The basis for a company's competitive strengths lie within their resources and core com-petences. However, the company's strategy needs to match the industry environment in order to get the most out of it. Success lies within understanding the environment and
being prepared to change the competitive strategy in response to external threats.
(Thompson & Strickland, 1999). The competitive landscape of an industry is very much restricted by external factors such as geographical, technological, legal, political, societal and economic factors. These factors not only influence the competitive strategy of a company but also contribute to the attractiveness of the industry (Thompson & Strick-land, 1999). These attributes are also referred to as the 'general environment' in which a company operate, and which cannot be controlled (Hitt et al. 2001).
Understanding a specific market begins with understanding the economic situation with factors as market size and growth rate, scope of rivals, number of customers, supply net-works, industry profitability and so forth (Thompson & Strickland, 1999). The industry environment, in which a number of factors contribute to the opportunities and threats of a company's competitive positioning, determine a company's profit potential (Hitt et al., 2001; Porter, 1980). Michael Porter (1980) introduced a model of five competitive forces (Figure 2) which describe the generic factors that influence the competition in any industry.
Figure 2. The Five Forces that Shape Industry Competition. According to Porter (1980).
The five force model is a powerful tool for analyzing a company's competitive environ-ment and the company's own position in it. The strength of the forces determine the level of profitability in the industry. Strong competitive forces result in low profit while positive profits are easier to attain when the competitive forces are at a favorable level (Porter 2008). The five competitive forces will be described below.
Rivalry among competitors
Intense rivalry among competitors generally drive down profitability in an industry and is visible in form of price reduction, discount campaigns, marketing campaigns, new product development and service improvements. Even more fierce competition occurs when an industry's growth rate is low and when competing companies are rather similar in size and structure. Additionally, if the exit barriers of an industry are high existing com-petitors will stay in the industry competing for the profit share (Porter, 2008).
Threat of new entrants
New entrants in an industry put pressure on existing companies by competing for market shares. The threat of entrants thus influences the potential profits in an industry. The possibility of threat of new entrants depends on the entry barriers. The entry barriers are many; largely due to the economies of scale that incumbents in an industry enjoy.
Incumbents often have established supply chains, technology, logistic chains that are utilized to a lower cost than newcomers would have. There are also economies of scale on the demand-side; referring to customers reluctance to change to a product from a new or smaller company. High switching costs will also influence new entrants. A number of capital requirements raise the entry barriers, such as investment in facilities, invento-ries and other capital resources. Furthermore, newcomers might have possession of dis-tribution channels or material supply which may be difficult to reach for new entrants Porter 2008).
Bargaining power of suppliers
Suppliers who are in a strong position to bargain will charge higher prices and gain ad-vantages to themselves by providing lower quality, restricted services or moving costs to their buyers. Such situations occur when there is a limited number of suppliers, there are no substitutes or when the switching costs are high. The bargaining power of suppli-ers is often high in industries with highly differentiated products.
Bargaining power of buyers
The buyers have similar negotiating arguments as the suppliers, pushing down prices and demanding better quality and service when there are few buyers in the market.
Companies with high fixed costs will try to fill their capacity by reducing selling prices, increasing rivalry further. Industries with standardized products and low switching costs will make it easier for buyers to compete suppliers against each other. Many customers are price sensitive, for example when the purchasing price has a large influence on the buyer's total costs. In high-value, undifferentiated products quality and service can be a more important factor than price as bad quality can become far more expensive than the purchasing price in the long run.
Threat of substitutes
Substitutes are products or services that serve a similar purpose as an industry's product.
Examples of substitutes are for example videoconferencing vs. traveling or plastic vs. alu-minum. The attraction of a substitute grows if the price-value ratio is better than the industry's products and the switching cost is low. Potential substitutes are not always obvious; for this reason, companies should be alert to changes in trends, technological advancement and material improvements as they might impact the competitive situa-tion negatively (Porter, 2008).
A sixth force was proposed in the mid 1990's, which is 'complementary products'. Com-plementary products and services are products that are provided together with another product. The positive effect of this is that customer experience added value by buying
complementary products or a bundle of products. Complements can affect the profita-bility and demand positively in some industries (Porter, 2008).
In some articles governmental regulations is also described as one influential force. This can be considered a valid addition as the global environment indeed offers challenges of navigating among both local and global policies and regulations. The influences of this force continuously fluctuate as a result of the general economic and political situation and in result of trade agreements between countries and economic associations. As ex-plained in previous chapter about the marine industry, regulations concerning environ-mental impacts is one of the main drivers of strategic decision-making in the marine industry. However, Porter (2008) describe the governmental factor rather as a contribu-tor to the five forces and not a force in itself for the reason that governmental regulations can't be seen as positive or negative influential factors.
Porter's five force model is one of the few theories that have has lasted over time and is today thought at business schools all over the world. The reason for its superiority is that it is timeless. The main idea, to understand your environment as a whole rather than simply focusing on your competitors, is as valid today as it was in 1980. However, the internal firm environment along with the corporate values and culture need to be in place to successfully realize the strategy. Following section will discuss this further.