EXTERNAL TASK ENVIRONMENTAL SCANNING 1 PORTER S FIVE FORCES

EXTERNAL (TASK) ENVIRONMENTAL SCANNING 1 PORTER’S FIVE FORCES FRAMEWORK 1

TOPIC COVERS… § Stakeholders § Porter’s Five Forces Analysis § Five forces analysis and strategy formulation § Internationalisation of five forces analysis § Limitations of the five forces framework 2

SCANNING THE EXTERNAL ENVIRONMENT ANALYSIS OF SOCIETAL ENVIRONMENT ECONOMIC, SOCIOCULTURAL, TECHNOLOGICAL, POLITICAL-LEGAL FACTORS MARKET ANALYSIS COMMUNITY ANALYSIS COMPETITOR ANALYSIS SUPPLIER ANALYSIS INTEREST GROUP ANALYSIS SELECTION OF STRATEGIC FACTORS * OPPORTUNITIES * THREATS C. 1992 BY ADDISON WESLEY PUBLISHING COMPANY, INC. GOVERNMENTAL ANALYSIS 3

THE FIVE FORCES § § § Threat Of New Entrants Threat Of Substitute Products Bargaining power Of Buyers Bargaining Power Of Suppliers Rivalry Among Existing Firms 4

FORCES DRIVING INDUSTRY COMPETITION OTHER STAKEHOLDERS POTENTIAL ENTRANTS RELATIVE POWER OF UNIONS, GOVERNMENTS, ETC. BARGAINING POWER OF SUPPLIERS THREAT OF NEW ENTRANTS INDUSTRY COMPETITORS BARGAINING POWER OF BUYERS SUPPLIERS BUYERS RIVALRY AMONG EXISTING FIRMS THREAT OF SUBSTITUTE PRODUCTS OR SERVICES SUBSTITUTES ADAPTED FROM COMPETITIVE STRATEGY : TECHNIQUES FOR ANLYZING INDUSTRIES AND COMPETITORS BY MICHAEL PORTER 5 SOURCE : SUGGESTED BY J. C. CAMILLUS, STRATEGIC PLANNING AND MANAGEMENT CONTROL, 1986 PP. 59 -67.

Threat Of New Entrants § Bring with them new capacity. § Seriousness of threat depends on entry barriers which may be as follows: l l l l economies of scale product differentiation capital requirements switching costs access to distribution channels cost advantage independent of size government policy threat of strong aggressive response 6

THREAT OF SUBSTITUTE PRODUCTS § Substitutes are products that fulfil the same need as that produced by the industry. § Can be from within or without the industry under consideration depending on industry definition. 7

THREAT OF SUBSTITUTE PRODUCTS (cont. ) Substitution threat is serious where: § they are favourably priced § are of better quality (higher value) § industry products have low switching costs 8

BARGAINING POWER OF BUYERS Buyers can force prices down, demand high quality products and can play competitors against each other. Buyer power is strong if: § they buy large quantities of industry output § products bought are undifferentiated § there are many suppliers § products have low switching costs § buyers can integrate backwards § buyers are low profit earners § purchase represent high input costs § purchase not critical to product quality 9

BARGAINING POWER OF SUPPLIERS § Can threaten firms by raising input prices or compromising on quality § suppliers are powerful if: l l l there is one large dominant supplier (e. g. ZESA) the product supplied is unique (Intel ] switching costs are high(accounting systems] there is a threat of forward integration industry poses little threat of backward integration 10 industry purchases small quantities

RIVALRY AMONG EXISTING FIRMS § Usually the most powerful of the competitive forces § The battleground can be any of the following: l l l l price (passenger transport) product quality ((electronic products) performance features (cell hand sets) service level (Amtec, IBM) advertising/ promotion (Coke, OK) distribution networks (coca-cola] technological innovations (CABS, 3 M) 11

RIVALRY AMONG EXISTING FIRMS (Cont. ) Rivalry is intense if: § There are many competitors of similar size § Industry growth is stagnant § There are high fixed costs § Some players are pursuing share gains § High exit barriers § There are low switching costs 12 § There is over-capacity in the industry

THE FIVE FORCES AND STRATEGY FORMULATION § According to porter there are three possible strategies: § Positioning the firm so that its capabilities provide the best defence against the forces § Making strategic manoeuvres that influence the balance of the forces to the firm’s favour. § Anticipating changes in the forces and responding to them before others do. 13

LIMITATIONS OF THE FIVE FORCES MODEL § The five forces are not exhaustive, there is need to look at other macro forces § The level of industry definition is subjective § What should substitutes mean? § It ignores the effect of technology on industry structure 14

INTERNATIONALISATION OF INDUSTRY ANALYSIS § § § Industry scope wider Lower entry barriers Increases number of competitors Increases industry rivalry/competition Increases bargaining power of buyers Lower profitability in some industries 15