Purpose: To discuss the Porter Five Forces Model.
1. What are the competitive dynamics of your industry?
2. Can you discuss the external environment within the context of your company’s industry and macroeconomic environment?
3. Use the Porter Five Forces model to describe the characteristics of your company’s external environment. It is important that you describe a real, specific example. You can use your company’s situation for this analysis. If you are not currently employed, you may describe a former employer or company. If security concerns preclude discussion of your current or former company, an example from the business press is acceptable.
Required reading materials to include Chapter Three from the textbook and both of the Harvard Business Review articles assigned in Unit Two. (ATTACHED)
Essentials of Strategic Management 7e CHAPTER 3 Evaluating a Company’s External Environment © 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill. Because learning changes everything.® Chapter 3 presents the concepts and analytical tools for assessing a company’s external environment. Attention centers on the competitive arena in which a company operates, together with the technological, societal, regulatory, or demographic influences in the macro-environment that are acting to reshape the company’s future market arena. 1 Learning Objectives Identify factors in a company’s broad macro-environment that may have strategic significance. Recognize the factors that cause competition in an industry to be fierce, normal, or relatively weak. Map market positions of key groups of industry rivals. Determine whether an industry’s outlook presents a company with sufficiently attractive opportunities for growth and profitability. © McGraw Hill This chapter presents the concepts and analytical tools for zeroing in on a single-business company’s external environment. 2 The First Test of a Winning Strategy: “How well does the current strategy fit the company’s situation?” Two facets of the company’s situation: Its external environment— industry and competitive environments in which it operates. Its internal environment—the company’s resources and organizational capabilities. © McGraw Hill Strategic thinking begins with an appraisal of the company’s external and internal environments (as a basis for deciding on a long-term direction and developing a strategic vision), moves toward an evaluation of the most promising alternative strategies and business models, and culminates in choosing a specific strategy. 3 Assessing the Company’s Industry and Competitive Environment Do macro-environmental factors and industry characteristics offer sellers opportunities for growth and attractive profits? What kinds and strengths of competitive forces are present in the industry? How will forces driving change in the industry impact its competitive intensity and profitability? Which rivals are strongly positioned in the market and which are not? What strategic moves are rivals likely to make next? What are the key factors of competitive success? Does the industry outlook offer good prospects for profitability? © McGraw Hill 4 Question 1: What Are the Strategically Relevant Components of a Company’s Macro-Environment? Relevant Factors: Play a significant role in shaping management’s decisions regarding the company’s long-term direction, objectives, strategy, and business model. Are on the immediate inner ring industry and competitive environment of the company—competitive pressures, the actions of rivals firms, buyer behavior, supplier-related considerations, and so on. © McGraw Hill The macro-environment encompasses the broad environmental context in which a company’s industry is situated that includes strategically relevant components over which the firm has no direct control. 5 FIGURE 3.1 The Components of a Company’s External Environment Access the slide image description. © McGraw Hill Figure 3.1, The Components of a Company’s Macro-environment, identifies the arenas within an organization’s macro-environment. 6 Core Concepts: Macro-Environment and PESTEL Analysis The macro-environment encompasses the broad environmental context in which a firm is situated and is comprised of six principal components: political factors, economic conditions, sociocultural forces, technological factors, environmental factors, and legal/regulatory conditions. PESTEL analysis can be used to assess the strategic relevance of the six principal components of the macro-environment: political, economic, social, technological, environmental, and legal forces. © McGraw Hill 7 The Six Components of the Macro-Environment Included in a PESTEL Analysis Political factors. Economic conditions. Technological factors. Sociocultural factors. Environmental forces. Legal and regulatory factors. © McGraw Hill Analysis of the impact of these factors is often referred to as PESTEL analysis, an acronym that serves as a reminder of the six components involved (Political, Economic, Sociocultural, Technological, Environmental, Legal/Regulatory). 8 Question 2: How Strong Are the Industry’s Competitive Forces? State of Competition: Where are we now? The dynamics of competition are not the same from one industry to another. The Five-forces Model of Competition: It is the most powerful and widely used tool for assessing the strength of the competitive forces that affect an industry’s attractiveness. © McGraw Hill Each of the frameworks presented in this chapter—PESTEL, five forces analysis, driving forces, strategy groups, competitor analysis, and key success factors—provides a useful perspective on an industry’s outlook for future profitability. Putting them all together provides an even richer and more nuanced picture. Thus, the final step in evaluating the industry and competitive environment is to use the results of each of the analyses performed to determine whether the industry presents the company with profit opportunities. 9 The Five Competitive Forces Affecting Industry Attractiveness Competitive pressures: Bargaining power of buyers. Substitute products of firms in other industries. Bargaining power of suppliers. The threat of new entrants into the market. Rivalry among competing sellers. © McGraw Hill The character and strength of the competitive forces operating in an industry are never the same from one industry to another. The most powerful and widely used tool for diagnosing the principal competitive pressures in a market is the five forces framework. 10 FIGURE 3.2 The Five-Forces Model of Competition Access the description of the slide image. Sources: Based on Michael E. Porter, “How Competitive Forces Shape Strategy,” Harvard Business Review 57, no. 2 (March–April 1979), pp. 137–145; and Michael E. Porter, “The Five Competitive Forces That Shape Strategy,” Harvard Business Review 86, no. 1 (January 2008), pp. 80–86. © McGraw Hill This five forces framework, depicted in Figure 3.2, holds that competitive pressures on to the industry, (3) potential new entrants companies within an industry come from five sources. These include (1) competition from rival sellers, (2) competition from competition from producers of substitute products, (4) supplier bargaining power, and (5) customer bargaining power. 11 The Competitive Force of Buyer Bargaining Power Whether seller-buyer relationships represent a minor or significant competitive force in limiting industry profitability depends on: Some or many buyers having sufficient bargaining leverage to obtain price concessions and other favorable terms. The extent to which buyers are price sensitive. © McGraw Hill Whether buyers are able to exert strong competitive pressures on industry members depends on (1) the degree to which buyers have bargaining power and (2) the extent to which buyers are price-sensitive. Buyers with strong bargaining power can limit industry profitability by demanding price concessions, better payment terms, or additional features and services that increase industry members’ costs. Buyer price sensitivity limits the profit potential of industry members by restricting the ability of sellers to raise prices without losing revenue due to lost sales 12 When Is the Bargaining Power of Buyers Stronger? Buyers gain bargaining leverage when: Their costs of switching to competing brands or substitutes are relatively low. Their large size allows them to demand concessions. They are few in number, control market access or, if a buyer-customer is particularly important to a seller. Weak buyer demand creates a “buyers’ market.” Buyers are well informed about products, prices, and costs. Buyers can integrate backward into the business of sellers. © McGraw Hill Whether buyers are able to exert strong competitive pressures on industry members depends on (1) the degree to which buyers have bargaining power and (2) the extent to which buyers are price-sensitive. Buyers with strong bargaining power can limit industry profitability by demanding price concessions, better payment terms, or additional features and services that increase industry members’ costs. Buyer price sensitivity limits the profit potential of industry members by restricting the ability of sellers to raise prices without losing revenue due to lost sales. 13 FIGURE 3.3 Factors Affecting the Strength of Buyer Bargaining Power Access the description of the slide image. © McGraw Hill Figure 3.3 summarizes the factors determining the strength of buyer power in an industry. Note that the first five factors are the mirror image of those determining the bargaining power of suppliers, 14 The Competitive Force of Substitute Products The strength of competitive pressures from the sellers of substitute products depends on whether: Substitutes are readily available and attractively priced. Buyers view the substitutes as comparable or better in terms of quality, performance, and other relevant attributes. The costs that buyers incur in switching to the substitutes are high or low. © McGraw Hill Companies in one industry are vulnerable to competitive pressure from the actions of companies in a closely adjoining industry whenever buyers view the products of the two industries as good substitutes. 15 FIGURE 3.4 Factors Affecting Competition from Substitute Products Access the description of slide image. © McGraw Hill Figure 3.4 depicts three factors that determine whether the competitive pressures from substitute products are strong or weak. Competitive pressures are stronger when: Good substitutes are readily available and attractively priced. Buyers view the substitutes as comparable or better in terms of quality. performance, and other relevant attributes. The costs that buyers incur in switching to the substitutes are low. 16 The Competitive Force of Supplier Bargaining Power 1 Industry suppliers can exert substantial bargaining power or leverage if: The supplied item is not a commodity readily available from many suppliers. Industry members cannot switch their purchases to another supplier or switch to attractive substitutes. Certain required inputs are in short supply. Certain suppliers provide a differentiated item that enhances the desired performance, quality, or image of the industry’s product. © McGraw Hill Whether the suppliers of industry members represent a weak or strong competitive force depends on the degree to which suppliers have sufficient bargaining power to influence the terms and conditions of supply in their favor. Suppliers with strong bargaining power are a source of competitive pressure because of their ability to charge industry members higher prices, pass costs on to them, and limit their opportunities to find better deals. 17 The Competitive Force of Supplier Bargaining Power 2 Industry suppliers can exert substantial bargaining power or leverage when: They provide specialized equipment or services that yield cost savings to industry members in conducting their operations. A large fraction of the costs of the buyer industry’s product is accounted by the cost of a particular input. Industry members are not major or large customers of suppliers. It does not make good economic sense for industry members to vertically integrate backward. © McGraw Hill Suppliers with strong bargaining power are a source of competitive pressure because of their ability to charge industry members higher prices, pass costs on to them, and limit their opportunities to find better deals. 18 FIGURE 3.5 Factors Affecting the Strength of Suppliers Access the description of the slide image. © McGraw Hill Figure 3.5 shows a variety of factors that determine the strength of suppliers’ bargaining power. 19 The Competitive Force of Potential New Entrants The threat of entrants into the marketplace presents significant competitive pressure when: There is a sizable pool of likely entry candidates. Potential entrants have ample entry resources at their command. Current industry participants are looking beyond their current markets for growth opportunities. When the industry is growing, offers attractive profit opportunities, and