Examination of Porter’s Five Force Research Project

Examination of Porter’s Five Force Research Project

Instructions/Descriptions

Examination of Porter’s Five Force Research Project

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Please review Chapter 4’s section concerning Porter’s 5 Forces, read the Forbes article Porter or Mintzberg: Whose View of Strategy Is the Most Relevant Today? (Links to an external site.) (Moore, 2011) and view the required You Tube video Five Competitive Forces That Shape Strategy (Links to an external site.), regarding Porter’s five forces.

In the video, Mr. Porter discusses how Porter’s Five Forces Analysis is an important tool for assessing the potential for profitability in an industry. As an example, Mr. Porter applied these five forces to the airline industry. Think of another industry where profitability is low. In an initial post of at least 250 words, apply the five forces to your chosen industry and demonstrate how those forces can lower profitability.

Guided Response: Respond to at least two of your fellow students’ posts in a substantive manner and provide recommendations to extend their thinking. Support your position by using information from the week’s readings or examples from current events and/or other scholarly or credible resources, using the Scholarly, Peer Reviewed, and Other Credible Sources (Links to an external site.) table for guidance. Properly cite any references.

You are encouraged to post your required replies earlier in the week to promote more meaningful and interactive discourse in this discussion forum. Continue to monitor the discussion forum until 5:00 p.m. (Mountain Time) on Day 7, and respond with robust dialogue to anyone who replies to your initial post.

External Environmental Analysis

Learning Objectives

By the time you have completed this chapter, you should be able to do the following: • Conduct an industry and competitive analysis and understand why it is important. • Conduct a market analysis and understand why it is important. • Scan the general environment for any changes or trends that might favor or adversely affect the company.

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CHAPTER 4Section 4.1 Industry and Competitive Analysis

Chapter Outline

4.1 Industry and Competitive Analysis

4.2 Market Analysis

4.3 Environmental-Trend Analysis

An analysis of the external environment covers the industry or segment in which the company competes, its competitors, markets, and other relevant environmental trends and changes. The purpose is to understand how the company’s relevant environment is changing and might change in the future—in this sense, “relevant” means anything the company might affect or could be affected by. Without such an understanding, doing strategic planning becomes much more difficult.

4.1 Industry and Competitive Analysis An industry analysis is the study of a firm’s industry and the forces that might be causing it to change. It involves using a number of standard but indispensable tools, including Porter’s five- forces model, industry attractiveness (part of the GE Matrix), driving forces, critical-success factor analysis, and strategic groups, all discussed in this chapter. Because the ways in which an industry changes can dramatically affect the decisions a company makes, an industry analysis has become a key element in strategic planning.

The word industry in “industry analysis” can mean a segment of a larger industry or the industry itself. If a company manufactures disk drives for personal computers, for example, it could say that it competes in the disk-drive industry for purposes of doing a strategic analysis, even though that is really a segment of the computer industry. What we are really analyzing is the arena in which the company competes.

One thing to keep in mind when conducting an industry analysis is to write down what is true for the industry, not for the company under analysis. Sometimes industry data are easy to obtain because they are regularly published or because trade groups or consulting firms keep tabs on industry statistics. However, many industries are not tracked by any group, or they consist largely of privately held firms. This makes get- ting industry data and completing an industry analysis difficult.

To minimize errors when using inadequate data or relying on one person’s estimates, it is advisable to assemble a group of people to

share perspectives and use shared estimates in the analysis. If the group is fairly knowledgeable about the industry, the perceptions gathered about the industry will be more useful and make

Ryan McVay/Photodisc/Thinkstock

Assembling a group of knowledgeable people can be very helpful when performing an industry analysis.

CHAPTER 4Section 4.1 Industry and Competitive Analysis

the understanding more complete. Group members who have differing estimates and opinions will be forced to explain their views and, in the process, either convince others they are correct or be persuaded to change their own views or estimates. In this way, a shared perspective leads to greater understanding.

Doing an Industry Analysis

The purpose of doing an industry analysis is to answer the following kinds of questions:

• What are the dominant economic characteristics of the industry? • In what ways is the industry changing, and why? • Do buyers and/or suppliers have greater bargaining power? • How steep are entry barriers? • Is the industry concentrated or fragmented? • What must one do well in order to succeed in this industry? • How appealing is the industry?

Dominant Economic Characteristics of an Industry Economic characteristics can vary by industry but generally are applicable throughout business and include the following:

• Industry size—total dollar sales of all firms in the industry. • Industry growth rate—percentage increase or decrease over the previous year. • Scope of competitive rivalry—local, regional, national, international. • Number of competitors—if known. • Stage in the industry’s lifecycle:
• emerging—must be a brand-new industry with total industry sales less than 5%. • growth—total industry sales growing at over 5% per year. • shakeout—a transitional period between growth and maturity where some competitors fail, others are acquired, and the total number of competitors shrinks. • mature—total industry sales of between 0–5% • declining—the growth rate must be negative for several years in a row.
• The customers or buyers—Who are they? Where are they? How many are there? • Degree of vertical integration—How many companies in the industry are vertically integrated forward? How many are vertically integrated backward? How many are vertically integrated in both directions?
• Rate of technological innovation—How dependent is the industry on technological innovation? How much innovation is taking place?
• Product characteristics—Are the products commodity-like or differentiated? This determines to a large extent the bargaining power the industry has with respect to buyers. Are the products high- or low-tech?
• Economies of scale—for example in purchasing, production, shipping, distribution, or advertising.
• Capacity utilization—Is capacity utilization in the industry high or low? How sensitive are variations in capacity utilization to profits? In commodity-like industries, profits are very sensitive to capacity utilization.
• Industry profitability—If profitability in the industry is not high, what are some causes? Commodity-like industries are low-profit, while those with differentiated companies command higher profits.

CHAPTER 4Section 4.1 Industry and Competitive Analysis

Forces Driving Industry Change To understand how an industry is changing, identify the driving forces causing those changes. The following are examples of driving forces:

• Changes in the industry growth rate • Changes in who buys the product and how customers use it • Product or marketing innovations • Changes in technology • Exit or entry of major firms • Circulation of technical knowledge • Increasing global scope of the industry • Changes in cost and efficiency, for example, in process innovations
• Emerging buyer preferences for differentiation • Changes in governmental or economic policy • Deregulation or increasing regulation of an industry • Changes in societal attitudes, concerns, and lifestyles • Reductions or increases in uncertainty and business risk • Likelihood that this and one or more other industries will merge or converge

It is one thing to ascertain that an industry has been and is changing, but quite another to gauge the way it will change in the future. That is, however, the challenge managers must face. If one can come to understand how an industry is changing and what is causing it to change, the chances are good that future changes can be predicted and possibly anticipated.

In many industries today, rapidly advancing technology is changing everything about the industry—the product itself, how it is made, how it is distributed, and how it is used. The examples provided of driving forces may provide a starting point for an examination of a particular industry and how it may be changing. Of course, it is important to keep in mind that every industry is unique and may have driving forces other than those listed here.

Bargaining Power What exactly is bargaining power? In simple terms, it comes down to who dictates the terms such as price, delivery, quality, and the like in a negotiation. Consider the example of someone trying to sell a used car. There is a certain “Blue Book” price for a car of a certain model, age, mileage, condition, and options. If the make and model is in high demand, the car at issue has low mileage, and is in good condition, then the price will be higher.

It is possible that several potential buyers may actually bid up the price. The seller in that situation may demand full payment in cash and other conditions and will probably get them. In this case, the seller has bargaining power and will end up making a favorable deal.

On the other hand, if the seller is desperate to sell the car, or it is not in very good condition, perhaps needing major repairs, and the seller has to incur costs to advertise extensively, he may have to accept the first offer that comes along, even at some fraction of his asking price. In this case, the buyer would have all the bargaining power and the seller none.

Sometimes both buyers and suppliers have bargaining power. In that situation it is likely that the industry in question has low profitability, the product is viewed as a commodity, rivalry among competitors is fierce, and innovation is relatively low. On the other hand, if companies in the industry have more bargaining power than both buyers and suppliers, the chances are that it is profitable, the products and competitors are differentiated and have strong brands, competition is controlled as it is in monopolistic competition, and innovation may be fairly rapid.

For another example of bargaining power, consider the unfortunate predicament of a California tool manufacturer. About 90% of the company’s production was going to one customer. Profit margin was understandably low. One day the customer demanded a price reduction of 10% and

CHAPTER 4Section 4.1 Industry and Competitive Analysis

delivery in small quantities at frequent intervals, thus forcing the tool manufacturer to carry even more inventory and increase its costs. If the company had not been so dependent on this one customer, it might have refused to supply it but it could not. Instead, it got squeezed. It’s not difficult to tell who had the bargaining power here.

This example is true and, while unfortunate, illustrates how shortsighted companies can be. The customer in this case did not appear to care that it might drive one of its principal suppliers out of business. Walmart is another example of a company that, because of its size and influence with its customers, retains the bargaining power when negotiating with its suppliers. It, too, appears to run many of its suppliers into the ground in its drive for ever-lower costs.

In contrast, Toyota and other companies practice Kaizen, a system in which independent suppliers sign long-term agreements with the manufacturer, practically collocate with the manufacturer, earn fair profits, and are given help and training to supply products and parts at the desired level of quality and delivery.

If a company has many suppliers all competing for the contract to supply it, the company has bar- gaining power. If it has to purchase a component, however, and only one company can supply it, that supplier will have bargaining power. One strategy that suppliers have for retaining bargaining power is to raise the switching costs of the buyer, that is, make it so expensive for a buyer to switch to a competing supplier that it will not do so.

Consider a supplier that provides its customer’s procurement staff with computer terminals that are tied in with its own system, enabling the customer to order at any time, track the status of delivery of any order, and so on. The service could be so convenient, and the purchasing company’s people so well trained and comfortable in using the ordering system, that it might not change suppliers even if a lower-cost competitor came along.

Porter’s Five-Forces Model In 1980, Michael E. Porter of the Harvard Business School developed what is probably the most influential tool for assessing the structure and competitive threats of an industry. Porter proposed a framework that in a given industry, five forces determine the degree of competitiveness in that industry. Competitiveness, in turn establishes the attractiveness or profitability of the industry. This model can be used by organizations considering a wide range of strategic plans, including entry into the industry and beyond. The five forces described by Porter are

• Rivalry among existing competitors • Bargaining power of buyers • Bargaining power of suppliers • Threat of new entrants • Threat of substitutes

Figure 4.1 depicts Porter’s five-forces model in diagrammatic form. The five main boxes in the shape of a cross constitute the actual model. The four “analysis” boxes in each corner add meaning to the model and enhance the industry analysis.

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In the model, the terms buyers and suppliers are self-evident; these are the customers of the industry and the firms that supply the raw materials, respectively. Rivals are all of the companies presently competing in the industry. New entrants are firms not currently engaged in the industry but which could potentially compete in the future.

For example, British supermarket chain Tesco PLC entered the U.S. grocery industry in 2007 under the brand Fresh and Easy, with an aggressive growth plan, concentrating primarily on the Southwest states. Although Tesco did not open Fresh and Easy locations in all U.S. markets, or even in all Southwestern communities, existing grocers were wise to be aware of the Fresh and Easy threat.

Examination of Porter’s Five Force Research Project

Examination of Porter’s Five Force Research Project

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Examination of Porter’s Five Force Research Project

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