1. External Analysis: Identification of Opportunities and Threats
Chapter 3
External Analysis: Identification of Opportunities and Threats

2. “To assure victory, always carefully survey the field before battle.”
- Sun Tzu
© RoyaltyFree/ Stockdisc/ Getty Images

3. What Is an Industry?
An industry is a group of companies offering products or services that are close substitutes for each other.
Example: The soft drink industry includes all beverages that can quench a customer’s thirst. The industry is defined in terms of the customer needs that the company wishes to satisfy. Coca Cola is not just competing with other sodas, but with all beverages, including soft drinks.

4. Analysis of Industry Goals of industry analysis:
To gain an understanding of the opportunities and threats confronting the firm
To use this understanding to identify strategies that will enable the company to outperform rivals

5. Beginning the Analysis
Starting point:
Identify the industry that the company is competing in.
Determine the industry’s boundaries which are the basic customer needs that are served

6. Figure 3.1: Porter’s Five Forces Model

7. Porter’s 5 Point Analysis
Risk of entry by potential competitors
The existing players usually try to create barriers to entry for the potential competitors
Economies of scales
Brand loyalty
Absolute cost advantages
Customer switching costs
Government regulations

8. Porter’s 5 Point Analysis
The intensity of rivalry among established companies
Rivalry refers to the competitive struggle between
companies in an industry to gain market share from each other
The competitive struggle for market share that depends on:
the industry’s competitive structure (Fragmented, consolidated)
industry demand
cost conditions
exit barriers

9. Porter’s 5 Point Analysis
Bargaining power of buyers
The ability of buyers to drive prices down or quality up

10. Porter’s 5 Point Analysis (cont’d)
Bargaining power of suppliers
The ability of suppliers to raise the costs of the industry
Wal-Mart's example
Closeness of product substitutes
How many other products can satisfy the same customer need?

11. Summary
The systematic analysis of forces in the industry environment using the Porter framework is a powerful tool that helps managers to think strategically.
It is important to recognize that one competitive force often affects the others, so all forces need to be considered when performing industry analysis.
Indeed, industry analysis leads managers to think systematically about the way their strategic choices will both affect and be affected by the five forces of industry competition and change conditions in the industry.

12. “Strategy is a choice on how to compete.” - Michael Porter
© RoyaltyFree/ Stockdisc/ Getty Images

13. Competitive Forces Weak competitive forces = Opportunity
Allows a company to earn greater profit
Strong competitive forces = Threat
Depress a company’s profits

14. Figure 3.2: Strategic Groups in the Pharmaceutical Industry

15. Strategic Groups
Groups of companies within an industry that follow a similar strategy
Example:
High-risk, High-return Strategy
Low-risk, Low-return Strategy

16. Strategic Groups (cont’d)
The closest competitors for a company are those in its strategic group
The most immediate threat to profitability comes from rivals within the strategic group

17. Strategic Groups (cont’d)
Each strategic group may face a different set of opportunities and threats
Varied threats include:
Risk of new entry
Degree of rivalry
Bargaining power of buyers and sellers
Competitive force of substitute and complementary goods

18. Changing Strategic Groups
Moving from one strategic group to another may be difficult or impossible.
Mobility Barriers: Within-industry factors that inhibit movement between strategic groups
Example:
Forest Labs entering the pharmaceutical industry: they would encounter barriers because they lack resources and competencies necessary to compete

19. Figure 3.3: Stages in the Industry Life Cycle

20. Industry Life Cycle
The industry life cycle is important in analyzing the strength of competition in an industry.
There are five sequential stages:
Embryonic
Growth
Shakeout
Mature
Decline
Competition increases as the industry progresses through the cycle.

21. Industry Life Cycle Stages
Embryonic
Decline
Growth
Shakeout
Mature

22. Stage 1 Embryonic: The industry is just beginning to develop
Development is slow
Buyers are unfamiliar with product
High prices

23. Stage 2 Growth: Demand takes off Many new customers First-time demand
Prices fall with development and higher volume
Entry barriers are relatively low
Relatively low competition

24. Figure 3.4: Growth in Demand and Capacity

25. Stage 3 Shakeout: Rate of growth slows
Demand approaches saturation levels
Few potential first-time buyers
Rivalries become intense
Excess capacity may exist

26. Stage 4 Mature: Market is totally saturated
Demand is limited to replacement demand
Growth is low or zero
Barriers increase
Threat of new entries decrease
Competition drives prices down

27. Stage 5 Decline: Falling demand = Excess capacity
Growth becomes negative due to
Technology substitution
Demographics
International competition

28. Macro-Environment
The broader economic, global, technological, demographic, social, and political contexts of business.
The macro-environment impacts the strength of forces in Porter’s model and ultimately, the attractiveness of the industry.
It is important for managers to pay close attention to external forces on their industry due to their direct impact.

29. Figure 3.5: The Role of the Macroenvironment

30. Macro-Environment (cont’d)
Macro-Economic Forces:
Forces at the national or regional level
Most important forces to monitor are:
growth rate of the economy
interest rate
currency exchange rates
price inflation
Global Forces:
Many countries experiencing economic growth since barriers to international trade have tumbled.
Growth in places like Brazil, China, and India is creating large new markets for goods and services.

31. Macro-Environment (cont’d)
Technological Forces:
Technological changes are destructive to some companies (threats) and creative for others (opportunities.)
They can effect the height of barriers of entry and reshape an industry.
Demographic Forces:
Outcomes of change in characteristics of the population such as
Age - Race
Gender - Sexual orientation
Ethnic origin - Social class
Currently there is a growing aging population, which is an opportunity for organizations to cater to an older age group

32. Macro-Environment (cont’d)
Social Forces:
Changing social mores and values affect industry, such as the trend toward health conscientiousness that causes customers to pay attention to different characteristics of products.
Political and Legal Forces:
Changes in laws and regulations that impact managers and companies
Result from political and legal developments within society and significantly affect businesses.
Firms and industries strive to influence the regulations that government enacts.

33. Video Clip: Psychographics & BMW

34. Macro-Environment