The first step in establishing a coherent strategy for the firm is assessing the exter- nal environment. Two commonly used models of external analysis are Porter’s five-force model and stakeholder analysis.

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Defining the
Organization’s
Strategic Direction
In 2008, Michael Levie, Rattan Chadha, and Robin Chadha set out to
create a new kind of hotel chain. Convinced that innovation in the
hotel industry had stagnated, they believed that there was an
opportunity to create more value for customers that were frequent
travelers, or “Mobile Citizens of the World.” They named their new
hotel chain “citizenM,” and they set out to rethink what dimensions
customers really cared about, and which they didn’t really value.
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Assesing The Firms’s
Current Position
To assess the firm’s current position in the marketplace, it is useful to
begin with some standard tools of strategic analysis for analyzing the
external and internal environment of the firm.
External Analysis The two most commonly used tools for analyzing
the external environment of the firm include Porter’s five-force
model and stakeholder analysis.
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External Analysis
Porter’s Five-Force Model In this model, the attractiveness of an industry
and a firm’s opportunities and threats are identified by analyzing five forces
While the five-force model was originally developed to assess industry
attractive- ness (i.e., “Is this a desirable industry in which to compete?”), in
practice the model is often used to assess a specific firm’s external
environment (i.e., “What factors in the firm’s external environment create
threats and opportunities for the firm?”). The dif- ference between these two
approaches is subtle but important. In the former approach, the analysis
focuses on the industry level, treating all competitors as roughly the same,
and its objective is to ascertain whether the industry as a whole will tend to
be profitable.
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Figure Porter’s Five
Force Model
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Porter’s Five- Force Model
Source: Adapted with the permission of The Free
Press, a Division of Simon & Schuster Adult
Publishing Group, from Competitive Strategy:
Techniques for Analyzing Indus- tries and
Competitors, by Michael E. Porter. Copyright ©
1980, 1998 by The Free Press. All rights reserved.

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The five forces are
1. The degree of existing rivalry. An industry’s degree of rivalry is
influenced by a number of factors. First, the number and relative
size of competitors will shape the nature of rivalry.
2. Threat of potential entrants. The threat of potential entrants is
influenced by both the degree to which the industry is likely to
attract new entrants (i.e., is it profitable, growing, or otherwise
alluring?) and the height of entry barriers.
3. Bargaining power of suppliers. The degree to which the firm relies
on one or a few suppliers will influence its ability to negotiate good
terms. If there are few suppliers or suppliers are highly
differentiated, the firm may have little choice in its buying decision,
and thus have little leverage over the supplier to negoti- ate prices,
delivery schedules, or other terms.
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The five forces are
4. Bargaining power of buyers. Many of the same factors that influence
the bar- gaining power of suppliers have an analogous role with the
bargaining power of buyers. The degree to which the firm is reliant
on a few customers will increase the customer’s bargaining power,
and vice versa.
5. Threat of substitutes. Substitutes are products or services that are
not considered competitors, but fulfill a strategically equivalent role
for the customer. For exam- ple, Starbucks may consider other
coffeehouses as competitors, but other social destinations (such as
bars or restaurants) or beverages (such as soft drinks or beer) as
substitutes. The more potential substitutes there are, and the closer
they are in function to the firm’s product or service, the greater the
threat of substitution.
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The five forces are
Recently, Porter has acknowledged the role of complements.5 As has been dis-
cussed in several of the earlier chapters, complements are products that enhance
the usefulness or desirability of a good. For example, software is an important
comple- ment for computers, and gasoline is an important complement for
automobiles. The availability, quality, and price of complements will influence the
threats and oppor- tunities posed by the industry. It is important to consider (1)
how important comple- ments are in the industry, (2) whether complements are
differentially available for the products of various rivals (impacting the
attractiveness of their goods), and (3) who captures the value offered by the
complements. For example, desktop printer manu- facturers such as Hewlett
Packard and Lexmark make a considerable portion of their desktop printing
profits from the ink cartridges that consumers have to replace when empty.
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Stakeholder Analysis
stakeholder Any entity that has an interest (“stake”) in the organization.
Stakeholder models are often used for both strategic and normative
purposes. A strategic stakeholder analysis emphasizes the stakeholder
management issues that are likely to impact the firm’s financial
performance, while a normative stakeholder analysis emphasizes the
stakeholder management issues the firm ought to attend to due to their
ethical or moral implications.
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Summary of Chapter
1. The first step in establishing a coherent strategy for the firm is
assessing the exter- nal environment. Two commonly used models of
external analysis are Porter’s five-force model and stakeholder
analysis.
2. Porter’s five-force model entails assessing the degree of existing
rivalry, threat of potential entrants, bargaining power of suppliers,
bargaining power of customers, and threat posed by substitutes.
Recently Porter added a sixth force, the role of complements.
3. Stakeholder analysis involves identifying any entity with an interest
in the firm, what it wants from the company, and what claims it can
make on the company.
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