1. The External Environment (Part Two)
Porter’s Five Forces
Industry Life Cycle

2. Bargaining Power of the Bargaining Power of the
Porter’s Five Forces Model (Competitive Forces)
Threat of New Entrants
Bargaining Power of the
Suppliers
Inter-Firm
Rivalry
Bargaining Power of the
Buyers
Threat of Substitutes

3. 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
à Industry attractiveness
à Profitability, supernormal profits

4. What is it trying to communicate?
How can it be used by strategic managers?

5. Bargaining Power of the
Porter’s Five Forces Model (Competitive Forces)
Who are the Buyers?
Factors impacting the bargaining power of the buyers:
Standardized industry product
Purchases are made in large volume
Number of buyers is small
Significant threat of backward integration
Switching costs are low
Buyers are well-informed about the seller’s costs
Bargaining Power of the
Buyers
Strong? Medium? Weak?

6. Bargaining Power of the
Porter’s Five Forces Model (Competitive Forces)
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
Bargaining Power of the
Suppliers
Strong? Medium? Weak?

7. Porter’s Five Forces Model (Competitive Forces)
Threat of New Entrants
Strong? Medium? Weak?
Why are New Entrants a threat?
Factors impacting the threat of New Entrants:
Economies of scale
Capital Requirements
Access to Distribution Channels
Other entry barriers (regulation)
Competitive retaliation
High industry profitability and growth

8. Porter’s Five Forces Model (Competitive Forces)
What is a substitute? Why are substitute products a threat?
Factors impacting the threat of substitute products:
Price of available substitutes
Switching costs
Industry growth and demand
Comparability of substitute in terms of quality, performance,
other features
Threat of Substitutes
Strong? Medium? Weak?

9. Porter’s Five Forces Model (Competitive Forces)
Factors impacting Inter-Firm Rivalry:
Concentration
Product Differentiation
Excess Capacity
Exit Barriers
Cost Conditions
Industry Life Cycle
# of equally balanced competitors
Inter-Firm
Rivalry
Strong? Medium? Weak?

10. Be Careful with the Categories in the Five Forces Model
Specialty Chemicals Pharmaceuticals Hospitals
Pharmaceuticals Firms Hospitals, Pharmacies Consumers,
Managed Care
Basic Chemical Firms Specialty Chemical Firms Pharmaceuticals
Specialty Chemical Firms Pharmaceutical Firms Hospitals
Bargaining Power
of the Buyers
of the Suppliers
Interfirm Rivalry

11. Bargaining Power of the Bargaining Power of the
Porter’s Five Forces Model (Competitive Forces)
Threat of New Entrants
Bargaining Power of the
Suppliers
Inter-Firm
Rivalry
Bargaining Power of the
Buyers
Threat of Substitutes

12. Industry Life Cycle
Mature
Decline
Emerging and Growth

13. 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 the
product is underdeveloped and hard to get
Uncertainty
First generation products tend to be improved rapidly
Example: Elder day care, genetic engineering, w ireless telecommunications

14. 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

15. 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 a
shift 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

16. 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 accommodate
buyer requirements
Examples: Funeral industry, hair care/beauty salons, restaurants

17. How would you describe the hotel industry?