Potter 5 Force

7/31/2019 Potter 5 Force

1/30

Ch2-1

Chapter 2

The External Environment:

Opportunities, Threats, Industry

Competition, and Competitor Analysis

Michael A. Hitt

R. Duane Ireland

Robert E. Hoskisson

2000 South-Western College Publishing


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Ch2-2

The Strategic

Management

Process

Chapter 3

Internal

Environment

Chapter 2

External

EnvironmentStrategic Intent

Strategic Mission

Strategy Formulation Strategy Implementation

Chapter 4

Business-Level

Strategy

Chapter 5

Competitive

Dynamics

Chapter 6

Corporate-Level

Strategy

Chapter 8

International

Strategy

Chapter 9

Cooperative

Strategies

Chapter 7

Acquisitions &

Restructuring

Chapter 10

Corporate

Governance

Chapter 11

Structure

& Control

Chapter 12

Strategic

Leadership

Chapter 13

Entrepreneurship

& Innovation

Strategic

Inputs

FeedbackStrategic

Outcomes

Strategic

Actions

Strategic

Competitiveness

Above Average

Returns


3/30

Ch2-3

Political/

Legal

Economic

Technological

Global

DemographicSociocultural

Competitive

Environment

Industry

Environment

Components of the General Environment


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Ch2-4

Components of the General EnvironmentDemographicSegment

Population size

Age structure

Geographic distribution

Ethnic mix

Income distribution

EconomicSegment

Inflation rates

Interest rates

Trade deficits or surpluses

Budget deficits or surpluses

Personal savings rate

Business savings rates

Gross domestic product

Political/Legal

Segment Antitrust laws

Taxation laws

Deregulation philosophies

Labor training laws

Educational philosophies and

policies

SocioculturalSegment

Women in the workforce

Workforce diversity

Attitudes about work lifequality

Concerns about theenvironment

Shifts in work and careerpreferences

Shifts in preferences regarding

product and service

characteristicsTechnological

Segment Product innovations

Applications of knowledge

Focus of private and

government-supported R&Dexpenditures

New communicationtechnologies

GlobalSegment

Important political events

Critical global markets

Newly industrialized countries

Different cultural andinstitutional attributes


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Ch2-5

External Environmental Analysis

The external environmental analysis process should be

conducted on a continuous basis. This process includesfour activities:

Scanning

Monitoring

Forecasting

Assessing

Identifying early signals of environmental

changes and trends

Detecting meaning through ongoing observationsof environmental changes and trends

Developing projections of anticipated outcomesbased on monitored changes and trends

Determining the timing and importance of

environmental changes and trends for firms'strategies and their management


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Ch2-6

Rank State

1 Massachusetts

2 California

3 Colorado

4 Washington

5 Connecticut

6 Utah

7 New Hampshire

8 New Jersey

9 Delaware

10 Arizona

Top 10 U.S. States MovingToward Digital EconomyStates in the top 10 ofthose that are trying totransform themselves tothe realities and needs of

a digital economy mayexperience an influx ofhigh-tech companies andskilled workers as well asincreases in tax revenues

External Environmental Analysis


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Threat ofNew

Entrants

Threat of

New

Entrants

Porters Five Forces

Model of Competition


8/30Ch2-8

Threat of New Entrants

Barriers to

Entry

Expected Retaliation

Government Policy

Economies of Scale

Product Differentiation

Capital Requirements

Switching Costs

Access to Distribution Channels

Cost Disadvantages Independent

of Scale


9/30Ch2-9

Bargaining

Power of

Suppliers

Threat ofNew

Entrants

Threat of

New

Entrants

Porters Five Forces



10/30Ch2-10

Bargaining Power of Suppliers

Suppliers exert power

in the industry by:

* Threatening to raise

prices or to reduce quality

Powerful suppliers

can squeeze industry

profitability if firms

are unable to recover

cost increases

Suppliers are likely to be powerful if:

Supplier industry is dominated by afew firms

Suppliers products have few substitutes

Buyer is not an important customer tosupplier

Suppliers product is an importantinput to buyers product

Suppliers products are differentiated

Suppliers products have highswitching costs

Supplier poses credible threat of

forward integration


11/30Ch2-11

Bargaining

Power of

Buyers

Threat ofNew

Entrants

Threat of

New

Entrants

Bargaining

Power of

Suppliers

Porters Five Forces



12/30Ch2-12

Bargaining Power of Buyers

Buyers compete

with the supplying

industry by:

*Bargaining down prices

* Forcing higher quality

* Playing firms off of

each other

Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases

are large relative to sellers sales

Purchase accounts for a significantfraction of suppliers sales

Products are undifferentiated

Buyers face few switching costs

Buyers industry earns low profits

Buyer presents a credible threat ofbackward integration

Product unimportant to quality

Buyer has full information


13/30Ch2-13

Threat of

Substitute

Products

Threat ofNew

Entrants

Threat of

New

Entrants

Bargaining

Power of

Buyers

Bargaining

Power of

Suppliers

Porters Five Forces



14/30Ch2-14

Threat of Substitute Products

Products

with similar

functionlimit the

prices firms

can charge

Keys to evaluate substitute products:

Products with improving

price/performance tradeoffs

relative to present industryproducts

Example:

Electronic security systems inplace of security guards

Fax machines in place of

overnight mail delivery


15/30Ch2-15

Threat of

Substitute

Products

Threat ofNew

Entrants

Threat of

New

Entrants

Rivalry Among

Competing Firms

in Industry

Bargaining

Power of

Buyers

Bargaining

Power of

Suppliers

Porters Five Forces



16/30Ch2-16

Rivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:

Jockeying for strategic position

Using price competition

Staging advertising battles

Making new product introductions

Increasing consumer warranties or service

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse off

Advertising battles may increase total industry demand, but

may be costly to smaller competitors


17/30Ch2-17

Cutthroatcompetition is more likely to occur when:


Numerous or equally balanced competitors

Slow growth industry

High fixed costs

Lack of differentiation or switching costs

High storage costs

Capacity added in large increments

High strategic stakes

High exit barriers

Diverse competitors


18/30Ch2-18

High exit barriersare economic, strategic and

emotional factors which cause companies to remain

in an industry even when future profitability is

questionable.

Specialized assets

Fixed cost of exit (e.g., labor agreements)

Emotional barriers

Government and social restrictions

Strategic interrelationships



19/30Ch2-19

Effects of Entry Barriers and Exit

Barriers on Industry Profits

Entry

Barriers

Exit Barriers

High

Low

HighLow


20/30Ch2-20

Low, Stable

Returns

Entry

Barriers

Exit Barriers

High

Low

HighLow




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High, Stable

Returns

Entry

Barriers

Exit Barriers

High

Low

HighLow

Low, Stable

Returns




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Ch2-22

Low, Risky

Returns

Entry

Barriers

Exit Barriers

High

Low

HighLow

Low, Stable

Returns

High, Stable

Returns




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Ch2-23

High, Risky

Returns

Entry

Barriers

Exit Barriers

High

Low

HighLow

Low, Stable

Returns

High, Stable

Returns

Low, Risky

Returns




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Ch2-24

Competitor Analysis

The follow-up to Industry Analysis is

effective analysis of a firms Competitors

Competitive

Environment

Industry

Environment


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Ch2-25

Competitor Analysis

Assumptions

What assumptions do ourcompetitors hold about the futureof industry and themselves?

Current Strategy

Does our current strategy supportchanges in the competitiveenvironment?

Future ObjectivesHow do our goals compare to our

competitors goals?

CapabilitiesHow do our capabilities compare

to our competitors?

Response

What will ourcompetitors do in thefuture?

Where do we have acompetitiveadvantage?

How will this changeour relationship withour competition?


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Ch2-26

Future Objectives

How do our goals compare

to our competitors goals?

Where will emphasis be

placed in the future?

What is the attitude

toward risk?

What Drives the competitor?

Competitor Analysis


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Ch2-27

What is the competitor doing?

What can the competitor do?

Future Objectives






toward risk?

Current Strategy

How are we currently

competing?

Does this strategy

support changes in the

competitive structure?

Competitor Analysis


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Ch2-28

What does the competitor believe

about itself and the industry?

Future Objectives






toward risk?

Current Strategy


competing?Does this strategy


competition structure?

Do we assume the future

will be volatile?

Are we assuming stable

competitive conditions?

What assumptions do our

competitors hold about the

industry and themselves?

Assumptions

Competitor Analysis


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Ch2-29

What are the competitors

capabilities?

Future Objectives






toward risk?

Current Strategy






will be volatile?

Are we operating under

a status quo?




Assumptions

What are my competitors

strengths and weaknesses?

How do our capabilities

compare to our

competitors?

Capabilities

Competitor Analysis

C i A i


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Future Objectives






toward risk?

Current Strategy






will be volatile?

Are we operating under

a status quo?




Assumptions

Response

What will our competitors

do in the future?

Where do we have a

competitive advantage?

How will this change our

relationship with our

competition?

Capabilities

What are my competitors

strengths and weaknesses?

How do our capabilities

compare to our

competitors?

Competitor Analysis

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