CHAPTER 3:

STRATEGIC ANALYSIS:
THE COMPETITIVE ENVIRONMENT
Lecture preview

What is the Competitive Environment?

What is Porter’s Five Forces Analysis?

Can you explain each of the “Five Forces”?

What are some of the criticisms of Porter’s Five

Forces Analysis?

How might Porter’s Five Forces be usefully

extended?
Learning Objectives
After completing this topic area you should be able to:
 Discuss the background to Porter's five forces;
 Evaluate Porter's five forces framework as a tool of
competitor analysis;
 Discuss the value net and the role of complementors in
creating value;
 Explain the benefits of co-opetition;
 Undertake an analysis of strategic groups within an
industry;
 Assess the impact of hypercompetition on competitive
behaviour.
Introduction
 The competitive environment
 Porter’s Five Forces Framework
 New entrants
 Buyers
 Suppliers
 Substitutes
 Rivals
 Criticisms of Porter’s Five Forces
 Value net, complementors and co-opetition;
 Strategic groups
 Hypercompetition
What is the competitive environment?

Those factors that have a direct impact on the competitive

position of a firm.

Such as:
customers, suppliers and rivals
but also the threat of new substitute products or services and
the threat of new entrants
The Competitive Environment and Porter’s

five forces
• AN ANALYSIS OF INDUSTRY STRUCTURE
•THE FRAMEWORK TRIES TO CAPTURE THE
VARIATION OF
COMPETITION WHILE REMAINING PERVASIVE AND
RIGOROUS
•GENERALIZATIONS ARE MADE TO ALL
INDUSTRIES ON
THE BASIS OF 5 CORE ELEMENTS
•UNDERTAKEN FROM THE PERSPECTIVE OF
INCUMBENT
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

• IT IS THE COMBINED STRENGTH OF THESE 5 FORCES THAT

DETERMINE AN ORGANIZATION’S POTENTIAL
RETURN ON INVESTMENT

•ORGANIZATIONS SHOULD POSITION THEMSELVES TO

MITIGATE PREVAILING INDUSTRY STRUCTURE (SEE
LECTURE 7)
 Porter’s Five Forces Framework of Industry
Competition

Figure 3.1
The Bargaining Power of Buyers

The ability to push down prices and or demand higher quality

Buyer power increases when:

- buyers are concentrated
- the industry product is standard or undifferentiated
- the costs of switching are low
- There is a credible threat of backward integration
- the product is relatively unimportant
- the buyer earns low profits
- The buyer has full information
The Bargaining Power of Buyers

The ability to push down prices and or demand higher quality

Buyer power increases when:

- buyers are concentrated
- the industry product is standard or undifferentiated
- the costs of switching are low
- There is a credible threat of backward integration
- the product is relatively unimportant
- the buyer earns low profits
- The buyer has full information
The Bargaining Power of Suppliers

Supplier power increases when:

- the supplier industry is dominated by a few
companies or is just more concentrated than the
industry it sells to
- supplier’s product is important to buyers
- suppliers are faced with few substitutes
- suppliers’ products are differentiated
- suppliers pose a credible threat of forward
integration
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
low switching costs
 Extra capacity in large increments
 High exit barriers
The Threat of New Entrants

 New entrants are attracted when profits are well in

excess of the 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
Barriers to entry
 Economies of scale
 Capital requirements
 Product differentiation
 Switching costs
 Access to distribution channels
 Cost advantages independent of size
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 determines the extent of their threat
Criticisms of Porter’s Five Forces

 The five forces framework assumes a

zero-sum game
 It is static and assumes stable markets
 Many strategies are not deliberate but emerge
 The government might usefully constitute a sixth
force
 The five forces need to approximate more closely a
dynamic theory of strategy – collaboration as well as
competition
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
 Figure 3.1 The value net (Brandenburger and Nabeluff, 1995)

Brandenburger and Nabeluff have coined

the term “co-opetition” for a combination of
competition and cooperation.
 The Inclusion of Complementors within
Porter’s Five Forces

Government?
Figure 3.4
See Key Work feature on SunSpace:
Complementors and their impact on competitive behaviour
Strategic Group Analysis

Strategic groups:
 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 far apart ‘strategic
space’ may exist that can be exploited
A map of strategic
groups within the world
automobile industry
Hypercompetition

 Relentlesscompetitive behaviour to force out

competitors
 The market is characterised by constant
disequilibrium
Example: Microsoft in software application
 constant upgrading and innovate disrupts any
rival’s attempt to establish a competitive
advantage
Lecture review
The Competitive Environment
Porter’s Five Forces Analysis
Criticisms of Porter’s Five Forces Analysis
Extending Porter’s Five Forces
Strategic Groups
workshops
Hypercompetition
[Industry life-cycle]
Virtual Learning and Seminar

VLH
See the question on the discussion board, do
your research and make at least one
contribution to the discussion
Seminar
Come along prepared to discuss the lecture
material and in particular the review and
discussion questions at the end of Henry 2e
chapter 3
Review and Discussion Questions
Review Questions:
1. To what extent does the inclusion of
complementors in Porter’s five forces
framework help our understanding of
competitive strategy?

2. What does hypercompetition teach us about the

pursuit of a sustainable competitive advantage?

Discussion Question
“The effect of government policy on industry
structure is too pervasive not to consider
government as a sixth competitive force.”
Discuss.