The five forces analysis is a framework developed by Michael Porter to analyze the competitive forces in an industry and assess the attractiveness of entering or competing in that industry. The five forces are:
- Threat of new entrants: This refers to the potential for new companies to enter the industry and compete with existing firms. Factors that can affect this force include the level of entry barriers, such as the cost of setting up a new business or the availability of resources and technology.
- Threat of substitute products or services: This refers to the potential for consumers to switch to alternative products or services that can fulfill the same need. Factors that can affect this force include the relative price and performance of substitutes, as well as the switching costs associated with switching to a substitute.
- Bargaining power of buyers: This refers to the ability of customers to negotiate lower prices or better terms with suppliers. Factors that can affect this force include the number and size of buyers, the importance of the product to the buyers, and the availability of substitute products.
- Bargaining power of suppliers: This refers to the ability of suppliers to negotiate higher prices or better terms with buyers. Factors that can affect this force include the number and size of suppliers, the importance of the product to the suppliers, and the availability of substitute products.
- Rivalry among existing competitors: This refers to the intensity of competition among existing firms in the industry. Factors that can affect this force include the number and size of competitors, the level of differentiation among competitors, and the rate of industry growth.
To conduct a five forces analysis, you would gather data on these forces and use it to assess the overall attractiveness of the industry. This can be done using tools like the ones mentioned in the prompt, which involve evaluating the various factors that affect each force and assigning a rating based on that evaluation. The results of the analysis can then be used to inform strategic decision-making, such as whether to enter or compete in the industry, or to identify areas for improvement in order to increase the competitiveness of a firm.
Question: Pick an industry of your choice, and then complete exercise 2 at the end of chapter 2 (under the application exercises). Below you will find the full explanation of how to use the tools and figures to analyze industry.
Industry analysis Activity Sheet.xlsx
(Figures 2.5-2.10 are represented in the activity sheet)
Detailed Explanation of how to implement the tool:
Understanding the five forces and their effect on the landscape that a firm competes in is a cornerstone of successful strategic analysis. Figures 2.5 through 2.10 are general analytical tools used by a number of Fortune 500 firms to evaluate the intensity of the five forces in an industry, either their own or one they are thinking about entering. These tools essentially help to quantify the ideas that we have already discussed in this chapter. In practice, top management often implicitly understands the dynamics of the five forces and might not personally use the tools presented here to map out the strength of each force and its overall effect on industry profitability. Although the tools might appear complicated, they distill the concepts from this chapter, allowing a relatively simple, yet comprehensive and detailed analysis of the five forces.
You can look for the data to complete these analysis tools in the sources listed in the online appendix to this text. Many of the indicators in these analysis tools are objective numbers that you can obtain from various data sources. Others are more subjective; they require a logical argument for the level—low, medium, or high—that you choose. Even for more subjective indicators, however, data from various sources, for instance, and articles in the business press, can take the guesswork out of doing a five-forces analysis.
To use the tools, for each separate item, put an X in the box that most accurately reflects the data you have gathered on your industry. For some boxes this is a range of data, for instance, 60 to 70 percent combined market share in the rivalry tool. If the correct number is anywhere within the range, put an X in the appropriate box. Cite your data source and/or explain the logic of your placement underneath each item. Your answer for some rows of boxes will be an average of more than one item. For instance, in the rivalry tool, the degree of industry standardization is the average of the four items below it.
After filling out each item, you will use the columns. Each column is assigned a number, 1 through 5. The columns will help you to find the correct answer for elements that have subsets to them. For instance, in the rivalry worksheet, you need to determine whether the degree of industry product standardization is low, medium, or high. The low, medium, and high are encased in boxes, letting you know that this is a major concept, while the rows that are not in boxes will help determine the answer to the major concept. You also should notice that each row of boxes lines up with a number to the left. Each number is a major concept that you will use to determine the overall level of whichever force you are measuring, in this case, rivalry.
So, to determine the degree of standardization, you will use data and/or logic to put an X on the right answer (according to your data) for each of the four rows underneath Product Standardization. Now the columns come into play. Notice that each X that you placed falls under one of the columns. Each column has a number 1 through 5. Add up the placement of your Xs and then divide by the number of rows you were using (in this case there were four) to determine whether Product Standardization is high, medium, or low.
To get the value for the overall intensity of each force, you will first add the values from the boxes with Xs in them (the major concepts, i.e., that have a row of boxes and a number next to them on the left side of the worksheet). The values come from the columns. So, you would look down each column and see if a box has an X in it. If all the boxes are in Column 1, we would get a six for the rivalry worksheet because there are six major concepts. If all of the boxes were in Column 5, we would get a 30 (6 × 5 = 30). After you have a total from adding the numbers of each box, which you obtained from the column it is in, you divide that number into the number of major concepts (6 for rivalry) times the number of columns (5). For the rivalry worksheet, the total number possible is 30. Suppose the sum of all of the major concepts (found in the boxes, each one under a numbered column) for your analysis is 15. Using those two numbers, you have 30 divided by 15 = 2. You would then place your answer for the Overall Intensity of Rivalry (the row at the very bottom) under Column 2, resulting in rivalry that is relatively competitive (halfway between fiercely competitive and neutral). As with the subconcepts, always round your answer to the nearest whole number. If you got a 1.6 or a 2.4, you still would put your final X under Column 2.
And now that you know how to use the worksheets, go and do great work!
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