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•What’s an Environment?What’s an Environment?• Analyzing the IndustryAnalyzing the Industry
Five ForcesFive ForcesCrown Cork & SealCrown Cork & Seal
TopicsTopics
Everything external to the organization Everything external to the organization
that potentially affects an organization’s that potentially affects an organization’s
performanceperformance
What’s an External Environment?What’s an External Environment?
General vs. SpecificGeneral vs. Specific
• GeneralGeneral = elements in society that can = elements in society that can
indirectly influence an industry and indirectly influence an industry and the the
firms within an industryfirms within an industry
Components of the General EnvironmentComponents of the General EnvironmentComponents of the General EnvironmentComponents of the General Environment
DemographicDemographic
Components of the General EnvironmentComponents of the General EnvironmentComponents of the General EnvironmentComponents of the General Environment
EconomicEconomicDemographicDemographic
Components of the General EnvironmentComponents of the General EnvironmentComponents of the General EnvironmentComponents of the General Environment
Political/Legal
Political/Legal
DemographicDemographic EconomicEconomic
Components of the General EnvironmentComponents of the General EnvironmentComponents of the General EnvironmentComponents of the General Environment
SocioculturalSociocultural
Political/Legal
Political/Legal
DemographicDemographic EconomicEconomic
Components of the General EnvironmentComponents of the General EnvironmentComponents of the General EnvironmentComponents of the General Environment
TechnologicalTechnological
Political/Legal
Political/Legal
DemographicDemographic EconomicEconomic
SocioculturalSociocultural
Components of the General EnvironmentComponents of the General EnvironmentComponents of the General EnvironmentComponents of the General Environment
Political/Legal
Political/Legal
DemographicDemographic EconomicEconomic
TechnologicalTechnological
GlobalGlobal
SocioculturalSociocultural
Components of the General EnvironmentComponents of the General EnvironmentComponents of the General EnvironmentComponents of the General Environment
Political/Legal
Political/Legal
DemographicDemographic EconomicEconomic
TechnologicalTechnological
GlobalGlobal
SocioculturalSociocultural
Specific (or task) =Specific (or task) = parts of the parts of the environment that are directly relevant to environment that are directly relevant to the achievement of an organization’s the achievement of an organization’s goalsgoals
– supplierssuppliers– customerscustomers– competitorscompetitors– governmental agenciesgovernmental agencies– special-interest groups special-interest groups
Threat of New
Entrants
Threat of New
Entrants
Threat of New
Entrants
Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition
Threat of New EntrantsThreat of New Entrants
Barriers to entryBarriers to entry Threat of retaliationThreat of retaliation
Threat of New EntrantsThreat of New EntrantsThreat of New EntrantsThreat of New Entrants
Barriers to Entry
Barriers to Entry
Economies of ScaleEconomies of Scale
Product DifferentiationProduct Differentiation
Capital RequirementsCapital Requirements
Switching CostsSwitching Costs
Access to Distribution ChannelsAccess to Distribution Channels
Cost Disadvantages Independent Cost Disadvantages Independent of Scaleof Scale
**
**
**
**
**
**
Government PolicyGovernment Policy**
Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition
Bargaining Power of Suppliers
Bargaining Power of Suppliers
Threat of New
Entrants
Threat of New
Entrants
Threat of New
Entrants
** Supplier industry is dominated by Supplier industry is dominated by a few firmsa few firms
** Suppliers’ products have few Suppliers’ products have few substitutessubstitutes
** Buyer is not an important customer Buyer is not an important customer to supplierto supplier
** Suppliers’ product is an important Suppliers’ product is an important input to buyers’ productinput to buyers’ product
** Suppliers’ products are differentiatedSuppliers’ products are differentiated
Suppliers are likely to be powerful if:Suppliers are likely to be powerful if:
** Suppliers’ products have high Suppliers’ products have high switching costsswitching costs
** Supplier poses credible threat of Supplier poses credible threat of forward integrationforward integration
Bargaining Power of SuppliersBargaining Power of Suppliers
Suppliers exert power in the industry by:Suppliers exert power in the industry by:
* Threatening to raise* Threatening to raiseprices or to reduce qualityprices or to reduce quality
Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of CompetitionPorter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition
Bargaining Power of Buyers
Bargaining Power of Buyers
Threat of New
Entrants
Threat of New
Entrants
Threat of New
Entrants
Bargaining Power of Suppliers
Bargaining Power of Suppliers
Bargaining Power of BuyersBargaining Power of BuyersBargaining Power of BuyersBargaining Power of Buyers
Buyers compete with the supplying
industry by:
Buyers compete with the supplying
industry by:
* Bargaining down prices* Bargaining down prices
* Forcing higher quality* Forcing higher quality
* Playing firms off of* Playing firms off ofeach othereach other
Bargaining Power of BuyersBargaining Power of BuyersBargaining Power of BuyersBargaining Power of Buyers
Buyer groups are likely to be powerful if:Buyer groups are likely to be powerful if:
** Buyers are concentrated or purchases Buyers are concentrated or purchases are large relative to seller’s salesare large relative to seller’s sales
** Purchase accounts for a significant Purchase accounts for a significant fraction of supplier’s salesfraction of supplier’s sales
** Products are undifferentiatedProducts are undifferentiated
** Buyers face few switching costsBuyers face few switching costs
** Buyers’ industry earns low profitsBuyers’ industry earns low profits
** Buyer presents a credible threat of Buyer presents a credible threat of backward integrationbackward integration
** Product unimportant to qualityProduct unimportant to quality
** Buyer has full informationBuyer has full information
Buyers compete with the supplying
industry by:
Buyers compete with the supplying
industry by:
* Bargaining down prices* Bargaining down prices
* Forcing higher quality* Forcing higher quality
* Playing firms off of* Playing firms off ofeach
othereach
other
Threat of Substitute Products
Threat of Substitute Products
Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition
Threat of New
Entrants
Threat of New
Entrants
Threat of New
Entrants
Bargaining Power of Buyers
Bargaining Power of Buyers
Bargaining Power of Suppliers
Bargaining Power of Suppliers
Threat of Substitute ProductsThreat of Substitute ProductsThreat of Substitute ProductsThreat of Substitute Products
Products with similar function limit the prices firms can charge
Products with similar function limit the prices firms can charge
Threat of Substitute ProductsThreat of Substitute ProductsThreat of Substitute ProductsThreat of Substitute Products
** Products with improving Products with improving price/performance tradeoffs price/performance tradeoffs relative to present industry relative to present industry productsproducts
Products with similar function limit the prices firms can charge
Products with similar function limit the prices firms can charge For Example:For Example:
Keys to evaluate substitute products:Keys to evaluate substitute products:
Electronic security systems in place Electronic security systems in place of security guardsof security guards
Fax machines in place of overnight Fax machines in place of overnight mail deliverymail delivery
Threat of Substitute Products
Threat of Substitute Products
Threat of New
Entrants
Threat of New
Entrants
Threat of New
Entrants
Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition
Rivalry Among Competing Firms
in Industry
Rivalry Among Competing Firms
in Industry
Bargaining Power of Buyers
Bargaining Power of Buyers
Bargaining Power of Suppliers
Bargaining Power of Suppliers
Intensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:Intense rivalry often plays out in the following ways:
** Jockeying for strategic positionJockeying for strategic position
** Using price competitionUsing price competition
** Staging advertising battlesStaging advertising battles
** Making new product introductionsMaking new product introductions
** Increasing consumer warranties or serviceIncreasing consumer warranties or service
Intense competition is more likely to occur when:is more likely to occur when:
** Numerous or equally balanced competitorsNumerous or equally balanced competitors
** Slow growth industrySlow growth industry
** High fixed costsHigh fixed costs
** Lack of differentiation or switching costsLack of differentiation or switching costs
** High storage costsHigh storage costs
** Capacity added in large incrementsCapacity added in large increments
** High strategic stakesHigh strategic stakes
** High exit barriersHigh exit barriers
Intensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing Competitors
High Exit Barriers are economic, strategic and High Exit Barriers are economic, strategic and emotional factors which cause companies to remain emotional factors which cause companies to remain in an industry even when future profitability is in an industry even when future profitability is questionable.questionable.
** Specialized assetsSpecialized assets
** Fixed cost of exit (e.g., labor agreements)Fixed cost of exit (e.g., labor agreements)
** Emotional barriersEmotional barriers
** Government and social restrictionsGovernment and social restrictions
** Strategic interrelationshipsStrategic interrelationships
Intensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing Competitors