External Analysis : The Identification External Analysis : The Identification of Industry Opportunities and of Industry Opportunities and ThreatsThreats

Presented by Group (6)

Strategic Management Theory

Content

• Analyzing Industry Structure

• Strategic Groups Within Industries

• Limitations of the Five Forces and Strategic Group Models

• Competitive Changes During an Industry’s Evolution

• Network Economics as a Determinant of Industry Conditions

• Globalization and Industry Structure

• The Nation-State and Competitive Advantage

Analyzing Industry Structure

Potential Competitors

• Potential competitors - not currently in market

but have capability to do if they choose

• More companies enter, more difficult to hold

market share and to generate profits

• Barriers to entry – factors make costly to enter

industry

Potential Competitors

• Main sources of barriers to new entry

• Brand Loyalty

• Absolute Cost Advantages

• Economies of Scale

• Switching Costs

• Government Regulation

Potential Competitors

• Brand loyalty

• Buyers prefer products of incumbent companies because of

brand loyalty (Example : Patent, Continuous Advertising etc.)

• Make difficult for new entrants

• Absolute Cost Advantages

• Derive from three main sources 1) superior production

operations, 2) control of particular inputs and 3) access to

cheaper funds

• Having absolute cast advantages can prevent from new

entrants

Potential Competitors

• Economies of Scale

• Cost advantages associated with large output

• Because of discount on purchase, fixed cost

• New entrant face dilemma of either small scale or large scale

• Threat of entry is reduced

• Switching Cost

• Arise when customer cost to switch from one to another product

• When cost is high, consumers still use old products even new

provide better

Potential Competitors

• Government Regulation

• Constituted a major entry barrier in many industries

• Entry Barriers and Competition

• Constituted a major entry barrier in many industries

Rivalry Among Established Companies

• If rivalry weak, have opportunities to raise price

and earn greater profits

• Intense rivalry among established constitutes a

strong threat to profitability

• Competitive Structure

• Demand Conditions

• Exit Barriers

Industry Competitive Structure

• Refers to number and size distribution of

companies in industry

• Vary from fragmented to consolidated

• Fragmented contains large number of small or

medium-sized

• Consolidated dominated by small number of large

companies known as oligopoly

Industry Competitive Structure

• Fragmented industries (Example: Video Rental)

• Low entry barriers and commodity-type products that

hard to differentiate

• Result in boom-bust cycles

• Create excess capacity because of low entry barriers

and high profits

• Result in price war

• Constitute threat than opportunity

• Best strategy – cost minimization

Industry Competitive Structure

• Consolidated industries (Example: Aerospace)

• Interdependent: competitive action of one directly affect

others

• High rivalry and price war constitute a major threat

• Try to compete on non-price factors when price war is threat

• Effectiveness depends how easy to differentiate products

although some products are not

• In practice, non-price competition can be damage and

expensive

Demand Conditions

• Determinant of intensity of rivalry among

established

• Growing demand reduce rivalry and get high

profit

• Declining demand be major threat; increase more

rivalry between established

Exit Barriers

• Economic, strategic and emotional factors that

keep companies in industry even returns are low

• Common exit barriers

• Investments have no alternative uses and can’t be sold

• High fixed cost

• Emotional attachments

• Economic dependence

Bargaining Power of Buyers

• Buyer affect the industry through their ability

• Buyers are most powerful in the following

• There are many small sellers and few large buyers.

• Buyers purchase in larger quantities.

• Supplier’s industry depends on buyers’ large % of total order.

• Buyers switch order base on low cost.

• Buyers purchase from multiple sellers at once.

• Buyers can easily vertically integrate to compete with

suppliers.

Bargaining Power of Suppliers

• Suppliers have ability to rise prices or reduce quality

over purchased products or services

• Suppliers are most powerful in the following

• Few substitutes and important to buyers

• Buyer’s industry is not an important customer to the supplier

• Costly for buyers to switch one supplier to another

• Suppliers can vertically integrate forward to compete

• Buyers cannot integrate backward to supply their own needs

Substitute Products

• Products that serve similar consumer needs

• Existence of close substitute present strong

competitive threat

• Strategies should be designed to take advantage

of this fact

Complementors

• Not included in Porter’s Five Forces Model

• Andrew Grove argued Porter ignores sixth force -

Complementors

• Complementors – companies that sell

complements to enterprise’s own product offerings

• Without supply of complementary result in low

demand and profit

Complementors

• Strong foundation in economic theory

• Health of industry depend on supply of

complementary products

Role of Macroenvironment

• Macroeconomic Environment

• Technological Environment

• Social Environment

• Demographic Environment

• Political and Legal Environment

Role of Macroenvironment

Macroeconomic Environment

• Determine general health and well-being of

economy

• Four important factors

• Growth rate of economy

• Interest rates

• Currency exchange

• Inflation rates

Growth Rate of Economy

• Produce a general easing of competitive

pressures

• Give opportunities to expand company’s

operations and earn higher profits

• Economic decline

• lead to reduction in consumer expenditures

• increase competitive pressures

• cause price wars in mature industries

Interest Rates

• Determine level of demand for company’s

products

• If interest rates low, consumers borrow money

to finance their purchases

• Rising interest rates are a threat and falling rates

an opportunity

Currency Exchange

• Value of different national currencies against

each other

• Direct impact on competitiveness of products in

global

• Low or declining dollar reduces the threat from

foreign competitors and while creating

opportunities for increased sales overseas

Inflation Rates

• Destabilize the economy: slower economic

growth, higher interest rates and volatile

currency movements

• Inflation increases, investment become

hazardous

• Key characteristic - makes the future less

predictable

• High inflation threat to companies

Technological Environment

• Both creative and destructive - both opportunity

and threat

• Most important impact is that it can make height

of barriers to entry

• As result, radically reshape industry structure

• Example : Because of internet technology,

• Online Service (Opportunity)

• Travel agent (Threat)

Social Environment

• Create opportunities and threats

• Immense impact and early recognized companies

get opportunities

• Example : Increase health consciousness in US in

1970s and 1980s

• Recognized industry (Opportunity) – low-calories beer

• Tobacco industry (Threat)

Demographic Environment

• Changing composition of population

• Example : for Baby boomers born in 1960s

• Now – aged

• In 1980s, get married,

• Increased demand in consumer appliances,

• Threats for toy industry

Political and Legal Environment

• Deregulation can reduce barriers to entry, and

• Lead to intense competition

• Example: Air Line industry in US

Concept of Strategic Groups

• Strategic group - group of companies; each follows

the same basic strategy as other companies in group

• Proprietary group

• High-risk because of expensive research and development

• High-return for being monopoly on its production and sales

• Generic Group

• low-risk for not heavy investment in R & D

• Low-return means unable charge high price

Implications of Strategic Groups

• Companies closet competitors are those in the same

strategic group

• Companies in strategic group pursue similar strategies

• Consumers can view products of such companies as

direct substitutes for others

• Example:

• Gold Roast

• Super

• Premier

Implications of Strategic Groups

• Different strategic groups have different standing

with respect to each of competitive forces

• All five forces vary in intensity among different

strategic groups within the same industry

Implications of Strategic Groups

• Managers must evaluate that company would be

better off competing in a different strategic group

• If environment of another group is more benign,

moving into that group which can be regarded to

gain opportunity

• Mobility barriers – factors that inhibit movement

between groups

• Include both barriers to entry and barriers to exist

Limitations of Five Forces and Strategic Group Models

• Five forces and Strategic group provide useful way

of thinking about and analyzing nature of

competition

• Need to aware of their shortcomings

• Present a static picture of competition and slights

innovation

• De-emphasize significance of differences while

overemphasizing importance of industry and strategic

group structure

Innovation and Industry Structure

• Many industries competition can be viewed as a process

driven by innovation

• New and small enterprises can compete with large

established by innovation

• Successful innovation can revolutionize industry

structure

• When stabilizes in its new configuration, the five forces

and strategic group concepts can once more be applied

Innovation and Industry Structure

• Innovations seem to lower barriers to entry, allow

more companies into industry

• As a result lead to fragmentation rather than

consolidation

Industry Structure and Company Differences

• Underemphasized importance of company

differences within an industry or strategic group

• Individual resources and capabilities of company

are far more important determinants of its

profitability than industry and strategic group

• A company will not be profitable just because it is

based in an attractive industry or strategic group

Competitive Changes During an Industry’s Evolution

• Most industries pass through a series of stages, from

growth through maturity and eventually into decline

• Changes in potential competitors and rivalry give rise

to different opportunities and threats at each stage

1) Embryonic industry

2) Growth industry

3) Shakeout

4) Mature industry

5) Declining industry

Stages of Industry Life Cycle

Embryonic Industries

• Growth at this stage is slow because of buyer’s unfamiliarity and poorly

developed distribution channels

• Barriers to entry at this stage base on access to key technological

know-how

• Rivalry based on perfecting products, educating customers, and

opening up distribution channels

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Growth Industries

• First-time demand expands rapidly as many new

consumers enter the market

• Control over technological knowledge as barrier

diminish time

• Growth of industry increase when

• Consumers become familiar with product

• Prices fall, experience and scale economies attained

• Example: U.S cellular telephone industry

Growth Industries

• Threat from potential competitors is highest

• Rivalry to be low

• Rapid growth in demand expands companies’

revenues and profits

• Opportunity to expand company’s operations

Industry Shakeout

• Demand approaches saturation levels

• Demand is limited to replacement demand

• During this stage,

• Rivalry become intense

• Continue to add capacity at rate consistent with past

growth

• Use historic growth rates to forecast further growth

rates and expansion plans

Industry Shakeout

• However, demand no longer grows at historic rates

• As a result, emergence of excess of productive capacity

• To utilize this capacity, companies cut prices that lead to

a price war

Mature Industries

• Market is totally saturated

• Demand is limited to replacement demand

• During this stage,

• Growth is zero or low

• Entry barriers increase and the threat of entry from

potential competitors decreases

• Competition for market share develops, driving down

prices. ( in order to maintain historic growth rates)

Mature Industries

• To survive the shakeout,

• Focus both on cost minimization and on building brand

loyalty (airlines example)

• Higher entry barriers gives the opportunity to increase

prices and profits

Mature Industries

• As a result of shakeout,

• most companies in the mature stage have consolidated

and become oligopolies

• they tend to recognize their interdependence and try to

avoid price wars

• Stable demand gives the opportunity to enter into price-

leadership agreements

Mature Industries

• As a benefit,

• Reduce the threat of rivalry among them

• Greater profitability

However, stability of a mature industry is always

threatened by further price wars

Declining Industries

• Growth can be negative including technological

substitution, social changes, demographics and

international competition

• Rivalry increases

• Competitive pressures become fierce depending

on the speed of the decline and height of exit

barriers

Declining Industries

• Main problem is falling demand leads to the

emergence of excess capacity

• Cut prices again

• The greater the exit barriers, the harder it is for

companies to reduce capacity

• The greater is the threat of severe price

competition

Variations on the Theme

• Important to remember that industry life cycle is

generalized

• In practice, industry life cycle do not always

follow the pattern

Network Economics as a Determinant of Industry Conditions• Primary determinant of competitive conditions in

high- technology industries

• Arise where size of “network” of complementary

products is a primary determinant of demand for

industry’s product

• Example: demand for telephones depend on size

of telephone network

Network Economics as a Determinant of Industry Conditions• Set up positive feedback loop when increased in

demand of complementary products

• Positive feedback loop can

• generate repaid demand growth

• result in becoming very concentrated and potential

competitors being locked out by high switching cost

Network Economics as a Determinant of Industry Conditions• Tend to be winner take all market

• Powerful network economics are

important ,positive feedback loop tend to

operation relative to buyer s and suppliers

• Trick is to find right strategy in order to set up

positive feedback loop

Globalization And Industry Structure

• Advantage of national differences in cost and quality of

factors of production, example: Boeing

• From national markets that have distinct entities and

isolated from trade barriers, barriers of distance ,time

and culture to a system in which national markets are

merging into huge global market

• Consumer use same basic product offerings (only

global market)

Globalization And Industry Structure

• Crucial for company to recognize that industry’s

boundary do not stop at national borders

• Shift from national to global markets has intensified

competitive rivalry in industry after industry

• Rate of innovation affect competitive intensified

• Even globalization has increased both threat of

entry and intensity of rivalry, it has also created

enormous opportunities

The Nation-State and Competitive Advantage

• Despite globalization, many of most successful

companies still cluster in small number of

countries

• Need to understand how national factors can affect

competitive advantage

• Also known as diamond model

• Four attributes of a nation-state that have

important impact on global competitiveness

The Nation-State and Competitive Advantage

The Nation-State and Competitive Advantage

• Factor endowments

• Prime determinant of competitive advantage

• Basic factors (e.g.: land, labor), Advanced factors (e.g.:

physical infrastructure, managerial sophistication)

• Local demand conditions

• Get competitive advantage if local consumers are

demanding and sophisticated

• Local consumers pressure local companies to meet high

quality standard and produce innovative products.

The Nation-State and Competitive Advantage

• Competitiveness of related and supporting industries

• Presence in country of suppliers or related industries that are

internationally competitive

• Example: technological leadership in U.S semiconductor provide

the success in personal computers

• Strategy, Structure and Rivalry

• Different management ideologies which either help or don’t help

them build national competitive advantage

• Domestic rivalry create pressures to innovate, to improve

quality

The Nation-State and Competitive Advantage

• Nation can achieve international success in

certain industry is function of combined impact of

factor

• Government can influence each of four

components either positively or negatively