Chapter 2, Part II The External Environment: PowerPoint Presentation, PPT - DocSlides

Chapter 2, Part II

The External Environment:

Opportunities, Threats, Industry Competition

and Competitor Analysis

Diane M. Sullivan, Ph.D., 2015

Sections modified from

Hitt

, Ireland, and

Hoskisson

,

Copyright © 2008

Cengage

Step 1in the Strategic Management Process

Insert figure 1.1 graphic

Collect information/ knowledge to help you determine what type of strategy would be effective and how it could best be implemented

One starting place is to examine the strategic inputs important in the I/O model

A reminder:

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 more direct effect on the firm

’

s strategic competitiveness and above-average returns than the general environment

Industry

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

The industry’s attractiveness (e.g., 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 firms competing within

the industry will capture long-term profitability by participating in the industry. Firms should pursue strategies that lessen the effects of negative forces.Porter’s Five Forces Model

Porter’s Five Forces:

The Power of Suppliers

Determined by five factors:

Suppliers’ industry dominated by a small number of firms

Suppliers sell unique or highly differentiated products

Suppliers are not threatened by substitutes

Suppliers threaten forward integrationFirms are not important customers for suppliersThe higher the power of suppliers, the more/less attractive the industry?

Porter’s Five Forces:

The Power of Buyers

Determined by four factor:

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.

Products sold to buyers are undifferentiated and standard

If the goods are commodities, buyers can find alternative productsBuyers are not earning significant economic profitsIf 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.Buyers threaten backward (vertical) integrationIf buyers can easily backward integrate (e.g., produce the goods or perform the service themselves) this gives them powerThe 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 differentiationCapital requirementsSwitching 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 technologyManagerial know-how: tacit knowledgeFavorable access to raw materials: low cost access to critical raw materialsGovernment 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 five factors:

Large number of competing firms that are roughly the same size

This leads to price competition

Slow industry growthLack of product differentiation

High exit barriersSpecialized assetsFixed costs of exit (e.g., labor agreements)Strategic interrelationshipsGovernmental and social restrictionsLarge production capacitiesIf, 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?

Porter’s Five Forces:

Conclusion/Outcome Analysis

Based on your analysis, rate each force from -5 (really bad, poor profit potential to +5 (great, excellent profit potential)

Five Forces Overall Analysis

Intensity of Rivalry Rating:

Power of Suppliers Rating:

Power of Buyers Rating:Threat of New Entrants Rating:Threat of Substitutes Rating:

Sum of Ratings:Scores between +10 to +25  Generally Attractive and High Profit PotentialScores between -6 to +9  Generally Moderately Attractive and Moderate Profit PotentialScores less than -6



Generally Unattractive and Low Profit Potential

Porter’s Five Forces:

Conclusion/Outcome Analysis Example

Based on your analysis, rate each force from -5 (really bad, poor profit potential to +5 (great, excellent profit potential)

Five Forces Overall Analysis

Intensity of Rivalry Rating:

-4 to -5

Power of Suppliers Rating: -3 to -5Power of Buyers Rating: -1 to -3Threat of New Entrants Rating: 0 to -2

Threat of Substitutes Rating: +1 to -3Sum of Ratings: -7 to -18Scores between +10 to +25  Generally Attractive and High Profit PotentialScores between -6 to +9 

Generally Moderately Attractive and Moderate Profit PotentialScores less than -6



Generally Unattractive and Low Profit Potential

These

results would suggest that the industry is not attractive and prospects for long-term profitability for the industry are low.