Worksheet 2: Analyzing Competitive Forces In An Industry

Worksheet 2analyzing Competitive Forces In An Industryexternal Environ

WORKSHEET 2 ANALYZING COMPETITIVE FORCES IN AN INDUSTRY EXTERNAL ENVIRONMENT Source : Grant,R.M., Jordan,J., & Walsh,P.R. (2015). Foundations of Strategy (Canadian Edition). Wiley PORTER’S FIVE FORCES MODEL The Force Step 1: Who? Step 2; Strength (VW, W, M, S, VS) Step 3: Justification & Impact (Use determinants from above) Threat of Competitive Rivalry Threat of New Entrants Threat of Substitute Products/ Services Threat of Supplier Bargaining Power Threat of Buyers Bargaining Power and Price Sensitivity Source : Adapted from Porter, M.E. (1979). ‘How competitive forces shape strategy’. Harvard Business Review, 57(2) , 137-45; and the course text Thompson,A.A., Peteraf,M.A., Gamble,J.E., & Strickland,A.J. (2018) Crafting & Executing Strategy: The Quest for Competitive Advantage, 21e. McGraw-Hill

CONCLUSION ABOUT THE LIKELY IMPACT OF THE COMPETITIVE FORCES ON THE INDUSTRY (from the perspective of an incumbent firm)

WORKSHEET 5 INDUSTRY KEY SUCCESS FACTORS EXTERNAL ENVIRONMENT KSF JUSTIFICATION Assessment of Key Success Factors : Rank the KSF’s from most to least critical? Justify your answer. Source : Adapted from Thompson,A.A., Peteraf,M.A., Gamble,J.E., & Strickland,A.J. (2020) Crafting & Executing Strategy: The Quest for Competitive Advantage, 22e. McGraw-Hill (p 79-80).

Paper For Above instruction

The analysis of industry external environment through Porter’s Five Forces model serves as a fundamental framework for understanding competitive dynamics and strategic positioning within an industry. This essay explores each of the five forces including rivalry among existing competitors, threats from new entrants, the threat of substitute products or services, bargaining power of suppliers, and bargaining power of buyers. By evaluating the strength of these forces, firms can anticipate the level of competition and develop strategies to enhance their competitive advantage.

Threat of Competitive Rivalry

The rivalry among existing competitors is often the most visible force in an industry. Its intensity depends on factors such as industry growth rate, product differentiation, fixed costs, and exit barriers. When industry growth is slow, firms tend to compete aggressively for market share, often leading to price wars and increased marketing expenses. For example, the airline industry experiences intense price competition due to high fixed costs and low product differentiation. Conversely, industries characterized by high product differentiation, such as luxury automobiles, usually encounter less direct rivalry. The strength of this force can be classified as high (H) when rivalry leads to sustained price cutting and innovation, or weak (W) when firms coexist with minimal direct competition. In this context, establishing unique value propositions and differentiation strategies can mitigate the intensity of rivalries and safeguard profitability.

Threat of New Entrants

The threat posed by potential new entrants hinges on barriers to entry including economies of scale, brand loyalty, access to distribution channels, and regulatory requirements. High barriers deter new competitors, thus protecting incumbents’ market share. For instance, the pharmaceutical industry benefits from high regulatory barriers and significant R&D investments, making entry difficult for newcomers. On the other hand, industries like online retail have lower entry barriers, increasing the threat from startups and new players. The strength of this force can be judged as medium (M) when barriers are moderate, or low (L) when entry is relatively easy. Incumbent firms should continuously innovate and strengthen barriers through investments, patents, and customer loyalty programs to sustain their market position.

Threat of Substitute Products/Services

Substitutes threaten industry profitability when they offer alternative solutions that fulfill similar needs at potentially lower cost or higher convenience. The impact of substitutes is significant in industries like beverage manufacturing, where bottled water and energy drinks serve as alternatives to soft drinks. Technological advances often facilitate substitutes, as seen with digital streaming replacing traditional cable TV. The threat level here can vary from high (H) when substitutes are readily available and inexpensive, to low (L) when switching costs are high. Firms need to monitor technological innovations and evolving consumer preferences to preempt or counteract the threat of substitutes effectively.

Bargaining Power of Suppliers

Suppliers wield influence over prices and quality when their concentration is high relative to that of industry firms, or when switching suppliers is difficult. For example, in the semiconductor industry, a limited number of suppliers control critical components, granting them significant bargaining power. High supplier power can lead to increased input costs, squeezing margins. Conversely, when multiple suppliers compete or when firms can vertically integrate, supplier power diminishes. The strength of this force can be assessed as high (H) when suppliers have considerable influence, or low (L) when industry players enjoy multiple sourcing options. Strategic supplier relationships and diversification can mitigate supplier power's adverse effects.

Bargaining Power of Buyers

Buyers exert pressure primarily through their ability to influence prices and demand higher quality or services. Large-volume buyers, such as supermarket chains, often negotiate favorable terms, reducing industry profitability. High price sensitivity among buyers amplifies their bargaining power, especially when switching costs are minimal. For example, in the consumer electronics industry, retailers and major buyers’ negotiation leverage can significantly affect manufacturer margins. The power of buyers can be classified as high (H) when their demands compel price reductions and product customization, or low (L) when buyers have limited alternatives. Maintaining customer loyalty and differentiating products are key strategies to neutralize buyer power.

Conclusion on the Impact of Forces

Overall, the collective strength of these five forces determines industry profitability and strategic opportunities. A high competitive rivalry coupled with low barriers to entry and strong supplier and buyer power can significantly diminish profit margins for incumbents. Conversely, industries with high entry barriers, differentiated products, and manageable supplier and buyer influences tend to offer more stable profit prospects. For incumbent firms, understanding these forces enables better strategic planning, such as investing in innovation, building barriers, and forging strategic alliances.

Industry Key Success Factors (KSFs)

Key Success Factors are critical elements that industry participants must excel in to outperform competitors. These include technological innovation, cost efficiency, customer loyalty, brand reputation, and access to distribution channels. Prioritizing KSFs allows firms to allocate resources effectively and develop core competencies aligned with industry demands.

Assessment and Ranking of KSFs

In analyzing industry-specific KSFs, their importance varies according to industry context. For instance, in the technology sector, innovation and speed to market are paramount, whereas in retail, customer loyalty and cost efficiency hold more weight. Ranking these KSFs from most to least critical involves evaluating their impact on competitive advantage. Technology firms might prioritize innovation at the top, followed by access to distribution, whereas service sectors may emphasize customer service quality. Justification hinges on how each factor influences market share, profitability, and long-term sustainability. Effective strategic focus on top-ranked KSFs enhances a firm's resilience and growth prospects.

Conclusion

Understanding the external industry forces and key success factors provides a strategic foundation for firms aiming to sustain competitive advantage. Regular assessment allows firms to adapt to changing market dynamics, technological disruptions, and competitive challenges, securing their position within the industry landscape.

References

• Grant, R. M., Jordan, J., & Walsh, P. R. (2015). Foundations of Strategy (Canadian Edition). Wiley.
• Porter, M.. (1979). How competitive forces shape strategy. Harvard Business Review, 57(2), 137-45.
• Thompson, A.., Peteraf, M.., Gamble, J.. E., & Strickland, A.. J. (2018). Crafting & Executing Strategy: The Quest for Competitive Advantage (21st ed.). McGraw-Hill.
• Thompson, A.., Peteraf, M.., Gamble, J.. E., & Strickland, A.. J. (2020). Crafting & Executing Strategy: The Quest for Competitive Advantage (22nd ed.). McGraw-Hill.
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