MB20101-ORGANISATIONAL BEHAVIOR AND DESIGN

UNIT I – Focus and Purpose

Definition, need and importance of organizational behaviour – Nature and
scope – Frame work – Organizational behaviour models- Disciplines that
contribute to OB field - Challenges and opportunities for OB.

Definition:
According to L. M. Prasad, “Organizational behavior can be defined as the
study and application of knowledge about human behavior related to other
elements of an organization such as structure, technology and social systems.”
In words of K Aswathappa, “OB is the study of human behaviour in
organisational setting, of the interface between human behaviour and
organisation and of the organisation itself.”
In words of Stephen P. Robbins, “OB is a field of study that investigates the
impact that individuals, groups and structures have on behaviour within
organisations for the purpose of applying such knowledge towards improving an
organisation’s effectiveness.”
Organizational Behavior (OB) can be defined as the understanding, prediction
and management of human behavior both individually or in a group that occur
within an organization.
Internal and external perspectives are the two theories of how organizational
behavior can be viewed from an organization’s point of view. In this tutorial,
we will be learning in detail about both the theories.
Importance of OB:
While working in an organization, it is very important to understand others
behavior as well as make others understand ours. In order to maintain a healthy
working environment, we need to adapt to the environment and understand the
goals we need to achieve. This can be done easily if we understand the
importance of OB.

Following points bring out the importance of OB −

  It helps in explaining the interpersonal relationships employees share
with each other as well as with their higher and lower subordinates.

 The prediction of individual behavior can be explained.

 It balances the cordial relationship in an enterprise by maintaining

effective communication.

 It assists in marketing.

 It helps managers to encourage their sub-ordinates.

 Any change within the organization can be made easier.

 It helps in predicting human behavior & their application to achieve.

 It helps in making the organization more effective.

Thus studying organizational behavior helps in recognizing the patterns of
human behavior and in turn throw light on how these patterns profoundly
influence the performance of an organization.

People
An organization consists of people with different traits, personality, skills,
qualities, interests, background, beliefs, values and intelligence. In order to
maintain a healthy environment, all the employees should be treated equally and
be judged according to their work and other aspects that affects the firm.

Example − A company offers campus placement to trainees from different

states like Orissa, Haryana, Arunachal Pradesh and many more. However,
during and after training, all trainees are examined only on the basis of their
performance in the tasks assigned.

Organizational Structure
Structure is the layout design of an organization. It is the construction and
arrangement of relationships, strategies according to the organizational goal.

Example − Organizational structure defines the relation of a manager with

employees and co-workers.

Technology
Technology can be defined as the implementation of scientific knowledge for
practical usage. It also provides the resources required by the people that affect
their work and task performance in the right direction.

Example − Introduction of SAP, big data and other software in the market
determines individual and organizational performance.

Environment
All companies function within a given internal and external environment.
Internal environment can be defined as the conditions, factors, and elements
within an enterprise that influences the activities, choices made by the firm, and
especially the behavior of the employees. While external environment can be
defined as outside factors that affect the company's ability to operate. Some of
them can be manipulated by the company’s marketing, while others require the
company to make adjustments.

Some examples of internal environment include employee morale, culture

changes, financial changes or issues, and some examples of external
environment include political factors, changes to the economy and the company
itself.

The concept of OB is based on two key elements namely −

Nature of people
Nature of the organization

Nature of People
In simple words, nature of people is the basic qualities of a person, or the
character that personifies an individual they can be similar or unique. Talking at
the organizational level, some major factors affecting the nature of people have
been highlighted. They are −

Individual Difference − It is the managerial approach towards each employee

individually, that is one-on-one approach and not the statistical approach, that
is, avoidance of single rule. Example− Manager should not be biased towards
any particular employee rather should treat them equally and try not to judge
anyone on any other factor apart from their work.

Perception − It is a unique ability to observe, listen and conclude something. It

is believing in our senses. In short, the way we interpret things and have our
point of view is our perception.
Example − Aman thinks late night parties spoil youth while Anamika thinks
late night parties are a way of making new friends. Here we see both Aman and
Anamika have different perception about the same thing.

A whole person − As we all know that a person’s skill or brain cannot be

employed we have to employee a whole person. Skill comes from background
and knowledge. Our personal life cannot be totally separated from our work life,
just like emotional conditions are not separable from physical conditions. So,
people function is the functioning of a total human being not a specific feature
of human being.

Motivated behavior − It is the behavior implanted or caused by some

motivation from some person, group or even a situation. In an organization, we
can see two different types of motivated employees −
Positive motivation − Encouraging others to change their behavior or say
complete a task by luring them with promotions or any other profits. Example −
“If you complete this, you will gain this.”
Negative motivation − Forcing or warning others to change their behavior else
there can be serious consequences. Example − “If you don’t complete this, you
will be deprived from the office.”
Value of person − Employees want to be valued and appreciated for their skills
and abilities followed by opportunities which help them develop themselves.

Nature of Organization

Nature of organization states the motive of the firm. It is the opportunities it

provides in the global market. It also defines the employees’ standard; in short,
it defines the character of the company by acting as a mirror reflection of the
company. We can understand the nature of any firm with its social system, the
mutual interest it shares and the work ethics.
Let us take a quick look at all these factors −
Social system − Every organization socializes with other firms, their customers,
or simply the outer world, and all of its employees - their own social roles and
status. Their behavior is mainly influenced by their group as well as individual
drives. Social system are of two types namely
Formal − Groups formed by people working together in a firm or people that
belong to the same club is considered as formal social system.
Example − A success party after getting a project.
Informal − A group of friends, people socializing with others freely, enjoying,
partying or chilling. Example − Birthday party.
Mutual interest − Every organization needs people and people need
organizations to survive and prosper. Basically it’s a mutual understanding
between the organization and the employees that helps both reach their
respective objectives.
Example − We deposit our money in the bank, in return the bank gives us loan,
interest, etc.

Ethics − They are the moral principles of an individual, group, and

organization. In order to attract and keep valuable employees, ethical treatment
is necessary and some moral standards need to be set. In fact, companies are
now establishing code of ethics training reward for notable ethical behavior.
n a very broad sense, the scope of OB is the extent to which it can govern or
influence the operations of an organization. The scope of OB integrates 3
concepts respectively −

Organizational behavior reflects the behavior of the people and management all
together, it is considered as field study not just a discipline. A discipline is an
accepted science that is based upon theoretical foundation, whereas OB is an
inter-disciplinary approach where knowledge from different disciplines like
psychology, sociology, anthropology, etc. are included. It is used to solve
organizational problems, especially those related to human beings.
There are four different types of models in OB. We will throw
some light on each of these four models.
Autocratic Model:

The root level of this model is power with a managerial orientation of authority.
The employees in this model are oriented towards obedience and discipline.
They are dependent on their boss. The employee requirement that is met is
subsistence.

The performance result is less. The major drawbacks of this model are people
are easily frustrated, insecurity, dependency on the superiors, minimum
performance because of minimum wage.

Custodial Model
The root level of this model is economic resources with a managerial orientation
of money. The employees in this model are oriented towards security and
benefits provided to them. They are dependent on the organization. The
employee requirement that is met is security.
This model is adapted by firms having high resources as the name suggest. It is
dependent on economic resources. This approach directs to depend on firm
rather than on manager or boss. They give passive cooperation as they are
satisfied but not strongly encouraged.

Supportive Model
The root level of this model is leadership with a managerial orientation of
support. The employees in this model are oriented towards their job
performance and participation. The employee requirement that is met is status
and recognition. The performance result is awakened drives.

This model is dependent on leadership strive. It gives a climate to help

employees grow and accomplish the job in the interest of the organization.
Management job is to assist the employee’s job performance. Employees feel a
sense of participation.

Collegial Model
The root level of this model is partnership with a managerial orientation of
teamwork. The employees in this model are oriented towards responsible
behavior and self-discipline. The employee requirement that is met is self-
actualization The performance result is moderate zeal.
This is an extension of supportive model. The team work approach is adapted
for this model. Self-discipline is maintained. Workers feel an obligation to
uphold quality standard for the better image of the company. A sense of
“accept” and “respect” is seen.

1. Human resources approach.

2. Contingency approach.
3. Productivity approach.
4. Systems approach.

And one more approach to study organizational behavior is Interdisciplinary

Approach.

Human Resources Approach

This approach recognizes the fact that people are the central resource in any
organization and that they should be developed towards higher levels of
competency, creativity, and fulfillment.

People thus contribute to the success of the organization.

The human resources approach is also called as the supportive approach in the
sense that the manager’s role changes from control of employee to active
support of their growth and performance.

The supportive approach contrasts with the traditional management approach.

In the traditional approach, managers decided what employees should do and

closely monitored their performance to ensure task accomplishment.

In the human resources approach, the role of managers changes from structuring
and controlling to supporting.

Contingency Approach

The contingency approach (sometimes called the situational approach) is based

on the premise that methods or behaviours which work effectively in One
situation fail in another.

For example: Organization Development (OD) programs, way work brilliantly

in one situation but fail miserably in another situation.

Results differ because situations differ, the manager’s task, therefore, is to

identify which method will, in a particular situation, under particular
circumstances, and at a particular time, best contribute to the attainment of
organization’s goals.

The strength of the contingency approach lies in the fact it encourages analysis
of each situation prior to action while at the same time discourages the habitual
practice of universal assumptions about methods and people.

The contingency approach is also more interdisciplinary, more system –

oriented and more research-oriented titan any other approach.

Productivity Approach

Productivity which is the ratio of output to input is a measure of an

organization’s effectiveness. It also reveals the manager’s efficiency in
optimizing resource utilization.

The higher the numerical value of this ratio, the greater the efficiency.

Productivity is generally measured in terms of economic inputs and outputs, but

human and social inputs and outputs also are important.
For example, if better organizational behaviour can improve job satisfaction, a
human output or benefit occurs.

In the same manner, when employee development programs lead to better

citizens in a community, a valuable social output occurs.

Organizational behavior decisions typically involve human, social, and/or

economic issues, and so productivity usually a significant part of these decisions
is recognized and discusses extensively in the literature on OB.

Systems Approach:
The Systems Approach to OB views the organization as a united, purposeful
system composed of interrelated parts.

This approach gives managers a way of looking at the organization as a whole,

whole, person, whole group, and the whole social system.

In so doing, the systems approach tells us that the activity of any segment of an
organization affects, in varying degrees the activity of every other segment. A
systems view should be the concern of every person in an organization.

The clerk at a service counter, the machinist, and the manager all work with the
people and thereby influence the behavioural quality of life in an organization
and its inputs.

Managers, however, tend to have a larger responsibility, because they are the
ones who make the majority are people oriented.

The role of managers, then, is to use organizational behavior to help build an

organizational culture in which talents are utilized and further developed,
people are motivated, teams become productive, organizations achieve their
goals and society reaps the reward.

Inter-Disciplinary Approach
Organizational behaviour is an integration of all other social sciences and
disciplines such as psychology, sociology, organizational theories etc.

They all are interdependent and influence each other. The man is studied as a
whole and therefore, all disciplines concerning man are integrated.

The four important approaches to the study of organisational behavior, i.e,

(1) Human Resource Approach,
(2) Contingency Approach,
 (3) Productivity Approach, and (4) System Approach.
1. Human Resources Approach:-
This approach recognizes that human resources in an organisation are the
central
force. Their development will contribute to the success of the organisation.
Human resources approach provides for the changes in the managerial role. It
requires that the managers, instead of controlling the employees, should provide
active support to them by treating them as part of the group.
2. Contingency Approach:-
The approach stresses that there is no single way to manage effectively under all
circumstances. The methods of behaviours which work effectively in one
situation may fail in another. The organisational structure and the processes of
management are governed by the external environment and several aspects of
the internal environment. Effective management processes will vary in different
situations depending on the individuals and groups in the organisation, the
nature of the job and technology, the environment facing the
organisation and its structure.
3. Productivity Approach:-
means the numerical value of the ratio of output to input. Higher the value of
this ratio, greater is the efficiency and effectiveness of the management. The
traditional concept of productivity was concerned with economic inputs and
output only. But nowadays human and social inputs and outputs are equally
important. Productivity, a significant part of organisational behaviour decisions,
is recognized and discussed extensively. These decisions relate to human, social
and economic issues. For example if better organisational behaviour can reduce
worker’s turnover or the number of absentees, a human output or benefit occurs.
4. System Approach:-
The systems approach is of the view that an organisation is a powerful system
with several subsystems which are highly and closely interconnected. Any
action taken to solve the problems in one subsystem will have its effect on the
other subsystems as well; since all the parts of the organisation are closely
connected.
Thus, this approach gives the managers a way of looking at the organisation as a
whole, whole group, and the whole social system. Systems approach has
become an integral part of modern organisational theory. Organisations are
termed as complex systems comprising of interrelated and interlocking systems.
COGNITIVE FRAMEWORK

Cognitive approach emphasizes the positive and freewill aspects of human

behavior and uses concepts such as expectancy, demand, and intention.
Cognition can be simply defined as the act of knowing an item of information.
In cognitive framework, cognitions precede behavior and constitute input into
the person’s thinking, perception, problem solving, and information processing.
The work of Edward Tolman can be used to represent the cognitive theoretical
approach. According to Tolman, learning consists of the expectancy that a
particular event will lead to a particular consequence. This cognitive concept of
expectancy implies that organism is thinking about, or is conscious or aware of
the goal and result of a behavior exhibited by it. It means that a person desires a
goal and also knows the behavior that will lead to achievement of the goals.

BEHAVIORISTIC FRAMEWORK

Pioneer behaviorists Ivan Pavlov and Jon B. Watson stressed the importance of
studying observable behaviors instead of the elusive mind. They advocated that
behavior could be best understood in terms of stimulus and response (S-R).
They examined the impact of stimulus and felt that learning occurred when the
S-R connection was made. Modern behaviorism, that marks its beginning with
B.F. Skinner, advocates that behavior in response to a stimulus is contingent on
environmental consequences. Thus, it is important to note that behaviortistic
approach is based on observable behavior and environmental variables (which
are also observable).
SOCIAL COGNITIVE FRAMEWORK

Social learning theory takes the position that behavior can best be explained in
terms of a continuous reciprocal interaction among cognitive, behavioral, and
environmental determinants. The person and the environmental situation do not
function as independent units but, in conjunction with behavior itself,
reciprocally interact to determine behavior. It means that cognitive variables
and environmental variables are relevant, but the experiences generated by
previous behavior also partly determine what a person becomes and can do,
which, in turn, affects subsequently behavior. A persons cognition or
understanding changes according to the experience of consequences of past
behavior.
Bandura developed social learning theory into the more comprehensive social
cognitive theory (SCT).
and Luthans have translated this SCT into the theoretical framework for
organizational behavior.
Social cognitive theory recognizes the importance of behaviorism’s contingent
environmental consequences, but also includes
cognitive processes of self regulation. The social part acknowledges the social
origins of much of human thought and action (what individual learns from
society), whereas the cognitive portion recognizes the influential contribution of
thought processes to human motivation, attitudes, and action. In social cognitive
theoretical framework, organizational participants are at the same time both
products and producers of their personality, respective environments, and
behaviors.

Five basic human capabilities as a part of SCT.

1. Symbolizing: People process visual experiences into cognitive models. They
help in future action.
2. Forethought: Employees plan their actions.
3. Observational: Employees learn by observing the performance of the referent
group (peers, supervisors and high performers) and the consequences of their
actions.
4. Self-regulatory: Employees self-regulate their actions by setting internal
standards (aspired level of performance).
5. Self-reflective: Employees reflect back on their actions (how did I do?) and
perceptually determine how they believe then can successfully accomplish the
task in the future given the context (probability of success between 0 to 100% is
estimated).

Main challenges and opportunities of organizational behaviour are :-

• Improving Peoples’ Skills.
• Improving Quality and Productivity.
• Total Quality Management (TQM).
• Managing Workforce Diversity.
• Responding to Globalization.
 • Empowering People.
• Coping with Temporariness.
• Stimulating Innovation and Change.
4. Improving People’s Skills
• Technological, Structural, Environmental changes are accelerated at a faster
rate in the business field.
• Unless employees and executives are equipped to possess the required skills to
adapt those changes, the targeted goals cannot be achieved in time.
• Two different categories of skills – Managerial skills and Technical skills.
• Managerial skills include listening skills, motivating skills, problem-solving
skill, decision-making skills etc.
• These skills can be enhanced by organizing a series of training and
development programs, career development programs, induction, and
socialization etc.
5. Improving quality and productivity
• Quality is the extent to which the customers believe the product or service
surpasses their needs and expectations.

The key dimensions of quality as follows:

• Performance: Primary rating characteristics of a product such as signal
coverage, audio quality, display quality etc.
• Features: Secondary characteristics, added features, such as calculators, and
alarm clock features in hand phone
• Conformance: Meeting specifications or industry standards, workmanship of
the degree to which a product’s design or operating characteristics match pre-
established standards
• Reliability: The probability of a product’s falling within t a specified period
of time
• Durability: It is a measure of product’s life having both economic and
technical dimension
• Services: Resolution of problem and complaints, ease of repair
• Response: Human to human interfaces, such as the courtesy of the dealer «
Aesthetics: Sensory characteristics such exterior finish
• Reputations: Past performance and other intangibles, such as being ranked
first.
• More and more managers are confronting to meet the challenges to fulfil the
specific requirements of customers.
6. TOTAL QUALITY MANAGEMENT (TQM):
• It is a philosophy of management that is driven by the constant attainment of
customer satisfaction through the continuous improvement of all organizational
process.
• The components of TQM are; (a) An intense focus on the customer, (b)
Concern for continual improvement, (c) Improvement in the quality of
everything the organization does (d) Accurate measurement and, (e)
Empowerment of employees.
7. Managing workforce diversity :
• The major challenge for organizations is to become more accommodating to
diverse groups of people by addressing their different life styles, family needs,
and work styles. Because In general, employees wanted to retain their
individual and cultural identity, values and life styles even though they are
working in the same organization with common rules and regulations.
• Managers have to shift their philosophy from treating everyone alike to
recognizing individual differences and responding to those differences in ways
that will ensure employee retention and greater productivity while, at the same
time not discriminating.
• If work force diversity is managed more effectively, the management is likely
to acquire more benefits such as creativity and innovation as well as improving
decision making skills by providing different perspectives on problems.
• If diversity is not managed properly and showed biases to favor only a few
categories of employees, there is potential for higher turnover, more difficulty
in communicating and more interpersonal conflicts.

8. Responding to globalization
• Today’s business is mostly market driven; wherever the demands exist
irrespective of distance, locations, climatic Conditions ( i.e. the business
operations are expanded to gain their market share and to remain in the top rank
etc. Business operations are no longer restricted to a particular locality or
region. • Company’s products or services are spreading across the nations using
mass communication, the internet, faster transportation etc.
• For Example - i. More than 95% of Nokia (Now Microsoft) hand phones are
being sold outside of their home country Finland. ii. Japanese cars are being
sold in different parts of the globe. Sri Lankan tea is exported to many cities
around the globe.
9. Empowering people:
• Empowerment is defined as putting employees in charge of what they do by
eliciting some sort of ownership in them.
• The executive must learn to delegate their tasks to the subordinates and make
them more responsible in their work.
• And in doing so, managers have to learn how to give up control and authority.
And Employees have to learn how to take responsibility for their work and
make appropriate decision.
• If all the employees are empowered, it drastically changes the type of
leadership styles, power relationships, the way work is designed and the way
organizations are structured.
10. Coping with temporariness
• Managers and employees must learn to cope with temporariness. As the
Product life cycles are slimming due to rapid changes in method of operation
and demand.
• They have to learn to deal with flexibility, spontaneity, and unpredictability.
• The knowledge of Organizational Behaviour will help in understanding the
current state of a work in the world of continual changes .
11. Stimulating Innovation and Change
• Today’s successful organizations must foster innovation and be proficient in
the art of change , otherwise they will become candidates for extinction in due
course of time and vanished from their field of business.
• Victory will go to those organizations that maintain flexibility, continually
improve their quality, and beat the competition to the market place with
innovative products and services.
• Amazon.com is putting a lot of independent bookstores out of business as it
proves you can successfully sell books from an Internet website.

UNIT-II
INDIVIDUAL BEHAVIOUR

Individual Behaviour Personality – types – Factors influencing

personality–Theories– Learning– Types of learners – The learning
process – Learning theories Emotions – Emotional Labour–Emotional
Intelligence –Theories. Attitudes – Characteristics – Components –
Formation –Measurement – Values. Perceptions – Importance – Factors
influencing perception – Interpersonal perception– Impression
Management. Motivation– Theories – Importance – Types – Effects on
work behavior.

The personality implies psychological and social character that an individual

acquires by hereditary biological endowment which provides him the basis
for development and social growth of environment within which he springs
forth.
Personality is the product of social interaction in group life.
In society every person has different traits such as skin, colour, height and
weight.
They have different types of personalities because individuals are not alike.
 It refers to the habits, attitudes as well as physical traits of a person which
are not same but have vary from group to group and society to society,
everyone has personality, which may be good or bad, impressive or
unimpressive.

It develops during the process of socialization in a culture of a specific group or

society. One cannot determine it of an individual exactly because it varies from
culture to culture and time to time.
For example, a killer is considered criminal in peace time and hero in war. The
feeling and actions of an individual during interaction moulds the personality.
It is the sum of total behaviours of the individual and covers both overt and
covert behaviours, interests, mentality and intelligence. It is the sum of physical
and mental abilities and capabilities.
The Meaning of Personality: Personality has been derived from the Latin word
“persona” which means “mask” used by the actors to change their appearance.
It is the combination of an individual thoughts, characteristics, behaviours,
attitude, idea and habits.

According to K. Young, “Personality is a patterned body of habits, traits,

attitudes and ideas of an individual, as these are organised externally into roles
and statuses, and as they relate internally to motivation, goals, and various
aspects of selfhood.”
G. W. Allport defined it as “a person’s pattern of habits, attitudes, and traits
which determine his adjustment to his environment.” According to Robert E.
Park and Earnest W. Burgess, personality is “the sum and organization of those
traits which determine the role of the individual in the group.”

Personality is a patterned body of habits, traits, attitudes, and ideas of an

individual’s, as these are organized externally into roles and statues and as they
relate internally to motivation, goals, and various aspects of selfhood. An
individual’s personality is the combination of traits and patterns that influence
their behavior, thought, motivation, and emotion.
It drives individuals to consistently think, feel, and behave in specific
ways; in essence, it is what makes each individual unique.

Over time, these patterns strongly influence personal expectations,

perceptions, values, and attitudes. In addition to this, personality
arises from within the individual and remains fairly consistent
throughout life. It is a pattern of stable states and characteristics of a
person that influence his or her behavior towards goal achievement.
Each person has unique ways of projecting these states.
The study of personality focuses on two broad areas;

One is understanding individual differences in particular personality

characteristics, such as sociability or irritability.
The other is understanding how the various parts of a person come
together as a whole.
What is Personality?
According to Gordon Allport, “Personality is the dynamic
organization within the individuals of those psychophysical systems
that determine his unique adjustments to his environments”.

Hence personality is a sum total of ways in which an individual reacts

and interacts with others. It is individual differences in characteristic
patterns of thinking, feeling and behaving. It is the supreme
realization of the innate habit of a living being.

It is an act of courage flung in the face of life, the absolute affirmation

of all that constitutes the individual, the most successful adaptation to
the universal conditions of existence, coupled with the greatest
possible freedom of self-determination.

Understanding Porter‘s Five Forces

Porter theorized that understanding both the competitive forces at play
and the overall industry structure are crucial for effective, strategic
decision-making, and developing a compelling competitive strategy
for the future.

In Porter’s model, the five forces that shape industry competition are

1. Competitive rivalry
This force examines how intense the competition is in the
marketplace. It considers the number of existing competitors and what
each one can do. Rivalry competition is high when there are just a few
businesses selling a product or service, when the industry is growing
and when consumers can easily switch to a competitor’s offering for
little cost. When rivalry competition is high, advertising and price
wars ensue, which can hurt a business’s bottom line.

2. The bargaining power of suppliers

This force analyzes how much power a business’s supplier has and
how much control it has over the potential to raise its prices, which, in
turn, lowers a business’s profitability. It also assesses the number of
suppliers of raw materials and other resources that are available. The
fewer supplier there are, the more power they have. Businesses are in
a better position when there are multiple suppliers. Learn more about
finding suppliers and B2B partners.

3. The bargaining power of customers

This force examines the power of the consumer, and their effect on
pricing and quality. Consumers have power when they are fewer in
number but there are plentiful sellers and it’s easy for consumers to
switch. Conversely, buying power is low when consumers purchase
products in small amounts and the seller’s product is very different
from that of its competitors.

4. The threat of new entrants

This force considers how easy or difficult it is for competitors to join
the marketplace. The easier it is for a new competitor to gain entry,
the greater the risk is of an established business’s market share being
depleted. Barriers to entry include absolute cost advantages, access to
inputs, economies of scale, and strong brand identity.

5. The threat of substitute products or services

This force studies how easy it is for consumers to switch from a
business’s product or service to that of a competitor. It examines the
number of competitors, how their prices and quality compare to the
business being examined, and how much of a profit those competitors
are earning, which would determine if they can lower their costs even
more. The threat of substitutes is informed by switching costs, both
immediate and long-term, as well as consumers’ inclination to
change. Learn how to perform a competitive analysis to stay ahead of
other players in the market. To take full advantage of this strategy
make sure you’re able to properly calculate cost of goods sold
(COGS).

Example of Porter’s Five Forces

There are several examples of how Porter’s Five Forces can be
applied to various industries. The ultimate goal is to identify the
opportunities and threats that could impact a business. As an example,
stock analysis firm Trefis looked at how Under Armour fits into the
athletic footwear and apparel industry.

Competitive rivalry: Under Armour faces intense competition from

Nike, Adidas, and newer players. Nike and Adidas, which have
considerably larger resources at their disposal, are making a play
within the performance apparel market to gain market share in this
up-and-coming product category. Under Armour does not hold any
fabric or process patents, hence its product portfolio could be copied
in the future.
Bargaining power of suppliers: A diverse supplier base limits supplier
bargaining power. Under Armour’s products are produced by dozens
of manufacturers based in multiple countries. This provides an
advantage to Under Armour by diminishing suppliers’ leverage.
Bargaining power of customers: Under Armour’s customers include
wholesale customers and end-user customers. Wholesale customers,
like Dick’s Sporting Goods, hold a certain degree of bargaining
leverage, as they could substitute Under Armour’s products with
those of Under Armour’s competitors to gain higher margins. The
bargaining power of end-user customers is lower as Under Armour
enjoys strong brand recognition.
Threat of new entrants: Large capital costs are required for branding,
advertising, and creating product demand, which limits the entry of
newer players in the sports apparel market. However, existing
companies in the sports apparel industry could enter the performance
apparel market in the future.

Threat of substitute products: The demand for performance apparel,

sports footwear and accessories is expected to continue to grow.
Therefore, this force does not threaten Under Armour in the
foreseeable future.
Strategies for success:
Analysis is complete, it’s time to implement a strategy to expand your
competitive advantage. To that end, Porter identified three generic
strategies that can be implemented in any industry (and by companies
of any size.)

Cost leadership:
Goal is to increase profits by reducing costs while charging industry-
standard prices, or to increase market share by reducing the sales
price while retaining profits.

Differentiation:
To implement this strategy, your company’s products need to be
significantly better than the competition’s, improving their
competitiveness and value to the public. It requires thorough research
and development, plus effective sales and marketing.

Focus:
Successful implementation entails the company selecting niche
markets in which to sell their goods. It requires an intense
understanding of the marketplace, its sellers, buyers and competitors.