Porter's Five Forces

Michael Porter, the father of competitive strategy, came up with Porter's Five Forces. The Five Forces are the 5 different factors that affect the competitiveness of the company. 

The Five Forces are 

Threat of New Entrants

-Cuts into market share and intensifies internal rivalry

-Factors that affect: Brand loyalty, access to natural resources, knowhow, government, steepness of learning curve

Supplier Power and Buyer Power

-Competitive nature of input market, concentration of upstream and downstream firms. 

Substitutes and Complements

-Availability of substitutes erode demand

-When price elasticity is large, then substitute pressure is large

Internal Competition

-Price competition erodes price cost margin and profitability

-Non-price competition can drive up costs - such as improvements in product. However profitability is less affected since costs are more likely to be passed onto consumers

-Reasons for internal rivalry; non-differentiated product, cost reductions, increased # of competitors, transparency of price and sale terms. 

What Should Firms Do to Cope with the Five Forces

1. Increase Switching costs to reduce internal rivalry - Google does a good job with gmail and calendar
2. Adopting Entry-deterring strategies
3. Doing vertical integration

Value Net - of Brandenberger states that competitive forces can be both beneficial and bad.

Six Segments Analysis (Competitive Strategy)

The first step to understanding in understanding whether a company's competitive strategy is sustainable is understanding the macroeconomic environment. Here, the question we want to answer is: Is the company's edge based on external trends such as government or from internal processes?

One example that comes to mind is Lan Airlines who derives its value from monopolizing the airline industry in Chile with government support vs Southwest Airlines who derives value from a strong culture and cost leadership. Lan Airlines derives its competitive advantage  from the benefits of government who protect the industry from outside competition, which can then be considered arguably sustainable - since other companies cannot produce the same relations.

The six categories of the industry environment are

1. Demographic: Biggest Change in US includes aging population - Baby boomers.
2. Economic: The economy lately has been in a slump but optimistic about improvement
3. Socio Cultural: What are the new trends? Do people prefer hipper clothes?
4. Global/Environment: Natural disasters, natural resources?
5. Technological: New expansions in technologly
6. Political/Legal: What are the political and legal factosr?