CHAPTER 2 : EXTERNAL ANALYSIS

COMPETITIVE FORCE
Michael Porter has identified five forces that determine the intrinsic long run profit
attractiveness of a market or market segment :
1. Intense segment riv!r"
A segment is unattractive if it already contains numerous, strong or aggressive
competitors. It is even more unattractive if it is stable or declining, if plant capacity
additions are done in large increments , if fixed costs are high, if exits are high, or if
competitors have high stakes in staying in segment. hese conditions !ill lead to
fre"uent price !ars, advertising battles and ne!#product introductions, and !ill make it
expensive to compete.
2. Ne# Entrnts
A segment $s attractiveness varies !ith the height of its entry and exit barriers. he most
attractive segment is one in !hich entry barriers are high and exit barriers are lo!. %e!
ne! firms can enter the industry and poor performing firms can easily exit. &hen both
entry and exit barrier are high, profit potential is high, but firms face more risk because
poorer#performing firms stay in and fight it out. &hen both entry and exit barriers are
lo!, firms easily enter and leave the industry, and the returns are stable and lo!. he
!orst case is !hen entry barrier are lo! and exit barriers are high. 'ere firms enter
during good times but find it hard to leave during bad times. he result is chronic over
capacity and depressed earnings for all.
$. S%&stit%te Pr'(%)ts
A segment is unattractive !hen there are actual or potential substitute for the product.
(ubstitutes place a limit on price and profit. he company has to monitor price trends
closely. If technology advances or competition increases in these substitutes industries,
prices and profits in the segment are likely to fall
*. +%"ers, gr'#ing +rgining -'#er
A segment is unattractive if the buyers possess strong or gro!ing bargaining po!er.
)uyers* bargaining po!er gro!s !hen they become more concentrated or organi+ed
!hen the product represents a significant fraction of the buyers $ costs !hen the product
is undifferentiated, !hen the buyers* s!itching costs are lo!, !hen the buyers are price
sensitive because of lo! profits or !hen buyers can integrate upstream. o protect
themselves , sellers might select buyers !ho have the least po!er to negotiate or s!itch
suppliers. A better defense consists of developing superior offers that strong buyers
cannot refuse.
.. S%--!iers, gr'#ing &rgining -'#er.
A segment is unattractive if the company*s suppliers are able to raise or reduce "uantity
supplied. (upplied tend to be po!erful !hen they are concentrated or organi+ed, !hen
they are fe! substitute, !hen the supplied product is an important input, !hen the costs
of s!itching suppliers are high, !hen the suppliers can integrate do!nstream . he best
defenses are to build !in#!in relations !ith suppliers or use multiple supply source.