MICRO ENVIRONMENT
14. PORTER’S FIVE FORCES MODEL - COMPETITIVE ANALYSIS
To gain a deep understanding of a company’s industry and competitive environment, managers do not need to gather all the information they can find and waste a lot of time digesting it. Rather, the task is much more focused. Thinking strategically about a company’s competitive environment entails using some well defined concepts and analytical tools.
The character, mix, and subtleties of competitive forces are never the same from one industry to another. A powerful and widely used tool for systematically diagnosing the principal competitive pressures in a market and assessing the strength and importance of each is the five-forces model of competition.(see figure) This model holds that the state of competition in an industry is a composite of competitive pressures operating in five areas of the overall market:
♦ Competitive pressures associated with the market maneuvering and jockeying for buyer patronage that goes on among rival sellers in the industry.
♦ Competitive pressures associated with the threat of new entrants into the market.
♦ Competitive pressures coming from the attempts of companies in other industries to win buyers over to their own substitute products.
♦ Competitive pressures stemming from supplier bargaining power and supplier-seller collaboration.
♦ Competitive pressures stemming from buyer bargaining power and seller-buyer Collaboration.
The way one uses the five-forces model to determine what competition is like in a given industry is to build the picture of competition in three steps:
Step 1: Identify the specific competitive pressures associated with each of the five forces.
Step 2: Evaluate how strong the pressures comprising each of the five forces are
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(fierce, strong, moderate to normal, or weak).
Step 3: Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits.
Figure: The Five Force model of Competition
Threat of new entrants: New entrants are always a powerful source of competition. The new capacity and product range they bring in throw up new competitive pressure. And the bigger the new entrant, the more severe the competitive effect. New entrants also place a limit on prices and affect the profitability of existing players.
Bargaining power of customers: This is another force that influences the competitive condition of the industry. This force will become heavier depending on the possibilities of the
POTENTIAL NEW ENTRANTS
Competitive pressures coming from the threat of entry of new rivals
Competitive
pressures stemming from Suppliers Bargaining Power
Competitive pressures stemming from buyer Bargaining Power
SUPPLIERS
BUYERS
FIRMS IN OTHER INDUSTRIES
OFFERING SUBSTITUTE
PRODUCTS
Competitive pressures coming from substitute products
INDUSTRY COMPETITORS
RIVALRY AMONG EXISTING FIRMS
buyers forming groups or cartels. Mostly, this is a phenomenon seen in industrial products.
Quite often, users of industrial products come together formally or informally and exert pressure on the producer in matters such as price, quality and delivery. Two top CDMA service providers Reliance and Tata Teleservices are putting a simultaneous pressure on Qualcomm to reduce the royalties on the CDMA based handsets. Such a collusion on the part of buyers can be a major force in some industries. The bargaining power of the buyers influences not only the prices that the producer can charge but also influences in many cases, costs and investments of the producer because powerful buyers usually bargain for better services which involve costs and investment on the part of the producer.
Bargaining power of suppliers: Quite often suppliers, too, exercise considerable bargaining power over companies. The more specialised the offering from the supplier, greater is his clout. And, if the suppliers are also limited in number they stand a still better chance to exhibit their bargaining power. The bargaining power of suppliers determines the cost of raw materials and other inputs of the industry and, therefore, industry attractiveness and profitability.
Rivalry among current players: The rivalry among existing players is an idea that can be easily understood. This is what is normally understood as competition. And it is obvious that for any player, the competitors influence prices as well as the costs of competing in the industry, in production facilities product development, advertising, sales force, etc.
Threats from substitutes: Substitute products are a latent source of competition in an industry. In many cases they become a major constituent of competition. Substitute products offering a price advantage and/or performance improvement to the consumer can drastically alter the competitive character of an industry. And they can bring it about all of a sudden. For example, coir suffered at the hands of synthetic fibre. Wherever substantial investment in R&D is taking place, threats from substitute products can be expected. Substitutes, too, usually limit the prices and profits in an industry.
So, in addition to existing rivals or competitors proper, forces such as new entrants, customers, suppliers, and substitutes have all to be viewed as forces governing competition in the industry. A firm has to give due weightage to each of these forces as a fight can emerge from any quarter.
The five forces together determine industry attractiveness/profitability. This is so because these forces influence the causes that underlie industry attractiveness/profitability. For example, elements such as cost and investment needed for being a player in the industry
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decide industry profitability, and all such elements are governed by these forces. The collective strength of these five competitive forces determines the scope to earn attractive profits. The strength of the forces may vary from industry to industry as also within a given
Self-Examination Questions Multiple Choice Questions
1. All are elements of micro environment except:
(a) Consumer.
(b) Suppliers.
(c) Competitors.
(d) Society.
2. All are elements of macro environment except:
(a) Society.
(b) Government.
(c) Competitors.
(d) Technology.
3. Select the correct statement out of the following:
(a) Environmental factors are totally beyond the control of a single industrial enterprise.
(b) Environmental factors are largely beyond the control of a single industrial enterprise.
(c) Environmental factors are totally within the control of a single industrial enterprise.
(d) None of the above.
4. In response to the changes in the environment organizations in general should:
(a) Understand the impact of changes on the strategy and make appropriate modifications.
(b) Make efforts that changes are reverted back so that organizations can function smoothly.
(c) Ignore the changes.
(d) None of the above.
5. Read the following three statements:
(i) The environment is constantly changing in nature
(ii) Various environmental constituents exist in isolation and do not interact with each other.
(iii) The environment has a far reaching impact on organizations.
From the combinations given below select an alternative that represent statements that are true:
(a) (i) and (ii).
(b) (ii) and (iii) (c) (i) and (iii) (d) (i), (ii) and (iii) Short answer Questions 1. What is a kieretsus?
2. What is demographic environment of business?
3. Write a short note on micro environment.
Essay type Questions
1. Do you advocate that organizations should concern themselves with the elements of its outside world? Why?
2. Discuss the relations between organizations and their external environment? How organizations strategically respond to their environment?
3. What do you mean by micro and macro environment?
4. Briefly discuss various elements of macro environment.
5. What is competitive environment? Discuss the five forces driving industry competition as given by Porter.
Case Study
Information technology (IT) exports from the Software Technology Park in Sohanpur in Uttar Pradesh has increased from Rs 1005 crore to Rs 1455 crore in the last five years. To further this growth and discuss the common issues various IT professionals of different companies assembled for a meeting. Their agenda included discussion on the issues relevant for the development of the technology park and available opportunities in IT industry for companies
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planning to set up IT and processing businesses in Sohanpur.
It was felt by a few persons that the absence of an airport and availability of uninterrupted round the clock power supply were major hurdles towards the development of the park. The nearest airport is 600 km away in New Delhi.
One of the participant highlighted the importance of world-class telecommunication facilities in the area. He felt that the telecommunications technology in the region is primitive and is not able to meet the present needs of the region. He also spoke at length about the problems of frequent job changes by present youth. He highlighted that a major problem is lack of patience in the young generation of IT professionals. He said retention was a major problem in Sohanpur as professional also preferred bigger cities. He suggested that the IT businesses should get together to create a conducive working climate for retention as well as growth.
Read the above case and answer the following questions:
(1) List out different environmental factors for a new entrepreneur who wants to start a new IT project in the Technology park. Segregate them as positive and negative.
(2) What is importance of an Airport in the city? Discuss.
(3) Suggest how manpower issues can be dealt by the businesses in the park.
Answers - Multiple Choice Questions 1. (d) 2. (c) 3. (b) 4. (a) 5. (c).