the business enviroment 2

8/6/2019 The Business Enviroment 2

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5-1Porters Five Force Model & Internal Analysis

Week 5: Business Environment



Learning Outcomes

� Understand the importance of industry analysis

� Illustrate and explain Porters Five Force Model

� Apply Porters 5 Forces to an industry and analyze

your results

� Outline the main components of the internal

environment of an organization and articulate

their implications for managerial actions.



5-3

What is Industry?

� Industry

� An industry is a group of firms producing a similar product

or service, such as airlines, fitness drinks, furniture, or electronic games.



5-4

Group Activity

� What is Strategy and why is this important in an organization

� What are the biggest threats to long term profitability in anindustry/What are the all the possible forces than can improveor reduce your profitability

� Which of the following two industries would you rather investin to make the best long term returns, the soft drink industry or the airline industry?

- List the reasons for your answer justifying your choice.

Write down your answers to the following questions as a group

and be prepared to discuss with the class:



5-5

Why is Industry Analysis Important?

� What is Strategy andWhy is this Topic Important?

Industry analysis tells us through research how attractivean industry is, what its potential is, is it worth investingin, what the dynamic and competitive forces of theindustry are like.

� To arrive at strategy we have an array of managementtools that include: PEST, SWOT and Porter¶s Five Forcesmodel.



Task Environment



5-7

The Five Competitive Forces

That Determine Industry Profitability

(1 of 3)

� Explanation of the Five Forces Model

� The five competitive forces model is a framework for

understanding the structure of an industry.

� The model is composed of the forces that determine

industry profitability.

� The forces²the threat of substitutes, the threat of new

entrants, rivalry among existing firms, the bargaining

power of suppliers, and the bargaining power of buyers² help determine the average rate of return for the firms in an

industry.



5-8

The Five Competitive Forces

That Determine Industry Profitability(2 of 3)

� Explanation of the Five Forces Model (continued )

� Each of the five forces impacts the average rate of return

for the firms in an industry by applying pressure on

industry profitability.

� Well-managed firms try to position their firms in a way that

avoids or diminishes these forces²in an attempt to beat the

average rate of return of the industry.



5-9

The Five Competitive ForcesThat Determine

Industry Profitability(3 of 3)

Five-Forces Model



What are substituteproducts?

� How can this impact industry

profitability?



5-11

Threat of Substitutes(1 of 2)

� Threat of Substitutes

� The price that consumers are willing to

pay for a product depends in part on the

availability of substitute products.� For example, there are few if any substitutes for

prescription medicines, which is one of the reasons the

pharmaceutical industry is so profitable.

� In contrast, when close substitutes for aproduct exist, industry profitability is

suppressed, because consumers will opt

out if the price gets too high.



How can the threat of new entrants impact

an industry?

How can you defend against

it?



5-13

Threat of New Entrants(1 of 6)

� Threat of New Entrants

� If the firms in an industry are highlyprofitable, the industry becomes a magnet to

new entrants.� Unless something is done to stop this, the competition in the

industry will increase, and average industry profitability willdecline.

� Firms in an industry try to keep the numberof new entrants low by erecting barriers toentry.� A barrier to entry is a condition that creates a disincentive for a new

firm to enter an industry.



5-15

Threat of New Entrants(3 of 6)

Note: This is not an exhaustive list there are other barriers to entry

Barrier to Entry Explanation

Government and legal

barriers

Barriers to Entry (continued )

In knowledge intensive industries, such as biotechnology and

software, patents, trademarks, and copyrights form major

barriers to entry. Other industries, such as broadcasting,require the granting of a license by a public authority.



How can you

determine the level of rivalry in an industry?



5-17

R ivalry Among Existing Firms(1 of 3)

� R ivalry Among Existing Firms

� In most industries, the major determinant of industry

profitability is the level of competition among existingfirms.

� Some industries are fiercely competitive, to the point where

prices are pushed below the level of costs, and industry-

wide losses occur.� In other industries, competition is much less intense and

price competition is subdued.



5-18

R ivalry Among Existing Firms(2 of 3)

Factors that determine the nature and intensity of the rivalry

among existing firms in an industry

Number and balance

of competitors

Degree of

difference betweenproducts

The more competitors there are, the more likely it is that

one or more will try to gain customers by cutting its price.

Price-cutting occurs more often when all the competitorsin an industry are about the same size and when there is

no clear market leader.

The degree to which products differ from one product

to another affects industry rivalry. For example, the

firms in commodity industries (such as paperproducts) tend to compete on price because there is

little difference between one manufacturers products

and anothers.



5-19

How can the Bargaining

Power of Suppliers impact

an industry?

What makes them powerful, whatare the consequences of powerful

Suppliers?



5-20

Bargaining Power of Suppliers(1 of 3)

� Bargaining Power of Suppliers

� Suppliers can suppress the profitability of the industries to

which they sell by raising prices or reducing the quality of the components they provide.

� If a supplier reduces the quality of the components it

supplies, the quality of the finished product will suffer, and

the manufacturer will eventually have to lower its price.� If the suppliers are powerful relative to the firms in the

industry to which they sell, industry profitability can suffer.



5-21

Bargaining Power of Suppliers(2 of 3)

Factors that have an impact on the ability of suppliers to

exert pressure on buyers

Supplier

concentration

Switching costs

Switching costs are the fixed costs that buyers encounter

when switching or changing from one supplier to another.

If switching costs are high, a buyer will be less likely to

switch suppliers.

When there are only a few suppliers that supply a critical

product to a large number of buyers, the supplier has anadvantage.



How can the Bargaining

Power of Buyers impact

an industry?



5-23

Bargaining Power of Buyers(1 of 3)

� Bargaining Power of Buyers

� Buyers can suppress the profitability of the industries from

which they purchase by demanding price concessions or increases in quality.

� For example, the automobile industry is dominated by a

handful of large companies that buy products from

thousands of suppliers in different industries. This allowsthe automakers to suppress the profitability of the

industries from which they buy by demanding price

reductions.



5-24

Bargaining Power of Buyers(2 of 3)

Factors that have an impact on the ability of suppliers to

exert pressure on buyers

Buyer group

concentration

Buyers costs

The greater the importance of an item is to a buyer, the

more sensitive the buyer will be to the price they pay. For

example, if the component sold by the supplier represents

50% of the cost of the buyers product, the buyer will

bargain hard to get the best price for that component.

If the buyers are concentrated, meaning that there are only

a few large buyers, and they buy from a large number of

suppliers, they can pressure the suppliers to lower costsand thus affect the profitability of the industries from

which they buy.



5-25

Group Activity

- Illustrate and Explain Porters Five Force Model

- Apply the model to two industries the Airline industry and the Soft Drinks Industry

- Determine which industry is the most attractive in terms of long term profitability.

Justify your answer and be ready to present your answer to the class.



Source: Porter (2008), Harvard Business Review



5-27

The Value of the Five Forces Model(1 of 4)

� Application of the Model

� The five forces model can be used to assess the

attractiveness of an industry by determining the level of threat to industry profitability for each of the forces.

� If a firm filled out the form shown on the next slide and

several of the threats to industry profitability were high, the

firm may want to reconsider entering the industry or think carefully about the position it would occupy.

� A firm can apply the five forces model to help determine

whether it should enter an industry



Threat to the Industry

Competitive Forces High (4-5) Medium (3-4) Low (1-2) Total

Threat of new entrants

Bargaining Power of Buyers

Bargaining Power of Suppliers

Threat of Substitutes

Rivalry

Total /25

* Maximum score 25 is very unattractive industry to enter

* Minimum score is 5 very attractive industry to enter

Five Forces Matrix



S

tudents: Bring yourPharmaceutical Industry Case

Study to the next class!!!



The Internal Environment



Class Question

� What are factors that make up the internal

organization of a firm?



The Internal Environment

Employees Resources

Organization

of the firm



Organization of the Firm

� The culture, structure, the departments,

the controls and incentives. The culture of

the organization.

� The culture: The basic pattern of values

and assumptions shared by employees

within an organization. Important because

it influences what a manager can andcannot do and what is encouraged or

discouraged by the organization



Employees (Human Capital)

Knowledge Skills

Capabilities

Whether employee are a strength or a weakness is a function both of the people who are

Hired and the hiring, training, motivation, and reward systems of the organization.



Resources

� Tangible resources

physical assets

� Intangible

resources nonphysical assets



Tangible and Intangible Resources

Tangible Resources/ Physical Assets:

-Land

-Buildings

-Equipment

-Inventory

-Money

Intangible Resources:

-Brand Name

-Company reputation

-Decision making processes- Intellectual property (patents. Trademarks)

Resources above can be the source of a competitive advantage depending on how valuable

or unique they may be.



Recap:

The Environment of Managers

General

Environment

Task

Environment

Internal

Environment

The Manager

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