today's lecture is about competitive strategy specifically Porter's five forces right there is from Harvard University and he's the developer of modern thinking about competitive strategy in different industries in the late 70s he developed three models that help us with our thinking about strategy today the five force model that's part of this lecture the value chain the next lecture and the generic strategies the last lecture for this week at the center of the model is industry rivalry or competition within the industry how competitive is the market think about McDonald's how many other fast food chains are is McDonald's competing with there's Burger King in and out Wendy's easy-out burger some smaller chains plenty of competition it's a very competitive marketplace and you have to distinguish yourself with high quality low cost or service with McDonald's they offer very quick service at a reasonable price it's a great food for on-the-go and great with the kiddies getting their happy meal the next competitive force is the threat of new entrants how many companies are seeking to break into the fast food chain industry really it doesn't happen very often not many seek to compete this way because the cost is just too great to compete with fast food giants that already exist the third competitive force is the threat of substitute products this means other places that your customers might go to get what you offer not necessarily hamburgers but food it's a substitute for a hamburger so Panera Bread Taco Bell a pizza place or a regular restaurant would all be substitute products for McDonald's offerings companies need to consider these competitors too so they can think about competitive pricing and features that make people select fast-food over other types of eateries the fourth force is the bargaining power of buyers in the case of McDonald's that's you and me we have a choice of what we eat and there are plenty of other fast-food trongs we could go to so our bargaining power is very high in the law if the line is too long at McDonald's and der Wienerschnitzel is right across the street giving free sauerkraut dogs we can drive across the street and eat there there's no cost to us to do that the fifth force is bargaining power of suppliers that is the companies supporting the products and services that lead to you getting a Big Mac someone sells beef soda bread coffee uniforms cleaning supplies and health care etc to make MacDonald's organization run if the companies that sell beef are scarce like suppose there's only two of them that McDonald's could buy beef from then the supplier power is high they can raise the price of beef and McDonald's has to pay because they cannot operate without it on the other hand if the uniform manufacturer decides to increase costs there are a lot of companies that sell uniforms McDonald's can switch suppliers without losing a lot of business so in that case the bargaining power is very low there's one other thing about this model that we haven't talked about government regulation and that wasn't actually part of Porter's five forces model people today say that's a sixth force that acts upon competition and industry and changes the model but it isn't one of Porter's original ideas there's a couple of terms I'd like to talk about before we go over the five force model again entry barriers and switching costs an entry barrier is something that you can set up that makes it not attractive for competitors to come into your market so this is used to reduce the force of the threat of new entrants so think about someplace like Southern California Edison its utility and everybody has to get their Electric through Edison so really that's a big entry barrier if you did happen to have the wherewithal to open an electric company like maybe you were a solar company that would require a massive infrastructure for you to be successful so it's a very high entry barrier to getting into that market if you were going to open a bar you would need a liquor license a liquor license can be very expensive so that's kind of an entry barrier also suppose you wanted to open an online megastore like Amazon except you'd call it glamazon or something like that to compete with Amazon you would need to have real brand name recognition and customers that were very loyal to you and you would have to have the infrastructure and the supply chain that helps you get your goods and services to people and that is a huge infrastructure that is very very expensive to set up so it's very prohibitive for a new entrant into the mega store online market switching costs are a way to prevent your customers from going to substitute products to achieve this you can offer them deals and memberships or you can have them signed contracts so that they are stuck with you for an agreed upon period of time being a member of a frequent flyer program like Southwest means that all earn free miles and rewards every time I fly with them so when buying a ticket for a trip I always go with them first you've probably had contracts that you signed with your cell phone or maybe your cable TV that locked you in so that people couldn't Swit you couldn't switch from the particular company you were buying from until the contract ran out so to increase switching costs people use deals for staying with that certain company loyalty programs memberships and contracts this picture shows many many strategies that people have mapped into porters models so it's not just entry barriers and switching costs there are several several things that companies do to combat the competitive forces and there this is one model that they're all listed in from business fund Escom and you don't have to remember all of these but just realize it's not just two things those are just two things that have been pulled out of it but many many ways to have companies fight the threats to new entrants and the substitute products and the bargaining powers of suppliers and buyers let's take an example and then you do one on your own this model is really for understanding the competitive forces that operate in an industry before you develop your own strategy for your company so let's look at the cellphone industry the intra industry rivalry is very competitive pricing plans trying to lure you away celebrity endorsements this is a very competitive industry people compete on cost and on differentiation each offers features that the other may not have the threat of new entrants really cost prohibitive it takes a lot of capital to compete with the large companies already doing business in the cellphone industry so the threat of new entrants is very low the threat of substitutes what's a substitute product for a telephone a landline writing a letter Skype email computer communication or maybe notebooks or pad computing so in this market the threat of substitute products is still low because those things don't really offer the flexibility and ease that your cell phone does bargaining power of buyers you and me we can go to any phone provider we like if our current service agreement is expired the service agreement is a switching cost until 2004 you couldn't take your phone number with you either this was a big switching cost but now you can switch when you like though you might have to pay a penalty if you do it early so our power is pretty high bargaining power of suppliers I had no idea so I had to look this one up on the internet but the bottom line seems to be that the parts that go into making a cell phone chips batteries SIM cards etc that there are many manufacturers for all of these parts and the supply for them is very easy to come by so the bargaining power of suppliers is low now let's think about entering the self-help app market with a new app that helps people quit smoking it's kind of weird to think that if you're successful your customer is going to leave you because they don't need your service anymore I found a lot of apps that were helpful for people quitting smoking so the intra industry rivalry was high that's right the threat of new entrants how hard is it to write an app that's going to help people quit smoking yes hi again everybody can do it if they can hire a programmer and come up with the content the threat of substitute products that would be drugs from the doctors nicotine patch taking a class to help someone quit this is actually low because it's very convenient to have the app on the phone going to these other substitute products might be prohibitive just because of convenience the bargaining power of buyers is super high if there are 15 apps and they're all free I can switch to any app I like anytime I like conversely the bargaining power of suppliers maybe that would be programmers to build the app and its features is low because you can hire them easily there are many many producers of apps and you can hire you can pick from any one of them to develop your app for quitting smoking this might be a poor choice for an industry to enter if you want to make any money