external analysis: identification of opportunities and threats chapter 3

External Analysis: Identification of

Opportunities and Threats

Chapter 3

3 | 2Copyright © Houghton Mifflin Company. All rights reserved.

“To assure victory, always carefully survey the field before battle.”

- Sun Tzu

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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.


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


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


Figure 3.1: Porter’s Five Forces Model


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



• 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



• Bargaining power of buyers– The ability of buyers to drive prices down

or quality up


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?


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.


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“Strategy is a choice on how to compete.”

- Michael Porter


Competitive Forces

• Weak competitive forces = Opportunity– Allows a company to earn greater profit

• Strong competitive forces = Threat– Depress a company’s profits


Figure 3.2: Strategic Groups in the Pharmaceutical Industry


Strategic Groups

• Groups of companies within an industry that follow a similar strategy

• Example:– High-risk, High-return Strategy– Low-risk, Low-return Strategy


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


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


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


Figure 3.3: Stages in the Industry Life Cycle


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.


Industry Life Cycle Stages

DeclineGrowth

Mature

Embryonic

Shakeout


Stage 1

• Embryonic:– The industry is just beginning to develop– Development is slow– Buyers are unfamiliar with product– High prices


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


Figure 3.4: Growth in Demand and Capacity


Stage 3

• Shakeout:– Rate of growth slows– Demand approaches saturation levels– Few potential first-time buyers– Rivalries become intense– Excess capacity may exist


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


Stage 5

• Decline:– Falling demand = Excess capacity– Growth becomes negative due to

• Technology substitution• Demographics• International competition


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.


Figure 3.5: The Role of the Macroenvironment


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.



• 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



• 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.


Video Clip: Psychographics & BMW


Macro-Environment

Macro-Economic Forces

Political & Legal Forces

Social Forces

Demographic Forces

Technological Forces

Global Forces

FIRM

external analysis: identification of opportunities and threats chapter 3

Documents

industry environment

forces of industry competition

external analysis

soft drink industry

systematic analysis

forces model slide

point analysis risk

competitive struggle