Henry: Understanding Strategic

Management

Chapter 3: The Competitive

Environment
Presented by Dr Adel Al-Alawi
 Chapter 3: The Competitive
Environment
Presented by Dr Adel Al-Alawi

The external environment facing an

organization consists of a general
environment and a competitive
environment.

It is widely accepted that the nature of

competition in an industry is more directly
influenced by developments taking place in
competitive environment
 PORTER’S FIVE FORCES
MODEL
• Michael Porter’s Ideas on competitive strategy
include some of the most pervasive analytical tools
used in strategic management.
• The Five Forces Model helps business people
understand the relative attractiveness of an industry
and the industry’s competitive pressures in terms of
1. Buyer power
2. Supplier power
3. Threat of substitute products or services
4. Threat of new entrants
5. Rivalry/competition among existing competitors

1-3
 The Competitive Environment
Porter’s five forces
•
•An analysis of industry structure
• The framework tries to capture the variation of
competition while remaining pervasive/broad
and rigorous/precise
• Generalizations are made to all industries on
the basis of 5 core elements
• Undertaken from the perspective of incumbent
/current organizations
 The Competitive Environment
Porter’s five forces
• Undertaken at the level of an organization’s strategic
business unit (SBU)
• Industry attractiveness (profit potential)
determined by interaction of 5 competitive forces

• Organizations should position themselves to

mitigate prevailing industry structure (See Ch. 7)

• It is the combined strength of these 5 forces that

determine an organization’s return on investment
 The Competitive Environment
Porter’s five forces
• Porter’s Five Forces Framework of
Industry Competition

Figure 3.1
 The Competitive Environment
Porter’s five forces

1. The Threat of New Entrants

2. The Bargaining Power of Buyers
3. The Bargaining Power of Suppliers
4. The Threat of Substitute Products
and Services
5. The Intensity of Rivalry among
Competitors in an Industry
 The Competitive Environment
Porter’s five forces
The Threat of New Entrants
• New competitors entering an industry and
reducing its profitability
• New entrants will be attracted to industries that
earn profits in excess of their cost of capital
• The threat of entry will depend on:
– the existence of barriers to entry
– the reaction of existing competitors.
• High barriers to entry make the threat of entry
low
• Expected retaliation will deter firms entering
the industry
 The Competitive Environment
Porter’s five forces
The Bargaining Power of Buyers
• This reflects the extent to which their purchase
represents a sizeable proportion of the
organization's overall sales
• Buyer power increases when:
- buyers are concentrated
- the industry product is standard or undifferentiated
- the costs of switching are low
- buyers pose a credible threat of backward
integration
 The Competitive Environment
Porter’s five forces
• Buyer power – high when buyers have
many choices and low when their choices
are few
• Competitive advantages are created to get
buyers to stay with a given company
– NetFlix – set up and maintain your movie list
– United Airlines – frequent flyer program
– Apple iTunes – buy/manage your music
– Dell – customize a computer purchase
 This
Buyer Power slide
• Competitive advantage – providing a
product or service in a way that customers
value more than what the competition is able
to do
• First-mover advantage – significant impact
on gaining market share by being the first to
market with a competitive advantage
• All competitive advantages are fleeting
– E.G., all airlines now have frequent flyer
programs

1-11
 The Competitive Environment
Porter’s five forces
The Bargaining Power of Suppliers
NB The buyer is the firm in the industry and the
supplier is the producer of that firm’s input
• Supplier power increases when:
- the supplier industry is dominated by a few companies
- It is more concentrated than the industry it sells to
- suppliers are faced with few substitutes
- suppliers’ products are differentiated
- suppliers pose a credible threat of forward integration
 Supplier Power
• Supplier power – high when buyers have
few choices and low when choices are many
• The opposite of buyer power

1-13
 The Competitive Environment
Porter’s five forces
The Threat of Substitute Products and
Services
• The threat from products and services that can
meet similar needs
• It does not refer to competition from new entrants
• Substitutes limit the potential returns of an
industry
• The price/performance ratio of substitute
products will determine the extent of their threat
 The Competitive Environment
Porter’s five forces
The Intensity of Rivalry among Competitors
This is affected by:
• Numerous or equally balanced competitors
• Slow industry growth
• High fixed costs
• Lack of differentiation or switching costs
• Extra capacity in large increments
• High exit barriers
The Competitive Environment
Criticisms of Porter’s Five Forces
• The five forces framework assumes a zero-
sum game . i.e. competitors can only succeed
at the expose or representation of other
players in the industry. For example Toyota
and Honda work closely with their suppliers to
ensure that parts are available at the right
price of the exact quality and only when
needed in order to reduce inventory and
associated costs.
The Competitive Environment
Criticisms of Porter’s Five Forces
• It is static and assumes stable markets
• Many strategies are not deliberate but
emerge (Mintzberg and Waters, 1985)
• The government might usefully constitute a
sixth force
• The five forces need to approximate more
closely a dynamic theory of strategy
 The Competitive Environment
Extending Porter’s Five Forces

• Brandenburger and Nalebuff (1996) use

of the value net
• The value net includes:
- a map of the competitive game
- the players in the game
- their relationship to each other
• Complementors supply complements to an
industry and thereby increase its value
The Competitive Environment
• The Inclusion of Complementors
within Porter’s Five Forces

Figure 3.4
 The Competitive Environment
Strategic Group Analysis
Strategic groups are:
• Firms in an industry following similar or identical
strategies
• Strategic groups constitute a cluster within an
industry
• Mobility barriers deter movement between
strategic groups
• If strategic groups are moving further apart
‘strategic space’ may exist that can be exploited
 The Competitive Environment
Hypercompetition
• A relentless mode of competitive behaviour to
force competitors out of the industry
• The market is characterised by constant
disequilibrium
• An example is Microsoft in software application
• It requires competitors to constantly upgrade
and innovate
• The effect is to erode any competitive
advantage