The Task Environment/Porters Competitive Forces

Model
Porter's five forces analysis is a framework that attempts to analyze the
level of competition within an industry and business development. It draws
upon industrial organization (IO) economics to derive five forces that determine the
competitive intensity and therefore attractiveness of an Industry.
Attractiveness in this context refers to the overall industry profitability.
Porter referred to these forces as the micro environment, to contrast it with
the more general term macro environment. They consist of those forces
close to a company that affect its ability to serve its customers and make a
profit.

1.Threat of new entrants

Profitable markets that yield high returns will attract new firms. This results in many
new entrants, which eventually will decrease profitability for all firms in the industry.
Unless the entry of new firms can be blocked by incumbents (which in business
refers to the largest company in a certain industry, for instance, in

telecommunications, the traditional phone company, typically called the "incumbent

operator"), the abnormal profit rate will trend towards zero (perfect competition).
The following factors can have an effect on how much of a threat new
entrants may pose:

The existence of barriers to entry (patents, rights, etc.). The most attractive
segment is one in which entry barriers are high and exit barriers are low. Few
new firms can enter and non-performing firms can exit easily.
Government policy
Capital requirements
Absolute cost
Cost disadvantages independent of size
Economies of scale
Economies of product differences
Product differentiation
Brand equity
Switching costs or sunk costs
Expected retaliation
Access to distribution
Customer loyalty to established brands
Industry profitability (the more profitable the industry the more attractive it
will be to new competitors)

2.Threat of substitute products or services

The existence of products outside of the realm of the common product boundaries
increases the propensity of customers to switch to alternatives. For example, tap
water might be considered a substitute for Coke, whereas Pepsi is a competitor's
similar product. Increased marketing for drinking tap water might "shrink the pie"
for both Coke and Pepsi, whereas increased Pepsi advertising would likely "grow the
pie" (increase consumption of all soft drinks), albeit while giving Pepsi a larger slice
at Coke's expense. Another example is the substitute of a landline phone with a
cellular phone.
Potential factors:

Buyer propensity to substitute

Relative price performance of substitute
Buyer switching costs
Perceived level of product differentiation
Number of substitute products available in the market
Ease of substitution
Substandard product
Quality depreciation
Availability of close substitute

3.Bargaining power of customers (buyers)

The bargaining power of customers is also described as the market of outputs: the
ability of customers to put the firm under pressure, which also affects the
customer's sensitivity to price changes. Firms can take measures to reduce buyer
power, such as implementing a loyalty program. The buyer power is high if the
buyer has many alternatives. The buyer power is low if they act independently e.g.
If a large number of customers will act with each other and ask to make prices low
the company will have no other choice because of large number of customers
pressure.
Potential factors:

Buyer concentration to firm concentration ratio

Degree of dependency upon existing channels of distribution
Bargaining leverage, particularly in industries with high fixed costs
Buyer switching costs relative to firm switching costs
Buyer information availability
Force down prices
Availability of existing substitute products
Buyer price sensitivity
Differential advantage (uniqueness) of industry products
RFM (customer value) Analysis
The total amount of trading

4.Bargaining power of suppliers

The bargaining power of suppliers is also described as the market of inputs.
Suppliers of raw materials, components, labor, and services (such as expertise) to
the firm can be a source of power over the firm when there are few substitutes. If
you are making biscuits and there is only one person who sells flour, you have no
alternative but to buy it from them. Suppliers may refuse to work with the firm or
charge excessively high prices for unique resources.
Potential factors are:

Supplier switching costs relative to firm switching costs

Degree of differentiation of inputs
Impact of inputs on cost or differentiation
Presence of substitute inputs
Strength of distribution channel
Supplier concentration to firm concentration ratio
Employee solidarity (e.g. labor unions)
Supplier competition: the ability to forward vertically integrate and cut out
the buyer.

5.Intensity of competitive rivalry

For most industries the intensity of competitive rivalry is the major determinant of
the competitiveness of the industry.
Potential factors:

Sustainable competitive advantage through innovation

Competition between online and offline companies
Level of advertising expense
Powerful competitive strategy
Firm concentration ratio
Degree of transparency

Globalization
The process whereby national economies and business systems are becoming
deeply interlinked with each other.

THE SPREAD OF MARKET-BASED SYSTEMS

Market Economy
An economy in which businesses are privately owned and prices are set by the
interaction of supply and demand.

Socialist Economy
An economy in which businesses are owned by the state and prices are set by state
planners.

FALLING BARRIERS TO TRADE AND INVESTMENT

International trade
The sale of a good or service across borders.

Foreign Direct Investment

Investments by a company based in one nation in business activities in another
nation.

Tariffs
A tax on imports.

Quotas
A limit on the number of items of a good that can be imported from a foreign nation.

Regional Trade Agreements

Agreements to remove barriers to trade between nations within a geographic
region.

TUMBLING COMMUNICATION AND

TRANSPORTATION COSTS
The lowering of barriers to international trade and FDI made globalization a
theoretical possibility; technological change has made it a tangible reality. Over the
past 30 y ears, global communications have been revolutionized by developments
in satellite, optical fiber, and wireless technologies, as well as the Internet. The
costs of global communications are plummeting, which lowers the costs of
coordinating and controlling a global organization. Between 1930 and 1990 the cost
of a three-minute phone call between New York and London fell from $244.65 to
$3.32.11 By 1998 it had plunged to just 36 cents for consumers.

Implications of Globalization
The implications of the trends we have just discussed are profound. First, these
trends have resulted in a massive surge in the volume of international trade and
foreign direct investment. According to data from the World Trade Organization,
from 1970 to 2004 the volume of world merchandise trade expanded almost 26fold, outstripping world production, which grew about 7.5 times in real terms. (World
merchandise trade includes trade in manufactured goods, agricultural goods, and
mining products, but not services. World production and trade are measured in real,
or inflation-adjusted, dollars.)

Globalization of Production
Sourcing goods and services from locations around the globe to take advantage of
national differences in the cost and quality of factors of production.

Globalization of Markets
The merging of historically distinct and separate national markets into one huge
global marketplace.

TECHNOLOGY: THE GREAT FACILITATOR

Due to technological innovations the real costs of information processing and
communication have fallen dramatically. These developments allow managers to
create and then manage a globally dispersed production system, further facilitating
the globalization of production. A worldwide communication network has become
essential for many internationals businesses.
For example, Dell uses the Internet to coordinate and control its globally dispersed
production system to such an extent that it holds only two days worth of inventory
at its assembly locations. Dells Internet-based system records orders for computer

equipment as the y are submitted by customers via the companys Web site, and
then immediately transmits the resulting orders for components to various suppliers
around the world.

Constraints on Globalization
Globalization is not inevitable. Powerful countervailing forces are constraining the
pace at which production and markets are becoming global. These constraints limit
the ability of managers to disperse production activities to locations in the world
where they can be performed at the lowest cost, as well as managers ability to
treat the entire world as a single homogeneous marketplace.

PROTECTIONIST COUNTERTRENDS
The worldwide march toward market-based economic systems with few or no
barriers to cross-border trade and investment is not guaranteed to continue. History
is full of reversals away from progressive trends. The first bloom of modern global
trade in the late 1800s and early 1900s was brought to an end by protectionist
policies in major trading nations during the 1920s and 1930s, which led to a slump
in international trade and helped usher in the Great Depression.

NATIONAL DIFFERENCES IN CONSUMER BEHAVIOR

It is important not to overstate the globalization of mark eats. Although many goods
and services are sold globallyfrom Boeing jets and Nokia cell phones to Starbucks
coffee and McDonalds hamburgersthere are still often substantial differences
between the tastes and preferences of consumers in different nations. Many
enterprises have discovered (at their cost) that foreign consumers differ from
domestic consumers, and that accounting for these differences requires them to
customize goods and services to better match local demand. In other words, truly
global markets may be some way off.

NATIONAL DIFFERENCES IN BUSINESS SYSTEMS

There are still major differences between nations in business systems, legal
systems, infrastructure, and overall level of economic development, and this works
against treating the world as a single global marketplace. In the pharmaceutical
industry.
For example, Americans are used to seeing advertisements for drugs on television;
but in many nations direct advertising of drugs to consumers is prohibited by law.

DIFFERENCES IN SOCIAL CULTURE

Finally, it is important to realize that differences in social culture across nations are
often profound. As such, they make it harder for firms to view the world market as
homogeneous and more difficult to manage operations in different countries. By
social culture we mean the system of values and norms that are held in common by
people living in a society. Values are abstract ideas about what a group believes to
be good, right, and desirable; they are shared assumptions about how things ought
to be. Norms are the social rules and guidelines that prescribe appropriate behavior
in particular situations.
For example:
Saudi Arabia and the United States: Cultural differences

The Benefits of Going Global

As globalization progresses, an increasing number of businesses are expanding
across national borders, becoming multinational enterprises in the process. A
multinational enterprise (MNE) is any business that has productive activities in two
or more countries. There are four main reasons why the managers of many
enterprises, both large and small, seek to expand their operations across national
borders: Doing so lets a firm expand the market for its products, realize scale and
location economies, and benefit from global learning.

EXPANDING THE MARKET

International expansion enlarges the market a firm can address, enabling it to
increase its sales and profits faster. The growth of Starbucks, for example, owes
much to the rapid international expansion of the company.
Starbucks opened its first international store in 1996, when it was operating some
700 stores in the United States. By 2005 the company had over 3,200 locations in
34 countries outside the United States (plus 7,000 more in the United States). In just
a decade Starbucks grew from a midsized national company to a world entity with a
powerful world brand. Going forward, Starbucks sees continued international
expansion as a major engine of growth. The companys aim is to make Starbucks as
ubiquitous inter nationally as other great American consumer brands, such as
McDonalds and Coca-Cola.

REALIZING SCALE ECONOMIES

The larger sales base associated with serving a global market can allow enterprises
to attain economies of scale, lower their costs, and boost their profits.
More generally, by serving domestic and international markets a firm may be able
to utilize its production facilities more intensively.
For example, if Intel sold microprocessors only in the United States, it might be ab le
to keep its factories open for only one shift, five days a week. By serving

international markets from the same factories, Intel can r un three shifts seven days
a week for lower costs and greater profitability.

REALIZING LOCATION ECONOMIES

Different locations around the world are more or less suitable for performing
different business activities.
For example, China is a good location for making textiles due to the combination of
low labor costs (textile manufacturing is labor-intensive) and good infrastructure.
The
United States is not as good for making textiles due to relative high labor costs; so
textile manufacturing has been migrating out of the United States for the last 20
years.

GLOBAL LEARNING
Implicit in our discussion so far is the idea that valuable skills are developed first at
home and then transferred to foreign operations.
Thus Wal-Mart developed its retailing skills in the United States before transferring
them to foreign locations. However, for more mature multinationals that have
already established a network of subsidiary operations in foreign markets, the
development of valuable skills can just as well occur in foreign subsidiaries.
Skills can be created anywhere within a multinationals global network of
operations, wherever people have the opportunity and incentive to try new ways of
doing things. The creation of skills that help lower the costs of production, enhance
perceived value, and support higher product pricing is not the monopoly of the
corporate center.