Expert answer:HRER825 Penn State Lesson ADP Five Forces Essay

  

Solved by verified expert:Think about a for-profit company with which you work (ADP, LLC), with which you have worked in the past, or with which you are familiar.Write an essay of at least 750 words addressing the following issues:Identify the industry in which the company exists, its size, and its primary products;Analyze the company’s competitive position using the five forces as defined by Porter;To what degree does the company’s position take into account stakeholders beyond the company’s shareholders; and,Based on your analysis, do you believe the organization has established a sustainable competitive position in its industry? Please explain.
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Lesson 08: Modern Strategy Analysis
Five Forces
Michael Porter also provides a tool to help analyze competitive pressures on a company, again one that helps the
understanding of where to focus efforts. In numerous articles he has discussed what he describes as the “five forces”
affecting a company’s ability to achieve and sustain a competitive advantage:
Industry Competitors
New Entrants
Buyers
Suppliers
Substitutes
The following Harvard Business Review interview with Michael Porter describes the definitions and relationships among
these elements.
The Five Competitive Forces That Shape Strategy
Video #.#, Length: 00:13:11, The Five Competitive Forces That Shape Strategy Transcript
Transcript
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THOMAS STEWART: I am Tom Stewart, Editor and Managing Director of the Harvard Business Review. Our
guest today is Michael Porter, Professor at Harvard University and Head of the Institute for Strategy and
Competitiveness. He is the author of the forthcoming HBR article, ìThe Five Competitive Forces That Shape
Strategyî. A reaffirmation, update, and extension of his groundbreaking 1979 article “How Competitive Forces
Shape Strategy”. Mike, thanks for joining the program. To start, let us remind our viewers of what the five
competitive forces are.
MICHAEL PORTER: Well Tom, the basic idea of the competitive forces starts with the notion that competition is
often looked at too narrowly by managers, and the five forces say that, yes you are competing with your direct
competitors, but you are also in a fight for profits with a broader extended set of competitors, customers who have
bargaining powers, suppliers who can have bargaining power, new entrants who might come in and kind of grab a
piece of the action, and substitute products or services that essentially place a constraint or a cap on your
profitability and growth. So the five forces is kind of a holistic way of looking at any industry and understanding
the structural underlying drivers of profitability and competence.
STEWART: So I use this to think about my rival makes it difficult for me. The threat of substitutes means I cannot
overcharge. The threat of new entrantsí means I cannot overcharge.
PORTER: Right.
STEWART: The same thing with the buyers and suppliers.
PORTER: The buyers and suppliers, and there is underlying drivers of each of those forces that the model really
sort of unveils and then you can actually apply this. Every industry is different. Every industry will have a different
set of economic fundamentals, but the five forces help you hone in on, first of all, what is really causing
profitability in the industry. What are the trends that are most likely to be significant in changing the game in the
industry? Where are the constraints, which if you can relax, it might allow you to find a really strong competitive
position?
STEWART: So how would you apply this analysis to an industry? Airlines for example.
PORTER: Airlines is a great industry. Actually you will see in the article or you have seen in the article that there
is a chart that compares profitability of industries, and airlines, I think has been on the bottom of that list for
decades. It is among the least profitable industries known to man, and the five forces really allow you very quickly
to understand why. I mean, let us just go around the chart. The nature of rivalry is incredibly intense and it is
almost exclusively unpriced. It has been very hard to differentiate, get the customer to wait even an extra two or
three minutes for another flight if they can get on the flight with a cheaper price. So there has been a very intense
price competition, low barriers to entry. Constant stream of new airlines coming into the industry despite the fact
that probability is low. It always puzzles me.
STEWART: Low barriers to entry because you can rent a plane, you do not have to buy them.
PORTER: You can rent a plane. You can lease a gate. It is all generic technology. You can start with one flight
between two city pairs. There is no real need to have a whole network in the beginning, and yet, people keep
coming in. I think it is just one of those “sexy” industries. It is a great example of how sexiness or coolness or
hotness or cheapness has nothing to do with industry profitability. The underlying structure is what drives
profitability. Yeah, the customer is very fickle and price sensitive. Suppliers of aircraft and aircraft engines and
even aircraft gates at airports now have a lot of clout. They can bargain away most of the profits. GE, and RollsRoyce, and Airbus, and Boeing make a lot more money than Airlines. They get most of the profit. And then of
course, there is always the substitute of getting on the train or driving your car or shipping your goods by air and
that sets kind of kept the consumer.
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STEWART: You have powerful suppliers of labor too. That is another powerful supplier.
PORTER: Right, exactly. There is a great case where you have unionized labor. Unlike other industries, in this
industry particularly with the pilots, the labor can literally shut you down, and there is no way around them. So, it
is an industry where there are spurts of what you might call mediocre profitability punctuated by long periods of
terrible profitability.
STEWART: So everyone of the five forces is very strong in that industry and you could take another industry
where the five forces are relatively benign.
PORTER: Right, like soft drinks. I mean, soft drinks have been a license to mint money and again, it is the
opposite kind of analysis. When I talk with students, we kind of joke around, there are five-star industries where
all the forces are attractive like soft drinks. There are zero-star industries where all the forces are unfavorable like
airlines and we are always trying to understand, okay, what is the configuration of underlying economic drivers
that is going to really shape the profit potential of this industry and then armed with that insight, what do I do
about it? How do I try to relax the constraint that is holding back industry profitability? How can I position myself to
kind of insulate from some of the gales, gale winds of those forces? Those implications of the five forces are
something that this new article has developed in much more detail.
STEWART: You conceived this framework nearly three decades ago and it has been the most extensively used
both in management scholarship and management practice of any strategy framework, and it changed the
definition of strategy in a lot of ways. In these three decades, what have you learned? What have you learned
about the application of these ideas in the real world of business?
PORTER: Well, the wonderful thing of course we learned is that these concepts can be applied to literally any,
any industry, to product, to service, high-tech, low-tech, emerging economies, developed economies. Indeed,
what one of the powers of the framework is it helps you get avoid getting trapped or tricked by the latest trend or
the latest technological sensation, and really allows you to focus on the underlying fundamentals. The internet is
a good example. We got very, very confused by the internet because people saw the internet as a force as
supposed to really enabling technology that might or might not impact the underlying structure of the industry. So
I think one thing I have learned is the framework is very, very robust, but I have also learned that there is a lot of
confusion and complexity in actually applying the framework in actual practice and we tried to clear as many of
those areas up as we could in this new article. For example, how to think about rivalry? How do we understand
when rivalry is really positive-sum, which allows many companies to do well? When does rivalry become really
zero-sum, where everybody is kind of dragged down into a destructive battle that you cannot win.
STEWART: Well, I can understand zero-sum. I mean, if we get in a price war, the only one who wins is the
consumer, which is nice if you are a consumer.
PORTER: Yeah.
STEWART: But what do you mean by positive-sum competition?
PORTER: Well, the trouble with the zero-sum competition is then the consumer gets a little price, but they really
got no choice, and a positive-sum competition is where companies can compete on different attributes, services,
features, customer support, that is actually relevant to particular groups of customers. The most really positivesum competition is where companies are really competing on different things in order to meet the needs of
different segment.
STEWART: So we are growing the pie and there is a piece for each of us.
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PORTER: There is a piece for each of us. In fact, one of the things we talked about in the new article, one of the
things I did in the new article that we really probably did not have the experience to do so many years ago was
really talk a lot about the implications. If this is the way competition works, what do you do about it? One of them
is might be in some industries rather than go for market share against your rivals, you might be much better off
just really expanding the pie, expanding the whole profit pool of the industry. That may be the best way for a
market leader to actually improve their circumstances rather than to trigger a destructive battle with their head-tohead rival.
STEWART: How should a company get started using the five forces framework? You are working your strategy
and you decide, “This really works for me.” How do you begin?
PORTER: Well, I think industry analysis and looking at the competitive environment is of course, probably the
starting basic discipline of any strategy formulation process. If you do not know what your industry looks like, if
you do not know how it is changing, if you do not know what the drivers or competition are, strategy is going to be
marginally useful, if not destructive. So we got to start with industry analysis figuring out what your industry is and
drawing the right boundaries.
STEWART: That is not always easy.
PORTER: It is not always easy. We have added a box in this new article, which really addresses that question
because I encountered so many companies that struggled with industry definition, identifying really what the
industry structure is in your particular industry. And then there is another thing that a lot of managers do. They
kind of go through the industry analysis and they say, “Okay. This is good, this is bad. This is good, this is bad.”
So this is an attractive industry or unattractive industry, but of course the real question is how is that industry
changing? Some have believed and taken the five forces as really a static snapshot, but of course the five forces
give you the tools for understanding the dynamics and where is that industry structure changing? How are buyers
and suppliers and substitutes and potential entry evolving? And then what implications does that hold for your
strategy? How do you position yourself to find that spot within the industry where you can command a really good
profit given the five forces? How can you maybe reshape the nature of the industry structure? We have got some
great new examples that are very, very contemporary in this article that I think will help the manager community
and the investor community really understand the application of this.
STEWART: Sometimes when people think about strategy, they think about a group of people, maybe from a
management consulting firm or maybe on the 33rd floor of the building, whatever it is, but it is sort of elite strategy
priesthood that goes in and does this. They are almost divorced from the rest of the management of the company,
the 99% of the other people working in the company. How can a strategy become part of the day-to-day life of a
working stiff manager in a company? How do you apply this framework, this thinking? How do you use it?
PORTER: Well, we think that this way of looking at an industry needs to be very, very broadly understood in the
organization. The thing about it is that managers, even rank and file employees, it is intuitive. People understand.
We have these customers, we have these suppliers, we are struggling with them everyday. They are trying to get
a better deal, we are trying to get a better deal. So intuitively, I think this is a way of helping people sort of step
back from all the excruciating little details that characterize any business and say, ìWhat is really important here?î
And then of course we have learned that strategy is completely useless, again, unless the results of the strategy
process, the position that you choose to occupy, the way you are going to drive your company is well understood
quite broadly because the number one purpose of strategy is alignment. It is really to get all the people in the
organization, making good choices, reinforcing each other’s choices because everybody is pursuing a common
value proposition or common way of gaining competitive advantage. I remember when I wrote this article, there
were many people who believed that strategy documents should be locked in the safe at night and should not be
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made available to the rank and file. There was a concern that some competitor would find some secret. Well, we
have actually learned now that it is the opposite. Your employees got to know your strategy, your channels have
to know your strategy, your suppliers have to know your strategy.
STEWART: Your competitors probably knew it already.
PORTER: Well, and frankly, again the competition is not zero-sum. If every company finds a unique need that it
can set out to meet, if it tries to deliver something different than its rivals, multiple rivals can be successful. If your
competitors can understand what you stand for and what you are committed to, maybe they will make a different
choice, rather than get dragged into this kind of mindless price wars that we see in so many industries.
STEWART: The five forces that shape strategy have been around for 30 years, they are going to be around for,
well, they have been around long before you wrote about it.
PORTER: That is right.
STEWART: They have been around as long as business has been around. They are going to be around as long
as business is around. The new article is just fabulous. Thank you so much.
PORTER: Thank you. Well, I am looking forward to kind of getting another surge of feedback from the
practitioners and we will keep learning.
STEWART: Thanks.
PORTER: Thanks Tom.
You may also read about Porter’s concept more extensively in Chapter 2 of the text, On Strategy: “The Five Competitive
Forces That Shape Strategy”, p. 39 (not required).
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JOEL E. URBANY: We’ve got decades of study of competitive strategy in the literatures of economics and
marketing and management. Many, many important frameworks come from Porter to the resource-based view of
the firm. The problem is the concepts within these frameworks are not very accessible or actionable. So here’s a
way to get right to the heart of the matter.
Davis and I have written about the three circle model in a brief piece in Harvard Business Review a few years
back in a book late last year. There’s really three core concepts that cut across these frameworks. And that is that
there are customers, there’s the company or your organization, and there’s the competition. And we’d add to that
the notion that competition in the marketplace is about competing for customers choices. Given that, we can
begin to think about value in the market and how we might break it down and understand those choices.
So think about a customer’s circle here. The customer’s circle contains the value sought by the customer, so the
requirements, benefits sought, even deeper values here. What value does the customer seek? Add to that a
second circle here which we would call our company’s circle. Still from the customer’s perspective here, what
value does the customer perceive in our offerings?
So two circles from the customer’s perspective, overlapping area, positive value in the middle, value we create
and which we perceive to deliver effectively on customer needs. If we call that one for the moment, we can point
out that there’s two over here, nonvalue, value we create that the customer either doesn’t care about or maybe
doesn’t know about. Three, unmet need.
These circles never overlap. There’s always some degree of needs that go unresolved for customers which
represent growth opportunity potentially. But this analysis is incomplete until we add a circle for the competitor.
What value does the customer perceive in their offering?
When we do this, we get a Venn diagram with seven different areas, the most significant of which is this one,
area A. It’s the pure definition of competitive advantage. What’s the value that we create that matters to
customers– it’s inside the customer’s circle– but that is different than the competition? What’s the value we
create that matters to customers but that is different from the competition?
This is why people choose us or not. That’s why people choose us. Again, seven areas is in this model, each of
which have strategic meaning and can be helpful in building growth strategy if we break down the value in the
marketplace there. But for now our three minutes, the focus is area A.
So here’s a challenge for you. First of all, use this picture, use the framework to communicate to your team and
teach them the basics of competitive strategy. And a lot of it boils down to area A. Spend a few minutes there.
And then ask everybody to write down an answer to this question– what is our area A?
If you’ve got five people that are better than even odds, you’re going to get five different answers. But with that
conversation, you started a very important process to define competitive uniqueness for your group, understand
it, dig more into it, and to begin to build a growth strategy around that. So what’s your area A? That’s a core
question of competitive strategy.
All right, thanks for listening and take care.
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Lesson 08: Modern Strategy Analysis
Relationship to S.W.O.T. Analysis
Perhaps one way to understand the notion of strategy is to make reference to a common analytical tool most of us have
employed at work: S.W.O.T Analysis: strengths, weaknesses, opportunities and threats. The result of that analysis might
create a matrix as follows:
Strengths
Weakness
Large market share in 3 of 7
U.S. regional markets
Little penetration in international
markets
7 patents on key components
65% of key managers are within
five years of retirement
Ability to recruit internationally
Threats
One competitor is developing a
product that would replace the
need for several items in our
product line
The barriers to entry in our
regional markets are very low
Opportunities
Three competitors have left 2 of
the 4 markets in which we do not
have a large market share
We have four pending patents
that will improve the quality of
our products in ways that cannot
be easily duplicated
All that information is relevant in deciding where to focus efforts (i.e., the destination) when seeking a competitive
advantage and the pa …
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