External Analysis: The Identification of Industry Opportunities and Threats Chapter 2

External Analysis Analyzing the dynamics of the industry in which an organization competes to help identify: Opportunities: conditions in the environment that a company can take advantage of to become more profitable Threats: conditions in the environment that endanger the integrity and profitability of the company’s business

Defining an Industry Industry Competitors A group of companies offering products or services that are close substitutes for each other Competitors Rival companies that serve the same basic customer needs

Defining an Industry (cont’d) Sector A group of closely related industries Market segments Distinct groups of customers within a market that can be differentiated from each other based on their distinct attributes and demands Changing industry boundaries

The Computer Sector: Industries and Segments

The Computer Sector Where is the customer?

The Computer Sector: Industries and Segments

Strategic Groups Within Industries Formed within an industry when some companies follow the same basic product positioning strategy, which is different from that of other companies in other groups Companies can position their products in terms of distribution channels, market segments, product quality, technological leadership, customer service, pricing policy, advertising policy, promotions

Strategic Groups in the Pharmaceutical Industry Insert Figure 2.3

Implications of Strategic Groups A company’s closest competitors are those in its strategic group Each strategic group may face a different set of opportunities and threats

The Role of Mobility Barriers A company may decide to move from one strategic group to another where the five forces are weaker and higher profits are possible Mobility barriers are similar to industry entry and exit barriers and must be weighed carefully

Industry Analysis: Background Industrial economics: focus on “common good” or competitive pricing Selected measures of competition (high, if) Level of concentration (low) Concentration – percent of total sales controlled by largest 4, 8, 12 players in the industry Presence of economies of scale (high) Product differentiation (low) Natural barriers, i.e. fixed supply (low)

Porter’s Five Forces Model Source: Adapted and reprinted by permission of Harvard Business Review. From “How Competitive Forces Shape Strategy,” by Michael E. Porter, Harvard Business Review, March/April 1979 © by the President and Fellows of Harvard College. All rights reserved.

Porter’s Five Forces Model An industry is competitive (if . . .) Risk of entry (high, low barriers) Intensity of Rivalry (high) Bargaining power of buyers (high) Bargaining power of suppliers (high) Presence of substitute products (yes) Complementors added later

Risk of Entry Natural barriers - oil fields, mines Barriers created over time – Brand loyalty (due to advertising, etc.) Cost advantage (due to cheap funds, control of inputs, production) Economies of scale (production and distribution susceptible to scale economies) Switching costs (microsoft to apple, oil to coal) Regulation

Intensity of Rivalry: Industry characteristics Industry demand Is long-term demand growing? stagnant? declining? Exit barriers Cost of shutting down business and/or moving to another.

Intensity of Rivalry: Due to industry structure Fragmented (large number of competitors) retailing Consolidated (4, 8, 12 competitors control 80% of the industry) cement Monopoly AT&T before the break-up

Power of Buyers: High if . . . Numerous participants selling to few buyers Buyers purchase large quantities Participants depend on a set of buyers for a large percent of their business Buyers have low switching costs Buyers can purchase from more than one Buyers can threaten to enter the industry

Power of Suppliers: High if . . . Product of suppliers few substitutes Profitability of supplier not dependent on industry purchases Industry has switching cost problems if they move to a new set of suppliers Suppliers can threaten to enter Industry can not threaten to enter suppliers’ industry

Substitutes Distinction between competing and substitute products Coke and Pepsi are not substitutes; they are close substitutes but not within this definition Coffee is a substitute for tea or caffeine drink Substitute for a car when going to Las Vegas? San Francisco? Substitute for a computer?

Complementors Adds value to an industry’s products Others: Software industry and computer industry Others: Hotel and airlines Malls will group movies and restaurants in same sector of the mall Mobile phones and developers of messages to be texted

Industry Life Cycle Analysis The strength and nature of the five forces change as an industry evolves through its life cycle Managers must anticipate how the forces will change as the industry evolves and formulate appropriate strategies

Stages in the Industry Life Cycle

Industry Life Cycle Addresses industry demand (intensity of rivalry) Emergence of industry standard normally propels industry into growth phase At the development or embryonic phase, different configurations compete As a standard emerges, industry demand goes through a period of higher rate of growth

Shakeout: Growth in Demand and Capacity

Limitations of Models for Industry Analysis Life cycle issues The embryonic stage can sometimes be skipped or short Industry growth can be revitalized The time span of the stages can vary Innovation and change Innovation can unfreeze and reshape industry structure An industry may be hypercompetitive, with permanent and ongoing change

Limitations of Models for Industry Analysis (cont’d) Company differences The importance of company differences within an industry or strategic group can be underemphasized The individual resources and capabilities of a company may be more important in determining profitability than the industry or strategic group

Exercise: Strategy in Action 2.1 Japanese Brewing Industry: What were key barriers to entry into industry? How did these change and what remained to be barriers for, say, an American brewer? 2.2 Breakfast Cereal Industry: Why was it necessary for pricing discipline to emerge? Are consumers better off?

The Role of the Macroenvironment

Rate of change? Economic indicators – interest rates, etc. Technological changes Political/Regulatory Demographic changes Social forces Are these in some order?

The Global and National Environments Globalization of production and markets Lower barriers to cross-border trade and investment National differences in the cost and quality of factors of production “Home” and “foreign” markets and competitors are blurring Intensified rivalry Intensified rate of innovation Many new markets are open

Additional Thoughts “Multi-nation” and “Global” Factor conditions, industry structure in other countries allow for innovation These innovation often travel across borders The internet is obviously one reason Personal travel Companies finding limited growth options at home Entry barriers Tariff Non-tariff

National and Competitive Advantage Source: Adapted from M.E. Porter, “The Competitive Advantage of Nations,” Harvard Business Review, March-April, 1990, p. 77.