5. 2-5
External Environment – everything
outside an organization’s boundaries
that might affect it.
General Environment
Task Environment
Internal Environment – the
conditions and forces within an
organization.
6. 2-6
Task environment consists of
specific organizations or groups
that influence an organization.
Competitors
Customers
Suppliers
Strategic partners
Regulators
7. 2-7
Competitors
Other organizations that compete
with our organization for
resources.
Most obvious resource is
customer dollars.
Organizations compete for bank
loans, property, quality labor,
technological breakthroughs,
patents, scarce raw materials.
The Task Environment. . .
8. 2-8
Whoever pays money to acquire an
organization’s products or services.
Customers of major organizations may
include: schools, hospitals, government
agencies, wholesalers, retailers and
manufacturers.
Customers have more discriminating tastes
and new products’ and services’
expectations.
Companies who expand internationally face
critical differences [no beef served in India,
alcohol served in Germany and France as a
part of the menu].
Customers
9. 2-9
Suppliers
Organizations that provide resources
for other organizations.
McDonald’s depends on Heinz for its
ketchup packets and Coca-Cola for its
soft drinks.
10. 2-10
Two or more companies that work together in
joint ventures or similar arrangement.
McDonald’s with Wal-Mart and Disney.
Strategic partnerships allow companies to
share expertise they lack, spread risk and
open new market opportunities.
Usually occurs with international firms. [Ford
shares a distribution and service center in
South America with Volkswagen and builds
minivans in the US with Nissan]
Strategic Partners (Allies)
11. 2-11
A unit that has the potential to control,
legislate or otherwise influence the
organization's policies and practices.
Regulatory agencies – created by the
government to protect the public from
certain business practices or to protect
organizations from one another.
Interest groups – organized by their
members to attempt to influence
organizations. No official power, but use
the media to call attention to their
positions.
Regulators
13. 2-13
Michael E Porter proposes that
managers should view the
organizational environments in
terms of five competitive forces:
The threat of new entrants
Competitive rivalry
The threat of substitute products
The power of buyers
The power of suppliers
Competitive Forces
14. 2-14
Porter’s Five Forces
Model of Industry Competition
Threat of
new entrants
Bargaining
power of buyers
Bargaining power
of suppliers
Threat of
Substitute products
and services
15. 2-15
The extent to which new competitors
can easily enter a market or market
segment.
Entrance is easier for market
requiring a small amount of capital to
open. [dry cleaner, pizza, hamburger
or sandwich shop, etc.]
The threat of new entrants
16. 2-16
More difficult when it takes a
tremendous investment in plant,
equipment and distribution systems
[automobile market, etc.]
The internet has reduced the costs
and other barriers of entry into many
market segments so the threat has
increased for many firms.
The threat of new entrants
17. 2-17 The Threat of New Entrants
Profits of established firms in the
industry may be eroded by new
competitors
High entry barriers lead to low
threat of new entries
Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale
Government policy
18. 2-18 Economies of scale
Economies of scale means spreading the costs of
production over the number of units produced.
The cost per unit declines when the number of
products increases.
This prevent entry by forcing the new entrant to
come in at a large scale – risk of strong reaction
from existing firms or- come in at a small scale
and accept a cost disadvantages.
Both are undesirable options.
19. 2-19 Product Differentiation
When existing competitors have strong
brand identification and customer
loyalty,
Differentiation creates a barrier to entry
by forcing entrants to spend heavily to
overcome existing customer loyalties
20. 2-20 Capital Requirements
The need to invest large financial resources
to compete creates a barrier to entry
Especially if the capital is required for risky
or unrecoverable up front advertising or
research and development (R&D)
The need to invest huge financial resources
in manufacturing facilities in order to
produce large commercial airplanes creates
a significant barrier to entry to any
competitor for Airbus.
21. 2-21 Switching Costs
A barrier to entry is created by the
existence of one-time cost that the
buyer faces when switching from one
supplier’s product or service to another
Once a software program such as Excel
or Word becomes established in an
office, office managers are very
reluctant to switch to a new program
because of the high training costs.
22. 2-22 Access to distribution channels
The new entrant’s need to secure
distribution for its product can create a
barrier to entry.
Smaller new firms often have difficulty
obtaining supermarket shelf space for
their goods because large retailers
charge for space on their shelves and
give priority to the established firms
who can pay for the advertising needed
to generate high customer demand.
23. 2-23
Cost disadvantages independent of
scale
Some existing competitors may have
advantages that are independent of size
or economies of scale.
These derive from:
1. Proprietary product(as an idea or object that is
owned entirely by the owner. Proprietary products, ideas and objects are the property of the
owner and cannot be recreated without the consent of the owner. It may be protected by
patent, trademark, copyrights, IPR)
2. Favorable access to raw materials
3. Government subsidies
24. 2-24 Government policy
Governments can limit entry into an
industry through licensing requirements
by restricting access to raw materials,
such as oil drilling sites in protected
areas.
25. 2-25
In an environment where, few or none
of these entry barriers are present, the
threat of new entry is high.
Ex: If a new firm can launch its business
with a low capital investment and operate
efficiently despite its small scale of
operation, it is likely to be a threat.
26. 2-26
The extent to which buyers of the
products or services in an industry
have the ability to influence the
suppliers.
The power of buyers
27. 2-27
The power of buyers
Relatively few potential buyers
for aircraft. Therefore, buyers
have considerable influence
over the price they are willing
to pay, the delivery date of the
order, etc.
Buyers have virtually no power
with products that have very
many willing buyers.
28. 2-28 The Bargaining Power of Buyers
Buyers threaten an industry
Force down prices
Bargain for higher quality or more
services
Play competitors against each
other
29. 2-29 The Bargaining Power of Buyers
A buyer group is powerful when
It is concentrated or purchases
large volumes relative to seller sales. If a large
percentage of supplier’s sales are purchased by a
single buyer, the importance of the buyer’s business
to the supplier increases.
The products it purchases from the industry
are standard or undifferentiated. They can
always find alternative suppliers. Alternative suppliers
are plentiful because the product is standard or
undifferentiated. Ex: Drivers of vehicles can easily
find Oil filling stations in the same quality
30. 2-30 A buyer group is powerful when…
The buyer faces few switching
costs: Changing suppliers cost very
little. Switching costs lock the buyer to
particular sellers. Conversely, the
buyer’s power is enhanced if the seller
faces high switching costs. Eg: office
supplies are easy to find.
31. 2-31 A buyer group is powerful when…
It earns low profits: Low profits
create incentive to lower purchasing
costs. On the other hand, highly
profitable buyers are generally less
price sensitive. A buyer earns low
profits and thus very sensitive to costs
and service differences. Eg: grocery
stores have very small margins.
32. 2-32 A buyer group is powerful when…
The buyers pose a credible threat
of backward integration: If buyers
are either partially integrated or pose a
credible threat of backward integration,
they are typically able to secure
bargaining concessions. They can
produce the product itself. Ex: a
newspaper chain could make its own
paper.
33. 2-33 A buyer group is powerful when…
The industry’s product is
unimportant to the quality of the
buyer’s products or services: When
the quality of the buyer’s products is
not affected by the industry’s product,
the buyer is more price sensitive.
Because they can easily substituted
without affecting the final product
adversely . Ex: electric wire bought for
use in lamps.
34. 2-34 A buyer group is powerful when…
The purchased product represents
a high percentage of a buyer’s
costs, thus providing an incentive
to shop around for a lower price.
35. 2-35 Backward Integration
A business strategy employed to expand profits and
gain greater control over production of a product
whereby a company will purchase or build a business
that will increase its own supply capability or lessen
its cost of production.
Examples:
A clothing manufacturer may purchase one of its suppliers of
fabrics to lessen the cost of raw materials and have more control
over the delivery schedules of the finished product.
A bakery business bought a wheat farm in order to reduce the
risk associated with the dependency on flour.
36. 2-36
The extent to which suppliers have
the ability to influence potential
buyers.
The power of the supplier depends
on the product being offered. The
more restricted the service or
product, the more power to the
supplier. [electricity providers,
telephone/internet access]
The power of suppliers
37. 2-37
Powerful suppliers can squeeze the
profitability of firms in an industry so far
that they can’t recover the costs of raw
material inputs.
The factors that make suppliers
powerful tend to mirror those that make
buyers powerful.
38. 2-38
The power of suppliers
Small wholesaler of vegetables has little
power, since if people do not like the
product, they can easily find an
alternative supplier.
39. 2-39 The Bargaining Power of Suppliers
Suppliers can exert power by
threatening to raise prices or
reduce the quality of purchased
goods and services
40. 2-40 The Bargaining Power of Suppliers
A supplier group will be powerful
when
The supplier group is dominated
by a few companies, but it sells to many. Ex:
petroleum industry
The supplier group is not obliged to contend with
substitute products for sale to the industry. The
power of even large powerful suppliers can be
checked if they compete with substitute. Substitutes
are not readily available. Ex: electricity
41. 2-41
A supplier group will be powerful
when…
A purchasing industry buys only a small
portion of the supplier group’s goods and
services and is thus the industry is not an
important customer of the supplier group.
When suppliers sell to several industries and
a particular industry does not represent a
significant fraction of its sales, suppliers are
more prone to exert power. Ex: sales of
lawn mower tires are less important to the
tire industry than are sales of auto tires.
42. 2-42
A supplier group will be powerful
when…
The supplier’s product is an important input to
the buyer’s business. When such inputs are
important to the success of the buyer’s
manufacturing process or product quality, the
bargaining power of suppliers is high.
The supplier group’s products are differentiated
or it has built up switching costs for the buyer.
Differentiation or switching costs facing the
buyers cut off their options to play one supplier
against another. Ex: word processing software
43. 2-43
A supplier group will be powerful
when…
The supplier group poses a credible
threat of forward integration. This
provides a check against the industry’s
ability to improve the terms by which it
purchases. Suppliers are able to
integrate forward and compete directly
with their present customers. Eg: a
microprocessor product such as Intel
can make PCs.
44. 2-44
When considering supplier power, we
focus on companies that supply raw
materials, equipment, machinery, and
associated services.
But the supply of labor is also an
important input to businesses, and
labour’s power varies overtime and
across occupations and industries.
45. 2-45 Forward Integration
A business strategy that involves a form of vertical
integration whereby activities are expanded to
include control of the direct distribution of its
products which means acquisition of or expansion
into a distribution channel.
Examples:
A farmer sells his/her crops at the local market rather than to a
distribution center.
Wholesaler sells products directly to consumer rather than to
small outlets “Retailers”
46. 2-46
A substitute product is a product that
appears to be different but can satisfy the
same need as another product. Ex:
texting is a substitute for e-mail; Internet
is a substitute for video stores.
The extent to which alternative products
or services may take the place of or
diminish the need for existing products
and/or services.
Personal computers (PCs) have virtually
eliminated the need for calculators,
typewriters and large mainframe
The threat of substitute products
47. 2-47 The Threat of Substitute Products and Services
Substitutes limit the potential
returns of an industry by placing
A ceiling on the prices that firms
in that industry can profitably charge
To the extent that switching costs are low,
substitutes may have a strong effect on an industry.
Tea can be considered a substitute for coffee. If the
price of coffee goes up high enough, coffee drinkers
will slowly begin switching to tea. The price of tea
thus puts a price ceiling on the price of coffee.
The more attractive the Price/performance ratio of
substitute products the tighter the lid on an
industry’s profits.
48. 2-48
Sometimes a difficult task, the
identification of possible substitute
products or services means searching
for products or services that can
perform the same function, even
though they have a different
appearance and may not appear to be
easily substitutable.
49. 2-49
The airline industry might not consider
video cameras much of a threat. But as
digital technology has improved and
wireless and other forms of
telecommunication have become more
efficient, teleconferencing has become
a viable substitute for business travel
for many executives.
Teleconferencing can save both time
and money.
50. 2-50
The nature of the competitive
relationship between firms in the
industry.
Large firms, dominant in the field, engage
in price wars, comparative advertising
and new-product introductions.
Examples include: Coke and Pepsi; American
Express and Visa
Small establishments, in contrast, do not
generally engage in such practices.
Competitive rivalry
51. 2-51
The Intensity of Rivalry among
Competitors in an Industry
Competition in an industry takes the form of
Fighting for position
Firms use techniques like Price competition
Advertising battles
Product introductions
Increased customer service or warranties
Price competition, typically highly destabilizing and are likely to
erode the average level of profitability in an industry.
Rivals easily match price cuts, an action that lower the profits
for all firms.
52. 2-52
Interacting factors lead to
intense rivalry
Numerous or equally balanced
competitors. When there are many firms in an
industry, the likelihood of mavericks is great. Even
when there are relatively few firms, and they are
nearly equal in size and resources, instability results
from fighting among companies having the resources,
for sustained and vigorous retaliation or similar
counter attack. They watch each other carefully to
make sure they match any move by another firm with
an equal countermove. Eg: major home appliance
industries.
53. 2-53
Interacting factors lead to
intense rivalry
Slow industry growth: Slow industry
growth turns competition into a fight for
market share, since firms seek to
expand their sales. Eg: any slowing in
passenger traffic tends to set off price
wars in the airline industry because the
only path to growth is to take sales
away from a competitor.
54. 2-54
Interacting factors lead to
intense rivalry
Lack of differentiation or switching costs:
A product can be very unique, with many qualities
differentiating it from others of its kind, or it may be a
commodity, a product whose characteristics are the
same, regardless of who sells it. Ex most people
choose a gas station based on location and pricing
because they view gasoline as a commodity. When
the product or service is perceived as a commodity
(raw material), the buyer’s choice is typically based on
price and service, resulting in pressures for intense
price and service competition. Lack of switching cost
has the same effect.
55. 2-55
Interacting factors lead to
intense rivalry
Capacity increased in large increments:
When economies of scale require that capacity
must be added in large increments, capacity
additions can be very disruptive to the industry
supply/demand balance. If the only way a
manufacturer can increase capacity is in a
large increment by building a new plant, it will
run that new plant at full capacity to keep its
unit cost as low as possible. Thus producing so
much that the selling price falls throughout the
industry.
56. 2-56
Interacting factors lead to
intense rivalry
High exit barriers: Exit barriers are economic,
strategic, and emotional factors that keep firms
competing even though they may be earning low or
negative returns on their investments. Some exit
barriers are specialized assets, fixed costs of exit,
strategic interrelationships ex: relationships between
the business units and others within a company in
terms of image, marketing, shared facilities and so
on. Emotional barriers and government and social
pressures (governmental discouragement of exit out
of concern for job loss.)
58. 2-58
Threat of new entry (very weak)
Large amount of capital required
Few legal barriers protect existing
companies from new entrants
New entrant could easily access suppliers
and distributors
Governments often protect their home
markets by introducing high import taxes.
59. 2-59 Buyer power (strong)
There are many buyers
Buyers do not threaten backward integration
Buyers can easily choose alternative car
brand
It does not cost much for buyers to switch
to another brand of vehicles or to start
using other type of transportation
60. 2-60
Competitive rivalry (very strong)
Moderate number of competitors
Customers are loyal to their brands
Industry is very large but matured
There is moderate threat of being
acquired by a competitor
61. 2-61 Supplier power (weak)
Large number of suppliers
Materials widely accessible
Suppliers do not pose any threat of
forward integration
Some suppliers are large but the most if
them are pretty small
62. 2-62 Threat of substitutes (weak)
There are many alternative types of
transportation, such as bicycles,
motorcycles, trains, buses or planes
Substitutes can rarely offer the same
convenience
Alternative types of transportation
almost always cost less and sometimes
are more environment friendly
