Group 3: Taylor Mullings, Yetunde Oyinwola, Eric Carstens, Alex Kollaritsch, Laura Padilla
Introduction and Objectives
 Examine External Factors
 Porter’s Five Forces
 Identifying Key Success Factors
The Mobile Phone Industry
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Motorola, Ericsson, Nokia, and Siemens
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Increasingly Complex Devices
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Apple’s IPhone and Google’s Android
Two major uncertainties facing producers:
o Differentiation
o Balance of Bargaining Power
Environmental Analysis
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External Influences
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PEST Analysis
o P- Political
o E- Economic
o S- Social
o T- Technological
PEST Analysis
Political
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Licences
• Standardization
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Restriction on Usage
PEST Analysis
Economic
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The level of economic activity
• The rapid take-up of mobile technologies in developing
economies
PEST Analysis
Social
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Health Scares
• Changes in Fashion
PEST Analysis
Technological
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Rapid Change
• Technological Improvements
PEST Analysis
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Can’t Scan Everything
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Listing Factors is not Enough
•
Must Learn to Exercise Judgment
Industry Analysis
• Industry Environment
o
o
o
Customers
Suppliers
Competitors
Industry Profit
• Create Value for the Customer
• Surplus of Value
o
Consumer Surplus
o
Producer Surplus
Industry Attractiveness
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Industries Earn Different Rates of Profit
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Not Random
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Small Markets vs Large Markets
Porter's Five Forces
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A framework for classifying and analysing the factors that
determine the intensity and level of competition in
different industries.
o Views profitability as determined by sources of
competition.
Porter's Five Forces
Competition from Substitutes
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Customers willingness to buy depends on availability of
substitutes.
o Demand elasticity/ inelasticity to price.
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The internet as a substitute to established industry.
o Travel agencies, newspaper and telecommunication.
The Threat of Entry
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Industry earning in excess of capital cost.
o
Entry restriction: licensed doctors and orthodontists.

o
Creates barriers to entry: any advantage an established firm has over
an entrant.
Threat of entry vs. actual entry.
Sources of Barriers to Entry
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Capital requirements: the cost of establishment in an
industry.
o Rockets and launching facilities vs. internet ventures.
Economies of scale: operating on a large scale and bearing
the costs of underutilized capacity vs. small scale with
high unit costs.
Absolute cost advantages: acquisition of low-cost sources
of raw materials.
o Saudi Aramco vs. Shell, Exxon and BP.
Sources of Barriers to Entry
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Product differentiation: established firms possess
advantages of brand recognition and customer loyalty.
o Advertising and promotions.
Access to channels of distribution: limited capacity in
channels, risk aversion and cost associated with products.
Governmental and legal barriers: the only effective barrier
to entry.
o Licensing, exclusivity, patents and copyrights
o Compliance costs tends to weigh more heavily on newcomers.
Sources of Barriers to Entry
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Retaliation: aggressive price-cutting, increased
advertising, sales promotion or litigation.
o To avoid retaliation, new entrant may seek initial less visible small-scale
market segments.
•
The effectiveness of barriers to entry: depends on
resources and capabilities that entrants possess.
o Established firms diversifying from other industry.
Rivalry Between Established Competitors
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Aggressive competition: price cuts and industry-wide
losses.
Mute competition: advertising, innovation and other
non-price dimensions.
Intensity of Competition
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Concentration: numbers and size distribution of firms
competing within a market.
Diversity of competition: The extent that firms can avoid
price wars depends on how similar they are in origin,
objectives, costs and strategy.
Product differentiation: similar firms and products -->
customers switching between them --> prices cutting.
Intensity of Competition
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Excess capacity and exit barriers: the balance between
demand and capacity.
o Barriers to entry are costs associated with capacity leaving an industry.
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Cost conditions: scale economies & ratio of FC and VC
o Cost structure: firms will take a marginal business at any price that
covers variable costs.
o Scale economies: encourages price wars to gain greater volume.
Bargaining Power of Buyers
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Bargaining power of buyers in an industry establishes the
ability of buyers to:
o Force a reduction in the prices of products or services
o To demand a higher quality of better service
o Seek more value for their purchases
Inputs vs. Outputs
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Input Markets
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Raw materials, labour services, components
Output Markets
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Sell goods and services to consumers
Bottom Line
o
Transactions create value for buyers and sellers.
Buyer Price Sensitivity
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Sensitivity to prices charged by firms in an industry
depend on the following:
o
o
o
Product differentiation
Competition between buyers
Cost of product relative to total cost
Relative Bargaining Power
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Key issue: The relative costs each party sustains as a result
of the transaction not occurring.
Factors that influence the bargaining power of buyers:
o Importance of volume to buyers
o Buyers’ information
o Switching costs
Restaurant Example
Bargaining Power of Suppliers
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Comparable analysis to buyer power
Key difference
o
Firms in the industry become buyers; producers of
inputs become suppliers
Applying Industry Analysis
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Understanding how industry structure drives
competition, allows us to apply this analysis in three ways:
o Forecast Industry Profitability
o Position the Company
o Change industry structure for the better
Forecasting Industry Profitability
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Not to explain the past, but to predict the future.
Use observations of structural trends in an industry to
forecast changes in competition and profitability.
Three stage process
o Examine how industry’s current level of profitability are a consequence
of its present structure
o Identify trends
o Identify how structural changes will affect five forces of competition
Positioning the Company
 How you position yourself in an industry is crucial in
determining if you succeed or fail.
 Can you think of any examples of companies that
either repositioned and thrived or ignored changes
and fell behind?
Positioning the Company
Music Industry
Trucking Industry
Movie Industry
Strategies to Alter Industry Structure
● Identify key structural features of an industry that are
depressing profitability
● Consider which of these structural features can be
changed through strategic innovations
○ Consolidation of an industry
○ Limit excess capacity,
○ Entry barriers preserve profitability
Using Industry Analysis
Mobile Phone Industry:
● Describing industry structure
● Forecasting industry profitability
● Positioning the company
● Strategies to alter industry structure
Key Issues and Challenges
Defining the Industry:
● Substitutability - The ability for customers to purchase
another product for the same purpose of a different
but similar product
Is a Jaguar and a Ford Focus substitutable with each other?
Key Issues and Challenges (Cont.)
 Choosing an appropriate level of analysis
 Segmentation - When a firm divides a market to better push
products towards certain consumers and users
 Steps to take:
 Identify possible segmentation variables
 Construct a segmentation matrix
 Analyze segmentation attractiveness
 Identify key success factors in each segment
 Analyze the attraction of brand versus narrow scope
Adding Additional Forces?
While the presence of substitutes reduces the value of a product,
The suppliers of
complements increase value.
compliments create
value for the industry
and can exercise
bargaining power
Examples
Profit Will Go To:
The supplier that builds a stronger market position and
reduces the value contributed by the other supplier
How is this done?
The Key Is To Achieve:
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Monopolisation
Differentiation
Shortage of supply in ones own product
While encouraging:
Competition
Commoditization
Excess capacity in production of complementary product
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Another Addition To Porter’s Five
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Governments
Example:
o
Australian government proposes to raise taxes on
profits of mining companies
Dealing With Dynamic Competition
Porter’s five determines competition in a predictable way but
ignores the dynamic forces of innovation and
entrepreneurship.
If structural transformation is rapid, the five forces model has
limited predictive value.
General feature of industries today: Hypercompetition
Does Industry Matter?
Are firms that are located in profitable industries likely
to be more profitable than those that are not?
The correct choice of firm strategy may be more
important than the correct choice of industry.
Identifying Key Success Factors
Start by asking two questions:
What do customers want?
What does the firm need to do to survive
competition?
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Identifying Key Success Factors
Prerequisites for success
What do
customers
want?
Analysis of demand
● Who are our
customers
● What do they want?
How does the firm
survive the
competition?
Analysis of competition
● What drives competition?
● What are the main
dimensions of competition?
● How intense is competition?
● How can we obtain a
superior competitive
position?
Identifying Key Success Factors
Example: Clothing Industry
Focus: Customers willing to pay premium for exclusivity and
quality
How to survive: differentiation can yield substantial price
premium, but imitation is rapid
Key success factor: differentiation requires speed of response
to changing fashions, style, reputation, and quality
Summary
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It is important for an industry to understand its
competitive environment in order to be successful.
Porter’s Five Forces
Limitations, intensity, and capability are all up to
each industry and firm.