2. After analyzing the macro or general environment –
Environmental scanning, a firm needs to analyze the
micro or task environment
3. Industry is a group of companies offering the similar
products or services.
These services and products are close substitutes to
each other.
4. Industry analysis is analysis of the forces which
determines the competition, and nature of
competition
Competition determines the profitability of a industry
and profitability determines the attractiveness of the
particular industry.
6. The Spectrum of Industry Structures
Types of competition
Perfect
Oligopoly Duopoly Monopoly
Competition
Concentration Many firms A few firms Two firms One firm
Entry and Exit No barriers Significant barriers High barriers
Barriers
Product Homogeneous
Differentiation Potential for product differentiation
Product
Perfect
Information Imperfect availability of information
Information flow
7. Profitability of US Industries
Median return on equity (%), 1999-2002
Pharmaceuticals 26.8 Gas & Electric Utilities 10.5
Tobacco 22.0 Food and Drug Stores 10.3
Household & Personal Products 20.5 Motor Vehicles & Parts 9.8
Food Consumer Products 20.3 Home Equipment 9.5
Medical Products & Equipment 18.8 Railroads 9.0
Beverages 18.8 Hotels, Casinos, Resorts 8.0
Scientific & Photographic Equipt. 16.5 Insurance: Life and Health 7.6
Commercial Banks 16.0 Building Materials, Glass 7.0
Publishing, Printing 14.3 Metals 6.0
Petroleum Refining 14.3 Semiconductors &
Apparel 14. 3 Electronic Components 5.8
Computer Software 13.5 Insurance: Property & Casualty 5.3
Electronics, Electrical Equipment 13.3 Food Production 5.3
Furniture 13.3 Telecommunications 3.5
Chemicals 12.8 Forest and Paper Products 3.5
Computers, Office Equipment 11.8 Communications Equipment (4.0)
Health Care 11.5 )
8. Industry attractiveness
Above profitability data reveals that tobacco and
pharmaceuticals are more profitable than other, so
these industries are more attractive than others.
9. The purpose of
Five-Forces Analysis
• The five forces are environmental forces that
impact on a company’s ability to compete in a
given market.
• The purpose of five-forces analysis is to diagnose
the principal competitive pressures in a market
and assess how strong and important each one is.
11. Threat of New Entrants
Economies of Scale
Product Differentiation
Barriers to
Entry Capital Requirements
Absolute cost advantage
Access to Distribution Channels
Government Policy
Expected Retaliation
12. Porter’s Five Forces
Model of Competition
Threat of
Threat of New
New Entrants
Entrants
Bargaining
Power of
Suppliers
13. Bargaining Power of Suppliers
Suppliers are likely to be powerful if:
Supplier industry is dominated by a few firms
Suppliers exert power
in the industry by:
Suppliers’ products have few substitutes
* Threatening to raise
prices or to reduce quality Buyer is not an important customer to supplier
Powerful suppliers
can squeeze industry Suppliers’ product is an important input to
buyers’ product
profitability if firms
are unable to recover Suppliers’ products have high switching costs
cost increases
14. Porter’s Five Forces
Model of Competition
Threat of
Threat of New
New Entrants
Entrants
Bargaining Bargaining
Power of Power of Buyers
Suppliers
15. Bargaining Power of Buyers
Buyer groups are likely to be powerful if:
If they can switch to other suppliers
Few number of buyers and large number of suppliers
Buyer has full information
16. Porter’s Five Forces
Model of Competition
Threat of
Threat of New
New Entrants
Entrants
Bargaining Bargaining
Power of Power of Buyers
Suppliers
Threat of
Substitute
Products
17. Threat of Substitute Products
Keys to evaluate substitute products:
Products with Products with improving price/performance
similar function tradeoffs relative to present industry
limit the prices products
firms can charge
Example:
Coffee and tea
Travel agencies and online reservation
systems
18. Porter’s Five Forces
Model of Competition
Threat of
Threat of New
New Entrants
Entrants
Bargaining Rivalry Among Competing Bargaining
Power of Firms in Industry Power of Buyers
Suppliers
Threat of
Substitute
Products
19. Rivalry Among Existing Competitors
1.Concentration- Size and number of
competitors
2.Product Differentiation – The more similar
the offerings among rival firms, the more willing
customers are switch to substitute and the greater
the incentive for firms to cut prices to increase
sales.
3.
20. Rivalry Between Established
Competitors
The extent to which industry profitability is depressed by
aggressive price competition depends upon:
• Concentration (number and size distribution of firms)
• Product differentiation
• Excess capacity and exit barriers
21. Porter Competitive Model
Airline Industry Analysis - North American Market
•Aircraft Manufacturers •Foreign Carriers
•Aircraft Leasing Companies •Regional Carrier Start ups
Potential •Cargo Carrier Business Strategy Change
•Labor Unions
•Food Service Companies New Entrants
•Fuel Companies
•Airports
•Local Transportation Service
•FAA
•Hotels
Intra-Industry Rivalry
Bargaining SBU: American Airlines
Bargaining
Power Rivals: United, Delta, US Air,
Northwest, Southwest Power of Buyers
of Suppliers
•Travel Agents
•Business Travelers
•Federal Government
•Alternate Travel Services
•Pleasure Travelers
•Fast Trains Substitute •Charter Service
•Boats
•Private Transportation
Products •U.S. Military
•Cargo and Mail
•Videoconferencing and Services
•Groupware
23. Power of complementors
• Complementors are other businesses from where
customers buy complementary goods.
• Complementors are allies as long as their interests
are met.
25. Changing fashion and fickleness
• Change in fashion
• Internet and mass media is rapidly modifying the
fashion and attitude of customers.
26. Change in governmental policy regarding the
particular industry
• Policy regarding any industry can influence the
growth and competitiveness of the particular
industry
