Copyright © 2001 Houghton Mifflin Company. All rights reserved. Chapter 3 External Analysis: The Identification of Industry Opportunities and Threats Strategic Charles W. L. Hill Management Gareth R. Jones Fifth Edition PowerPoint Presentation by Charlie Cook An Integrated Approach

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-2 Analyzing Industry Structure Opportunities and threats are competitive challenges arising for changes in industry conditions. Analytic tools such as the five forces model help managers formulate appropriate strategic responses.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-3 Source: Adapted and reprinted by permission of Harvard Business Review. An exhibit from “How Competitive Forces Shape Strategy” by Michael E.. Porter (March-April 1979), Copyright © 1979 by the President and Fellows of Harvard College: all rights reserved. The Five Forces Model FIGURE 3.1

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-4 Potential Competitors New entrants into an industry threaten incumbent companies. Barriers to entry:  Brand loyalty  Absolute cost advantages  Economies of scale  Switching costs  Government regulation Entry barriers reduce the threat of new and additional competition.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-5 Rivalry Among Established Companies The intensity of competitive rivalry in an industry arises from:  Industry’s competitive structure.  Demand (growth or decline) conditions in industry.  Height of industry exit barriers.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-6 Competitive Structure Continuum of Industry Structures Fragmented Many firms, no dominant firm Few firms, shared dominance (oligopoly) Consolidated One firm or one dominant firm (monopoly)

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-7 The Bargaining Power of Buyers Buyers are most powerful when:  There are many small sellers and few large buyers.  Buyers purchase in large quantities.  A single buyer is a large customer to a firm.  Buyers can switch suppliers at low cost.  Buyers purchase from multiple sellers at once.  Buyers can easily vertically integrate to compete with suppliers.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-8 The Bargaining Power of Suppliers Suppliers have bargaining power when:  Their products have few substitutes and are important to buyers.  The buyer’s industry is not an important customer to the supplier.  Differentiation makes it costly for buyers to switch suppliers.  Suppliers can vertically integrate forward to compete with buyers and buyers can’t integrate backward to supply their own needs.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-9 Substitute Products The competitive threat of substitute products increases as they come closer to serving similar customer needs. CloseFar

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-10 A Sixth Force: Complementors Complementors:  Companies whose products are sold in tandem with another company’s products.  Increased supply of a complementary product collaterally increases demand for the primary product. Example:  Faster CPU chips fuel sales of personal computers.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-11 The Role of the Macroenvironment FIGURE 3.2

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-12 Strategic Groups Within Industries The concept of strategic groups  Within an industry, a competitor grouping using similar strategies that differ from other industry groups. Implications of strategic groups  The closest industry competitors are those in the group.  The various industry groups are differentially and competitively advantaged and positioned.  Mobility barriers inhibit the movement of competitors from one strategic group to another.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-13 FIGURE 3.3 Strategic Groups in the Pharmaceutical Industry

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-14 Limitations of the Five Forces and Strategic Group Models Both models are static and ignore innovation. Their focus is on industry and group structures rather than individual companies.  Innovation creates change in industry structures, altering the competitive environment.  Industry structure cannot fully explain the performance differences between industry competitors.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-15 FIGURE 3.4 Punctuated Equilibrium and Competitive Structure

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-16 FIGURE 3.5 The Industry Life Cycle Model Stages in the industry life cycle:

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-17 FIGURE 3.6 Growth in Demand and Capacity

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-18 Network Economics As a Determinant of Industry Conditions The demand for primary industry products depends on the size of the total market for complementary products.  Network economics result in positive feedback loops that foster rapid demand increases.  Market competitors are protected by switching cost entry barriers.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-19 FIGURE 3.7 Positive Feedback in the Computer Industry

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-20 Globalization and Industry Structure Globalization  Globally dispersed production lowers costs and increases quality.  Global markets are replacing national markets. Trend implications  No isolated national markets  More competitors, more intense competition  More rapid innovation and shorter product life cycles

Copyright © 2001 Houghton Mifflin Company. All rights reserved.3-21 FIGURE 3.8 The Nation-State and Competitive Advantage The determinants of competitive advantage: Factor endowments