Summary of External Assessment in Strategic Management

## Introduction Competition shapes how firms set prices, design products, and position themselves in markets. This study material explains the key drivers of industry competition, how firms respond, and practical tools (especially Porter’s Five Forces) to analyze competitive intensity. The goal is to give a Not attending student clear, actionable understanding of industry competition and how firms manage it. > **Definition:** Industry competition refers to the set of forces and behaviors among firms, suppliers, customers, and substitutes that determine price levels, profitability, and strategic choices within a market. ## Overview: What influences industry competition Break industry competition into digestible parts: - Rivalry among existing firms - Potential entry of new competitors - Potential development of substitute products - Bargaining power of suppliers - Bargaining power of consumers These five elements form Porter’s Five-Forces framework, a practical tool to assess how attractive an industry is for profit-making. ### Porter’s Five Forces — quick map > **Definition:** Porter’s Five-Forces Model is a framework to analyze competitive intensity and industry profitability by examining five distinct forces that affect every market. 1. **Rivalry among competing firms** - Most powerful force in many industries. - Firms react to each other’s strategies: price cuts, improved quality, added features, warranties, and advertising. - Rivalry intensifies when many competitors exist, competitors are similar in size and capability, demand slows, or products are easily substitutable. 2. **Potential entry of new competitors** - Easier entry increases competition and tends to lower profits. - Common barriers to entry: economies of scale, technology and know-how, brand loyalty, high capital requirements, distribution access, patents, government regulation, tariffs, and raw material access. - Incumbents deter entry by lowering prices, improving offerings, extending warranties, or offering financing specials. 3. **Potential development of substitute products** - Substitutes limit the price a firm can charge — creating a price ceiling and capping potential profits. - Substitutes become more competitive when their relative price falls or switching costs for consumers decline. - Measure substitute strength by market share inroads, capacity expansion plans, and sales/profit growth of substitute producers. 4. **Bargaining power of suppliers** - Supplier power increases when few suppliers exist, when suppliers offer highly differentiated or scarce inputs, or when switching suppliers is costly. - Firms may pursue backward integration (acquiring suppliers) to reduce supplier power and secure inputs. - Strategic partnerships (e.g., just-in-time deliveries) can improve quality, reduce inventory, and cut costs for both sides. 5. **Bargaining power of consumers** - Powerful customers can demand lower prices, better service, or improved warranties. - Consumer power rises when buyers are large or concentrated, products are undifferentiated, switching is inexpensive, or buyers are well informed. ### Rivalry — deeper view - Triggers of intense rivalry: - Many comparable competitors - Slow or shrinking market demand leading to excess capacity - High fixed or storage costs - Commodity-type products - Low switching costs for buyers - Typical competitive responses include price competition, quality improvements, enhanced services, and marketing campaigns. > **Definition:** Backward integration is a strategy where a firm acquires or controls its suppliers to reduce input costs or secure supply reliability. ## Practical examples and applications - Example 1: Soft drink market - Rivalry: Coca-Cola vs. Pepsi use advertising, packaging, and promotions. - Entry barriers: strong brands and distribution networks deter new entrants. - Substitutes: bottled water and energy drinks cap soft drink prici