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

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

3. 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

4. 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

5. The Computer Sector: Industries and Segments

6. The Computer Sector
Where is the customer?

7. The Computer Sector: Industries and Segments

8. 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

9. Strategic Groups in the Pharmaceutical Industry
Insert Figure 2.3

10. 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

11. 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

12. 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)

13. 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.

14. 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

15. 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

16. 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.

17. 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

18. 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

19. 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

20. 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?

21. 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

22. 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

23. Stages in the Industry Life Cycle

24. 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

25. Shakeout: Growth in Demand and Capacity

26. 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

27. 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

28. 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?

29. The Role of the Macroenvironment

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

31. 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

32. 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

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