THE FIVE COMPETITIVE FORCES THAT SHAPE STRATEGY NOTES
THE FIVE COMPETITIVE FORCES THAT SHAPE STRATEGY NOTES
Competitive Forces
1. Rivalry Among Existing Competitors
2. The Power if Buyers
3. The Power of Suppliers
4. Threat of Entrants
5. The Threat of Substitute Products/Services
The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry.
Understanding the competitive forces, and their causes, reveals the roots of an industry’s current profit- ability while providing a framework for anticipating and influencing competition (and profitability) over time.
Defending against the competitive forces and shaping them in a company’s favor are crucial to strategy.
Threat of Entrants
New entrants cause competition on market share, which then puts pressure on prices, costs, and the rate of investment necessary to compete
Puts cap on profit potential in the industry
Barriers to Entry
1. Supply-side economies of scale: Supply-side scale economies deter entry by forcing the aspiring entrant either to come into the industry on a large scale, which requires dislodging entrenched competitors, or to accept a cost disadvantage.
2. Demand-side benefits of scale: Demand-side benefits of scale discourage entry by limiting the willingness of customers to buy from a newcomer and by reducing the price the newcomer can command until it builds up a large base of customers.
3. Customer switching costs: The larger the switching costs, the harder it will be for an entrant to gain customers.
4. Capital requirements: The need to invest large financial resources in order to compete can deter new entrants.
5. Incumbency advantages independent of size: incumbents may have cost or quality advantages not available to potential rivals.
6. Unequal Access to Distribution Channels: The more limited the wholesale or retail channels are and the more that existing competitors have tied them up, the tougher entry into an industry will be.
7.
Competitive Forces
1. Rivalry Among Existing Competitors
2. The Power if Buyers
3. The Power of Suppliers
4. Threat of Entrants
5. The Threat of Substitute Products/Services
The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry.
Understanding the competitive forces, and their causes, reveals the roots of an industry’s current profit- ability while providing a framework for anticipating and influencing competition (and profitability) over time.
Defending against the competitive forces and shaping them in a company’s favor are crucial to strategy.
Threat of Entrants
New entrants cause competition on market share, which then puts pressure on prices, costs, and the rate of investment necessary to compete
Puts cap on profit potential in the industry
Barriers to Entry
1. Supply-side economies of scale: Supply-side scale economies deter entry by forcing the aspiring entrant either to come into the industry on a large scale, which requires dislodging entrenched competitors, or to accept a cost disadvantage.
2. Demand-side benefits of scale: Demand-side benefits of scale discourage entry by limiting the willingness of customers to buy from a newcomer and by reducing the price the newcomer can command until it builds up a large base of customers.
3. Customer switching costs: The larger the switching costs, the harder it will be for an entrant to gain customers.
4. Capital requirements: The need to invest large financial resources in order to compete can deter new entrants.
5. Incumbency advantages independent of size: incumbents may have cost or quality advantages not available to potential rivals.
6. Unequal Access to Distribution Channels: The more limited the wholesale or retail channels are and the more that existing competitors have tied them up, the tougher entry into an industry will be.
7.