The Task Environment

8/17/2019 The Task Environment

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The Task Environment/Porter’s Competitive Forces

Model

Porter's fve orces analysis is a framework that attempts to analyze the

level of competition within an industry and business development. It draws

upon industrial organization (IO) economics to derive ve forces that determine the

competitive intensity and therefore attractiveness of an Industry.

Attractiveness in this context refers to the overall industry protability.

Porter referred to these forces as the micro environment, to contrast it with

the more general term macro environment. hey consist of those forces

close to a company that a!ect its ability to serve its customers and make a

prot.

1.Threat o ne entrants

Protable markets that yield high returns will attract new rms. his results in many

new entrants, which eventually will decrease protability for all rms in the industry.

"nless the entry of new rms can be blocked by incumbents #which in business

refers to the largest company in a certain industry, for instance, in


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telecommunications, the traditional phone company, typically called the $incumbent

operator$%, the abnormal prot rate will trend towards zero #perfect competition%.

The olloin! actors can have an e"ect on ho m#ch o a threat ne

entrants may pose$

• he existence of barriers to entry #patents, rights, etc.%. he most attractivesegment is one in which entry barriers are high and exit barriers are low. &ew

new rms can enter and non'performing rms can exit easily.

• (overnment policy

• )apital re*uirements

• Absolute cost

• )ost disadvantages independent of size

• +conomies of scale

• +conomies of product di!erences

• Product di!erentiation

• rand e*uity

• -witching costs or sunk costs• +xpected retaliation

• Access to distribution

• )ustomer loyalty to established brands

• Industry protability #the more protable the industry the more attractive it

will be to new competitors%

%.Threat o s#&stit#te prod#cts or services

he existence of products outside of the realm of the common product boundaries

increases the propensity of customers to switch to alternatives. &or example, tap

water might be considered a substitute for )oke, whereas Pepsi is a competitorssimilar product. Increased marketing for drinking tap water might $shrink the pie$

for both )oke and Pepsi, whereas increased Pepsi advertising would likely $grow the

pie$ #increase consumption of all soft drinks%, albeit while giving Pepsi a larger slice

at )okes expense. Another example is the substitute of a landline phone with a

cellular phone.

Potential actors$

• uyer propensity to substitute

• /elative price performance of substitute

• uyer switching costs

• Perceived level of product di!erentiation• 0umber of substitute products available in the market

• +ase of substitution

• -ubstandard product

• 1uality depreciation

• Availability of close substitute

.(ar!ainin! poer o c#stomers )yers*


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he bargaining power of customers is also described as the market of outputs2 the

ability of customers to put the rm under pressure, which also a!ects the

customers sensitivity to price changes. &irms can take measures to reduce buyer

power, such as implementing a loyalty program. he buyer power is high if the

buyer has many alternatives. he buyer power is low if they act independently e.g.

If a large number of customers will act with each other and ask to make prices lowthe company will have no other choice because of large number of customer3s

pressure.

Potential actors$

• uyer concentration to rm concentration ratio

• 4egree of dependency upon existing channels of distribution

• argaining leverage, particularly in industries with high xed costs

• uyer switching costs relative to rm switching costs

• uyer information availability

• &orce down prices

• Availability of existing substitute products• uyer price sensitivity

• 4i!erential advantage #uni*ueness% of industry products

• /&5 #customer value% Analysis

• he total amount of trading

+.(ar!ainin! poer o s#ppliers

he bargaining power of suppliers is also described as the market of inputs.

-uppliers of raw materials, components, labor, and services #such as expertise% to

the rm can be a source of power over the rm when there are few substitutes. If

you are making biscuits and there is only one person who sells 6our, you have noalternative but to buy it from them. -uppliers may refuse to work with the rm or

charge excessively high prices for uni*ue resources.

Potential actors are$

• -upplier switching costs relative to rm switching costs

• 4egree of di!erentiation of inputs

• Impact of inputs on cost or di!erentiation

• Presence of substitute inputs

• -trength of distribution channel

• -upplier concentration to rm concentration ratio

• +mployee solidarity #e.g. labor unions%• -upplier competition2 the ability to forward vertically integrate and cut out

the buyer.


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,.-ntensity o competitive rivalry

&or most industries the intensity of competitive rivalry is the ma7or determinant of

the competitiveness of the industry.

Potential actors$

• -ustainable competitive advantage through innovation

• )ompetition between online and o8ine companies

• 9evel of advertising expense

• Powerful competitive strategy

• &irm concentration ratio

• 4egree of transparency

lo&aliation

he process whereby national economies and business systems are becomingdeeply interlinked with each other.

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Market Economy

An economy in which businesses are privately owned and prices are set by the

interaction of supply and demand.

ocialist Economy

An economy in which businesses are owned by the state and prices are set by stateplanners.

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-nternational trade

he sale of a good or service across borders.

Forei!n 4irect -nvestment

Investments by a company based in one nation in business activities in another

nation.

Tari"s

A tax on imports.


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2e!ional Trade 3!reements

Agreements to remove barriers to trade between nations within a geographic

region.

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he lowering of barriers to international trade and &4I made globalization a

theoretical possibility: technological change has made it a tangible reality. ;ver the

past ???= the cost

of a three'minute phone call between 0ew @ork and 9ondon fell from BCC.DE to

y >??F it had plunged to 7ust ?H= to B==C the volume of world merchandise trade expanded almost BD'

fold, outstripping world production, which grew about H.E times in real terms. #Gorld

merchandise trade includes trade in manufactured goods, agricultural goods, and

mining products, but not services. Gorld production and trade are measured in real,

or in6ation'ad7usted, dollars.%

lo&aliation o Prod#ction-ourcing goods and services from locations around the globe to take advantage of

national di!erences in the cost and *uality of factors of production.

lo&aliation o Markets

he merging of historically distinct and separate national markets into one huge

global marketplace.

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4ue to technological innovations the real costs of information processing and

communication have fallen dramatically. hese developments allow managers tocreate and then manage a globally dispersed production system, further facilitating

the globalization of production. A worldwide communication network has become

essential for many internationals businesses.

For e>ample, 4ell uses the Internet to coordinate and control its globally dispersed

production system to such an extent that it holds only two days3 worth of inventory

at its assembly locations. 4ell3s Internet'based system records orders for computer


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e*uipment as the y are submitted by customers via the company3s Geb site, and

then immediately transmits the resulting orders for components to various suppliers

around the world.

Constraints on lo&aliation

(lobalization is not inevitable. Powerful countervailing forces are constraining the

pace at which production and markets are becoming global. hese constraints limit

the ability of managers to disperse production activities to locations in the world

where they can be performed at the lowest cost, as well as managers3 ability to

treat the entire world as a single homogeneous marketplace.

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he worldwide march toward market'based economic systems with few or no

barriers to cross'border trade and investment is not guaranteed to continue. istory

is full of reversals away from progressive trends. he rst bloom of modern global

trade in the late >F==s and early >?==s was brought to an end by protectionist

policies in ma7or trading nations during the >?B=s and >?


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&inally, it is important to realize that di!erences in social culture across nations are

often profound. As such, they make it harder for rms to view the world market as

homogeneous and more diKcult to manage operations in di!erent countries. y

social culture we mean the system of values and norms that are held in common by

people living in a society. Lalues are abstract ideas about what a group believes to

be good, right, and desirable: they are shared assumptions about how things oughtto be. 0orms are the social rules and guidelines that prescribe appropriate behavior

in particular situations.

&or example2

-audi Arabia and the "nited -tates2 )ultural di!erences

The (enefts o oin! lo&al

As globalization progresses, an increasing number of businesses are expanding

across national borders, becoming multinational enterprises in the process. Amultinational enterprise #50+% is any business that has productive activities in two

or more countries. here are four main reasons why the managers of many

enterprises, both large and small, seek to expand their operations across national

borders2 4oing so lets a rm expand the market for its products, realize scale and

location economies, and benet from global learning.

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International expansion enlarges the market a rm can address, enabling it to

increase its sales and prots faster. he growth of -tarbucks, for example, owes

much to the rapid international expansion of the company.

-tarbucks opened its rst international store in >??D, when it was operating some

H== stores in the "nited -tates. y B==E the company had over


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international markets from the same factories, Intel can r un three shifts seven days

a week for lower costs and greater protability.

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4i!erent locations around the world are more or less suitable for performing

di!erent business activities.

&or example, )hina is a good location for making textiles due to the combination of

low labor costs #textile manufacturing is labor'intensive% and good infrastructure.

he

"nited -tates is not as good for making textiles due to relative high labor costs: so

textile manufacturing has been migrating out of the "nited -tates for the last B=

years.

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Implicit in our discussion so far is the idea that valuable skills are developed rst at

home and then transferred to foreign operations.

hus Gal'5art developed its retailing skills in the "nited -tates before transferring

them to foreign locations. owever, for more mature multinationals that have

already established a network of subsidiary operations in foreign markets, the

development of valuable skills can 7ust as well occur in foreign subsidiaries.

-kills can be created anywhere within a multinational3s global network of

operations, wherever people have the opportunity and incentive to try new ways ofdoing things. he creation of skills that help lower the costs of production, enhance

perceived value, and support higher product pricing is not the monopoly of the

corporate center.

Documents

The Task Environment