2.02 – Acquiring information to guide business decision making Michael Porter’s 5-Forces Model

What is environmental scanning? Environmental scanning is the acquisition and use of information about events, trends, and relationships in an organization's external environment, the knowledge of which would assist management in planning the organization's future course of action. Environmental scanning is the acquisition and use of information about events, trends, and relationships in an organization's external environment, the knowledge of which would assist management in planning the organization's future course of action.

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Five Forces Analysis assumes that there are five important forces that determine competitive power in a business situation. These are: Supplier Power Supplier Power Buyer Power Buyer Power Competitive Rivalry Competitive Rivalry Threat of Substitution Threat of Substitution Threat of New Entry Threat of New Entry

Supplier Power How easy it is for suppliers to drive up prices? How easy it is for suppliers to drive up prices? How many suppliers are there? How many suppliers are there? What are their sizes? What are their sizes? What is the cost of switching from one to another What is the cost of switching from one to another The fewer the supplier choices you have, the more powerful your suppliers are. The fewer the supplier choices you have, the more powerful your suppliers are.

Buyer Power How easy it is for buyers to drive prices down? How easy it is for buyers to drive prices down? How many? How large? Can they switch away from you? How many? How large? Can they switch away from you? If you deal with few, powerful buyers, then they are often able to dictate terms to you. If you deal with few, powerful buyers, then they are often able to dictate terms to you.

Competitive Rivalry How many and how capable are your competitors (direct and indirect)? How many and how capable are your competitors (direct and indirect)? Is your product or service a commodity, or are you the only one who has/does what you do? Is your product or service a commodity, or are you the only one who has/does what you do? The ease with which your customers can switch to a competitor puts pressure on your business. The ease with which your customers can switch to a competitor puts pressure on your business.

Threat of substitution How easily can your customers find another way of doing what you do for them? How easily can your customers find another way of doing what you do for them? If you own a hamburger restaurant, how likely is it that people will change their minds and buy chicken? If you own a hamburger restaurant, how likely is it that people will change their minds and buy chicken?

Threat of New Entry How easily can new competitors start to do what you do? How easily can new competitors start to do what you do? Is it expensive to get started? Is it expensive to get started? Is the business equipment or machinery heavy? Is the business equipment or machinery heavy?