Ch. 5 Provided by Dana
Discuss each of Porter’s five forces model. What information can a multinational obtain from Porter’s five forces industry analysis?
To formulate good strategies, managers must understand their industries. Understanding the industry involves the economic characteristics, and knowing the driving forces of change and competition in the industry.
Competition - Degree of competition among existing competitors in the industry. Competition has significant influence on the profitability of the industry and what strategic moves the players make.
Increased competition comes from such forces as the power of key suppliers and buyers or the threat of potential new entries into the industry.
Threat of new entrants – companies need to consider the degree to which they may face new competitor in their industry. Threat of new entrants is generally dependent on barriers to entry.
Bargaining power of buyers – refers to the degree to which buyers of the industry’s products can influence the competitors within that industry. Buyers are becoming increasingly sophisticated globally and will have an ever-growing influence on most industries. To remain competitive, most companies will have to create innovative products and services at low prices.
Bargaining power of suppliers – suppliers tend to have high power if they can exert significant influence on competitors within the industry. Example: DeBeers controls a significant proportion of the supply of diamonds and has significant influence on the global diamond market.
Threat of substitutes – the extent to which competitors are confronted with alternatives for their products. Example: Netflix pioneered the web based DVD rentals but now Blockbuster and Amazon.com are offering the same service. In this instance, the threat of substitution is high.
Multinational companies can determine the attractiveness of the various industries in which they are involved and also to ascertain which forces require attention. This information would be helpful in setting strategies. Analysis of an industry helps the manger identify the important characteristics of companies and their products or services that lead to competitive success.


Heidi's Response

Discuss each of Porter/s five forces model.
Michael Porter’s five forces model is a popular technique that can help a multinational firm understand the major forces at work in the industry and the degree of attractiveness of the industry.
  1. The degree of competition among existing competitors in the industry.
    • There is a high degree of competition among auto manufactures globally, and such competition has significant influence on the profitability of the industry and what strategic moves the players make.
  2. The threat of new entrants
    • The threat of new entrants is generally dependent on barriers to entry such as high start up costs.
  3. The bargaining power of buyers
    • The degree to which buyers of the industry’s products can influence the competitors within that industry. Buyers are becoming increasingly sophisticated globally and will have an ever-growing influence on most industries. To remain competitive most companies will have to create innovative products and services at low prices.
  4. The bargaining power of suppliers
    • Suppliers tend to have high power if they can exert significant influence on competitors within an industry (scarce resources – diamonds, metals)
  5. The threat of substitutes
    • The extent to which competitors are confronted with alternatives for their products (Netflix web-based DVD rental vs. Amazon.com web-based movies on demand services).
What information can a multinational obtain from Porter’s five forces industry analysis?
  • Understand the competition at the domestic and global level.
  • Examine their industries in which they are involved and also to ascertain which forces require attention.
  • Understand industries to assess the dominant economic traits. The dominant economic characteristics of an industry affect how strategies work. Issues that influence strategy selection include market size, ease of entry and exit, and whether there are economies of scale in production.
  • Monitor driving forces of change in an industry such as: speed of new product innovations, technological changes, and changing societal attitudes and lifestyles.