Reading notes, writing homework help

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Question Description

Read the article attached and write a reading notes follow by the requirements. Absolutely original work,otherwise will be withdrew.

Format:

Two-page, single space, business block, justified margins, 10-point font

APA bibliographic citation of the work as your ‘title’

Content:

Central theme – identify author’s main lesson/argument – what is the author(s) teaching us

Critical analysis – evaluate the lesson/argument – strengths/weaknesses – considering pointing to a frame of reference in your own life or your training in the subject

Main takeaways – so what and now what? How do we best apply the knowledge from this article? Essentially, why does this study matter?

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Awareness of the five forces can help a company understand the structure of its industry and stake out a position that is more profitable and less vulnerable to attack. 78 Harvard Business Review 1808 Porter.indd 78 | January 2008 | hbr.org 12/5/07 5:33:57 PM THE FIVE COMPETITIVE FORCES THAT SHAPE STRATEGY STRATEGY Peter Crowther by Michael E. Porter Editor’s Note: In 1979, Harvard Business Review published “How Competitive Forces Shape Strategy” by a young economist and associate professor, Michael E. Porter. It was his first HBR article, and it started a revolution in the strategy field. In subsequent decades, Porter has brought his signature economic rigor to the study of competitive strategy for corporations, regions, nations, and, more recently, health care and philanthropy. “Porter’s five forces” have shaped a generation of academic research and business practice. With prodding and assistance from Harvard Business School Professor Jan Rivkin and longtime colleague Joan Magretta, Porter here reaffirms, updates, and extends the classic work. He also addresses common misunderstandings, provides practical guidance for users of the framework, and offers a deeper view of its implications for strategy today. IN ESSENCE, the job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly, as if it occurred only among today’s direct competitors. Yet competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products. The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry. As different from one another as industries might appear on the surface, the underlying drivers of profitability are the same. The global auto industry, for instance, appears to have nothing in common with the worldwide market for art masterpieces or the heavily regulated health-care hbr.org 1808 Porter.indd 79 | January 2008 | Harvard Business Review 79 12/5/07 5:34:06 PM LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy delivery industry in Europe. But to understand industry competition and profitabilThe Five Forces That Shape Industry Competition ity in each of those three cases, one must analyze the industry’s underlying structure in terms of the five forces. (See the exThreat hibit “The Five Forces That Shape Industry of New Competition.”) Entrants If the forces are intense, as they are in such industries as airlines, textiles, and hotels, almost no company earns attractive returns on investment. If the forces are benign, Rivalry as they are in industries such as software, Among Bargaining Bargaining soft drinks, and toiletries, many companies Power of Power of Existing Suppliers are profitable. Industry structure drives Buyers Competitors competition and profitability, not whether an industry produces a product or service, is emerging or mature, high tech or low tech, regulated or unregulated. While a myriad of factors can affect industry profitability Threat of in the short run – including the weather Substitute Products or and the business cycle – industry structure, Services manifested in the competitive forces, sets industry profitability in the medium and long run. (See the exhibit “Differences in Industry Profitability.”) Understanding the competitive forces, and their underThe strongest competitive force or forces determine the lying causes, reveals the roots of an industry’s current profitprofitability of an industry and become the most important ability while providing a framework for anticipating and to strategy formulation. The most salient force, however, is influencing competition (and profitability) over time. A not always obvious. healthy industry structure should be as much a competitive For example, even though rivalry is often fierce in comconcern to strategists as their company’s own position. Unmodity industries, it may not be the factor limiting profitderstanding industry structure is also essential to effective ability. Low returns in the photographic film industry, for strategic positioning. As we will see, defending against the instance, are the result of a superior substitute product – as competitive forces and shaping them in a company’s favor Kodak and Fuji, the world’s leading producers of photoare crucial to strategy. graphic film, learned with the advent of digital photography. In such a situation, coping with the substitute product becomes the number one strategic priority. Forces That Shape Competition Industry structure grows out of a set of economic and The configuration of the five forces differs by industry. In technical characteristics that determine the strength of the market for commercial aircraft, fierce rivalry between each competitive force. We will examine these drivers in the dominant producers Airbus and Boeing and the bargainpages that follow, taking the perspective of an incumbent, ing power of the airlines that place huge orders for aircraft or a company already present in the industry. The analysis are strong, while the threat of entry, the threat of substican be readily extended to understand the challenges facing tutes, and the power of suppliers are more benign. In the a potential entrant. movie theater industry, the proliferation of substitute forms of entertainment and the power of the movie producers THREAT OF ENTRY. New entrants to an industry bring and distributors who supply movies, the critical input, are new capacity and a desire to gain market share that puts important. pressure on prices, costs, and the rate of investment necessary to compete. Particularly when new entrants are diversifying from other markets, they can leverage existMichael E. Porter is the Bishop William Lawrence University Proing capabilities and cash flows to shake up competition, as fessor at Harvard University, based at Harvard Business School in Pepsi did when it entered the bottled water industry, MicroBoston. He is a six-time McKinsey Award winner, including for his soft did when it began to offer internet browsers, and Apple most recent HBR article, “Strategy and Society,” coauthored with did when it entered the music distribution business. Mark R. Kramer (December 2006). 80 Harvard Business Review 1808 Porter.indd 80 | January 2008 | hbr.org 12/5/07 5:34:13 PM The threat of entry, therefore, puts a cap on the profit potential of an industry. When the threat is high, incumbents must hold down their prices or boost investment to deter new competitors. In specialty coffee retailing, for example, relatively low entry barriers mean that Starbucks must invest aggressively in modernizing stores and menus. The threat of entry in an industry depends on the height of entry barriers that are present and on the reaction entrants can expect from incumbents. If entry barriers are low and newcomers expect little retaliation from the entrenched competitors, the threat of entry is high and industry profitability is moderated. It is the threat of entry, not whether entry actually occurs, that holds down profitability. entry by limiting the willingness of customers to buy from a newcomer and by reducing the price the newcomer can command until it builds up a large base of customers. 3. Customer switching costs. Switching costs are fixed costs that buyers face when they change suppliers. Such costs may arise because a buyer who switches vendors must, for example, alter product specifications, retrain employees to use a new product, or modify processes or information systems. The larger the switching costs, the harder it will be for an entrant to gain customers. Enterprise resource planning (ERP) software is an example of a product with very high switching costs. Once a company has installed SAP’s ERP system, for example, the costs of moving to a new vendor are astronomical Industry structure drives competition and profitability, not whether an industry is emerging or mature, high tech or low tech, regulated or unregulated. Barriers to entry. Entry barriers are advantages that incumbents have relative to new entrants. There are seven major sources: 1. Supply-side economies of scale. These economies arise when firms that produce at larger volumes enjoy lower costs per unit because they can spread fixed costs over more units, employ more efficient technology, or command better terms from suppliers. Supply-side scale economies deter entry by forcing the aspiring entrant either to come into the industry on a large scale, which requires dislodging entrenched competitors, or to accept a cost disadvantage. Scale economies can be found in virtually every activity in the value chain; which ones are most important varies by industry.1 In microprocessors, incumbents such as Intel are protected by scale economies in research, chip fabrication, and consumer marketing. For lawn care companies like Scotts Miracle-Gro, the most important scale economies are found in the supply chain and media advertising. In smallpackage delivery, economies of scale arise in national logistical systems and information technology. 2. Demand-side benefits of scale. These benefits, also known as network effects, arise in industries where a buyer’s willingness to pay for a company’s product increases with the number of other buyers who also patronize the company. Buyers may trust larger companies more for a crucial product: Recall the old adage that no one ever got fired for buying from IBM (when it was the dominant computer maker). Buyers may also value being in a “network” with a larger number of fellow customers. For instance, online auction participants are attracted to eBay because it offers the most potential trading partners. Demand-side benefits of scale discourage because of embedded data, the fact that internal processes have been adapted to SAP, major retraining needs, and the mission-critical nature of the applications. 4. Capital requirements. The need to invest large financial resources in order to compete can deter new entrants. Capital may be necessary not only for fixed facilities but also to extend customer credit, build inventories, and fund startup losses. The barrier is particularly great if the capital is required for unrecoverable and therefore harder-to-finance expenditures, such as up-front advertising or research and development. While major corporations have the financial resources to invade almost any industry, the huge capital requirements in certain fields limit the pool of likely entrants. Conversely, in such fields as tax preparation services or short-haul trucking, capital requirements are minimal and potential entrants plentiful. It is important not to overstate the degree to which capital requirements alone deter entry. If industry returns are attractive and are expected to remain so, and if capital markets are efficient, investors will provide entrants with the funds they need. For aspiring air carriers, for instance, financing is available to purchase expensive aircraft because of their high resale value, one reason why there have been numerous new airlines in almost every region. 5. Incumbency advantages independent of size. No matter what their size, incumbents may have cost or quality advantages not available to potential rivals. These advantages can stem from such sources as proprietary technology, preferential access to the best raw material sources, preemption of the most favorable geographic locations, established brand identities, or cumulative experience that has allowed incum- hbr.org 1808 Porter.indd 81 | January 2008 | Harvard Business Review 81 12/5/07 5:34:18 PM LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy bents to learn how to produce more efficiently. Entrants try to bypass such advantages. Upstart discounters such as Target and Wal-Mart, for example, have located stores in freestanding sites rather than regional shopping centers where established department stores were well entrenched. 6. Unequal access to distribution channels. The new entrant must, of course, secure distribution of its product or service. A new food item, for example, must displace others from the supermarket shelf via price breaks, promotions, intense selling efforts, or some other means. The more limited the wholesale or retail channels are and the more that existing competitors have tied them up, the tougher entry into an industry will be. Sometimes access to distribution is so high a barrier that new entrants must bypass distribution channels altogether or create their own. Thus, upstart low-cost airlines have avoided distribution through travel agents (who tend to favor established higher-fare carriers) and have encouraged passengers to book their own flights on the internet. 7. Restrictive government policy. Government policy can hinder or aid new entry directly, as well as amplify (or nullify) the other entry barriers. Government directly limits or even forecloses entry into industries through, for instance, licensing requirements and restrictions on foreign investment. Regulated industries like liquor retailing, taxi services, and airlines are visible examples. Government policy can heighten other entry barriers through such means as expansive patenting rules that protect proprietary technology from imitation or environmental or safety regulations that raise scale economies facing newcomers. Of course, government policies may also make entry easier – directly through subsidies, for instance, or indirectly by funding basic research and making it available to all firms, new and old, reducing scale economies. Entry barriers should be assessed relative to the capabilities of potential entrants, which may be start-ups, foreign firms, or companies in related industries. And, as some of our examples illustrate, the strategist must be mindful of the creative ways newcomers might find to circumvent apparent barriers. Expected retaliation. How potential entrants believe incumbents may react will also influence their decision to enter or stay out of an industry. If reaction is vigorous and protracted enough, the profit potential of participating in the industry can fall below the cost of capital. Incumbents often use public statements and responses to one entrant to send a message to other prospective entrants about their commitment to defending market share. Newcomers are likely to fear expected retaliation if: • Incumbents have previously responded vigorously to new entrants. • Incumbents possess substantial resources to fight back, including excess cash and unused borrowing power, avail- 82 Harvard Business Review 1808 Porter.indd 82 | January 2008 | Differences in Industry Profitability The average return on invested capital varies markedly from industry to industry. Between 1992 and 2006, for example, average return on invested capital in U.S. industries ranged as low as zero or even negative to more than 50%. At the high end are industries like soft drinks and prepackaged software, which have been almost six times more profitable than the airline industry over the period. able productive capacity, or clout with distribution channels and customers. • Incumbents seem likely to cut prices because they are committed to retaining market share at all costs or because the industry has high fixed costs, which create a strong motivation to drop prices to fill excess capacity. • Industry growth is slow so newcomers can gain volume only by taking it from incumbents. An analysis of barriers to entry and expected retaliation is obviously crucial for any company contemplating entry into a new industry. The challenge is to find ways to surmount the entry barriers without nullifying, through heavy investment, the profitability of participating in the industry. THE POWER OF SUPPLIERS. Powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants. Powerful suppliers, including suppliers of labor, can squeeze profitability out of an industry that is unable to pass on cost increases in its own prices. Microsoft, for instance, has contributed to the erosion of profitability among personal computer makers by raising prices on operating systems. PC makers, competing fiercely for customers who can easily switch among them, have limited freedom to raise their prices accordingly. Companies depend on a wide range of different supplier groups for inputs. A supplier group is powerful if: • It is more concentrated than the industry it sells to. Microsoft’s near monopoly in operating systems, coupled with the fragmentation of PC assemblers, exemplifies this situation. • The supplier group does not depend heavily on the industry for its revenues. Suppliers serving many industries will not hesitate to extract maximum profits from each one. If a particular industry accounts for a large portion of a supplier group’s volume or profit, however, suppliers will want to protect the industry through reasonable pricing and assist in activities such as R&D and lobbying. • Industry participants face switching costs in changing suppliers. For example, shifting suppliers is difficult if companies have invested heavily in specialized ancillary equip- hbr.org 12/5/07 5:34:24 PM Profitability of Selected U.S. Industries Average Return on Invested Capital in U.S. Industries, 1992–2006 50 10th percentile 7.0% 25th percentile 10.9% Median: 14.3% 75th percentile 18.6% Average ROIC, 1992–2006 90th percentile 25.3% Number of Industries 40 30 20 10 0 0% or lower 5% 10% 15% 20% 25% 30% ROIC 35% or higher Return on invested capital (ROIC) is the appropriate measure of profitability for strategy formulation, not to mention for equity investors. Return on sales or the growth rate of profits fail to account for the capital required to compete in the industry. Here, we utilize earnings before interest and taxes divided by average invested capital less excess cash as the measure of ROIC. This measure controls for idiosyncratic differences in capital structure and tax rates across companies and industries. Source: Standard & Poor’s, Compustat, and author’s calculations ment or in learning how to operate a supplier’s equipment (as with Bloomberg terminals used by financial professionals). Or firms may have located their production lines adjacent to a supplier’s manufacturing facilities (as in the case of some beverage companies and container manufacturers). When switching costs are high, industry participants find it hard to play suppliers off against one another. (Note that suppliers may have switching costs as well. This limits their power.) • Suppliers offer products that are differentiated. Pharmaceutical companies that offer patented drugs with distinctive medical benefits have more power over hospitals, health maintenance organizations, and other drug buyers, for example, than drug companies offering me-too or generic products. • There is no substitute for what the supplier group provides. Pilots’ unions, for example, exercise considerable supplier power over airlines partly because there is no good alternative to a well-trained pilot in the cockpit. • The supplier group can credibly threaten to integrate forward into the industry. In that case, if industry participants make too much money relative to suppliers, they will induce suppliers to enter the market. THE POWER OF BUYERS. Powerful customers – the flip side of powerful suppliers – can capture more value by forcing down prices, demanding better quality or more service ...
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School: University of Maryland

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Running head: COMPETITIVE FORCES SHAPING STRATEGY

Competitive Forces Shaping Strategy
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COMPETITIVE FORCES SHAPING STRATEGY

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Introduction
The formation of the forces that affect strategy varies according to industry. For instance, in the industry of profit
making airplane, there is aggressive competition between the leading producers and the negotiating power of the
carriers which place vast orders for the airplane are robust, whereas the threat to the new entrance, the threat of
alternatives, and the influence of suppliers are extra gentle. However, in the industry of the movie business, the
multiplying of substitute kinds of entertainment and the influence of the movie creators as well as suppliers who
distribute movies, are essential. The toughest competitive power is responsible for establishing the effectiveness of
an industry and hence is the topmost necessity to strategy making. Nevertheless, the most outstanding force is not
usually noticeable at all times.
Central theme
In this discussion, the author attempts to make people comprehend that there exist some five powers that influence
rivalry in the market. This rivalry is essential in the making of strategies which help individual businesses to remain
relevant in their industry. Comprehending the competitive powers as well as their sources exhibits the origins of an
industry’s present efficiency while at the same time offering a background for expecting and manipulating rivalry
over a certain period. An industry with a fit configuration must entail competition which establishes the positions of
individual firms in the market hence facilitating production of quality commodities. Comprehending the
organization of the industry is crucial as it facilitates operative strategic placing.
Therefore, the author mentions five powers that influence the creation of strategy in businesses. These forces
comprise of the threat to the entrance, the negotiating ability of suppliers, the negotiating ability of buyer, the threat
to alternative commodities or services, and the competition among the current rivals in the market. These elements
significantly impact the way strategies are formed since the tacticians are supposed to consider them while creating
their game plan for effectiveness in the market. The performance of individual firms is also affected by these powers
since they directly affect the operation of a business. Despite competition being robust in product industries, it is not
always the element tha...

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