ACCA SBL Syllabus C. Strategy - Porter's 5 Forces - Notes ^{1 / 8}

Porter proposed this as a means of examining the competition at the SBU level

(if this was performed at a more general level the variety of influences would be so big, it would reduce the value of the analysis)

Porter's 5 Forces

• Threat of Entry

  This becomes a problem to a company when:

  1. No economies of scale exist currently

  2. Little capital is required to set up

  3. Competitors expect very little retaliation

  4. There are few Legal restraints to get into the industry

  5. No differentiation of your own product

• These barriers to entry differ in different markets, in the exam you need to look for:

  What barriers exist & how powerful are they

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• Power of Buyers / Customers

  This is a problem to the company when:

  1. Suppliers are small and many (customers have lots of choice)

  2. Many alternative suppliers (we have a lack of differentiation)

  3. Switching suppliers is cheap and easy

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• Power of Suppliers

  This is a problem to the company when:

  1. There are few suppliers (Not much choice where to buy from)

  2. Switching is expensive and difficult

  3. The supplier has an excellent brand

  4. Customers are fragmented

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• Some organisations (eg RCA) do not supply tangible goods but a service.

  The availability of skilled staff is therefore crucial and a strong differentiator

  A big problem in creating a strategy is how the power can be enhanced and make sure that in the “buyer-seller” relationship both win…

• Threat of Substitutes

  Higher when:

  1. Substitution of Product easy (eg Email v postal service)

  2. Substitution of Need easy (Phone made ipod unnecessary for some)

  3. Generic substitution of Need (Car v Holiday)

• Key points to look for in the exam:

  • Does the substitute make our product obsolete?

  • Does the substitute bring a higher perceived benefit?

  • Can the buyer easily switch to the substitute?

  • Can the risk of substitution be reduced by building in “switching costs”

I read an interview with the head of Evernote about making its product free and then charging for a premium service if required.

His thoughts were counter-intuitive but backs up the switching costs theory - he said that to grow the number of users who transfer to the premium package - you need to make the free package even better!

(Mailchimp did a similar thing and reported equal success in their premium service takeup)

The idea is that the free service becomes so useful that “switching” to another provider is unthinkable as you have used this one so long and have spent time organising your account (think facebook).

Therefore switching costs are now very high (if only in terms of time) and so now when you need something more you look to that brands premium service rather than elsewhere

Competitive Rivalry

Is the rivalry going to intensify and how can it be influenced?

A problem to the company when:

1. The competition is of similar size

2. There are more global customers in market

3. There are high fixed costs (thus making turnover vital and can lead to price wars)

4. Extra capacity only available in large increments

5. There are high exit barriers (eg specialised plant bought or redundancy costs)