Assessing the Nature of Competition
Techniques are used to assess the internal and external
environment: Porter’s Five Forces Model - used to
analyse an industry in which an organization operates.
We will examine Michael Porter’s Model of assessing the
nature of competition.
It examines the competition in an industry
It helps managers to identify the factors that affect the
intensity of competition within a particular industry.
It depicts the relationship between different players and
potential players
Porter’s Five Forces Framework
Porter’s Five Forces Framework helps identify the
attractiveness of an industry in terms of five
competitive forces:
1)The threat of entry
2)The threat of substitutes
3)The bargaining power of buyers
4)The bargaining power of suppliers and
5)The extent of rivalry between competitors.
The Five Forces framework
1.The threat of entry
The threat is greater if an industry is attractive
enough to entice new operators and there is
sufficient customer base to support new
entrants.
There is high potential for profits
Low set up costs
In other words, there is low financial risk
combined with high potential returns.
1. The threat of entry
In this segment, we want to identify companies
which are likely to be able to enter the market to
compete with existing operators.
Barriers to entry are the factors that need to be
overcome by new entrants if they are to
compete. The threat of entry is low when the
barriers to entry are high and vice versa.
4. The threat of entry
The main barriers to entry are:
• Economies of scale/high fixed costs
• Experience and learning
• Access to supply and distribution channels
• Differentiation and market penetration costs
• Legislation or government restrictions (e.g.
licensing)
• Expected retaliation from incumbents
2. Threat of substitutes
Substitutes are products or services that offer a similar benefit to an
industry’s products or services, but have a different nature i.e. they
are from outside the industry.
Customers will switch to alternatives (and thus the threat increases) if:
The price or performance of the substitute is superior (e.g.
Aluminium is more expensive than steel but it is more cost efficient for
car parts).
Substitutes are likely to emerge from alternative technologies
The substitute benefits from an innovation that improves customer
satisfaction (e.g. high speed trains can be quicker than airlines from
city centre to city centre on short haul routes).
Hence the substitute threaten the survival of traditional product
providers.
3. The bargaining power of buyers
Buyers are the organisation’s immediate customers, not
necessarily the ultimate consumers.
If buyers are powerful, then they can demand cheap
prices or product/service improvements to reduce profits.
Buyer power is likely to be high when:
•Buyers are concentrated
•Buyers have low switching costs
•Buyers can supply their own inputs (backward vertical
integration).
4. The bargaining power of suppliers
Business suppliers are those who supply what
organisations needs to produce the product or
service.
If an organisation has powerful suppliers, they
can reduce the organisation’s profits.
Let us examine situations when the supplier is
powerful
4. The bargaining power of suppliers
Supplier power is likely to be high when:
•The suppliers are concentrated (few of them)
•Suppliers provide a specialist or rare input
•Switching costs are high (it is disruptive or
expensive to change suppliers)
•Suppliers can integrate forwards (e.g. low-cost
airlines have cut out the use of travel agents).
4. The bargaining power of suppliers
The greater the advantage that suppliers of key raw
materials or components have, the less attractive is the
industry. An industry is generally more attractive when:
•Many suppliers sell a commodity product to the companies in it.
•Substitute products are available for the items suppliers
provide.
•Companies find it easy to switch suppliers or to substitute
products.
•When the items suppliers provide the industry account for a
relatively small portion of the cost of the industry’s finished
products.
5. Rivalry between existing competitors
Rivalry among companies competing in
the industry.
Competitive rivals are organisations with
similar products and services aimed at
the same customer group.
The strongest of the five forces in most
industries is the rivalry that exists among the
businesses competing in a particular market.
This force makes markets a dynamic and
highly competitive place.
5.Rivalry between existing competitors
The degree of rivalry increases when:
Competitors are of roughly equal size and
capacity.
Competitors are aggressive in seeking
leadership.
There are high fixed costs and excess capacity
The exit barriers are high.
There is a low level of differentiation.
The market is mature or declining.
Assessment of the Internal and External
Environments
After surveying the power these five forces exert
on an industry, entrepreneurs can evaluate the
potential for their companies to generate
reasonable sales and profits in a particular
industry to answer the question,
“Is this industry a good one for my business?”
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Knowledge of these underlying sources of
competitive pressure is important because
1) They highlight the critical strengths and
weaknesses of the company.
2) They clarify the areas where strategic changes
may yield the greatest payoff.
3) They highlight places where industry trends
promise to hold opportunities and threats.
4) They highlight areas where the company
should confront competition and where to
avoid it.
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Porter’s Generic
Competitive Strategies
Developing a strategic plan helps the
small business differentiate itself from
other companies—a common pitfall for
many small firms.
• Cost Leadership Strategy
• Differentiation Strategy
• Focus Strategy
.
Cost leadership
Cost leadership is an attempt by the business to
compete by having the lowest costs associate with
the product.
The idea is to reach buyers that are price
sensitive.
The company in this case sets the floor price.
The prerequisite to success is low cost.
By containing costs, lower prices will net sufficient
profit margins. Examples: Shoprite, Walmart
Differentiation:
Differentiation: Positioning one’s product or service
apart from the competition that builds loyal customers
that are not easily pulled away by the competition.
This is done on the basis of something that the
customer values e.g. Status, Prestige, Exclusivity.
The company can successfully charge a premuim
price for products and services.
To be successful, the product must be truly different
Examples: Mercedes Benz, Cadillac
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Differentiation:
For differentiation to be successful, the product
must be truly different
Examples: Mercedes Benz, Cadillac
-Imitations can pose a threat to successful
differentiation
-can outprice itself out of the market
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Focus
Focus: Select one (or more) segments(s); identify
customers' special needs, wants, and interests; and
approach them with a good or service specifically
designed to excel in meeting those needs, wants,
and interests.
-Niche needs to be large enough to be profitable.
-This strategy is suited to smaller companies.
Examples: tall men’s clothing and television
networks such as Black Entertainment (BET
Assessment of the Internal and External
Environments
The analysis of strengths and weaknesses of
organisations should follow.
The task involves more than identifying and evaluating
an organisations strengths and weaknesses; it also
requires capturing a sense of how those strengths and
weaknesses combine to help an organisation position
itself in the market.
This process of matching possibilities with capabilities is
basic to the development of strategies and action plans for
achieving goals.
SWOT ANALYSIS
1.The objectives of a SWOT analysis are
(i)To assist managers in finding the best match between
environmental possibilities and organisational capabilities.
(ii)To help managers identify areas that needs to be
strengthened
.
Swot Analysis
A single term often used to refer to both
environmental and organisational assessment is
SWOT Analysis
It focuses on the strengths, weaknesses,
opportunities and threats facing organisations.
SWOT is a reminder to managers that
developing strategies requires an analysis of both
external and internal factors.
.
What are strengths, weaknesses,
opportunities, and threats?
Strengths: Positive internal factors that
contribute to a company's ability to achieve its
mission, goals, and objectives. Examples
include:
• Committed workforce
• Positive Public Image
• Quality products.
• Base of Loyal customers
.
SWOT
Weaknesses: Negative internal factors that
inhibit a company's ability to achieve its mission,
goals, and objectives. Examples include:
High rates of employee turnover
Poor customer service
Lack of Capital
Shortage of Skilled workers
Inferior Location
.
SWOT
Opportunities: Positive external
options that a business could exploit to
accomplish its mission, goals, and
objectives. Examples include:
•Expanding global markets
•An overlooked Niche
•New product which offers better value
.
SWOT
Threats: Negative external forces that
inhibit a business's ability to accomplish its
mission, goals, and objectives. Examples
include:
• New Competitors
• Rising Interest rates
• Increase in energy prices
• Technological advances which make your
product obsolete.
Key Success Factors
Every industry has controllable variables that
determine the relative success of market
participants.
Businesses can achieve dramatic market
advantages over their competitors by focusing
efforts on these key success factors.
Definition: Key Success Factors that determine a
company’s ability to compete successfully in an
industry.
Key Success Factors
Examples of Key Success Factors in a Fast
Food Outlet:
• Sufficient Start-up Capital
• Cleanliness
• Friendly and attentive service
• Speed
• Location
• Consistent Quality
Competitive advantage
• A competitive advantage is an
aggregation of factors that sets a
company apart from its competitors.
• It gives it a unique position in the market.
No business can be everything to
everyone.
• Smaller firms have an advantage over
larger firms because they are well suited
to concentrate on niche markets.
PEST ANALYSIS
PEST analysis looks at environmental trends in the
wider environment in which the organisation and its
industry are located. It comprises the following:
•Political
•Economical
•Social
•Technological environment.
Also known as PESTEL if it includes ecological
and legal environment.
Political environment
Political environment – the content and stability
of political forces affect the ability of an
organisation’s leaders to set goals and formulate
strategies.
Radical shifts in the political philosophy of a
nation’s leaders can make business goal setting
and planning extremely difficult.
Challenge:pay attention to campaign Promises
during elections
Economic Environment
Consumption patterns of potential customers are
affected by economic forces such as:
• Rate of inflation
• Interest rests,
• Availability of credit for consumer purchases or investment
purposes,
• Rate of unemployment,
• Size of disposable personal income.
A firm’s top executives need information about the
general economy in order to set meaningful directions
for the firm.
Social Environment
Demographics: Age structure of the population, birth
rate, death rate, geographical distribution, household
structure etc. are all important because they will
determine whether or not a market exists and whether
or not the organisation can easily access skilled
employees.
Employees are interested in the quality of their work
lives as well as the quantity of the benefits they
receive from working. Moreover, the society at large
demands that organizations conduct their businesses
ethically and in a socially responsible manner.
Technological environment
Technological environment – Technology refers
to the total set of mechanisms and processes
used for performing and accomplishing tasks.
High performing firms are devoting financial
and human resources to technology
management, which involves developing a
strategy for managing technology that is
consistent with strategic goals and corporate
strategy.
Technological environment
It also includes identifying priorities for
technology investment, trying the
investment to the firm’s profitability goals,
Technology is one of the most rapidly
changing components of the environment.
Organisations should monitor trends in
this environment.
Ecological Environment
Commercial Organisations cannot ignore threats to
the natural environment because:
1.There is increasing pressure on natural resources
which can place severe constraint on production
possibilities.
2.The public is increasingly aware of ecological
issues.
Therefore the challenge for companies is how they
can capitalize on green consumerism and be seen
to care for the environment
Legal Environment
The relationship between the organisation and its
customers is influenced by the prevailing law e.g.
rights of buyers and duties of the seller.
It also influences the relationship that the organisation
has with members of the public.
It influences relationships between business
organisations e.g anti-competitive practices.
For example the banning of certain imported goods:
cooking oil; produce such as; mangoes, cabbages,
onions, tomatoes, onions etc, from our supermarkets
to promote local products.
