External Analysis Industry Structure The Porter 5-Forces Model Success Factors

Environmental Influences by Proximity Micro-environment or Task Environment Macro-environment

The Macro-environment The Industry Environment Suppliers Competitors Customers Natural environment Demographic structure Demographic structure Social structure The National/ International economy Technology Government

The Core of the Firm’s Environment Competitors Suppliers Customers Regulatory System The Firm’s Battleground

The Determinants of Industry Profit Demand Competition Regulatory framework

The Basic Source of Profit The Creation of Customer Value Operations transforms inputs into goods and services for the customer. For operations to be profitable, the first criterion is that the value of the product or service created (as measured by the price that the customer is willing to pay) exceeds the cost of the inputs used in its creation.

The stronger competition is between producers, the greater is the proportion of the surplus gained by customer (“consumer surplus”) and the less producers earn (“producer surplus” or “economic rent”). The Basic Source of Profit

Industry Profitability is Governed by The value of the product or service to customers The intensity of competition The relative bargaining power at different levels in the supply chain.

The Analysis of Competition in an Industry Industry Structure The basic premise that underlies industry analysis is that the level of industry profitability is neither random nor the result of entirely industry specific influences but is determined, in part at least, by the systematic influence of industry structure.

The Underlying Theory Theory of monopoly The theory of perfect competition Structure Conduct & Performance

The Spectrum of Industry Structures Structural Features No. of producers Entry & Exit barriers Product differentiation Information Many None Perfect Availability Perf. Comp. Few Significant Extensive Restricted Oligopoly Two High Moderate Restricted Duopoly One High Low Restricted Industry Type Monopoly

Porter’s 5-Force Model Competitive Rivalry Bargaining Power of Suppliers Bargaining Power of Buyers Threat from New Entrants Threat from Substitutes

Competitive Rivalry Bargaining Power of Suppliers Bargaining Power of Buyers Threat from New Entrants Threat from Substitutes Porter’s 5-Force Model and PEST P E S T

Porter’s “Five Forces of Competition” Model views the profitability of an industry as indicated by its rate of return on invested capital relative to its cost of capital as determined by five sources of competitive pressure.

The Model includes Three sources of horizontal competition: Competition from the suppliers of substitutes The threat of competition from entrants, Competition from established producers Two sources of vertical competition The bargaining power of suppliers The bargaining power of buyers

Threat of New Entrants New entrants are attracted to an industry because of potential profit opportunities Potential entrants will try to gauge the potential for retaliation Industries are surrounded by barriers of entry that new entrants must scale

Barriers of Entry Economies of Scale Absolute Cost Advantages Capital Requirements Product Differentiation Access to Distribution Channels Governmental and Legal Barriers Retaliation by Established Producers Relative Levels of Profitability

Supplier Power Supplier concentration Substitutability between suppliers The potential for and degree of vertical integration The relative power of Suppliers and how they behave can affect industry profitability.

Buyer Power Price sensitivity cost of product relative to total costs product differentiation competition between buyers Bargaining power size and concentration of buyers relative to suppliers buyers’ switching costs buyers’ information buyers’ ability to backward integrate

Buyers’ switching costs The lower the cost of switching between suppliers, the more effective is buyer power

Threat of Substitutes Availability of substitutes Degree of concentration and relative size of the buyer Buyer propensity to substitute Relative price performance of substitutes Ability of firms to differentiate and re-define the product offering

Industry Rivalry The Number of Firms and Industry Concentration Diversity of Competitors Product Differentiation Industry Capacity & Level of Exit Barriers Cost Conditions Profitability of the Industry

Cost condition: Scale Economies and the Ratio of Fixed to Variable Costs In the short term, the ratio determines how far companies will slash prices in order to utilise spare capacity Examples…The car industry with very high fixed costs and large scale advantages

Industry Structural Evolution Model Exits from the Industry Initial or CurrentEvolving Former StructuralStructural Structural PatternPattern Pattern Strategic Investments by Existing Firms Strategic Investments Evolutionary by New Entrants Processes

An Alternative way of looking at Industry Dynamics BCG 2 Industry Matrix

Advantages of Scale Degree of Differentiation High Low LowHigh Fragmented Specialisation StalemateVolume

Generic Strategies Cost Leadership Differentiation Focus Firms compete by choosing a generic strategy that they can adopt that can be used in conjunction with their distinctive competencies to create competitive advantage. Porter identifies the following:

Key Success Factors What Do Our Customers Want? How do we Compete in this Industry? What Does the Firm Need to Do to Survive Competition? The Configuration of the Value Chain - Cost Drivers. Appropriate Skills & Resources How is the future going to shape our strategy?

Identifying Key Success Factors GENERAL PREREQUISITES FOR SUCCESS The Ability to Survive Competition ANALYSIS OF COMPETITION The main structural drivers? The principal dimensions? Intensity? How to obtain a superior position? Supplying a product for which customers are willing to pay a price that exceeds the cost of production. ANALYSIS OF CUSTOMERS AND DEMAND Who? What? How? KEY SUCCESS FACTORS

End Note If managers don’t have detailed answers to questions about the future, their companies can’t expect to be market leaders. Most layoffs at large companies have been the fault of managers who have fallen asleep at the wheel and missed the turn off for the future Hamel & Prahalad