Bethel University Porters Airline Industry with The Five Forces Model Strategic Managment 250 words, Cite 2 scholarly sources, APA format. Use the attached

Bethel University Porters Airline Industry with The Five Forces Model Strategic Managment 250 words, Cite 2 scholarly sources, APA format. Use the attached text book as 1 source

Analyze an industry’s potential profitability considering Porter’s Five Forces Model. Consider each step as you analyze the industry, and remember Porter’s Model applies to industries and not specific companies. So don’t analyze a particular company here but rather an industry.

Here are some industry examples from which you can choose or you may want to choose another such as the industry in which you are employed or have been.

Airline industry

Fast-food industry

Big Box Retail industry

Entertainment industry

Cellular Phone industry

Automobile industry

Cosmetics Industry Industry Competition
BChapter Outline
E3-1 Industry Life Cycle Stages
N3-2 Industry Structure
N3-3 Intensity of Rivalry among Incumbent Firms
E 3-3a Concentration of Competitors
3-3b High Fixed or Storage Costs
T 3-3c Slow Industry Growth
T 3-3d Lack of Differentiation or Low Switching Costs
, 3-3e Capacity Augmented in Large Increments
3-3f Diversity of Competitors
B 3-3g High Strategic Stakes
3-3h High Exit Barriers
A3-4 Threat of Entry
R 3-4a Economies of Scale
B 3-4b Brand Identity and Product Differentiation
A 3-4c Capital Requirements
R 3-4d Switching Costs
3-4e Access to Distribution Channels
A 3-4f Cost Advantages Independent of Size
3-4g Government Policy
23-5 Pressure from Substitute Products
83-6 Bargaining Power of Buyers
3-7 Bargaining Power of Suppliers
8
3-8 Limitations of Porter’s Five Forces Model
23-9 Summary
TKey Terms
SReview Questions and Exercises
Practice Quiz
Notes
Reading 3-1
9781111219802, Strategic Management: Theory and Practice, John Parnell – © Cengage Learning
3
38
Chapter 3
T
Industry
A group of competitors
that produce similar
products or services.
his chapter marks the beginning of the strategic management process and is one of two that considers the external environment. At
this point it is appropriate to focus on factors external to the organization and to view firm performance from an industrial organization
perspective. Internal factors are considered later in the process and in future
chapters.
Each business operates among a group of companies that produces competing products or services known as an industry. The concept of an industry is a
simple one, but it is often confused in everyday conversations. The term industry
does not refer to a single company or specific firms in general. For example, in
the statement, “A new industry is moving to the community,” the word industry
should be replaced by company or firm.
Although usually differences exist among competitors, each industry has its
own set of combat rules governing such issues as product quality, pricing, and
distribution. This is especially true for industries that contain a large number of
B
firms offering standardized products and services. Most competitors—but not
all—follow the rules. E
For example, most service stations in the United States
generally offer regularN
unleaded, midgrade, and premium unleaded gasoline at
prices that do not differ substantially from those at nearby stations. Breaking the
N a different strategic course might be possible, but
so-called rules and charting
may not be desirable. E
As such, it is important for strategic managers to understand the structure of the industry(s) in which their firms operate before decidT
ing how to compete successfully.
Defining a firm’s industry
is not always an easy task. In a perfect world, each
T
firm would operate in one clearly defined industry; however, many firms compete
in multiple industries, ,and strategic managers in similar firms often differ in their
conceptualizations of the industry environment. In addition, some companies
have utilized the Internet to redefine industries or even invent new ones, such
B or Priceline’s travel businesses. As a result, the process
as eBay’s online auction
of industry definition A
and analysis can be especially challenging when Internet
competition is considered.1
R
Numerous outside sources can assist a strategic manager in determining
B
“where to draw the industry
lines” (i.e., determining which competitors are in
the industry, which are not, and why). Government classification systems, such
A
as the Standardized Industrial Classification (SIC), as well as distinctions made
R
by trade journals and business
analysts may be helpful. In 1997, the U.S. Census
Bureau replaced the SIC
system
with the North American Industry Classification
A
System (NAICS), an alternative system designed to facilitate comparisons of business activities across North America. Astute managers assess all of these sources,
however, and add their2own rigorous and systematic analysis of the competition
when defining the industry.
8 factors can be used when drawing the industry lines. In
Numerous descriptive
the case of McDonald’s,
8 for example, attributes such as speed of service, types of
products, prices of products, and level of service may be useful. Hence, one might
2 as consisting of restaurants offering easy to consume,
define McDonald’s industry
moderately priced food
T products rapidly and in a limited service environment.
Broad terms such as “fast food” are often used to describe such industries, but
S
doing so does not eliminate the need for a clear, tight definition.
Some factors are usually not helpful when defining an industry, however, such
as those directly associated with strategy and firm size. For example, it is not a
good idea to exclude a “fast-food” restaurant in McDonald’s industry because it is
not part of a large chain or because it emphasizes low-priced food. Rather, these
9781111219802, Strategic Management: Theory and Practice, John Parnell – © Cengage Learning
Industry Competition
factors explain how such a restaurant might be positioned vis-à-vis to McDonald’s,
a concept discussed in greater detail in Chapter 7.
The concept of primary and secondary industries may also be a useful tool in
defining an industry. A primary industry may be conceptualized as a group of close
competitors, whereas a secondary industry includes less direct competition. When
one analyzes a firm’s competition, the primary industry is loosely considered to be
“the industry,” whereas the secondary industry is presented as a means of adding
clarity to the analysis. For example, McDonald’s primary industry includes such
competitors as Burger King and Wendy’s, whereas its secondary industry might also
include restaurants that do not emphasize hamburgers and offer more traditional
restaurant seating such as Pizza Hut and Denny’s. The distinction between primary
and secondary industry may be based on objective criteria such as price, similarity
of products, or location, but is ultimately a subjective call.
Once the industry is defined, it is important to identify the market share,
which is a competitor’s share of the total industry sales, for the firm and its key
B
rivals. Unless stated otherwise, market share calculations are usually based on
E rather than units produced or sold
total sales revenues of the firms in an industry
by the individual firms. This information N
is often available from public sources,
especially when there is a high level of agreement as to how an industry should
N
be defined.
When market share is not available or substantial
differences exist in industry
E
definitions, however, relative market share, or a firm’s share of industry sales
T are considered, can serve as a useful
when only the firm and its key competitors
substitute. Consider low-end discount retailer
T Dollar Tree as an example and
assume that the only available market share data considers Dollar Tree to be part
, store industry. If a more narrow
of the broadly defined discount department
industry definition is proposed—perhaps one limited to deep discount retailers—
new market share calculations will be necessary. In addition, it becomes quite
B the multitude of mom-and-pop discomplicated when one attempts to include
counters in the calculations. In this situation,
A computing relative market shares
that consider Dollar Tree and its major competitors can be useful. Assume for the
R
sake of this example that four major competitors are identified in this industry—
B and Fred’s—with annual sales
Dollar General, Family Dollar, Dollar Tree,
of $6 billion, $5 billion, $2 billion, and $1 billion, respectively. Relative market
A
share would be calculated on the basis of a total market size of $14 billion
(i.e., 6 + 5 + 2 + 1). In this example, relativeRmarket shares for the competitors are
43 percent, 36 percent, 14 percent, and 7A
percent, respectively. From a practical
standpoint, calculating relative market share can be appropriate when external
data sources are limited.
A firm’s market share can also become2quite complex as various industry or
market restrictions are added. Unfortunately, the precise market share information most useful to a firm may be based8on a set of industry factors so complex that computing it becomes an arduous
8 task. In a recent analysis, the Mintel
International Group set out to identify the size of the “healthy snack” market
2 the fact that many products such as
in the United States, a task complicated by
cheese, yogurt, and cereal are eaten as snacks
T in some but not all instances.2 To
overcome this barrier, analysts computed a total for the healthy snack market by
S
adding only the proportion of each food category consumed as a healthy snack.
In other words, 100 percent of the total sales of products such as popcorn and
trail mix—foods consumed as “healthy snacks” 100 percent of the time—were
included in the total. In contrast, only 40 percent of cheese consumption, 61 percent of yogurt consumption, and 21 percent of cereal consumption were included
39
Market Share
The percentage of total
market sales attributed
to one competitor (i.e.,
firm sales divided by
total market sales).
Relative Market
Share
A firm’s share of industry
sales when only the firm
and its key competitors
are considered (i.e., firm
sales divided by total
sales of a select group
firms in the industry).
9781111219802, Strategic Management: Theory and Practice, John Parnell – © Cengage Learning
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Chapter 3
Case Analysis 3-1
Step 2: Identification of the Industry and the Competitors
After the organization has been introduced, its industry must be specifically identified.
This process can be either relatively simple or difficult. For example, most would agree
that Kroger is in the “grocery store industry,” and its competition comes primarily from
other grocery stores. However, not all decisions are simple. For example, should WalMart be classified in the department store industry (competing with upscale malloriented stores) or in the discount retail industry (competing with low-end retailers such
as Family Dollar)? Is Taco Bell in the fast-food industry or in the broader restaurant
industry? To further complicate matters, many corporations are diversified and compete
in a number of different industries. For example, Anheuser Busch operates breweries
and theme parks. In cases in which multiple business units are competing in different
industries, one needs to identify multiple industries. Market shares or relative market
Bits key competitors—based on the best available data—should
shares for the firm and
also be identified. It isE
important to clarify industry definition at the outset so that the
macroenvironmental forces that affect it can be realistically assessed. In addition, a
N
firm’s relative strengths and weaknesses can be classified as such only when compared
to other companies inN
the industry.
E
in the total. Although T
this approach is reasonable and can be quite useful, it can
only be calculated when
T one has access to data that may not be readily available.
Hence, analysts must use the best data available to describe the relative market
,
positions of the competitors
in a given industry (see Case Analysis 3-1).
3-1 Industry
B Life Cycle Stages
Industry Life Cycle
The stages (introduction, growth, shakeout,
maturity, and decline)
through which industries often pass.
Like firms, industries develop
and evolve over time. Not only might the group of
A
competitors within a firm’s industry change constantly, but also the nature and
R can change as it matures and its markets become better
structure of the industry
defined. An industry’s B
developmental stage influences the nature of competition
and potential profitability among competitors.3 In theory, each industry passes
A
through five distinct phases of an industry life cycle (see Figure 3-1).
R is beginning to form is considered to be in the introducA young industry that
tion stage. Demand for the industry’s outputs is low at this time because product
A
and/or service awareness is still developing. Virtually all purchasers are first-time
buyers and tend to be affluent, risk tolerant, and innovative. Technology is a key
concern in this stage because
businesses often seek ways to improve production
2
and distribution efficiencies as they learn more about their markets.
Normally, after key 8
technological issues are addressed and customer demand
begins to rise, the industry
8 enters the growth stage. Growth continues but tends to
slow as the market demand approaches saturation. Fewer first-time buyers remain,
2 to be upgrades or replacements. Many competitors are
and most purchases tend
FIGURE
3-1
T
The S
I n dustr y
Life Cy cle
9781111219802, Strategic Management: Theory and Practice, John Parnell – © Cengage Learning
Industry Competition
profitable, but available funds may be heavily invested into new facilities or technologies. Some of the industry’s weaker competitors may go out of business in this
stage.
Shakeout occurs when industry growth is no longer rapid enough to support
the increasing number of competitors in the industry. As a result, a firm’s growth
is contingent on its resources and competitive positioning instead of a high
growth rate within the industry. Marginal competitors are forced out, and a small
number of industry leaders may emerge.
Maturity is reached when the market demand for the industry’s outputs is completely saturated. Virtually all purchases are upgrades or replacements, and industry growth may be low, nonexistent, or even negative. Industry standards for quality
and service have been established, and customer expectations tend to be more
consistent than in previous stages. The U.S. automobile industry is a classic example of a mature industry. Firms in mature industries often seek new uses for their
products or services or pursue new markets, often through global expansion.
B
The decline stage occurs when demand for an industry’s products and services
E turn to more convenient, safer, or
decreases and often begins when consumers
higher quality offerings from firms in substitute
N industries. Some firms may divest
their business units in this stage, whereas others may seek to “reinvent themselves”
Nwith a similar product or service.
and pursue a new wave of growth associated
A number of external factors can facilitate
E movement along the industry life
cycle. When oil prices spiked in 2005, for example, firms in oil-intensive industries such as airlines and carmakers beganT
to feel the squeeze.4 When an industry
is mature, however, firms are often betterTable to withstand such pressures and
survive.
Although the life cycle model is useful, for analysis, identifying an industry’s
precise position is often difficult, and not all industries follow these exact stages
or at predictable intervals.5 For example, the U.S. railroad industry did not reach
maturity for many decades and extendedB
over a hundred years before entering
decline, whereas the personal computer industry
began to show signs of maturity
A
after only seven years. In addition, following an industry’s decline, changes in the
R
macroenvironment may revitalize new growth. For example, the bicycle industry
fell into decline some years ago when theB
automobile gained popularity but has
now been rejuvenated by society’s interest in health and physical fitness.
3-2 Industry
A
R
Structure
A
Factors associated with industry structure have been found to play a dominant
role in the performance of many companies, with the exception of those that are
2 needs to understand these factors
its notable leaders or failures.6 As such, one
at the outset before delving into the characteristics
of a specific firm. Michael
8
Porter, a leading authority on industry analysis, proposed a systematic means of
8 in an industry known as Porter’s “five
analyzing the potential profitability of firms
forces” model. According to Porter, an industry’s
overall profitability, which is the
2
combined profits of all competitors, depends on five basic competitive forces, the
T Figure 3-2).
relative weights of which vary by industry (see
1.
2.
3.
4.
5.
Intensity of rivalry among incumbent firms S
Threat of new competitors entering the industry
Threat of substitute products or services
Bargaining power of buyers
Bargaining power of suppliers
9781111219802, Strategic Management: Theory and Practice, John Parnell – © Cengage Learning
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42
Chapter 3
FIGURE
3-2
Por te r ’s F iv e Force s M ode l
B
E
N
N
E
T
These five factors combine
to form the industry structure and suggest (but do
not guarantee) profitability
prospects
for firms that operate in the industry. Each
T
of the factors is discussed in greater detail in sections 3-3 through 3-7.
,
3-3 Intensity of Rivalry among
B
Incumbent
Firms
A when a firm identifies the opportunity to improve its
Competition intensifies
position or senses competitive
pressure from other businesses in its industry,
R
which can result in price wars, advertising battles, new product introductions or
B
modifications, and even increased customer service or warranties.7 Rivalry can
be intense in some industries.
For example, a battle wages in the U.S. real-estate
A
industry, where traditional brokers who earn a commission of 5 to 6 percent are
R
being challenged by discount brokers who charge sellers substantially lower fees.
A seller typically split commissions, which usually fall in
Agents for the buyer and
the $7,000 range for both agents when a home sells for $250,000. Discount brokers argue that the primary service provided by the seller’s agent is listing the
2 service (MLS) database, the primary tool used by most
home in a multiple listing
buyers and their agents
8to peruse available properties. Discount brokers provide
sellers with a MLS listing for a flat fee in a number of markets, sometimes less
8 brokers are angry, however, and argue that discount
than $1,000. Traditional
brokers simply do not2provide the full array of services available at a so-called
full-service broker. Traditional brokers dominate the industry, accounting for
98 percent of all sales T
in 2005. They often control the local MLS databases, and
many discount brokersScharge that they are not provided equal access to list their
properties.8 Hence, rivalry in this industry—especially between full-service and
discount brokers—remains quite intense.
Competitive intensity often evolves over time and depends on a number of
interacting factors, as discussed in sections 3-3a through 3-3h. Factors should be
assessed independently and then integrated into an overall perspective.
9781111219802, Strategic Management: Theory and Practice, John Parnell – © Cengage Learning
Industry Competition
3-3a Concentration of Competitors
The number of companies in the industry and their relative sizes or power levels
influence an industry’s intensity of rivalry. Industries with few firms tend to be
less competitive, but those with many firms that are roughly equivalent in size
and power tend to be more competitive, as each firm fights for dominance.
Competition is also likely to be intense in industries with large numbers of firms
because some of those companies may believe that they can make competitive
moves without being noticed.9
3-3b High Fixed or Storage Costs
When firms have unused productive capacity, they often cut prices in an effort to
increase production and move toward full capacity. The degree to which prices
(and profits) can fall under such conditions is a function of the firms’ cost structures. Those with high fixed costs are most likely to cut prices when excess capacB capacity to be able to spread their
ity exists, because they must operate near
overhead over more units of …
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