Chapter 5
Industry, Market
&
Competitive Feasibility Analysis:
Evaluating Industry Attractiveness via
Porter’s Five Forces Model
Diane M. Sullivan, Ph.D., 2010
Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage
I/O Model of
Firm Performance

I/O Model says

The industry in which a
firm chooses to
compete has a stronger
influence on firm
performance than do
the choices managers
make inside their
organizations
What’s the Industry Environment?

The industry environment has a direct effect on a firm’s
competitiveness and their ability to generate profits

Industry: a market containing a group of firms producing
products/services that are similar
The industry’s attractiveness, it’s long-term profit
potential, is a function of the five forces of competition
Porter’s Five Forces Model
The results of our
Porter’s Five Forces
analysis tell us if the
industry is attractive
(e.g., how likely it is
that the industry will
be profitable in the
long-term).
Porter’s Five Forces:
The Power of Suppliers


Determined by 5 factors:
1.
Suppliers’ industry dominated by a small number of firms
2.
Suppliers sell unique or highly differentiated products
3.
Suppliers are not threatened by substitutes
4.
Suppliers threaten forward integration
5.
Firms are not important customers for suppliers
The higher the power of suppliers, the more/less
attractive the industry?
Porter’s Five Forces:
The Power of Buyers

Determined by 4 factors:
1.
Number of buyers is small

2.
Products sold to buyers are undifferentiated and standard

3.
If buyers are not earning high economic profits, they are 1) likely to be price
sensitive, and 2) their simple ability to afford higher-priced goods is low.
Buyers threaten backward integration


If the goods are commodities, buyers can find alternative products
Buyers are not earning significant economic profits

4.
Because there are few buyers, they can have more power over those
providing the goods. Large-volume buyers are also powerful.
If buyers can easily backward integrate (e.g., produce the goods or perform
the service themselves) this gives them power
The higher the power of buyers, the more/less attractive the
industry?
Porter’s Five Forces:
Threat of Substitutes

Substitutes are products/services from other industries that viably serve the
same function as products/services in the focal industry

Determined by:


What are substitutes for the USPS?


What’s its purpose (e.g., what need does it serve or problem does it solve)?
What are substitutes for libraries?


The availability of substitutes from other industries (e.g., in the auto
manufacturing industry, substitutes come in the form of public transportation,
bicycles, flying, walking, etc.).
What’s its purpose?
The higher the threat of substitutes of suppliers, the more/less attractive the
industry?
Porter’s Five Forces:
Threat of New Entrants

Determined by:

Barriers to entry:






Economies of scale
Product differentiation
Capital requirements
Switching costs faced by customers if they were to switch to another supplier of the
good
Access to distribution channels (e.g., if the entrant cannot secure a way to distribute
it’s product, it is a barrier to their entry)
Cost advantages independent of scale (e.g., other cost advantages other than
capturing economies of scale)





Proprietary technology: secret or patented technology
Managerial know-how: tacit knowledge
Favorable access to raw materials: low cost access to critical raw materials
Government regulation of entry
The higher the threat of new entrants, the more/less attractive the industry?
Porter’s Five Forces:
Intensity of Rivalry

Determined by 5 factors:
1.
Large number of competing firms that are roughly the same size

2.
3.
4.
Slow industry growth
Lack of product differentiation
High exit barriers




5.
Specialized assets
Fixed costs of exit (e.g., labor agreements)
Strategic interrelationships
Governmental and social restrictions
Large production capacities


This leads to price competition
If, in order to obtain economics of scale, production capacity must be added
in large increments, an industry is likely to experience periods of
oversupply after new capacity comes online. This leads to price cutting.
The higher the intensity of rivalry, the more/less attractive the
industry?
Industry Analysis Feasibility
Assignment Deliverables

For Checkpoint #3 (due Thur., November 11, 2010)

Determine the industry within which your firm will
compete

Compile general information about the industry (e.g., industry size,
growth rate, number of competitors, market share across
competitors, etc.)

Conduct a Porter’s Five Forces Analysis on the industry
 Determine how each separate force impacts the industry’s
attractiveness and prospects for long-term profitability
 Determine the overall industry attractiveness and prospects for longterm profitability based on the analysis