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Learning Outcomes:
?
Recognize the basic concepts and terminology used in Strategic Management. ClO-1
?
Describe the different issues related to environmental scanning, strategy formulation, and strategy
implementation in diversified organizations. ClO-2
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Demonstrate how executive leadership is an important part of strategic management. ClO-5
Assignment Question(s):
A. Discussion questions
1. How can a decision maker identify strategic factors in a corporation?s external international
environment?
2. Discuss the relationship between corporate governance and social responsibility? Give
examples.
B. Critical thinking
Review the figure 4-3, p.110 from your textbook and answer the following questions:
1. Choose any example of industry from the real national or international market, and detail
Porters? five forces framework with a graphic representation.
2. According to Porter?s framework, what determines the level of competitive intensity in your
chosen industry?
3. Assess the threat of new entrants, and substitute products/ services for your chosen industry.
4. Is your chosen industry attractive for investment? Why or why not?
110
PART 2 Scanning the Environment
PORTER’S APPROACH TO INDUSTRY ANALYSIS
Michael Porter, an authority on competitive strategy, contends that a corporation is most con-
cerned with the intensity of competition within its industry. The level of this intensity is deter-
mined by basic competitive forces, as depicted in Figure 4-3. ?The collective strength of these
forces,” he contends, “determines the ultimate profit potential in the industry, where profit po-
tential is measured in terms of long-run return on invested capital.947 In carefully scanning its
industry, a corporation must assess the importance to its success of each of six forces: threat
of new entrants, rivalry among existing firms, threat of substitute products or services, bar-
gaining power of buyers, bargaining power of suppliers, and relative power of other stakehold-
ers.48 The stronger each of these forces, the more limited companies are in their ability to raise
prices and earn greater profits. Although Porter mentions only five forces, a sixth-other
stakeholders-is added here to reflect the power that governments, local communities, and
other groups from the task environment wield over industry activities.
Using the model in Figure 4-3, a high force can be regarded as a threat because it is likely
to reduce profits. A low force, in contrast, can be viewed as an opportunity because it may al-
low the company to earn greater profits. In the short run, these forces act as constraints on a
company’s activities. In the long run, however, it may be possible for a company, through its
choice of strategy, to change the strength of one or more of the forces to the company’s advan-
tage. For example, Dell’s early use of the Internet to market its computers was an effective way
to negate the bargaining power of distributors in the PC industry.
A strategist can analyze any industry by rating each competitive force as high, medium,
or low in strength. For example, the global athletic shoe industry could be rated as follows:
FIGURE 4-3
Forces Driving
Industry
Competition
Potential
Entrants
Threat
of New
Entrants
Relative
Power
of Unions,
Governments,
Special
Interest
Groups, etc.
Other
Stakeholders
Industry
Competitors
Bargaining
Power
of Buyers
O
Buyers
Suppliers
Rivalry Among
Existing Firms
Bargaining
Power
of Suppliers
Threat of
Substitute
Products
or Services
Substitutes
SOURCE: Reprinted with the permission of The Free Press. A Division of Simon & Schuster, from COMPETITIVE
ADVANTAGE: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright ? 1980, 1988
by The Free Press. All rights reserved.

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