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Answered) 3 Evaluating the Industry LEARNING OBJECTIVES 1. Explain how five forces analysis is useful to organizations. Be able to offer an example of each of...

i NEED HELP WRITING A DISCUSSION POST (2-3 PARAGRAPHS) ABOUT THE COLLEGE OF NMSU. Enrollment is declining and top admins are struggling to solve it. Utilizing Porters 5 forces model starting on page 88 (see attached)

a) illustrate your understanding of how each force applies to NMSU

b) Choose which force you would focus on to solve the issue of declining enrollment.

3.3 Evaluating the Industry
1. Explain how five forces analysis is useful to organizations. 2. Be able to offer an example of each of the five forces. The Purpose of Five Forces Analysis
Visit the executive suite of any company and the chances are very high that the chief executive officer and
her vice presidents are relying on five forces analysis to understand their industry. Introduced more than
thirty years ago by Professor Michael Porter of the Harvard Business School, five forces analysis has long
been and remains perhaps the most popular analytical tool in the business world (Figure 3.8 "Industry
Analysis"). Porter’s Five Forces
Reproduced with permission
The purpose of five forces analysis is to identify how much profit potential exists in an industry. To do so,
five forces analysis considers the interactions among the competitors in an industry, potential new Saylor URL:
88 entrants to the industry, substitutes for the industry’s offerings, suppliers to the industry, and the
industry’s buyers. [1] If none of these five forces works to undermine profits in the industry, then the profit potential is very strong. If all the forces work to undermine profits, then the profit potential is very weak.
Most industries lie somewhere in between these extremes. This could involve, for example, all five forces
providing firms with modest help or two forces encouraging profits while the other three undermine
profits. Once executives determine how much profit potential exists in an industry, they can then decide
what strategic moves to make to be successful. If the situation looks bleak, for example, one possible move
is to exit the industry. The Rivalry among Competitors in an Industry
The competitors in an industry are firms that produce similar products or services. Competitors use a
variety of moves such as advertising, new offerings, and price cuts to try to outmaneuver one another to
retain existing buyers and to attract new ones. Because competitors seek to serve the same general set of
buyers, rivalry can become intense (Figure 3.9 "Rivalry"). Subway faces fierce competition within the
restaurant business, for example. This is illustrated by a quote from the man who built McDonald’s into a
worldwide icon. Former CEO Ray Kroc allegedly once claimed that “if any of my competitors were
drowning, I’d stick a hose in their mouth.” While this sentiment was (hopefully) just a figure of speech,
the announcement in March 2011 that Subway had surpassed McDonald’s in terms of numbers of stores
might lead the hostility of McDonald’s toward its rival to rise.
Understanding the intensity of rivalry among an industry’s competitors is important because the degree of
intensity helps shape the industry’s profit potential. Of particular concern is whether firms in an industry
compete based on price. When competition is bitter and cutthroat, the prices competitors charge—and
their profit margins—tend to go down. If, on the other hand, competitors avoid bitter rivalry, then price
wars can be avoided and profit potential increases.
Every industry is unique to some degree, but there are some general characteristics that help to predict
the likelihood that fierce rivalry will erupt. Rivalry tends to be fierce, for example, to the extent that the
growth rate of demand for the industry’s offerings is low (because a lack of new customers forces firms to
compete more for existing customers), fixed costs in the industry are high (because firms will fight to have Saylor URL:
89 enough customers to cover these costs), competitors are not differentiated from one another (because this
forces firms to compete based on price rather than based on the uniqueness of their offerings),
and exit barriers in the industry are high (because firms do not have the option of leaving the industry
gracefully). Exit barriers can include emotional barriers, such as the bad publicity associated with massive
layoffs, or more objective reasons to stay in an industry, such as a desire to recoup considerable costs that
might have been previously spent to enter and compete.
Industry concentration is an important aspect of competition in many industries. Industry concentration
is the extent to which a small number of firms dominate an industry (Figure 3.10 "Industry
Concentration"). Among circuses, for example, the four largest companies collectively own 89 percent of
the market. Meanwhile, these companies tend to keep their competition rather polite. Their advertising
does not lampoon one another, and they do not put on shows in the same city at the same time. This does
not guarantee that the circus industry will be profitable; there are four other forces to consider as well as
the quality of each firm’s strategy. But low levels of rivalry certainly help build the profit potential of the
In contrast, the restaurant industry is fragmented, meaning that the largest rivals control just a small
fraction of the business and that a large number of firms are important participants. Rivalry in
fragmented industries tends to become bitter and fierce. Quiznos, a chain of sub shops that is roughly 15
percent the size of Subway, has directed some of its advertising campaigns directly at Subway, including
one depicting a fictional sub shop called “Wrong Way” that bore a strong resemblance to Subway.
Within fragmented industries, it is almost inevitable that over time some firms will try to steal customers
from other firms, such as by lowering prices, and that any competitive move by one firm will be matched
by others. In the wake of Subway’s success in offering foot-long subs for $5, for example, Quiznos has
matched Subway’s price. Such price jockeying is delightful to customers, of course, but it tends to reduce
prices (and profit margins) within an industry. Indeed, Quiznos later escalated its attempt to attract
budget-minded consumers by introducing a flatbread sandwich that cost only $2. Overall, when choosing
strategic moves, Subway’s presence in a fragmented industry forces the firm to try to anticipate not only Saylor URL:
90 how fellow restaurant giants such as McDonald’s and Burger King will react but also how smaller sub
shop chains like Quiznos and various regional and local players will respond. The Threat of Potential New Entrants to an Industry
Competing within a highly profitable industry is desirable, but it can also attract unwanted attention from
outside the industry. Potential new entrants to an industry are firms that do not currently compete in the
industry but may in the future (Figure 3.11 "New Entrants"). New entrants tend to reduce the profit
potential of an industry by increasing its competitiveness. If, for example, an industry consisting of five
firms is entered by two new firms, this means that seven rather than five firms are now trying to attract
the same general pool of customers. Thus executives need to analyze how likely it is that one or more new
entrants will enter their industry as part of their effort to understand the profit potential that their
industry offers.
New entrants can join the fray within an industry in several different ways. New entrants can be start-up
companies created by entrepreneurs, foreign firms that decide to enter a new geographic area, supplier
firms that choose to enter their customers’ business, or buyer firms that choose to enter their suppliers’
business. The likelihood of these four paths being taken varies across industries. Restaurant firms such as
Subway, for example, do not need to worry about their buyers entering the industry because they sell
directly to individuals, not to firms. It is also unlikely that Subway’s suppliers, such as farmers, will make
a big splash in the restaurant industry.
On the other hand, entrepreneurs launch new restaurant concepts every year, and one or more of these
concepts may evolve into a fearsome competitor. Also, competitors based overseas sometimes enter
Subway’s core US market. In February 2011, Australia-based Oporto opened its first US store in
California. [2] Oporto operates more than 130 chicken burger restaurants in its home country. Time will tell whether this new entrant has a significant effect on Subway and other restaurant firms. Because a
chicken burger closely resembles a hamburger, McDonald’s and Burger King may have more to fear from
Oporto than does Subway. Saylor URL:
91 Every industry is unique to some degree, but some general characteristics help to predict the likelihood
that new entrants will join an industry. New entry is less likely, for example, to the extent that existing
competitors enjoy economies of scale (because new entrants struggle to match incumbents’ prices),
capital requirements to enter the industry are high (because new entrants struggle to gather enough cash
to get started), access to distribution channels is limited (because new entrants struggle to get their
offerings to customers), governmental policy discourages new entry, differentiation among existing
competitors is high (because each incumbent has a group of loyal customers that enjoy its unique
features), switching costs are high (because this discourages customers from buying a new entrant’s
offerings), expected retaliation from existing competitors is high, and cost advantages independent of size
exist. The Threat of Substitutes for an Industry’s Offerings
Executives need to take stock not only of their direct competition but also of players in other industries
that can steal their customers. Substitutes are offerings that differ from the goods and services provided
by the competitors in an industry but that fill similar needs to what the industry offers (Figure 3.12
"Substitutes"). How strong of a threat substitutes are depends on how effective substitutes are in serving
an industry’s customers.
At first glance, it could appear that the satellite television business is a tranquil one because there are only
two significant competitors—DIRECTV and DISH Network. These two industry giants, however, face a
daunting challenge from substitutes. The closest substitute for satellite television is provided by cable
television firms, such as Comcast and Charter Communications. DIRECTV and DISH Network also need
to be wary of streaming video services, such as Netflix, and video rental services, such as Redbox. The
availability of viable substitutes places stringent limits on what DIRECTV and DISH Network can charge
for their services. If the satellite television firms raise their prices, customers will be tempted to obtain
video programs from alternative sources. This limits the profit potential of the satellite television
In other settings, viable substitutes are not available, and this helps an industry’s competitors enjoy
profits. Like lightbulbs, candles can provide lighting within a home. Few consumers, however, would be Saylor URL:
92 willing to use candles instead of lightbulbs. Candles simply do not provide as much light as lightbulbs.
Also, the risk of starting a fire when using candles is far greater than the fire risk of using lightbulbs.
Because candles are a poor substitute, lightbulb makers such as General Electric and Siemens do not need
to fear candle makers stealing their customers and undermining their profits.
The dividing line between which firms are competitors and which firms offer substitutes is a challenging
issue for executives. Most observers would agree that, from Subway’s perspective, sandwich maker
Quiznos should be considered a competitor and that grocery stores such as Kroger offer a substitute for
Subway’s offerings. But what about full-service restaurants, such as Ruth’s Chris Steak House, and “fast
causal” outlets, such as Panera Bread? Whether firms such as these are considered competitors or
substitutes depends on how the industry is defined. Under a broad definition—Subway competes in the
restaurant business—Ruth’s Chris and Panera should be considered competitors. Under a narrower
definition—Subway competes in the sandwich business—Panera is a competitor and Ruth’s Chris is a
substitute. Under a very narrow definition—Subway competes in the sub sandwich business—both Ruth’s
Chris and Panera provide substitute offerings. Thus clearly defining a firm’s industry is an important step
for executives who are performing a five forces analysis. The Power of Suppliers to an Industry
Suppliers provide inputs that the firms in an industry need to create the goods and services that they in
turn sell to their buyers. A variety of supplies are important to companies, including raw materials,
financial resources, and labor (Figure 3.13 "Suppliers"). For restaurant firms such as Subway, key
suppliers include such firms as Sysco that bring various foods to their doors, restaurant supply stores that
sell kitchen equipment, and employees that provide labor.
The relative bargaining power between an industry’s competitors and its suppliers helps shape the profit
potential of the industry. If suppliers have greater leverage over the competitors than the competitors
have over the suppliers, then suppliers can increase their prices over time. This cuts into competitors’
profit margins and makes them less likely to be prosperous. On the other hand, if suppliers have less
leverage over the competitors than the competitors have over the suppliers, then suppliers may be forced
to lower their prices over time. This strengthens competitors’ profit margins and makes them more likely Saylor URL:
93 to be prosperous. Thus when analyzing the profit potential of their industry, executives must carefully
consider whether suppliers have the ability to demand higher prices.
Every industry is unique to some degree, but some general characteristics help to predict the likelihood
that suppliers will be powerful relative to the firms to which they sell their goods and services. Suppliers
tend to be powerful, for example, to the extent that the suppliers’ industry is dominated by a few
companies, if it is more concentrated than the industry that it supplies and/or if there is no effective
substitute for what the supplier group provides. These circumstances restrict industry competitors’ ability
to shop around for better prices and put suppliers in a position of strength.
Supplier power is also stronger to the extent that industry members rely heavily on suppliers to be
profitable, industry members face high costs when changing suppliers, and suppliers’ products are
differentiated. Finally, suppliers possess power to the extent that they have the ability to become a new
entrant to the industry if they wish. This is a strategy calledforward vertical integration. Ford, for
example, used a forward vertical integration strategy when it purchased rental car company (and Ford
customer) Hertz. A difficult financial situation forced Ford to sell Hertz for $5.6 billion in 2005. But
before rental car companies such as Avis and Thrifty drive too hard of a bargain when buying cars from an
automaker, their executives should remember that automakers are much bigger firms than are rental car
companies. The executives running the automaker might simply decide that they want to enjoy the rental
car company’s profits themselves and acquire the firm. Strategy at the Movies
Flash of Genius
When dealing with a large company, a small supplier can get squashed like a bug on a windshield. That is
what college professor and inventor Dr. Robert Kearns found out when he invented intermittent
windshield wipers in the 1960s and attempted to supply them to Ford Motor Company. As depicted in the
2008 movie Flash of Genius, Kearns dreamed of manufacturing the wipers and selling them to Detroit
automakers. Rather than buy the wipers from Kearns, Ford replicated the design. An angry Kearns then
spent many years trying to hold the firm accountable for infringing on his patent. Kearns eventually won Saylor URL:
94 in court, but he paid a terrible personal price along the way, including a nervous breakdown and
estrangement from his family. Kearns’s lengthy battle with Ford illustrates the concept of bargaining
power that is central to Porter’s five forces model. Even though Kearns created an exceptional new
product, he had little leverage when dealing with a massive, well-financed automobile manufacturer. The Power of an Industry’s Buyers
Buyers purchase the goods and services that the firms in an industry produce (Figure 3.14 "Buyers"). For
Subway and other restaurants, buyers are individual people. In contrast, the buyers for some firms are
other firms rather than end users. For Procter & Gamble, for example, buyers are retailers such as
Walmart and Target who stock Procter & Gamble’s pharmaceuticals, hair care products, pet supplies,
cleaning products, and other household goods on their shelves.
The relative bargaining power between an industry’s competitors and its buyers helps shape the profit
potential of the industry. If buyers have greater leverage over the competitors than the competitors have
over the buyers, then the competitors may be forced to lower their prices over time. This weakens
competitors’ profit margins and makes them less likely to be prosperous. Walmart furnishes a good
example. The mammoth retailer is notorious among manufacturers of goods for demanding lower and
lower prices over time. [3] In 2008, for example, the firm threatened to stop selling compact discs if record companies did not lower their prices. Walmart has the power to insist on price concessions because its
sales volume is huge. Compact discs make up a small portion of Walmart’s overall sales, so exiting the
market would not hurt Walmart. From the perspective of record companies, however, Walmart is their
biggest buyer. If the record companies were to refuse to do business with Walmart, they would miss out
on access to a large portion of consumers.
On the other hand, if buyers have less leverage over the competitors than the competitors have over the
buyers, then competitors can raise their prices and enjoy greater profits. This description fits the textbook
industry quite well. College students are often dismayed to learn that an assigned textbook costs $150 or
more. Historically, textbook publishers have been able to charge high prices because buyers had no
leverage. A student enrolled in a class must purchase the specific book that the professor has selected. Saylor URL:
95 Used copies are sometimes a lower-cost option, but textbook publishers have cleverly worked to
undermine the used textbook market by releasing new editions after very short periods of time.
Of course, the presence of a very high profit industry is attractive to potential new entrants. Firms such as
the publisher of this book, have entered the textbook market with lower-priced offerings. Time will tell
whether such offerings bring down textbook prices. Like any new entrant, upstarts in the textbook
business must prove that they can execute their strategies before they can gain widespread acceptance.
Overall, when analyzing the profit potential of their industry, executives must carefully consider whether
buyers have the ability to demand lower prices. In the textbook market, buyers do not.
Every industry is unique to some degree, but some general characteristics help to predict the likelihood
that buyers will be powerful relative to the firms from which they purchases goods and services. Buyers
tend to be powerful, for example, to the extent that there are relatively few buyers compared with the
number of firms that supply the industry, the industry’s goods or services are standardized or
undifferentiated, buyers face little or no switching costs in changing vendors, the good or service
purchased by the buyers represents a high percentage of the buyer’s costs, and the good or service is of
limited importance to the quality or price of the buyer’s offerings.
Finally, buyers possess power to the extent that they have the ability to become a new entrant to the
industry if they wish. This strategy is called backward vertical integration. DIRECTV used to be an
important customer of TiVo, the pioneer of digital video recorders. This situation changed, however, when
executives at DIRECTV grew weary of their relationship with TiVo. DIRECTV then used a backward
vertical integration strategy and started offering DIRECTV-branded digital video recorders. Profits that
used to be enjoyed by TiVo were transferred at that point to DIRECTV. The Limitations of Five Forces Analysis
Five forces analysis is useful, but it has some limitations too. The description of five forces analysis
provided by its creator, Michael Porter, seems to assume that competition is a zero-sum game, meaning
that the amount of profit potential in an industry is fixed. One implication is that, if a firm is to make
more profit, it must take that profit from a rival, a supplier, or a buyer. In some settings, however, Saylor URL:
96 collaboration can create a larger pool of profit that benefits everyone involved in the collaboration. In
general, collaboration is a possibility that five forces analysis tends to downplay. The relationships among
the rivals in an industry, for example, are depicted as adversarial. In reality, these relationships are
sometimes adversarial and sometimes collaborative. General Motors and Toyota compete fiercely all
around the world, for example, but they also have worked together in joint ventures. Similarly, five forces
analysis tends to portray a firm’s relationships with its suppliers and buyers as adversarial, but many
firms find ways to collaborate with these parties for mutual benefit. Indeed, concepts such as just-in-time
inventory systems depend heavily on a firm working as a partner with its suppliers and buyers. KEY TAKEAWAY
• “How much profit potential exists in our industry?” is a key question for executives. Five forces analysis
provides an answer to this question. It does this by considering the interactions among the competitors in
an industry, potential new entrants to the industry, substitutes for the industry’s offerings, suppliers to
the industry, and the industry’s buyers. EXERCISES
1. What are the five forces? 2. Is there an aspect of industry activity that the five forces seems to leave out? 3. Imagine you are the president of your college or university. Which of the five forces would be most
important to you? Why? [1] Porter, M. E. 1979, March–April. How competitive forces shape strategy. Harvard Business Review, 137–156.
[2] Odell, K. 2011, February 22. Portuguese-influenced Australian chicken burger chain, Oporto, comes to
SoCal. Eater LA. Retrieved from
[3] Bianco, B., & Zellner, W. 2003, October 6. Is Wal-Mart too powerful? Bloomberg Businessweek. Retrieved
from Saylor URL:
97 3.4 Mapping Strategic Groups
1. Understand what strategic groups are. 2. Learn three ways that analyzing strategic groups is useful to organizations. The analysis of the strategic groups in an industry can offer important insights to executives. Strategic
groups are sets of firms that follow similar strategies to one another. [1] More specifically, a strategic
group consists of a set of industry competitors that have similar characteristics to one another but
differ in important ways from the members of other groups (Figure 3.15 "Strategic Groups").
Understanding the nature of strategic groups within an industry is important for at least three
reasons. First, emphasizing the members of a firm’s group is helpful because these firms are usually
its closest rivals. When assessing their firm’s performance and considering strategic moves, the other
members of a group are often the best referents for executives to consider. In some cases, one or
more strategic groups in the industry are irrelevant. Subway, for example, does not need to worry
about competing for customers with the likes of Ruth’s Chris Steak House and P. F. Chang’s. This is
partly because firms confront mobility barriers that make it difficult or illogical for a particular firm to
change groups over time. Because Subway is unlikely to offer a gourmet steak as well as the
experience offered by fine-dining outlets, they can largely ignore the actions taken by firms in that
restaurant industry strategic group.


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