Porter Analysis (version anglaise quasi définitive)
Exhibit 1 the five forces model applied to French distribution of photography…(porter,2001)(pour être redirigé vers la version française et résumée cliquer sur le titre)
This tool was designed as a framework to help strategic decision weighting the forces that drive an industry. It enables to shift form outside to inside view, meaning it can be used whether by a firm that wish to evaluate its position in it, or by an external firm that wish to evaluate the barriers to enter it. Interpretation of the model has to be done taking in account indicators such as growth rate of the market, concentration ratio (number of firms sharing the market) and the relative positions of the actors in terms of market shares. Porter states there are three generic strategies firms can pursue:
- Cost leadership: targeting a broad segment of the market and deriving a competitive advantage by lowering costs.
- Differentiation: deriving a strategic advantage trough uniqueness.
- Focus: targeting a narrow segment of the market (niche),deriving a strategic advantage either from being a cost leader or a differentiator.
Firms should chose to follow one generic strategy. Porter uses the term of “stuck in the middle”, to name firms that has chosen to follow more than one strategy simultaneously and therefore, cannot extract any advantage.
The five forces that drive industries are :
From left to right on the horizontal axis, the bargaining power between suppliers, internal rivalry and clients.
From top to bottom on the vertical axis, the threat represented by new entrants and substitution.
Photo retailers usually act on two sides of the industry: sales of cameras and laboratory processing.
Most of the data I used was extracted from studies of Syndicat des
Entreprises de l’Image, de la Photo et de la Communication
(SIPEC) and Photo Marketing Association (PMA), concerning the results and trends of photo consumption in France in year 2005. Other information come from divers researches on the web, specialised press and my own knowledge of the industry.
In the sector of digital cameras, which includes compact and SLR (single lens reflex) cameras, sales market used to grow with annual ratio around 100% between 2000 and 2004 with 330K unit sold in 2000, and 4,1 million units in 2004 (SIPEC, 2005). Although some segments of the market such as SLR and lenses are still evolving with the same ratio (+67%), growth has globally decreased to 10% from 2004 to 2005 but is still attractive; the market is maturing and the actors are consolidating their position on their respective segment.
The second aspect of the photo industry concerns the laboratory processing of pictures. It is commonly accepted that the digitisation of photography and the end of silver films has brought many choices for the consumers to process their pictures. The major consequence was a disaffection of the traditional laboratories. For the first time in six years, trends expressed by both SIPEC and PMA are optimistic regarding the evolution of prints ordered as the number grew of 23% between 2004 and 2005; it is expected to grow following the same for the next two years.
I used a scale from 1 to 5 to weight the level of intensity of each of the five forces (5 being the more intense).
On the side of suppliers (graded 1), the distribution is facing a low intensity pressure. Since late 90s until now, as digital photography was a promise of two digit growth, many new entrants came into the field to gain market shares on a huge open market. Barriers to entry were low for big actors such as Sony, Hewlet Packard and later followed by Samsung, which all had the technology capacity to enter the market. Traditional photo actors knew how to make lenses, but had to learn the rest of digital technology. In the same time, many of them had to deal with their process of globalisation, re-organising their entire set of activities. This was a period of huge investment, with low returns in profitability. Beside that, the channel of distributions diversified with the boom of e-commerce, and suppliers had to manage with channel conflicts, implementing and testing new distribution strategies. Nowadays, the market has entered a mature phase but is still very fragmented and under pressure, facing the coming of substitutes such as camera phones. Yet, another segment of the market, the SLR, is entering a dynamic phase; even it is a small segment in terms of volumes, it intends to be the most lucrative as it is located in the upper level of the market. Therefore the competition between suppliers should remain as intensive as it was the past years, and this particular segment should be more fragmented than it used to be in the silver age. In that position they cannot afford to lose or neglect a channel distribution.
On the photo finishing side (laboratories services), the initial effect of digitisation was to reduce the size of the market as demand for prints dramatically decreased. Before that, the market used to be divided in two almost equal shares: 50% of the photo prints used to be produced in house by small retailers (minilab); the other 50% were shared between three major actors (Kodak, Fujilab, and Konica) and a few small suppliers. Many of the last mentioned simply disappeared. On the other side, major suppliers started to run websites to enable direct orders from consumers, and built photo kiosk networks with integrated printers. Small retailers who could not invest in equipments to internalise their production, felt the first effect of disintermediation (Tapscott the 12 thems). Nowadays, growth is back and consumption of photo print is expected to explode and new entrants are emerging with new technologies such as Hewlet Packard and Xerox.
In « internal rivalry » the pressure is high (4) and the events that were mentionned previously for the suppliers could be applied again. On both side of the market, there is high competition, many new entrants, a multiplication of distribution channels, and barriers to entry lowered by the booming of internet distribution. The situation had leaded to a price war in the domain of camera sells that is hardly quietening now that a panel of virtual and physical actors are gone. Yet, price war is now initiating on the side of photo finishing. Consumers are numerous and divers, so are the vendors and the distribution channels. On line print services have exploded with the coming of pure virtual players in addition to the “desintermediated” suppliers (Kodak, HP). On line print orders share is growing 100% every year and is now counting for 15% of the market, compared to other methods (SIPEC). Photo kiosks networks are emerging in supermarkets, shopping malls, and beside the coffee machine at the office.
The bargaining power of clients is very high (5) because the variety of choices is wide, crossing the traditional boundaries of the industry. Many possibilities are proposed to buy a picture recorder item and to process the pictures. Shots can be taken from a digital camera, a camephone (mobile phone equipped with a lens to take pictures), a webcam or a camcorder. Quality of these items is as divers as the motivation to shot pictures and the way to process them. Many solutions to process the pictures are still to be invented.
The bargaining power of the clients became so strong that many distributors had to completely rethink their offers to bring more value. All the vendors are forced to provide more for the same price Cutting the price is not enough, many virtual and physical players have either disappeared or been absorbed doing so (Nomatica, Photo station and Photoservice).
The threat of new entrants in relatively weak (2) because the nature of their competition doe not bring something new. Threat such as the one brought by HP in the market happens in an existing segment of the market, and could be qualified as traditional compared to the one brought by substitution. Nevertheless, there is a specific threat with the entering of Telecom actors in that market. For example Orange acquired the capacity to traditionally process the pictures buying two major shops chains in France : Photo Station and Photo Service. Both of the chains have in house photo finishing production. Orange is present on the mobile phone market (selling camephones as well) and the Internet distribution. The convergence of technologies enables the company to capture the pictures and attention of the clients upstream. They are able to propose a wide variety of services before the print process such as storage and share of pictures. In addition the company could be applying its business model to that industry: clients could be paying their print on their phone or Internet bills, on line storage of pictures could be included as a feature of Internet package. I have hesitated to integrate this actor in the substitution threat, but its intentions have been expressed only on the traditional side of the market. Therefore it appears on both sides.
Pressure from the substitutes is higher (3) and will certainly increase. Half of the photos that are printed on paper today, are done using a home printer. Other segments are “in store and on line” printings. Yet, according to PMA, only 1/3 of the shots taken by digital cameras are printed; this does not included shots taken by others items equipped with photo features. SIPEC predicts that in 2008, the volume of camephones sold will represent 4 times the volume of cameras sold. Many of the pictures taken will probably never be printed, and there are huge opportunities to create alternative services. On that aspect small retailers are facing the effect of prosumption described by Tapscott (Tapscott the 12 thems). Consumers do not require the service of photo laboratories to process their pictures. The major threat in that domain comes from unexpected actors, which makes the threat looks even more threatening. Actors such as Google, Flickr and Microsoft consider digital pictures in their essential aspect : digital data.. They know how to detect, store, organise and transport the pictures. They have created services around the « dematerialised » aspect of photography. Business models adopted by these companies make the services very valuable for the consumers, as they are usually almost free for them. They also developed the opportunity to generate revenues from their relationship with the traditional actors, selling the information to them. For example when using Google’s product Picasa, a consumer can choose a vendor within a list of online print distributors; the distributor has to pay to appear in that list.
Porters model has more recently be criticised in the light of the ongoing development of the internet and changes in the wider business environment. One major area of criticism is that porters essentially microeconomics approach was developed for a traditional, non-digital business environment.). In addition, new forces have been proposed that complement and affect the traditional five forces framework. These have been have identified by (Downes, xyz) as:
- Globalisation
- Digitisation
- Deregulation
Adding the three new forces provides a picture that is more reliable to the instable and moving aspects of today’s environment.
Nevertheless, in the article “beyond Porter, critique of the critique of Porter” Dagmar Recklies outlines that Porter’s theories lost influence but did not become invalid : “All we have to do is to apply them with the knowledge of their limitations in mind and to use them as a part of a larger framework of management tools, techniques and theories”. Using five forces in the old economy, relationships between actors were defined under terms of bargaining power or competitive positions. Because the environment has become instable and more complex, Recklies suggest that success is based on the ability to build co-operations for mutual benefits. This element took place under divers forms during the past years in the photo industry :
- strategic alliances between manufacturers to develop the same products distributed under different brand names : Leica and Panasonic share the same line of products.
- Common standards: the acceptance of the CCD technology (Charge-Coupled Device) to equip the major part of the compact digital cameras.
- Networks of Partners: specifically in France, the closure of brand chains such as Shop Photo and Camara.Recklies also points that “the most sustainable of Downes new forces will probably be digitalization” as information and the quality of it are becoming the nerve of any economy. In that prospective, there are interrogations about the way to approach the actors previously mentioned as substitutes. Some of these companies such as Google and Flickr are specialized in managing information, and as they are virtually entering the industry one challenge is to determine if they should be considered as potential partners or competitors.
Libellés : Porter strategy
posted by stéphane delcourt @ 03:26
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