...on its head. What do you think this means? Antitrust laws are intended to protect, promote competition and to push industry profits towards competitive floor in order to resist market dominance. Porter’s five forces model reflects that an industry has absolute market power if threat of entrants and substitutes are low along with weak bargaining power among suppliers and buyers, and if industry is not competitive. 2. Comment on the following: All of wisdom contained in the five-forces framework is reflected in the economic identity: Profit = (Price – Average Cost) x Quantity [π = (P-AC) x Q] Porters all five competitive forces affect the variables in equation: (1) Rivals: If competition within industry is high, profit π will be lower due to lower P . (2) Entry: If barriers to market entry are weak, new entrants in industry will boost competition, reducing P in order to avert market entry. Or new competitors will increase supply (Q), driving P & π down. In addition to this, firms operating at full capacity will be left with only choice of raising P to maximize π. (3) Substitutes: Availability of substitute goods can limit price level P, so as to deter buyers from switching to substitute product or service. (4) Suppliers: High bargaining power of suppliers can cause firm’s AC to increase, as a result driving Q down. (5) Buyers: Buyer’s high market power will force P to reduce. 3. How does the magnitude of scale economies affect the intensity of each...
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...Introduction: In 1979, Harvard Business Review published “How Competitive Forces Shape Strategy” by a young economist and associate professor, Michael E. Porter. It was his first HBR article, and it started a revolution in the strategy field. In subsequent decades, Porter has brought his signature economic rigor to the study of competitive strategy for corporations, regions, nations, and, more recently, health care and philanthropy. “Porter’s five forces” have shaped a generation of academic research and business practice. With prodding and assistance from Harvard Business School Professor Jan ‘ Rivkin and longtime colleague Joan Magretta, Porter here reaffirms, up-dates, and extends the classic work. He also ad-dresses common misunderstandings, provides practical guidance for users of the framework, and offers a deeper view of its implications for strategy today. In essence, the job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly, as if it occurred only among today’s direct competitors. Yet competition for profits goes beyond established industry rivals to include four other competitive forces as well customers, suppliers, potential entrants, and substitute products. The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry. As different from one another as industries might appear on the surface, the underlying...
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...THE EXTERNAL AND INTERNAL ENVIRONMENTS If managers in the airline industry are going to run their organizations efficiently, they have to understand the external environment confronting them, anticipate how changes in the environment might affect the profitability of their airlines, and take appropriate actions. These actions might include reducing capacity as demand declines, purchasing more fuel-efficient jets, avoiding price wars with low-cost airlines if possible, and reducing labor costs. At the same time the ability of managers to take such actions is shaped by the airlines’ internal environment. For example, some long-established airlines, such as United, have powerful labor unions that have resisted attempts by managers to cut pay for pilots, flight attendants, and ground staff, or to introduce flexible work practices that boost labor productivity. This constraint has kept costs high and made it more difficult for managers to do what is required to make the airline profitable. The situation confronting managers in the airline industry, while dramatic, is not unique. The work of all managers is affected by two main environments: the external environment and the internal environment. The external environment constitutes everything outside a firm that might affect the ability of the enterprise to attain its goals. The external environment itself can be subdivided into two main components. There is the industry or taskenvironment confronting the organization, which typically...
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...1. IMAX can be considered as a part of 3 different industries: photographic equipment and supplies, motion picture and video tape production and motion picture and video distribution. If we had to consider only the video production and distribution, one may say that IMAX is evolving in a very competitive environment. In fact, the rivalry between competitors is really harsh, mainly because of the presence of big integrated actors such as Columbia studios, Pixar, etc. Moreover, the business within this particular industry is risky since a film production needs a huge investment, so the return on investment of a movie is rarely important. IMAX interacts with its environment as it takes inputs and distributes its output, in form of large screen format movies with 3D images and distorted sound. Like every organization IMAX has also external and internal environment which affects its outputs. * External Environment: The factors and forces outside the IMAX Corporation that affects its performance are its external environment. External environment of the IMAX Corporation has two components: * Specific environment: Specific environment specific environment includes those forces and factors those directly relevant to the achievement of the IMAX goals. The main forces that that make the IMAX specific environment are: * Customers: Customers represent potential uncertainty to the IMAX because their taste changes. Therefore IMAX should need to create educational and...
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...interaction of internal and external strategies in creating competitive advantage ? Understand the difference between market-level and firm-level demand elasticity ? Understand economies of scale and network externalities ? Determine the applicability of skills and resources to new markets I> ------------------------------------------------- Markets ------------------------------------------------- Offerings ------------------------------------------------- Capabilities ------------------------------------------------- Competitive Advantage ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- Porter forces ------------------------------------------------- I . Business Definition How would you define the Car rentals business , within the perspective of this case / What markets are being served, with what kind of offerings and to what customer segments ? How is ERAC positioned in this industry ? What is its unique proposition ? Is this sustainable?Are there any inherent gaps or weaknesses in this position- Who are its competitors ? what are the sources of ERAC’s competitive advantage ?What capabilities are demanded to create value … II> II. Industry Structure How would you characterize the economic forces that influence outcomes in this industry – of all the five (customer power, suppliers, barriers to change ie entry ad exit , substitution and...
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...the interaction of internal and external strategies in creating competitive advantage? Understand the difference between market-level and firm-level demand elasticity? Understand economies of scale and network externalities? Determine the applicability of skills and resources to new markets I> ------------------------------------------------- Markets ------------------------------------------------- Offerings ------------------------------------------------- Capabilities ------------------------------------------------- Competitive Advantage ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- Porter forces ------------------------------------------------- I. Business Definition How would you define the Car rentals business , within the perspective of this case / What markets are being served, with what kind of offerings and to what customer segments ? How is ERAC positioned in this industry? What is its unique proposition? Is this sustainable? Are there any inherent gaps or weaknesses in this position? Who are its competitors? What are the sources of ERAC’s competitive advantage? What capabilities are demanded to create value … II> II. Industry Structure How would you characterize the economic forces that influence outcomes in this industry – of all the five (customer power, suppliers, barriers to change i.e. entry and exit, substitution and...
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...Reproduction or translation of any part of this work without the permission of the copyright holder is against the law. Your downloading and use of this eBook requires, and is an indication of, your complete acceptance of these ‘Terms of Use.’ You do not have any right to resell or give away part, or the whole, of this eBook. Porter’s Five Forces Table of Contents Preface 2 Visit Our Website 3 Introduction 4 Porter’s Five Forces Analysis 6 Competitive Rivalry 11 Threat of New Entrants 18 Threat of Substitutes 20 Bargaining Power of Suppliers 23 Bargaining Power of Customers 25 Summary 28 Other Free Resources 30 References 31 ISBN 978-1-62620-999-2 © www.free-management-ebooks.com 1 Porter’s Five Forces Preface This eBook describes Porter’s Five Forces Framework, a technique that provides a model for industry analysis and business strategy development. You will learn: ●● The five key factors the model uses to identify and evaluate potential opportunities and risks ●● The importance of defining your market accurately and how this can affect the usefulness of the results you obtain ●● How to measure competitive rivalry using the Concentration Ratio and the Herfindahl–Hirschman...
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...INDUSTRY AND COMPETITIVE ANALYSIS Crafting strategy is an analysis-driven exercise. Managers need to carry out an assessment of the environment in which the organisation operates. Managers cannot get by with opinions, good instincts and creative thinking. Three situational considerations are: 1. Macro-environmental analysis; 2. Industry and competitive conditions; 3. A company¹s own internal situation and competitive position. MACRO-ENVIRONMENTAL ANALYSIS This includes the political, economic, social, technological, legal and ecological factors (PESTLE Analysis). 1. Political Factors • How stable is the political environment? • What influences has politics on the recruitment of top officials in the organization eg there was a lot of politics that went on in the recruitment of officials in parastals which caused the parastatals to be inefficient. • Forecast of investment in a country including FDI has to be considered in terms of the political unrest eg in Zimbabwe right now, foreign companies are not investing in the country due to the unfavourable political situation. There are takeovers of companies by the government for the purposes on indigenization. Examples of such companies are Lobels, mining companies where it is required that 51% of the shareholding be indigenous people. Foreign companies no longer have faith in business operations in Zimbabwe. This has affected companies that would have ventured into joint ventures...
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...the early 1 990s was a result of their ability to manage their relationships with their complementors. They built a security chip into the hardware and then licensed the right to develop games to outside firms. These firms paid a royalty to Nintendo for each copy of the game sold. The royalty revenue enabled Nintendo to sell game consoles at close to their cost, thereby increasing their market share, which, in turn, caused more games to be sold and more royalties to be generated. 2. Porters industry Competitiveness Analysis – Define buyers, suppliers, and rivalry (plus caveats) pg. 46-52 Potential competitors may include a supplier considering to considering forward integration. 5 Basic Competitive forces: 1. The threat of new entrants. 2. The Bargaining power of buyers 3. The bargaining power of suppliers. 4. The threat of substitute products and services. 5. The intensity of rivalry among competitors in an industry. 1. The Threat of New Entrants * Possibility that the profits may be eroded by new...
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...POWER Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry | | THREAT OF NEW ENTRANTS Barriers to Entry Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Expected retaliation Proprietary products | | THREAT OF SUBSTITUTES -Switching costs -Buyer inclination to substitute -Price-performance trade-off of substitutes | | BUYER POWER Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity Threat of backward integration Product differentiation Buyer concentration vs. industry Substitutes available Buyers' incentives | DEGREE OF RIVALRY -Exit barriers -Industry concentration -Fixed costs/Value added -Industry growth -Intermittent overcapacity -Product differences -Switching costs -Brand identity -Diversity of rivals -Corporate stakes | I. Rivalry In the...
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...profits more rapidly than its rivals. * General managers are responsible for the overall performance of the organization, or for one of its major self-contained divisions. Their overriding strategic concern is for the health of the total organization under their direction. * Functional managers are responsible for a particular business function or operation. Although they lack general management responsibilities, they play a very important strategic role. * Formal strategic planning models stress that an organization’s strategy is the outcome of a rational planning process. * The major components of the strategic management process are defining the mission, vision, and major goals of the organization; analyzing the external and internal environments of the organization; choosing a business model and strategies that align an organization’s strengths and weaknesses with external...
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...Strategic Management and Business Policy, 14e (Wheelen) Chapter 4 Environmental Scanning and Industry Analysis 1) Environmental scanning is the monitoring, evaluating, and disseminating of information from the external environment to key people within the corporation. Answer: TRUE Difficulty: Easy Chapter Objective: Recognize aspects of an organization’s environment that can influence its long-term decisions 2) A corporation uses environmental scanning to avoid strategic surprise. Answer: TRUE Difficulty: Moderate Chapter Objective: Recognize aspects of an organization’s environment that can influence its long-term decisions AACSB: Analytical Thinking 3) Political-legal forces regulate the values, mores, and customs of society. Answer: FALSE Difficulty: Easy Chapter Objective: Recognize aspects of an organization’s environment that can influence its long-term decisions 4) The societal environment includes the economic, technological, political-legal, and sociocultural forces. Answer: TRUE Difficulty: Moderate Chapter Objective: Recognize aspects of an organization’s environment that can influence its long-term decisions 5) Industry analysis was popularized by Michael Porter. Answer: TRUE Difficulty: Moderate Chapter Objective: Recognize aspects of an organization’s environment that can influence its long-term decisions 6) In dynamic environments, the CEO's focus is on forces in the societal environment. Answer: FALSE Difficulty:...
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...strategy (ex: Coca Cola). External environment conditions create both threats and opportunities for firms that have major implications for their strategic actions. Regardless of the industry, the external environment is critical to a firm’s survival success. The firm’s understanding of the external environment is matched with knowledge about its internal environment to form its vision, to develop its mission and to take actions that result in strategic competitiveness and above-average returns. Factors that can have an impact on business have to be taken in consideration. Companies sometimes have to have strategic scenario in case of an unexpected factors, which can affect the external environment: - The attacks of September 11, - The coalition invasion in Afghanistan in October 2001, - The outbreak of the Severe Acute Respiracy Syndrome (SARS) - The war in Iraq in 2003, - The Madrid (2004) and London (2005) bombings. I. The general, industry and competitor environments. The external environment Demographic Global Industry environment Threat of new entrant Power of suppliers Power of buyers Product substitutes Intensity of rivalry Economic Competitor environment 14 Technological Socio-cultural Political/Legal A firm’s external environment is divided into three main areas: the general, industry and competitors. The general environment is composed of dimensions in broader society that influence an industry and, indirectly, the firms within in. Focused...
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...CC-307-017 Dynamic Strategic Alignment This reference note was prepared by Professor Steven White to introduce basic concepts and a framework for discussing strategic management. Copyright © 2009 by CEIBS (China Europe International Business School). No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the permission of CEIBS The CEIBS Case Centre is sponsored by McKinsey & Company. Dynamic Strategic Alignment CC-307-017 Dynamic Strategic Alignment This note introduces the concepts and frameworks that are commonly used in strategic analysis, integrating them within an on-going process of creating and improving strategic alignment. 1. FUNDAMENTALS The objective of strategic management is to create alignments—within the firm and between the firm and its environment—that give the firm competitive advantage and enable it to achieve its goals. Strategic change, therefore, is fundamentally a decision about what changes to make in order to create or improve alignment that moves the firm closer to its goals. Managers may increase alignment and performance by a) changing elements of the firm, b) changing features of the environment in which operate, or c) shifting to another environment. There will usually be multiple options, and managers must decide which changes are necessary, possible and worth the effort required. When making...
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...Answer 1). Many IT managers focus solely on mastering new tech skills to increase their value to their employers -- a strategy that makes perfect sense, but only up to a point. Once a manager reaches that point, he is viewed as only technically proficient and being perceived as unskilled in business planning and learning how to communicate and collaborate well with customers, coworkers, and service providers. Having a balance of these "hard" technology skills and "soft" business and people skills, you can go a long way toward insulating your career from recessionary woes. Here are the five essential business skills that an IT managers should possessSkill 1: Financial skills IT Professionals need to focus on financial outcomes by setting realistic and measurable goals and objectives, estimating and budgeting the projects more realistically and by learning methods for tracking and reporting progress. They must be aware of organisational metrics used to track financial performance-and how those metrics are applied throughout the organization, including their own projects. A significant part of being "business savvy" is understanding basic financial principles and applying sound metrics to track and report performance. Skill 2: Build strong working relationships Establishing and maintaining good work relationships is the key to a positive workplace. Effective businesses encourage the development of positive relationships between managers and employees as well as amongst...
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