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The External Environment (Part Two)
Porter’s Five ForcesIndustry Life Cycle
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Porter’s Five Forces Model (Competitive Forces)
Threat of New Entrants
Threat of Substitutes
Bargaining Power of the Suppliers
Bargaining Power of the Buyers
Inter-FirmRivalry
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Porters Five Forces Areas of Microeconomics
Bargaining Power of Suppliers
Supply and demand theory, cost and production theory, price elasticity
Bargaining Power of Buyers
Supply and demand theory, customer behavior, price elasticity
Inter-Firm Rivalry Market structures, number of players, market size and growth rates
Threat of Substitutes Substitution effects
Threat of New Entrants
Market entry barriers
Industry attractiveness
Profitability, supernormal profits
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What is it?
What is it trying to communicate?
How can it be used by strategic managers?
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Porter’s Five Forces Model (Competitive Forces)
Bargaining Power of the Buyers
Who are the Buyers?
Factors impacting the bargaining power of the buyers:
Standardized industry productPurchases are made in large volumeNumber of buyers is smallSignificant threat of backward integrationSwitching costs are lowBuyers are well-informed about the seller’s costs
Strong? Medium? Weak?
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Porter’s Five Forces Model (Competitive Forces)
Bargaining Power of the Suppliers
Factors impacting the bargaining power of the suppliers:
Product represents a significant % of purchaser’s final product Few suppliers Unique product or input Significant threat of forward integration Supplied product is less expensive for the purchaser to buy than make
Strong? Medium? Weak?
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Porter’s Five Forces Model (Competitive Forces)
Threat of New Entrants
Why are New Entrants a threat?
Factors impacting the threat of New Entrants:
Economies of scaleCapital RequirementsAccess to Distribution ChannelsOther entry barriers (regulation)Competitive retaliationHigh industry profitability and growth
Strong? Medium? Weak?
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Porter’s Five Forces Model (Competitive Forces)
Threat of Substitutes
What is a substitute? Why are substitute products a threat?
Factors impacting the threat of substitute products:
Price of available substitutesSwitching costsIndustry growth and demandComparability of substitute in terms of quality, performance,other features
Strong? Medium? Weak?
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Porter’s Five Forces Model (Competitive Forces)
Inter-FirmRivalry
Factors impacting Inter-Firm Rivalry:
ConcentrationProduct DifferentiationExcess CapacityExit BarriersCost ConditionsIndustry Life Cycle# of equally balanced competitors
Strong? Medium? Weak?
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Bargaining Power of the Buyers
Bargaining Powerof the Suppliers
Interfirm Rivalry
Specialty Chemicals Pharmaceuticals Hospitals
Pharmaceuticals Firms Hospitals, Pharmacies Consumers, Managed Care
Basic Chemical Firms Specialty Chemical Firms Pharmaceuticals
Specialty Chemical Firms Pharmaceutical Firms Hospitals
Be Careful with the Categories in the Five Forces Model
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Porter’s Five Forces Model (Competitive Forces)
Threat of New Entrants
Threat of Substitutes
Bargaining Power of the Suppliers
Bargaining Power of the Buyers
Inter-FirmRivalry
![Page 12: The External Environment (Part Two) Porter’s Five Forces Industry Life Cycle](https://reader035.vdocuments.us/reader035/viewer/2022080223/56813d34550346895da6f697/html5/thumbnails/12.jpg)
Industry Life Cycle
Emerging and Growth
Mature
Decline
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Characteristics of an Emerging and Growth Industry
Markets are new and unproven
Most buyers are first-time users
Companies are in build and grow mode (supplier implications)
Technological know-how is just emerging
Information about customers, market conditions and how buyers use theproduct is underdeveloped and hard to get
Uncertainty
First generation products tend to be improved rapidly
Example: Elder day care, genetic engineering, w ireless telecommunications
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Characteristics of a Mature Industry
Slowing growth in buyer demand (head to head competition for market share)
Buyers are more sophisticated
Greater emphasis on cost and service
Overcapacity
Process Innovation
Internationalization
Industry profitability shrinks
Consolidation
Examples: Automotive, Personal and Household care, Ready to Eat Breakfast
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Characteristics of a Declining Industry
In general, demand grows slower than the economy as a whole based on:technological substitution (calculators/slide rules; computers/typewriters),demographic shifts (increase/decrease in older or younger people) or ashift in needs/tastes (decreased need for red meat).
Greater consolidation
Competitive pressures intensify
To grow and prosper companies must take market share away from rivals
Example: Railroad transport industry
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Fragmented Industries
Absence of highly visible, well-known market leaders
Low entry barriers
Absence of scale economies
Market for industry’s product is local
Market is so diverse that it takes a large number of firms to accommodatebuyer requirements
Examples: Funeral industry, hair care/beauty salons, restaurants
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How would you describe the hotel industry?