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An INDUSTRY is a group of firms that produce
similar products or offer similar services that
are close substitutes.

Compared with the general environment, the

industry environment has a more direct effect
on the firm’s:
■ Strategic competitiveness
■ Ability to earn above-average
returns

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© Jessica Chung & Cengage Learning All Rights Reserved 2018
© Jessica Chung & Cengage Learning All Rights Reserved 2018
An industry’s profit potential is a function
of the five forces of competition:
■ The threats posed by new entrants
■ The power of suppliers
■ The power of buyers
■ Product substitutes
■ The intensity of rivalry among competitors

Strategies are chosen, in part, because of

the influence of an industry’s
characteristics.

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 FIGURE 2.2

The Five Forces

of Competition
Model

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THE FIVE FORCES OF COMPETITION MODEL
● The five forces model of competition expands
the arena for competitive analysis. Historically,
firms concentrated only on direct competitors.
● Today, firms must study many industries, as
competitors are defined more broadly. For
example, the communications industry now
encompasses media companies, telecoms,
entertainment companies, and smartphone
producers.
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THE FIVE FORCES OF COMPETITION MODEL
1/5 THREAT OF NEW ENTRANTS: BARRIERS TO ENTRY

● Can threaten market share of existing competitors

● May stimulate additional production capacity
● New competitors may force existing firms to be more
efficient and to learn how to compete on new
dimensions – tutorial centre, snack shop in swh
● Entry barriers make it difficult for new firms to enter
an industry and often place them at a competitive
disadvantage even when they are able to enter – joint hand?

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THE FIVE FORCES OF COMPETITION MODEL
1/5 THREAT OF NEW ENTRANTS: BARRIERS TO ENTRY

● High entry barriers tend to increase the returns

for existing firms in the industry and may allow
some firms to dominate the industry
● Industry incumbents want to maintain high
entry barriers in order to discourage potential
competitors from entering the industry

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THE FIVE FORCES OF COMPETITION MODEL
1/5 THREAT OF NEW ENTRANTS: BARRIERS TO ENTRY

FUNCTION OF TWO FACTORS

1 BARRIERS TO ENTRY
● Economies of scale *
● Product differentiation *
● Capital requirements *
● Switching costs
● Access to distribution channels
● Cost disadvantages independent of scale
● Government policy *
2 EXPECTED RETALIATION
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© Jessica Chung & Cengage Learning All Rights Reserved 2018
© Jessica Chung & Cengage Learning All Rights Reserved 2018
© Jessica Chung & Cengage Learning All Rights Reserved 2018
THE FIVE FORCES OF COMPETITION MODEL
2/5 BARGAINING POWER OF SUPPLIERS

SUPPLIER POWER INCREASES WHEN:

● Suppliers are large and few in number
● Suitable substitute products are not available
● Industry firms are not a significant customer
for the suppliers
● Suppliers’ goods are critical to buyers’
marketplace success

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THE FIVE FORCES OF COMPETITION MODEL
2/5 BARGAINING POWER OF SUPPLIERS

SUPPLIER POWER INCREASES WHEN (cont’d):

● Suppliers’ products create high switching costs
● Suppliers have substantial resources and
provide a highly differentiated product
● Suppliers pose a credible threat to integrate
forward into the buyers’ industry

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© Jessica Chung & Cengage Learning All Rights Reserved 2018
© Jessica Chung & Cengage Learning All Rights Reserved 2018
THE FIVE FORCES OF COMPETITION MODEL
3/5 BARGAINING POWER OF BUYERS

BUYER POWER INCREASES WHEN:

● Buyers purchase a large portion of an
industry’s total output
● Buyers’ purchases are a significant portion
of a seller’s annual revenues
● Switching costs are low (to other industry
product)

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THE FIVE FORCES OF COMPETITION MODEL
3/5 BARGAINING POWER OF BUYERS

BUYER POWER INCREASES WHEN (cont’d):

● The industry’s products are
undifferentiated or standardized – shift to other
competitors?

● Buyers pose a credible threat to integrate

backward into the sellers’ industry

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THE FIVE FORCES OF COMPETITION MODEL
4/5 THREAT OF SUBSTITUTE PRODUCTS

THREAT OF SUBSTITUTE PRODUCTS INCREASES

WHEN:
● Buyers face few switching costs
● The substitute product’s price is lower
● Substitute product’s quality and performance
are equal to or greater than the existing
product – mobile phone/ food?
● Differentiated industry products that are
valued by customers reduce this threat
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THE FIVE FORCES OF COMPETITION MODEL
5/5 INTENSITY OF RIVALRY AMONG COMPETITORS

INDUSTRY RIVALRY
● Competitors are rarely homogeneous; they differ in resources
and capabilities and seek to differentiate themselves from
competitors
● Firms seek to differentiate their products in ways that
customers value and in which the firms have a competitive
advantage
● Common rivalry dimensions:
■ Price
■ Service after the sale
■ Innovation
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© Jessica Chung & Cengage Learning All Rights Reserved 2018
© Jessica Chung & Cengage Learning All Rights Reserved 2018
THE FIVE FORCES OF COMPETITION MODEL
5/5 INTENSITY OF RIVALRY AMONG COMPETITORS

EXIT BARRIERS vs entry barriers

High exit barriers prevent competitors from
leaving the industry
EXAMPLES
■ Specialized assets: assets with values linked to
a particular business
■ Fixed costs of exit: such as labor agreements
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THE FIVE FORCES OF COMPETITION MODEL
5/5 INTENSITY OF RIVALRY AMONG COMPETITORS

EXIT BARRIERS (examples cont’d):

■ Strategic interrelationships: relationships of

mutual dependence, such as those between one
business and other parts of a company’s
operations, including shared facilities and access
to financial markets

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THE FIVE FORCES OF COMPETITION MODEL
INTERPRETING INDUSTRY ANALYSES

Low entry barriers

Suppliers and buyers

have strong positions Unattractive
Strong threats from Industry
substitute products

Intense rivalry among

competitors LOW PROFIT POTENTIAL
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© Jessica Chung & Cengage Learning All Rights Reserved 2018
THE FIVE FORCES OF COMPETITION MODEL
INTERPRETING INDUSTRY ANALYSES

High entry barriers

Suppliers and buyers

have weak positions
Attractive
Few threats from Industry
substitute products

Moderate rivalry
among competitors HIGH PROFIT POTENTIAL
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 COMPETITOR INTELLIGENCE
■ Set of data and information the firm gathers to better
understand and anticipate competitors' objectives,
strategies, assumptions, and capabilities
■ The ethical and legal gathering of needed information
and data that provides insight into:
● What drives competitors
■ Shown by organization's future objectives
● What the competitor is doing and can do
■ Revealed in organization's current strategy
● What the competitor believes about the industry
■ Shown in organization's assumptions
● What the competitor’s capabilities are
■ Shown by organization's strengths and weaknesses

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FIGURE 2.3
Competitor
Analysis
Components

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Questions?

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2018
Tutorial exercise & Article reading

© Jessica Chung & Cengage Learning All Rights Reserved 2017

2018