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Model
Porter's five forces analysis is a framework that attempts to analyze the
level of competition within an industry and business development. It draws
upon industrial organization (IO) economics to derive five forces that determine the
competitive intensity and therefore attractiveness of an Industry.
Attractiveness in this context refers to the overall industry profitability.
Porter referred to these forces as the micro environment, to contrast it with
the more general term macro environment. They consist of those forces
close to a company that affect its ability to serve its customers and make a
profit.
The existence of barriers to entry (patents, rights, etc.). The most attractive
segment is one in which entry barriers are high and exit barriers are low. Few
new firms can enter and non-performing firms can exit easily.
Government policy
Capital requirements
Absolute cost
Cost disadvantages independent of size
Economies of scale
Economies of product differences
Product differentiation
Brand equity
Switching costs or sunk costs
Expected retaliation
Access to distribution
Customer loyalty to established brands
Industry profitability (the more profitable the industry the more attractive it
will be to new competitors)
The bargaining power of customers is also described as the market of outputs: the
ability of customers to put the firm under pressure, which also affects the
customer's sensitivity to price changes. Firms can take measures to reduce buyer
power, such as implementing a loyalty program. The buyer power is high if the
buyer has many alternatives. The buyer power is low if they act independently e.g.
If a large number of customers will act with each other and ask to make prices low
the company will have no other choice because of large number of customers
pressure.
Potential factors:
Globalization
The process whereby national economies and business systems are becoming
deeply interlinked with each other.
Socialist Economy
An economy in which businesses are owned by the state and prices are set by state
planners.
Tariffs
A tax on imports.
Quotas
A limit on the number of items of a good that can be imported from a foreign nation.
Implications of Globalization
The implications of the trends we have just discussed are profound. First, these
trends have resulted in a massive surge in the volume of international trade and
foreign direct investment. According to data from the World Trade Organization,
from 1970 to 2004 the volume of world merchandise trade expanded almost 26fold, outstripping world production, which grew about 7.5 times in real terms. (World
merchandise trade includes trade in manufactured goods, agricultural goods, and
mining products, but not services. World production and trade are measured in real,
or inflation-adjusted, dollars.)
Globalization of Production
Sourcing goods and services from locations around the globe to take advantage of
national differences in the cost and quality of factors of production.
Globalization of Markets
The merging of historically distinct and separate national markets into one huge
global marketplace.
equipment as the y are submitted by customers via the companys Web site, and
then immediately transmits the resulting orders for components to various suppliers
around the world.
Constraints on Globalization
Globalization is not inevitable. Powerful countervailing forces are constraining the
pace at which production and markets are becoming global. These constraints limit
the ability of managers to disperse production activities to locations in the world
where they can be performed at the lowest cost, as well as managers ability to
treat the entire world as a single homogeneous marketplace.
PROTECTIONIST COUNTERTRENDS
The worldwide march toward market-based economic systems with few or no
barriers to cross-border trade and investment is not guaranteed to continue. History
is full of reversals away from progressive trends. The first bloom of modern global
trade in the late 1800s and early 1900s was brought to an end by protectionist
policies in major trading nations during the 1920s and 1930s, which led to a slump
in international trade and helped usher in the Great Depression.
Finally, it is important to realize that differences in social culture across nations are
often profound. As such, they make it harder for firms to view the world market as
homogeneous and more difficult to manage operations in different countries. By
social culture we mean the system of values and norms that are held in common by
people living in a society. Values are abstract ideas about what a group believes to
be good, right, and desirable; they are shared assumptions about how things ought
to be. Norms are the social rules and guidelines that prescribe appropriate behavior
in particular situations.
For example:
Saudi Arabia and the United States: Cultural differences
international markets from the same factories, Intel can r un three shifts seven days
a week for lower costs and greater profitability.
GLOBAL LEARNING
Implicit in our discussion so far is the idea that valuable skills are developed first at
home and then transferred to foreign operations.
Thus Wal-Mart developed its retailing skills in the United States before transferring
them to foreign locations. However, for more mature multinationals that have
already established a network of subsidiary operations in foreign markets, the
development of valuable skills can just as well occur in foreign subsidiaries.
Skills can be created anywhere within a multinationals global network of
operations, wherever people have the opportunity and incentive to try new ways of
doing things. The creation of skills that help lower the costs of production, enhance
perceived value, and support higher product pricing is not the monopoly of the
corporate center.