Chapter 5

Industry, Market &

Competitive Feasibility Analysis:

Evaluating Industry Attractiveness via Porter’s Five Forces Model

Diane M. Sullivan, Ph.D., 2010

Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage

I/O Model of Firm Performance

I/O Model says The industry in which a

firm chooses to compete has a stronger influence on firm performance than do the choices managers make inside their organizations

What’s the Industry Environment? The industry environment has a direct effect on a firm’s

competitiveness and their ability to generate profits

Industry: a market containing a group of firms producing products/services that are similar

The industry’s attractiveness, it’s long-term profit potential, is a function of the five forces of competition

The results of our

Porter’s Five Forces

analysis tell us if the

industry is attractive

(e.g., how likely it is

that the industry will

be profitable in the

long-term).

Porter’s Five Forces Model

Porter’s Five Forces: The Power of Suppliers

Determined by 5 factors:1. Suppliers’ industry dominated by a small number of firms

2. Suppliers sell unique or highly differentiated products

3. Suppliers are not threatened by substitutes

4. Suppliers threaten forward integration

5. Firms are not important customers for suppliers

The higher the power of suppliers, the more/less attractive the industry?

Porter’s Five Forces: The Power of Buyers

Determined by 4 factors:1. Number of buyers is small

Because there are few buyers, they can have more power over those providing the goods. Large-volume buyers are also powerful.

2. Products sold to buyers are undifferentiated and standard If the goods are commodities, buyers can find alternative products

3. Buyers are not earning significant economic profits If buyers are not earning high economic profits, they are 1) likely to be price

sensitive, and 2) their simple ability to afford higher-priced goods is low.

4. Buyers threaten backward integration If buyers can easily backward integrate (e.g., produce the goods or perform

the service themselves) this gives them power

The higher the power of buyers, the more/less attractive the industry?

Porter’s Five Forces: Threat of Substitutes

Substitutes are products/services from other industries that viably serve the same function as products/services in the focal industry

Determined by: The availability of substitutes from other industries (e.g., in the auto

manufacturing industry, substitutes come in the form of public transportation, bicycles, flying, walking, etc.).

What are substitutes for the USPS? What’s its purpose (e.g., what need does it serve or problem does it solve)?

What are substitutes for libraries? What’s its purpose?

The higher the threat of substitutes of suppliers, the more/less attractive the industry?

Porter’s Five Forces: Threat of New Entrants

Determined by: Barriers to entry:

Economies of scale Product differentiation Capital requirements Switching costs faced by customers if they were to switch to another supplier of the

good Access to distribution channels (e.g., if the entrant cannot secure a way to distribute

it’s product, it is a barrier to their entry) Cost advantages independent of scale (e.g., other cost advantages other than

capturing economies of scale) Proprietary technology: secret or patented technology Managerial know-how: tacit knowledge Favorable access to raw materials: low cost access to critical raw materials

Government regulation of entry

The higher the threat of new entrants, the more/less attractive the industry?

Porter’s Five Forces: Intensity of Rivalry

Determined by 5 factors:1. Large number of competing firms that are roughly the same size

This leads to price competition

2. Slow industry growth3. Lack of product differentiation4. High exit barriers

Specialized assets Fixed costs of exit (e.g., labor agreements) Strategic interrelationships Governmental and social restrictions

5. Large production capacities If, in order to obtain economics of scale, production capacity must be

added in large increments, an industry is likely to experience periods of oversupply after new capacity comes online. This leads to price cutting.

The higher the intensity of rivalry, the more/less attractive the industry?

Industry Analysis Feasibility Assignment Deliverables

For Checkpoint #3 (due Thur., November 11, 2010) Determine the industry within which your firm will

compete Compile general information about the industry (e.g., industry size,

growth rate, number of competitors, market share across competitors, etc.)

Conduct a Porter’s Five Forces Analysis on the industry

Determine how each separate force impacts the industry’s attractiveness and prospects for long-term profitability

Determine the overall industry attractiveness and prospects for long-term profitability based on the analysis