure: Then buyer bargain hard &shop around.ii. The buyer group earns low profits: BUYER UNDER PRESSURE TO TRIM COSTS.

iii. Quality of buyer is little affected by products or services: If quality is affected by industry then buyer is not price sensitive.

iv. Buyer is price insensitive if: 1. If product or services pay many times over by improving performance.2. If product is more undifferentiated.

(4)THREAT OF NEW SUBSTITUTE:

A substitute per- forms the same or a similar function as an industry’s product by a different meansE.g.-mail is a substitute for express mail.

Substitutes are always present, but they are easy to overlook because they may appear to be very different from the industry’s product. When the threat of substitutes is high, industry profitability suffers.

They also reduce the bonanza an industry can reap in good times.eg In emerging economies, for example, the surge in demand for wired telephone lines has been capped as many consumers opt to make a mobile tele- phone their first and only phone line.

The threat of a substitute is high if:

1. The better the relative value of the substitute, the tighter is the lid on an industry’s profit potential eg.skype has overcome long distance calling being in expensive.

2. The buyer’s cost of switching to the substitute is low. Switching from a proprietary, branded drug to a generic drug usually involves minimal costs,

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MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATIL

3. technological changes or competitive discontinuities in seemingly unrelated businesses can have major impacts on industry profitability eg. Improvements in plastic materials, for example, allowed them to substitute for steel in many automobile components.

(5)R IV AL R Y AMON G E XISTIN G C O M P ETI T O R S: Rivalry exists in form of including

price discounting, new product introductions, advertising campaigns, and Service improvements.

Degree of rivalry depends on intensity with which they compete & basis on which they compete

I the intensity of rivalry am greatest if:1. Numerous competitors both in size and power.2. Slow growth precipitates fight.3. Exit barriers are high.

4. Rivalry is high if goals go beyond economic performance of industry.eg state owned company have goals of employment and prestige.als clashes of personality and ego.

5. Firms cannot read each other’s signals.

Rivalry also affects basis of competition. Dimension s whether rivals converge on same dimension or different.

PRICE DIMENSION: Destructive to profitability of industry and transfer profit to customers. Diverts attention of customers towards product features and service.

Price competition is most liable to occur if:1. Products identical & few switching costs for buyers.

2. Fixed costs are high and marginal costs are low.

3. Large capacity expansion.

4. Product is perishable

OTHER DIMENSION( NON-PRICE RIVALRY ): On product features, support services, delivery time, or brand image,

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MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATIL

Features: o no erosion of profitability.o Improves customer value.o Support higher prices.o Improve value over substitute or raise barrier for new entrant.o POSITIVE SUM COMPETITION.o HIGHER AVERAGE profitabilityo Expand industry.

Thus nature of competition is towards positive direction.

Limitation on rivalry :

Factors not considered IN PORTER FIVE FORCES areo TOO MANY “ME TOO” :every one wants too be in rat race every one wants too

devlop same product this factor should be kept in mind wrt rivalry.o SUDDEN CHANGE IN MACRO ENVIORNMENT :cannot be ignored bcoz any

change in enviornment can cause all competition among rival TOO BLEED TO DEATH.Eg any hike in crude prices will cause airlines with very bad impact on profitability like kingfisher airlines.

o LACK OF BUSSINESS MATURITY :Many rivals can lessen impact of competition by forming allainces and mergers among themselves which we refer as bussiness maturity.

FACTORS,NOT FORCES:

1. INDUSTRY GROWTH RATE : fast growth promises more opportunities but narrow focus can cause bad strategy development.

2. TECHNOLOGY &INNOVATION : also acts to make industry attractive or in attractive3. GOVERNMENT :can support industry eg.patent barrier orconversely by favouring unions &

bankruptcy rules.4. COMPLEMENTARY PRODUCT &SERVICES : combination add to the product value.

ADVANTAGES OF PORTER FIVE FORCES:

i. The value of Porters model is more that it enables managers to think about the current situation of their industry in a structured, easy-to-understand way as a starting point for further analysis.

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MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATIL

ii. It helps company to know average profitability of its industry and how it is changing over time.iii. They provide baseline for sizing up companies strengths and weaknessesiv. It tells us where company stands versus buyers,suppliers,entrants,rivals and substitutes.v. It helps in understanding industry structure towards fruitful possibilities for strategic action like

Positioning company. Shaping industry structure. Expanding profit pool defining industry.

LIMITATION OF PORTER FIVE FORCES:

i. The model is best applicable for analysis of simple market structures, analysis of all five forces gets very difficult in complex industries with multiple interrelations, product groups, by-products and segments.

ii. Narrow focus on particular segments of such industries, however, bears the risk of missing important elements.

iii. The model assumes relatively static market structures. in today’s dynamic markets. Technological breakthroughs and dynamic market entrants from start-ups or other industries may completely change business models, entry barriers and relationships along the supply chain within short times.

iv. Inside-out strategy is ignored (core competence)v. It does not cope with synergies and interdependencies within the portfolio of large corporations

(parenting advantage)vi. The environments which are characterized by rapid, systemic and radical change require more

flexible, dynamic or emergent approaches to strategy formulation (disruptive innovation) vii. Sometimes it may be possible to create completely new markets instead of selecting from

existing ones (blue ocean strategy)

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MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATIL

APPLICABILITY:

1. PHARMA INDUSTRY:

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RETAILING INDUSTRY

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MARKETING MANAGMENT (Assignment no.1) Review On Porter Five Forces That Shapes StrategyROLLNO. 20 VIPUL PATIL

AVIATION INDUSTRY

THE END

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