Chapter 2, Part II The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis Diane M. Sullivan, Ph.D., 2014 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 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 integration 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 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 products 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. Buyers threaten backward (vertical) 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 five factors: Large number of competing firms that are roughly the same size  This leads to price competition Slow industry growth Lack of product differentiation High exit barriers  Specialized assets  Fixed costs of exit (e.g., labor agreements)  Strategic interrelationships  Governmental and social restrictions 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?

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 Potential Scores between -6 to +9  Generally Moderately Attractive and Moderate Profit Potential Scores 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 -5 Power of Buyers Rating: -1 to -3 Threat of New Entrants Rating: 0 to -2 Threat of Substitutes Rating: +1 to -3 Sum of Ratings: -7 to -18 Scores between +10 to +25  Generally Attractive and High Profit Potential Scores between -6 to +9  Generally Moderately Attractive and Moderate Profit Potential Scores 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.