1. External Analysis: The Identification of Industry Opportunities and Threats Porter, Five Forces and Industry Cycles

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.

3. The Five Forces Model FIGURE 3.1
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.

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.

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.

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)

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.

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.

9. Substitute Products
The competitive threat of substitute products increases as they come closer to serving similar customer needs.
Far
Close

10. A Sixth Force: 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.

11. The Role of the Macroenvironment

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.

13. Strategic Groups in the Pharmaceutical Industry
FIGURE 3.3

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.

15. Punctuated Equilibrium and Competitive Structure
FIGURE 3.4

16. The Industry Life Cycle Model
Stages in the industry life cycle:
FIGURE 3.5

17. Growth in Demand and Capacity
FIGURE 3.6

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.

19. Positive Feedback in the Computer Industry

20. Globalization and Industry Structure
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