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Team 4: Peter Hogue, Cameron Lloyd, Breann
Flores, Jonathon Jordan,
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Defined as: All of the external influences that
affect its decisions and performance.
There are a large number of the influences so
it helps to categorize them.
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2 ways of classifying influences
◦ Source: political, economic, social and technological
factors (PEST analysis)
◦ Proximity: “Micro Environment” can be
distinguished from the “Macro Environment”
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4 factors examined in a PEST Analysis
◦ Political: How the government restricts your product
and how they select who is allowed to do what
◦ Economic: How the current economy affects
business. (America’s recent recession)
◦ Social: How people view your product. Safety,
fashion, etc.
◦ Technological: Are you staying ahead of the curve?
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Formed by relationship with three sets of
players
◦ Customers: Firm must understand its customers in
order to create value for them.
◦ Suppliers: Firm must understand suppliers and
manage relationships with suppliers
◦ Competitors: Firm must understand competitors,
because their profitability depends on it.
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To have profit in a firm, value has to be
created for the customer.
But, value doesn’t directly equal profit.
Consumer surplus vs. producer surplus
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The value of the product to customers
The intensity of competition
The bargaining power of the producers in
relation to their suppliers
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Some industries earn high rates of profit
Others earn much lower rates of profit
Small markets vs. large markets
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Three stages to predict future profitability of
an industry
 1.) examine current levels of competition and
profitability
 2.) Identify trends that are changing in the industry
 3.) Identify how these structural changes will affect the
five forces of competition and resulting profitability of
the industry
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“ The threat of entry rather than actual entry may
be sufficient to ensure that established firms
constrain their prices to the competitive level”
Contestability
 Sunk costs
 “hit-and-run” entry
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Barrier to entry
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Capital requirements
Absolute cost advantage
Product differentiation
Government and legal barriers
Retaliation
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Input market firms
Output markets firms
 Buyers price sensitivity
 Bargaining power
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Concentration
 Concentration ratio
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Diversity of competitors
Product differentiation
Excess capacity and exit barriers
Cost conditions
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Buyer propensity to substitutes
Relative prices and performance substitutes
Cigarettes example
Wind farms vs. Natural gas

Horizontal Competition
◦ Competition from substitutes
◦ Competition from entrants
◦ Competition from established rivals
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Vertical Competition
◦ Power of suppliers
◦ Power of buyers
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Availability of substitutes
◦ Ex. Coke and Pepsi
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Absence of close substitutes
◦ Ex. Gasoline
◦ Ex. Cigarettes
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Impact of the internet
◦ Ex. Travel agencies
◦ Ex. Telecommunications
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Capital requirements
Economies of scale
Absolute cost advantage
Product differentiation
Access to distribution channels
Government and legal barriers
Retaliation by established producers
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Concentration
Diversity of competitors
Product differentiation
Excess capacity and exit barriers
Cost conditions

Bargaining Power
◦ Supplier
◦ Buyer

Complex component manufacturers
◦ Ex. Disk drives

Buyers’ Price Sensitivity
◦ Cost of product relative to total cost
◦ Product differentiation
◦ Competition between buyers

Relative Bargaining Power
◦ Size and concentration of buyers relative to
producers
◦ Buyers’ switching costs
◦ Buyers’ information
◦ Buyers’ ability to backward integrate
To survive and prosper in an industry, a firm must
meet two criteria: first it must supply what customers
want to buy; second it must survive competition.
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Who are our customers and what do they
want?
What does the firm need to do to survive
competition?
Key Success Factors
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Combining the industry competition analysis
with what the customers want we can
discover what the key success factors are
Prerequisites for success
What do customers
want?
How does the firm
survive competition?
Analysis of demand
•Who are our
customers?
•What do they want?
Key Success
Factors
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?
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http://www.youtube.com/watch?v=zrnPbZVlL
QI
Steel
What do
customers want?
How do firms
survive
competition?
Key success
factors?
•Low price
•Product consistency
•Reliability of supply
•Specific technical
specifications for
special steel
•Commodity products,
excess capacity, high
fixed cost, excess
capacity, intense price
competition
•Cost efficiency and
financial strength
essential
•Cost efficiency
requires: large-scale
plants, low-cost
location, rapid capacity
adjustment
•Alternatively high
technology, small-scale
plants can achieve low
costs through flexibility
and high productivity
Questions?