3. Chapter Roadmap
• The Strategically Relevant Components of a Company’s External
Environment
• Thinking Strategically About a Company’s Industry and
Competitive Environment
• Question 1: What Are the Industry’s Dominant Economic Features?
• Question 2: What Kinds of Competitive Forces Are Industry
Members Facing?
• Question 3: What Factors Are Driving Industry Change and What
Impacts Will They Have?
• Question 4: What Market Positions Do Rivals Occupy—Who Is
Strongly Positioned and Who Is Not?
• Question 5: What Strategic Moves Are Rivals Likely to Make Next?
• Question 6: What Are the Key Factors for Future Competitive
Success?
• Question 7: Does the Outlook for the Industry Present an Attractive
Opportunity?
3
4. • Two considerations
• Company’s external or
macro-environment
• Industry and competitive conditions
• Company’s internal or
micro-environment
• Competencies, capabilities,
resource strengths and weaknesses,
and competitiveness
What Is Situation Analysis?
4
7. Key Questions Regarding the
Industry and Competitive Environment
Industry’s
dominant
economic
traits
Competitive
forces and
strength of
each force
Drivers of
change in the
industry
Competitor
analysis
Key success
factors
Conclusions:
Industry
attractiveness
7
8. Q #1: What are the Industry’s Dominant
Economic Traits?
• Market size and growth rate
• Scope of competitive rivalry
• Number of rivals
• Buyer needs and requirements
• Production capacity
• Pace of technological change
• Vertical integration
• Product innovation
• Degree of product differentiation
• Economies of scale
• Learning and experience curve effects
8
9. • Objectives are to identify
• Main sources of competitive forces
• Strength of these forces
• Key analytical tool
• Five Forces Model
of Competition
Q #2: What Kinds of Competitive Forces Are
Industry Members Facing?
9
13. Common Barriers to Entry
• Sizable economies of scale
• Cost and resource disadvantages independent of size
• Brand preferences and customer loyalty
• Capital requirements and/or other
specialized resource requirements
• Access to distribution channels
• Regulatory policies
• Tariffs and international trade restrictions
13
16. Competitive Pressures: Collaboration Between
Sellers and Suppliers
• Sellers are forging strategic partnerships
with select suppliers to
• Reduce inventory and logistics costs
• Speed availability of next-generation
components
• Enhance quality of parts being supplied
• Squeeze out cost savings for both parties
• Competitive advantage potential may
accrue to sellers doing the best job of
managing supply-chain relationships
16
18. Strategic Implications of the
Five Competitive Forces
• Competitive environment is unattractive from
the standpoint of earning good profits when
• Rivalry is vigorous
• Entry barriers are low
and entry is likely
• Competition from
substitutes is strong
• Suppliers and customers have
considerable bargaining power
18
19. • Competitive environment is ideal from
a profit-making standpoint when
• Rivalry is moderate
• Entry barriers are high
and no firm is likely to enter
• Good substitutes
do not exist
• Suppliers and customers are
in a weak bargaining position
Strategic Implications of the
Five Competitive Forces
19
20. Q #3: What Factors Are Driving Industry Change and What
Impacts Will They Have?
• Industries change because forces
are driving industry participants
to alter their actions
• Driving forces are the
major underlying causes
of changing industry and
competitive conditions
20
22. Question 4: What Market Positions Do
Rivals Occupy?
• One technique to reveal
different competitive positions
of industry rivals is
strategic group mapping
• A strategic group is a
cluster of firms in an industry
with similar competitive
approaches and market positions
22
23. Strategic Group Mapping
• Firms in same strategic group have two or
more competitive characteristics in
common
• Have comparable product line breadth
• Sell in same price/quality range
• Emphasize same distribution channels
• Use same product attributes to appeal
to similar types of buyers
• Use identical technological approaches
• Offer buyers similar services
• Cover same geographic areas
23
24. Q #5: What Strategic Moves
Are Rivals Likely to Make?
• A firm’s best strategic moves are affected
by
• Current strategies of competitors
• Future actions of competitors
• Profiling key rivals involves gathering
competitive intelligence about
• Current strategies
• Most recent actions and public
announcements
• Resource strengths and weaknesses
• Efforts being made to improve their situation
• Thinking and leadership styles of top
executives
24
25. Q #6: What Are the Key Factors for Competitive
Success?
• KSFs are those competitive factors most affecting every
industry member’s ability to prosper. They concern
• Specific strategy elements
• Product attributes
• Resources
• Competencies
• Competitive capabilities
that a company needs to have to be competitively
successful
• KSFs are attributes that spell the difference between
• Profit and loss
• Competitive success or failure
25
27. Q #7: Does the Outlook for the Industry Present an
Attractive Opportunity?
• Involves assessing whether the industry
and competitive environment is attractive
or unattractive for earning good profits
• Under certain circumstances, a firm
uniquely well-situated in an otherwise
unattractive industry
can still earn unusually good profits
• Attractiveness is relative, not absolute
• Conclusions have to be drawn from the
perspective of a particular company
27
29. The Nature of an External Analysis
• The external Analysis is aimed at identifying
key External factors that need actionable
responses.
• Firms should be able to respond to the external
factors by
• formulating strategies that take advantage
of external opportunities or
• that minimize the impact of potential
threats.
29
30. External Factor Evaluation (EFE) matrix
• External Factor Evaluation (EFE) matrix is a strategic-
management tool often used for assessment of current
business conditions.
• The EFE matrix is a good tool to describe and prioritize
the opportunities and threats that a business is facing.
30
31. Gathering Information for External Environmental
Analysis
• Managers need information in order to know and
develop an understanding about what is happening in
the external environment.
• Three approaches to information gathering:
• Scanning: general observation of environmental
changes; looking for early signals of changes.
• Monitoring: close attention to specific developments
that could affect the organization.
• Competitive Intelligence: following actions of
competitors.
31
32. Competitive Intelligence Programs
• Competitive Intelligence (CI)
• a systematic and ethical process for gathering and
analyzing information about the competition’s activities
and general business trends to further business’s own
goals.
32
33. Competitive Intelligence Programs
The three basic objectives of Competitive Intelligence
(CI) program are:
1. to provide a general understanding of an industry and
its competitors.
2. to identify areas in which competitors are weak and
to assess the impact strategic actions would have on
competitors.
3. to identify potential moves that a competitor
might make that would risk a firm’s position in the
market.
33
34. The Characteristics of External Forces
Key external factors should be:
1. Important to achieving long-term and annual
objectives.
2. Measurable.
3. Applicable to all competing firms, and
4. Hierarchical in the sense that some will relate to the
overall company and others will be more narrowly
focused on functional or divisional areas.
34
37. Macro-environment – PESTEL (3)
Socio-cultural
• Population
demographics.
• Income distribution.
• Lifestyle changes.
• Attitudes to work and
leisure.
• Levels of education.
Technological
• Government spending on
research.
• Government and industry
focus on technological
effort.
• Speed of technology
transfer.
37
40. Need for External Comparison
Understand key opportunities and
threats
Develop appropriate strategies to
maximize opportunities and counter
threats
Requires competitive intelligence in the
following spheres
◦ Economic
◦ Social
◦ Political
◦ Legal
◦ Technological 40
41. External Information Sources
Indexes – Wall Street Index, Business
Periodicals Index
Internet Sources – New York Stock
Exchange, Investor
Guide, BigBook.com
Magazines –
Barrons, Forbes, Washington Post
Government – Department of
Commerce, Science and Technology
Consultants – Boston Consulting
Group, Deloitte 41
42. Tools for an External Audit
Porter’s Five
Forces Model
◦ Rivalry among
competitors
◦ Potential entry of
new competitors
◦ Potential
development of
substitute products
◦ Bargaining power of
suppliers
◦ Bargaining power of
consumers
External Factor
Evaluation (EFE)
Matrix
◦ Key factors
◦ Importance of
factors
◦ Ranking for factors
◦ Sum of weighted
score
Competitive Profile
Matrix
42
43. The Competitive Profile Matrix Steps
Step 1
• Identify key factors
Step2
• Assign factors to each factor ranging from 0 to 1
Step 3
• Rate each factor from 1 to 4 for each firm. (1 – Greatest
weakness 4 – Biggest Strength)
Step 4
• Calculate weighted score for each factor
Step 5
• Find total weighted score for each firm
43
45. Advantages
Critical success factors identified
Strong and weak points of firm with respect to
competitors found out
Includes both internal and external factors as
parameters
Comparative analysis made easier
45
46. Limitations
Differences in overall scores of two
firms do not reveal by how much a
firm is better than the other
Possible errors in factor weightage
Gives relative strength of firm, not an
exact number
Not a substitute for intuitive judgement
46
48. Porter’s Five Forces of Competitive Analysis
Introduction
Porter’s Five Forces Chart
Porter’s Five Forces
Porter's Five Forces Evaluation
Importance of Porter’s Five Forces
Using The Tools
Navigating The Model Development: Before, During and After
Limitations
How it will be useful from exam point of view
Group Members
49.
50. Introduction
• The Five Forces Model was developed by Michael E. Porter to help companies
assess the nature of an industry’s competitiveness and develop corporate
strategies accordingly.
• The strength of the five forces will determine the level of profit within an
industry
that a competitor can expect to make
• Through his model, Porter classifies five main competitive forces that affect any
market and all industries. It is these forces that determine how much competition
will exist in a market and consequently the profitability and attractiveness of this
market for a company. Through sound corporate strategies, a company will aim to
shape these forces to its advantage to strengthen the organizations position in
the industry.
• Cont…
51. Introduction
• This model aimed to provide a new way to use effective strategy to identify,
analyze and manage external factors in an organization’s environment.
• Porter’s five forces model is an analysis tool that uses five industry forces
to
determine the intensity of competition in an industry and its profitability level.
• An attractive market place does not mean that all companies will enjoy similar
success levels. Rather, the unique selling propositions, strategies and processes
will put one company over the other.
• The Five Forces were Porter’s conclusions on the reasons for differing levels of
competition, and hence profitability, in differing industries. They are empirically
derived, i.e. by observation of real companies in real markets, rather than the
result of economic analysis.
52.
53. Bargaining
Power of
Suppliers
Bargaining
Power of
Customers
Threat of
New
Entrants
Threat of
Substitutes
Competitive
Rivalry
within an
Industry
Threat of New Entry
- Time and cost of entry
- Specialist knowledge
- Economics of Scale
- Cost advantage
- Technology protection
- Barriers to entry
Competitive Rivalry
- Number of competitors
- Quality difference
- Other difference
- Switching costs
- Customer loyalty
Buyer Power
- Number of customers
- Size of each orders
- Differences between
competitors
- Price sensitivity
- Ability to substitute
- Cost of changing
Supplier Power
- Number of suppliers
- Size of suppliers
- Uniqueness of service
- Your ability to substitute
- Cost of changing
Threat of Substitute
- Substitute performance
- Cost of change
54. Competitive Rivalry within an
Industry
• This force is the major determinant on how competitive and profitable
an industry is. In competitive industry, firms have to compete
aggressively for a market share, which results in low profits. Rivalry
among competitors is intense when:
- There are many competitors
- Exit barriers are high
- Industry growth is slow or negative
- Products are not differentiated and can be easily substituted
- Competitors are of equal size
- Low customer loyalty
55. Competitive Rivalry within an Industry - Example
• McDonald’s faces tough competition because the fast food restaurant market
is already saturated.
• This element of the Five Forces analysis tackles the effect of competing firms
in the industry environment. In McDonald’s case, the strong force of
competitive rivalry is based on the following external factors:
• High number of firms (strong force)
• High
aggressiveness of
firms (strong force)
Low switching costs
(strong force)
• The fast food restaurant industry has many firms of various sizes, such as
global chains like McDonald’s, KFC and local fast food restaurants and road side
stops (vada pav) . Also, most medium and large firms aggressively market their
products. In addition, McDonald’s customers experience low switching costs,
which means that they can easily transfer to other restaurants. Thus, this
element of the Five Forces analysis of McDonald’s shows that competition is
among the most significant external forces on the business.
56. Bargaining Power of Suppliers
• Strong bargaining power allows suppliers to sell higher priced or low
quality raw materials to their buyers. This directly affects the buying
firms’ profits because it has to pay more for materials. Suppliers have
strong bargaining power when:
- There are few suppliers but many buyers
- Suppliers are large and threaten to forward integrate
- Few substitute raw materials exist
- Suppliers hold scarce resources
- Cost of switching raw materials is especially high.
57. Example of Suppliers also influence the competiveness of an industry
• The bargaining power of Toyota’s supplier is Weak
• Toyota has many suppliers in its automotive manufacturing sector. Resources like
metal, raw materials, leather, plastic, computers, cooling system, electrical system,
breaking system and fuel supply system are all bought from hundreds of different
suppliers and different bargaining prices distributed across the globe.
• One of the competitive advantages of Toyota is its strong relationship with the
suppliers and its efficient manner of monitoring supply chain places low
bargaining power on the suppliers.
• In addition most vehicle manufactures own many interchangeable suppliers, and
also have the ability to produce the components by their own in the short time.
Thus, the suppliers do not own the power to change the price.
58. Bargaining Power of Buyer
• Customers have the power to demand lower price or higher product
quality from industry producers when their bargaining power is strong.
Lower price means lower revenues for the producer, while higher quality
products usually raise production costs. Both scenarios result in lower
profits for producers. Customers exert strong bargaining power when:
Buying in large quantities or control
many access points to the final customer
- Only few customers exist
- Switching costs to other supplier are low
- They threaten to backward integrate
- There are many substitutes
- Customers are price sensitive
59. Example of Bargaining power of Buyer
Depends on the marketing channel used for Coca-Cola
1. Super Markets
2. Convenience Stores
3. Soda Shop
4. Vending Machine
5. Restaurant and Food stores
Bargaining power of buyer is high for fountain supermarkets and mass
merchandising because of the low profitability and strong negotiation
power of retail channels but for vending machine bargaining power is
non-existing caused by high profitability.
60. Threat of New Entrants
• This force determines how easy (or not) it is to enter a particular
industry. If an industry is profitable and there are few barriers to enter,
rivalry soon intensifies. When more organizations compete for the same
market share, profits start to fall. It is essential for existing organizations
to create high barriers to enter to deter new entrants. Threat of new
entrants is high when:
- Low amount of capital is required to enter a market
- Existing companies can do little to retaliate
- Existing firms do not possess patents, trademarks or do not have
established brand reputation
- There is no government regulation
- There is low customer loyalty
- Products are nearly identical
- Economies of scale can be easily achieved
61. Example of Threat of New Entrant – Entry of
Reliance JIO Telecommunications
1. Jio has grown at a scorching pace:-the network, which has been adding 1-
1.2 million subscribers a day, will likely have 25 million 4G customers.
2. Jio has set off a fierce mobile tariff war in the country:
3. Jio is hurting the balance sheets of other telecom companies: Airtel saw a
4.9% decline in its Q2 profit following the operator slashing data tariffs.
4. Jio is forcing the other players to join forces:-Vodafone and Idea Merger
5. Jio could impact the online content market in India:-The Jio suite offers
more than 300 live streaming TV channels and hundreds of music albums
and movies. This forces other incumbents to up their game in the online
video streaming space.
62. • This force is especially threatening when buyers can easily find substitute
products with attractive prices or better quality and when buyers can switch
from one product or service to another with little cost. For example, to switch
from coffee to tea doesn’t cost anything, unlike switching from car to bicycle.
• Determining Factors :-
First, if the consumer’s switching costs are low
Second, if the substitute product is cheaper than the industry’s product
Third, if the substitute product is of equal or superior quality compared to the
industry’s product, the threat of substitutes is high
Fourth, if the functions, attributes, or performance of the substitute product are
equal or superior to the industry’s product
Threat of Substitutes
63. • EXAMPLE – THE AIRLINE INDUSTRY
• From the point of view of airlines themselves, the flying business is very competitive.
There are hundreds of airlines all trying to get a bigger piece of the pie. Global
recessions have also meant cost cutting exercises for most airlines in the industry and
often less travel in the part of consumers.
• Depending on the nature of the airline’s business, the threat of substitutes can range
from lower on the scale to mid-range.
• For domestic or regional airlines or routes, there is always the option of taking a car,
bus or train. It may take longer but often this consideration is outweighed by the cost
advantages of substitute methods
• There is also no switching cost to deal with.
• In the case of international airlines, the threat of substitutes is almost non-existent
• On longer routes, a traveler needs to take a flight with no possible alternates
• Threat here is from competitors who may offer better rewards, better prices or a better
flying experience
• There is also somewhat of a switching cost
Example of Threat of substitutes
66. Competitive Rivalry - (High)
Competitive rivalry has increased post liberalization to a great extent
The automotive industry is majorly commanded by domestic player, with
an immense market share in the country during FY 15-16
• The competition has turned more intense after the entry of foreign players
like Volkswagen and Ford in low- priced hatchback segment
• Foreign firms have aggravated the competition by changing their traditional
designs and substituting it to cater Indian needs
Porter's Five Forces Of Auto Industry – Passenger Car
67. Threat of New Entrants - (Medium - High)
Economies of Scale and Capital requirement
Brand identity, Product Differentiation and Customer
Switching Costs
Other factors like access to raw material, technology and
distribution channel
Government policies and protection for the sector
– 100 % FDI in the automotive industry
Porter's Five Forces Of Auto Industry
68. Substitute Products - (High)
Scenario of Indian Travel Industry
– Rail & Air Travel – 10%
– Road Travel -90%
– Two Wheleer – 72%
– Passenger Vehicle (Cars, Jeeps & Taxi’s) – 14%
– Public Transport Buses & Non Passenger Vehicle – 14%
Availability of close subsititue
Switching Cost
Substitute price and value
Porter's Five Forces Of Auto Industry
69. Bargaining Power of Suppliers - (Low)
• Number of Supplier:
– More than 500 auto component manufacturers in the organized
sector represented by ACMA (Automotive Components
Manufacturer's Association of India)
– 5000 manufacturers in the unorganized sector
• Import from Nations with Free Trade Agreement & Low
Import Duties
– Japan, South Korea, Thailand, China, Malaysia & South Africa
Porter's Five Forces Of Auto Industry
70. Bargaining Power of Buyer- (High)
Number of Potential Buyer – Huge
Changing Preferences, Income Graph
Low switching Cost
– Very Few Established Players
– Brand Loyalty is low
– Launch of New Models every Year
Porter's Five Forces Of Auto Industry
71. Industry Attractiveness of Auto Industry –
Low
Force Threat to
Profit
(Present)
Internal Rivalry High High. Will rise
Threat to Entry Low Moderate
Substitutes High High
Bargaining Power of Buyer High High, Will rise
Bargaining Power of Supplier Low Moderate
72. Strategies Adopted by the Auto Industry based on the
Analysis
• Capacity addition
Considering low cost of production, prominent auto companies are increasing their
production capacity in order to capture a dominant share in Indian automobile
industry.
Most of the automobile companies are eyeing India as an outsourcing hub.
With the total investment of around USD163.7 million, Honda Motorcycle &
Scooter India expanded its production of Activa in 3 variants at Ahmedabad plant.
Launch of new models
In 2015-16, few of the newly launched cars were Volkswagen Ameo, Mahindra e-
Verito, Toyota Land Cruiser 200, Maruti Baleno, Honda BR-V, Tata Tiago, Toyota
Innova Crysta & Maruti Ciaz & under premium range Audi Q7, Audi S5 Sportback,
Ford Mustang, Rolls-Royce Dawn & Porsche 911.
Honda is planning to introduce bigger & premium car models in 2017 to uplift its
sales & share in the market
In December 2016, Bajaj Auto launched its most powerful bike in the segment,
‘Bajaj Dominar 400’
Fiat Chrysler Automobiles India, is planning to launch its new Jeep brand Compass
by February 2017, which is going to be produced indigenously in Ranjangaon,,
Maharashtra. India will be the 4th manufacturing hub, globally, for the brand.
73. • Marketing & advertisement
Each & every firm is now focusing on shelling out a chunk of their
profits on advertisement
The idea is to make the customers more brand conscious &
increasing brand positioning
This is giving the firms differential advantage. Success today lies in
structuring & restructuring strategies
Catering Indian needs
India boasts a large population of middle class
Most of the firms including Ford & Volkswagen have adapted
themselves to cater to this class by dropping their traditional
structure and designs
This allows them to compete directly with domestic firms making
the sector highly competitive
Strategies Adopted by the Auto Industry based on the
Analysis
74. Importance of The Porter’s Five Forces
What
Strategy to
Use ?
Basic Knowledge of
Business Strategy
& that influence
the design making
Industry Analysis
- Industry relevance
- Industry players
- Industry structure
- Future changes
Measure and
Monitor strategy
effectivenessStrategies
- Competitiveadvantage
- Cost advantage
- Marketing dominance
- New product
development
- Contraction /
Diversification
- Price leadership
- Global
- Re-engineering
- Downsizing
- Restructuring
How to Deal with Competition
75. Using The Tools
• We now understand that Porter’s five forces framework is used
to analyze industry’s competitive forces and to shape
organization’s strategy according to the results of the analysis.
But how to use this tool? We have identified the following
steps:
• Step 1. Gather the information on each of the five forces
• Step 2. Analyze the results and display them on a diagram
• Step 3. Formulate strategies based on the conclusions
76. Navigating the Model Development: Before, During and After
It is beneficial for a company working on a Porter’s five forces analysis to maintain
an analytical frame of mind before the process begins, during the process and
after everything has been completed. Some aspects to keep in mind are:
Before
Understand the goals
of the analysis and
expectations from it
Understand the scope
of the analysis and
who are the potential
beneficiaries
Allow
honest
session
open and
brainstorming
regarding
these questions.
During
Keep a focus on the
future
Do not focus on what
could’ve been done
better in the past,
but focus on future
improvements
Analyze positives and
negatives
Be open to new
ideas and
possibilities
After
Identify lessons learnt and
how they can be used in the
future
Document positives and
negatives. Identify best practices
Understand whether the
analysis had the required impact
Follow up on implementation
plans
Record information from
the analysis to be used in
future decisions
78. How it will be useful from exam point of view
Year Questions Marks
2009
Michael Porter’s five forces model of Industry attractiveness enables any
company to outperform their competitors. Illustrate your answer by analyzing
any Industry of your choice
20
2010
Explain how Michael Porter’s five forces model is helpful in forth coming
SWOT – Analysis carried out in formulation of Business strategy 20
2011
How Porter’s Five forces Model is useful in identifying opportunities andthreats
for a business organization for formulation of various strategies
10
2012
In business level strategies, Porter’s generic theory is very important. Discuss
the differences in strategic approach in cost leadership, Differentiation, and
Focus strategy. How does Hybrid strategy fit into this structure and can it be
successful
20
2013
2014
Porter’s five force model of industry attractiveness enable any company to
output from their competitors. How is this possible? Illustrate with examples 10
2015
“The low-cost leadership strategy at times enables the firm to define itself
against each of five competitive forces” explain 5
2015 Explain Porter’s Diamond model of National Competitive Advantage 5
2016
Porter’s five force model of industry attractiveness
enable any company to outperform their competitive. How is this possible?
Illustrate with examples
5
