External Environment

Question 1

industry

Answer 1

group of firms producing products that are close substitutes.

Question 2

What are Porter’s five competitive forces

Answer 2

1. Rivalry among competing firms
2. threat of new entrants
3. bargaining power of suppliers
4. bargaining power of buyers
5. threat of substitute products

Question 3

Intensity of Rivalry Among Competitors (6 things)

Answer 3

Rivalry is intense when:
• Numerous or equally balanced competitors (Bakeries in Montreal; Coca-Cola vs. PepsiCo globally)
• Lack of differentiation or low switching costs (car rentals)
• Slow industry growth (household cleaning products)
• High fixed costs or high storage costs (restaurants, beauty salons)
• High strategic stakes (Google vs. Microsoft in voice search)
• High exit barriers (high investment in specialized assets, contractual obligations involving penalties, management’s emotional attachment to a particular business or market)

Question 4

Threat of new entrants

Answer 4

Its significance is function of two factors:
1: Barriers to entry
• Economies of scale (Amazon: input volume discounts, lower per unit marketing costs)
• Capital requirements (aircraft manufacturing: cost of equipment, up-front advertising etc.)
• Switching costs of customers (SAP software installation in the organizations)
• Access to distribution channels (difficulty for retailers to get into popular shopping malls)
• Cost disadvantages independent of scale (access to raw materials, brand reputation,
proprietary technology)
• Government policy (telecommunications services, liquor retailing, subsidized daycare licenses)
2: Expected retaliation from existing firms in the industry
past competitive reactions, public announcements of intent

Question 5

Threat of Substitute Products

Answer 5

The threat is significant when:
Goods or services outside of a given industry perform same or similar functions at a competitive price.
Examples:
- Adoption of smart phones and tablets negatively impacted demand for personal computers.

Question 6

Bargaining Power of Suppliers (6 things)

Answer 6

They are powerful when:
• Few large companies and more concentrated than the industry to which they sell
(Intel to PC manufacturers)
• No or few substitutes (Google search to businesses who seek visibility on the web)
• Supplier’s goods are critical to buyer’s success (content providers to Netflix)
• Suppliers’ products are highly differentiated (producers of popular cartoons selling
licenses to toy manufacturers)
• Threat of forward integration (supplier bringing buyer’s function in-house: Apple stores).
• Industry firms not significant customer to supplier group (consumer electronics represent only 9% of total semiconductor sales)

Question 7

Bargaining Power of Buyers (5)

Answer 7

They are powerful when:
• They purchase a large portion of industry’s total output (Wal-Mart)
• Product sales accounts for significant portion of seller’s annual revenue
(coffee bean suppliers to Starbucks)
• Low switching costs (consumers vs. coffee shops)
• Industry products are undifferentiated or standardized (PC computers)
• Threat of backward integration (buyer bringing supplier’s function inhouse (airlines owning oil refineries)

Question 8

What are some common mistake when applying Porter’s 5 forces?

Answer 8

1. Defining an industry too broadly or too narrowly
2. Confusing products of direct competitors with the “threat of substitutes” force
   - - substitutes are outside of the industry
3. Focusing too much on labeling the 5 forces