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The Forces you need to manage

This is easily recognizable, and for good reason. It has helped many structure their thoughts about the ecosystem in which they must fight, survive, thrive and dominate. Like all tools if it does not help and is not immediately appropriate then discard it and move on. But usually it generates some good discussion.

We have structured this as an aide-memoir and pose useful questions appropriate to each of the forces. You might want to link the views you garnered in earlier sessions on whether to grow with smaller customers or be bold take what you can and grow through large customer take-ons. Here you can reaffirm views on the various power dynamics at play.

A thought experiment to run through over a beer

It is worthwhile remembering that one of the key enablers of the industrial revolution, was the creation of corporations which became juristic entities, and could legally be recognized as the owner of an asset. This legal entity could sign contracts, even commit crimes, and be held accountable for its actions. ie Human attributes were bestowed upon them. Try this exercise, apply a few personality profile tests to a corporate of your choice. It is hard to argue with the conclusion that the relentless pursuit of profit (shareholder value) is a psychopathic pursuit that would not be tolerated in a human, and that corporations bear the traits of a psychopath. With this in mind, how secure are you in your relationships with supplier and consumers of your business?

5 forces are at play and influencing the decisions of the market participants

Porter 5 Forces

Start off with a view on the intensity of competition in your market.

Economists measure rivalry by indicators of industry concentration. You can find data at stat SA, but it is not great. The world bank research shows that 1972-1996, that in all three census years, in almost all sectors the largest 5% of firms produce more than 50% of output. By the 1990’s, there is no manufacturing sector in which 5% of the firms do not produce at least 50% of total output. And the largest 10% of firms produce at least 50% of output for all three manufacturing censuses under consideration You don't have to worry about Gini coefficients and Rosenbluth summarys, just find two sets of data 1 showing the relative contribution of the 4 largest firms and the relative contribution of the 10 largest firms. here is the data for manufacturing in RSA. The data starts on page 13. since 1996, many of these oligopolies have been broken, but you might find yourself in an industry dominated by one. Typically what happens is that these large organizations have no culture of competition, and will in many cases consider you too small to be a competitive threat. Unfortunately, what happens is the SMEs are played off against each other and there are lots of things to be done in this instance, especially if consumers are being disadvantaged or jobs lost. Call Spark! to discuss.

Especially in SA you will notice the intensity of rivalry being influenced in various ways, make sure you understand which of these applies to your business.

The number of firms is increasing quicker than the market they serve where the consumer market is stagnant must compete for the same customers and resources. The rivalry intensifies if the firms are recent entrants, leading to a struggle at the bottom of the market. The short-term insurance market is a very good example of this.

STAGNANT market growth causes firms to fight for market share with new entrants almost always competing on price. Many companies remain entrenched with their view of the market. SMEs should use their size advantage and mobility to work out how to service emerging segments.

High fixed costs result in an economy of scale effect that raises barriers to entry. When total costs are mostly fixed costs, firms must produce near capacity to attain the lowest unit costs. Steel producers and cement face this situation currently, and they will pass on these pains to SMEs.

High storage costs or highly perishable products cause a producer to sell goods as soon as possible. If other producers are attempting to unload at the same time, competition for customers intensifies.

Low Customer switching costs give consumers power and results in healthy competition that When a customer can freely switch from one product to another there is a greater need to continue adding value to the customer. They vote with their feet!

Low levels of product differentiation is associated with high competitoin and market consolidation. Brand can,alleviate matters but rarely does - diary, bread etc Collusion is a constant consumer threat..

Strategic stakes are high as in successful expansion into Africa,

High Cost of Exit often negate abandoning a product. The firm must compete. High exit barriers cause a firm to remain in an industry, even when the venture is not profitable. A common exit barrier is asset specificity. Many mines face this situation.

A diversity of rivals with different cultures, histories, and philosophies make an industry unstable. There is greater possibility for mavericks and for misjudging rival's moves. Rivalry is volatile and can be intense., where NGOs and foreign aid is involved this lack of stability undermines the whole market.

Industry Shakeout. As is expected in parts of financial services. The potential for high profits induced new firms to enter a market and incumbent firms to increase production. regulatory changes will also drive much of this new activity. A point will be reached where the industry becomes crowded with competitors, and demand cannot support the new entrants and the resulting increased supply.

Threat Of Substitutes

In Porter's model, substitute products refer to products in other industries. To the economist, a threat of substitutes exists when a product's demand is affected by the price change of a substitute product. A product's price elasticity is affected by substitute products - as more substitutes become available, the demand becomes more elastic since customers have more alternatives. A close substitute product constrains the ability of firms in an industry to raise prices.

Consumer Power

Consumer Power

Consumers are Powerful if:


Consumers are concentrated - there are a few consumers with significant market share Mass Retailers
Consumers purchase a significant proportion of output - distribution of purchases or if the product is standardized Electricity or Water
Consumers possess a credible backward integration threat - can threaten to buy product from a rival this is the case of the parts suppliers to the motor industry in Uitenhage

Consumers are Weak if:


Producers threaten forward integration - producer can take over own distribution/retailing Movie-producing companies have integrated forward to acquire theaters
Significant Consumers switching costs - products not standardized and Consumers cannot easily switch to another product Any of the technologies that do not follow standards and can apply proprietary solutions - ie. Apple Airplay
Consumers are fragmented (many, different) - no Consumers has any particular influence on product or price true for logistics
Producers supply critical portions of Consumers' input - distribution of purchases True for mining

Supplier Power

A producing industry requires raw materials - labor, components, and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products. Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry's profits. The following tables outline some factors that determine supplier power.

Supplier Power

Suppliers are Powerful if:


Credible forward integration threat by suppliers Baxter International, manufacturer of hospital supplies, acquired American Hospital Supply, a distributor
Suppliers concentrated Drug industry's relationship to hospitals
Significant cost to switch suppliers Microsoft's relationship with PC manufacturers
Customers Powerful Boycott of grocery stores selling non-union picked grapes

Suppliers are Weak if:


Many competitive suppliers - product is standardized Tire industry relationship to automobile manufacturers
Purchase commodity products Grocery store brand label products
Credible backward integration threat by purchasers Timber producers relationship to paper companies
Concentrated purchasers Garment industry relationship to major department stores
Customers Weak Travel agents' relationship to airlines

You are the new entrant so this is how the bigger competition view you and will react to you!

Barriers to exit work similarly to barriers to entry. Exit barriers limit the ability of a firm to leave the market and can exacerbate rivalry - unable to leave the industry, a firm must compete. Some of an industry's entry and exit barriers can be summarized as follows:

Barriers to Entry

Easy to Enter if there is:

Common technology

Little brand franchise

Access to distribution channels

Low scale threshold

Difficult to Enter if there is:

Patented or proprietary know-how

Difficulty in brand switching

Restricted distribution channels

High scale threshold

Easy to Exit if there are:

Saleable assets

Low exit costs

Independent businesses

Difficult to Exit if there are:

Specialized assets

High exit costs

Interrelated businesses

Generic Strategies to Counter the 5 Forces

Strategy can be formulated on three levels: corporate level business unit level functional or departmental level. The business unit level is the primary context of industry rivalry. Michael Porter identified three generic strategies (cost leadership, differentiation, and focus) that can be implemented at the business unit level to create a competitive advantage. The proper generic strategy will position the firm to leverage its strengths and defend against the adverse effects of the five forces.

Let’s take a step back and consider two well-known and two of the few consistently profitable airlines – Ryan Air and Singapore Airlines. Use the next section on RyanAir to understand this properly Now you can complete the Trends, Strengths and Weakness