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External Analysis: The Identification of Industry Opportunities and Threats

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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

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Defining an Industry

IndustryA group of companies offering products or

services that are close substitutes for each other

CompetitorsRival companies that serve the same basic

customer needs

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Defining an Industry (cont’d)

SectorA group of closely related industries

Market segmentsDistinct groups of customers within a market

that can be differentiated from each other based on their distinct attributes and demands

Changing industry boundaries

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The Computer Sector: Industries and Segments

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Porter’s Five Forces Model & The Sixth Force of Complementors

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.

Complementors

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Risk of Entry by Potential Competitors Barriers to entry

Brand loyaltyAbsolute cost advantage

Superior production operations and processes Control of particular inputs required for production Access to cheaper funds because existing companies

represent lower risks than new entrants

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Risk of Entry by Potential Competitors (cont’d) Barriers to entry (cont’d)

Economies of scale Cost reductions from mass producing a standardized output Discounts on bulk purchases of inputs Advantages of spreading fixed costs over a large production

volume Cost savings from marketing and advertising for a large

volume of output Customer switching costs Government regulation

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Rivalry Among Established Companies Industry competitive structure

Fragmented vs. consolidated (oligopoly or monopoly)

Industry demand

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Rivalry Among Established Companies Exit barriers

Investments in assets of little or no alternative value or that cannot be sold

High fixed costs of exitEmotional attachments to an industryEconomic dependenceNeed to maintain an expensive collection of

assets in order to participate effectively in an industry

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The Bargaining Power of Buyers Buyers are most powerful when

The industry that is supplying a particular product or service is composed of many small companies and the buyers are large and few in number

Buyers purchase in large quantities The supply industry depends on the buyers for a large

percentage of its total orders Switching costs are low It is economically feasible for buyers to play one

supplier against another Buyers can threaten to produce the product

themselves

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The Bargaining Power of Suppliers Suppliers are most powerful when

There are few substitute products The industry is not an important customer to the

supplier Switching costs are high for companies switching to a

different supplier Suppliers can threaten to compete directly with

buyers by entering their industry Buyers cannot threaten to enter the suppliers’ industry

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Substitute Products

Many substitute productsAre a threat and limit the price that companies

in one industry can charge for their product, and thus industry profitability

Few or weak close substitutesGives the industry the opportunity to raise

prices and earn additional profits

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A Sixth Force: Complementors

When complementors are important and their number is increasingDemand and profits in the industry are

boosted When complementors are weak

Industry growth can slow and profits can be limited

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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

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Strategic Groups in the Pharmaceutical Industry

Insert Figure 2.3

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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

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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

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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 changes as the industry evolves and formulate appropriate strategies

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Stages in the Industry Life Cycle

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Shakeout: Growth in Demand and Capacity

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Limitations of Models for Industry Analysis Life cycle issues

The embryonic stage can sometimes be skipped 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

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Punctuated Equilibrium and Competitive Structure

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Limitations of Models for Industry Analysis (cont’d)

Company differencesThe 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

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The Role of the Macroenvironment

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The Macroenvironment

Changes in these forces can have a direct impact on Porter’s five forces:EconomicTechnologicalDemographicSocialPolitical and Legal

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The Global and National Environments Globalization of production and

marketsLower barriers to cross-border trade and

investmentNational differences in the cost and quality of

factors of production

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The Global and National Environments Globalization of production and

markets“Home” and “foreign” markets and competitors

are blurring Intensified rivalry Intensified rate of innovationMany new markets are open

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National and Competitive Advantage

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