The External Environment (Part Two)

Porter’s Five ForcesIndustry Life Cycle

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

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

What is it?

What is it trying to communicate?

How can it be used by strategic managers?

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?

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?

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?

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?

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?

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

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

Industry Life Cycle

Emerging and Growth

Mature

Decline

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

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

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

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

How would you describe the hotel industry?