Chapter 5 Industry, Market & Competitive Feasibility Analysis: Evaluating Industry Attractiveness via Porter’s Five Forces Model Diane M. Sullivan, Ph.D., 2010 Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage

I/O Model of Firm Performance  I/O Model says The industry in which a firm chooses to compete has a stronger influence on firm performance than do the choices managers make inside their organizations

What’s the Industry Environment?  The industry environment has a direct effect on a firm ’ s competitiveness and their ability to generate profits  Industry: a market containing a group of firms producing products/services that are similar The industry ’ s attractiveness, it’s long-term profit potential, is a function of the five forces of competition

The results of our Porter’s Five Forces analysis tell us if the industry is attractive (e.g., how likely it is that the industry will be profitable in the long-term). Porter’s Five Forces Model

Porter’s Five Forces: The Power of Suppliers  Determined by 5 factors: 1. Suppliers’ industry dominated by a small number of firms 2. Suppliers sell unique or highly differentiated products 3. Suppliers are not threatened by substitutes 4. Suppliers threaten forward integration 5. Firms are not important customers for suppliers  The higher the power of suppliers, the more/less attractive the industry?

Porter’s Five Forces: The Power of Buyers  Determined by 4 factors: 1. Number of buyers is small  Because there are few buyers, they can have more power over those providing the goods. Large-volume buyers are also powerful. 2. Products sold to buyers are undifferentiated and standard  If the goods are commodities, buyers can find alternative products 3. Buyers are not earning significant economic profits  If buyers are not earning high economic profits, they are 1) likely to be price sensitive, and 2) their simple ability to afford higher-priced goods is low. 4. Buyers threaten backward integration  If buyers can easily backward integrate (e.g., produce the goods or perform the service themselves) this gives them power  The higher the power of buyers, the more/less attractive the industry?

Porter’s Five Forces: Threat of Substitutes  Substitutes are products/services from other industries that viably serve the same function as products/services in the focal industry  Determined by: The availability of substitutes from other industries (e.g., in the auto manufacturing industry, substitutes come in the form of public transportation, bicycles, flying, walking, etc.).  What are substitutes for the USPS? What’s its purpose (e.g., what need does it serve or problem does it solve)?  What are substitutes for libraries? What’s its purpose?  The higher the threat of substitutes of suppliers, the more/less attractive the industry?

Porter’s Five Forces: Threat of New Entrants  Determined by: Barriers to entry:  Economies of scale  Product differentiation  Capital requirements  Switching costs faced by customers if they were to switch to another supplier of the good  Access to distribution channels (e.g., if the entrant cannot secure a way to distribute it’s product, it is a barrier to their entry)  Cost advantages independent of scale (e.g., other cost advantages other than capturing economies of scale)  Proprietary technology: secret or patented technology  Managerial know-how: tacit knowledge  Favorable access to raw materials: low cost access to critical raw materials  Government regulation of entry  The higher the threat of new entrants, the more/less attractive the industry?

Porter’s Five Forces: Intensity of Rivalry  Determined by 5 factors: 1. Large number of competing firms that are roughly the same size  This leads to price competition 2. Slow industry growth 3. Lack of product differentiation 4. High exit barriers  Specialized assets  Fixed costs of exit (e.g., labor agreements)  Strategic interrelationships  Governmental and social restrictions 5. Large production capacities  If, in order to obtain economics of scale, production capacity must be added in large increments, an industry is likely to experience periods of oversupply after new capacity comes online. This leads to price cutting.  The higher the intensity of rivalry, the more/less attractive the industry?

Industry Analysis Feasibility Assignment Deliverables  For Checkpoint #3 (due Thur., November 11, 2010) Determine the industry within which your firm will compete  Compile general information about the industry (e.g., industry size, growth rate, number of competitors, market share across competitors, etc.)  Conduct a Porter’s Five Forces Analysis on the industry  Determine how each separate force impacts the industry’s attractiveness and prospects for long-term profitability  Determine the overall industry attractiveness and prospects for long- term profitability based on the analysis