4. @agatestudio
• Every Industry has its own characteristics
• The characteristics determine profitability of its
members (companies)
• By knowing how the industry works, company owner
can analyze what strategy should be applied for
his/her company
• Luckily, there’s guideline to help us analyze how
industry works
• Other than this guideline is not changing industry
value/ profitability
Forces That Shape Strategy
8. @agatestudio
Bargaining Power of Suppliers
• Powerful suppliers capture more of the value by:
– Larger in scale to its customers
– Serving many industries
– Buyers have high switching cost
– Differentiated products
– Few Substitute
– Can participate to customers industry
(vertical expansion)
9. @agatestudio
Threat of New Entrants
• There will be more new competitor to come to reap
industry value while:
– low supply-side economies of scale (low fixed cost)
– Low Demand-side benefits of scale (anyone can sell the
product without special network)
– Low costumer switching cost
– Equal access to distribution channels
– No government restriction policy
10. @agatestudio
Bargaining Power of Customers
• Customers can take large chunk of value to
themselves in these conditions:
– Few Buyers
– Standardized products
– Low switching cost to other supplier
– Have capability to integrate to
Supplier industry
– Have high price sensitivity
– Few effect on product quality
11. @agatestudio
Threat of Substitutes
• The industry value is transferred to another industry
when:
– Offer attractive price-performance trade off
(commonly more performance with same price in other
product)
– Low switching cost
12. @agatestudio
Competitive Rivalry within An Industry
• Others might get more value than your company and
keep playing in the industry when:
– Others has bigger size & power
– Grow faster than your company when industry growth is
slower
– High exits barriers
– Commit beyond profitability
(idealism of founders)
– Lack of communication for
each industry players
13. @agatestudio
How to Analyze with 5 Forces
•Write down potential sources that
can gain value in each forces
•Put symbol (o) when its favorable
to your company ,(-) for unfavorable
and (--) for extremely unfavorable of
your company
THEN:
1. Focus your strategy on how to
gain value fast and big enough in
the favorable (weak) forces
towards your company
2. Exploit Industry change to your
company favor
3. Shaping Industry structure to
your company competitive
advantage
16. @agatestudio
Strategy Building Blocks
• There are 2 blocks to build strategy based on
company circumstances:
– Predictability
• How predictable is the future outcomes? (sales trends, business
cycle, how confident management can predict the future)
– Malleability
• To what extent company can influence condition
19. When Predictability is High
Classical Approach
• Used when environment is
predictable and you cannot
change it:
– E.g. Airlines, Household
products, oil and gas
– Construct multiyear financial
forecast
– Determined annual target
Visionary Approach
• Used when environment is
predictable and you can change
it:
– E.g. Software, chemical, media
– Plan thoroughly with high bet on
end of journey
– Have courage to commit
resources
– Take deliberate step to reach
goal with few options
20. When Predictability is Low
Adaptive Approach
• Used when environment is
unpredictable and you cannot
change it:
– E.g. Apparel, Construction
material, Transportation
– Refine goals by lean cost and
acquire/divest business segment
smoothly
– Engineered to be flexible in
strategy (less than 1 year
planning)
Shaping Approach
• Used when environment is
unpredictable and you can
change it:
– E.g. Internet business,
professional services
– Short/continual planning cycle
– Strategy is implemented as
portfolio of experiments
– Rallying to form ecosystem of
customers and suppliers.
21. @agatestudio
When everything is messed up!
• Survival Approach
– When access to capital or other critical resources is
severely restricted or business model is threaten to not
sustain:
• Reduce cost
• Preserving capital
• Trimming business portfolios
• After environment calms down, go back to
apply other approach
22. @agatestudio
Summary
• To sum up:
1. Know how your industry works by implementing Michael
Porter 5 forces
2. Indentify the weakest forces in the industry and gain
value from it
3. Build your strategy further by identifying predictability
and malleability of industry environment in future time
horizon
4. Apply strategy approach to have appropriate planning
cycle for the company
5. Re-check the condition regularly by applying Porter 5
Forces
