THE COMPETITIVE

ENVIRONMENT

Cristina Boari - BS 2021-22

Cristina Boari - BS 2021-22
Average Economic Profits of U.S. Industries
(1989–2006)

Cristina Boari - BS 2021-22

Main questions
• How can we analyze and understand our competitive environment?
• How can we evaluate its attractiveness?
• How can we evaluate a competitive environment as an opportunity
for investment?

Cristina Boari - BS 2021-22

The five forces framework: origins
• Industry’s structure determines the conduct of buyers and
sellers and their profits (Mason, 1939)

• Three basic barriers to entry (Bain, 1950s)

• absolute cost advantage by an established firm
• product differentiation
• economies of scale
•Major focus on the role of public policy

Cristina Boari - BS 2021-22

The five forces framework by Porter
• Porter’s “Note on the Structural Analysis of Industries” (1974)
• Focus on the business policy objective of profit maximization
• rather than the public policy objective of minimizing “excess” profits
• Competitive Strategy (1980)
• Interest in firms’ strategies
• “five forces” framework
• extended competition for value, rather than just competition among existing
rivals
• Bain Consulting survey (1993) : 25% usage rate of the model

Cristina Boari - BS 2021-22

Five forces framework

Cristina Boari - BS 2021-22

Competition in Italian shoes industry
• Chinese production started
competing with Italian shoes in late
‘90s
• Chinese shoes had prices lower than
Italian shoes
• How did Italian firms react?
• Which was the most “dangerous”
reaction for firms’ profit?
• Which competitive environment
conditions do bring firms to use this
“dangerous” reaction?

Cristina Boari - BS 2021-22

Force 1: Degree of Rivalry
• Rivalry and the probability that
competition evolves as “price war”
• Several determinants of rivalry exist
• Number and relative size of direct
competitors
• Slow growth of the market
• Amount of fixed costs
• Capacity utilization
• Low differentiation of offer and
switching costs
• Behavioral determinants
• Exit barriers
Cristina Boari - BS 2021-22
The beer industry in USA in 1970s

• Many SMEs with local markets

• In 1969 Philip Morris acquires Miller, a medium –sized
producer of beer
• Miller becomes the leader producer in USA, with a national
market
• How did the competitive environment change for U.S.
producers?
• What would have limited the Philip Morris entry into the
industry?
Cristina Boari - BS 2021-22
Force 2: Threat of Entry
• Industry profitability is also influenced by potential
competitors!!
• Entry barriers matter
• Economies of scale and experience
• High Product differentiation
• Switching costs
• High need of capital
• Access to key resources
• Public policy
• Network effect

• Incumbents’reactions may matter

• Barriers to entry can change
• over time
• depending on firms’ strategies Cristina Boari - BS 2021-22
Napster and the file sharing
• Fall 1999: the start up Napster and the service of file sharing
• December 1999: Major record companies took legal action against Napster
for copyright infringement
• February 2001: 13,6 million Napster users
• 1999-2001: dozens of Napster’s clones are created
• March 2001: Bertelsman makes an agreement with Napster
• May 2002: Bertelsman buys Napster
• Sony and Vivendi start their subscription services
• ……….many Napster’s imitators (Kazaa, Gnutella….) and the record
industry is the first to experiment the impact of internet with 2digit drops
of sales and profits

Cristina Boari - BS 2021-22

Force 3: Threat of Substitutes
• Different products, services or business models that satisfy
the same basic need of customers
• Customers not always quick in detecting them
• Sometimes difficult to be spotted and addressed by
incumbents!
• Threat of substitutes depends on:
• Price-to-performance ratios
• Switching costs for customers
• Retraining
• Retooling
• Redesign
Cristina Boari - BS 2021-22
Force 4: Buyer Power and price sensitivity
• Determinants of bargaining power
• Relative size and concentration of customers
• Customers buy standardized products
• Customers have good information
• Customers threaten to integrate backward
• Willingness or incentive to use buyer power
• Financial crisis
• Customers buy in large volumes
• Product/service is significant portion of buyer’s costs

Cristina Boari - BS 2021-22

Force 5: Supplier Power
• Involves suppliers of components, product, services, labor

• Determinant of bargaining power

• relative size and concentration of suppliers relative to industry participants
• High degree of differentiation of product and services/ switching costs
• Suppliers threaten to integrate downward

Cristina Boari - BS 2021-22

Cristina Boari - BS 2021-22
The evaluation of industry attractiveness requires
a forward looking perspective

Cristina Boari - BS 2021-22

Critics to the Porter’s framework
• A static model
• The role of innovation is limited
• Are industries given and stable?
• The relationships among different actors are competitive: “ a
zero-sum game”?

Cristina Boari - BS 2021-22