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©2012 South-Western, a part of Cengage Learning
External Analysis: The Identification of Opportunities and Threats
Chapter 3
Essentials of Strategic Management, 3/eCharles W.L. Hill | Gareth R. Jones
©2012 South-Western, a part of Cengage Learning
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.
©2012 South-Western, a part of Cengage Learning
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
©2012 South-Western, a part of Cengage Learning
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
©2012 South-Western, a part of Cengage Learning
Porter’s 5 Point Analysis
Risk of entry by potential competitors The intensity of rivalry among established
companies The competitive struggle for market share that
depends on: the industry’s competitive structure industry demand cost conditions exit barriers
©2012 South-Western, a part of Cengage Learning
Porter’s 5 Point Analysis (cont’d)
Bargaining power of buyers The ability of buyers to drive prices down
or quality up Bargaining power of suppliers
The ability of suppliers to raise the costs of the industry
Closeness of product substitutes How many other products can satisfy the
same customer need?
©2012 South-Western, a part of Cengage Learning
Competitive Forces
Weak competitive forces = Opportunity Allows a company to earn greater profit
Strong competitive forces = Threat Depress a company’s profits
©2012 South-Western, a part of Cengage Learning
Strategic Groups
Groups of companies within an industry that follow a similar strategy
Example: High-risk, High-return Strategy Low-risk, Low-return Strategy
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
©2012 South-Western, a part of Cengage Learning
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
©2012 South-Western, a part of Cengage Learning
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
©2012 South-Western, a part of Cengage Learning
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.
©2012 South-Western, a part of Cengage Learning
Stage 1
Embryonic: The industry is just beginning to develop Development is slow Buyers are unfamiliar with product High prices
©2012 South-Western, a part of Cengage Learning
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
©2012 South-Western, a part of Cengage Learning
Stage 3
Shakeout: Rate of growth slows Demand approaches saturation levels Few potential first-time buyers Rivalries become intense Excess capacity may exist
©2012 South-Western, a part of Cengage Learning
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
©2012 South-Western, a part of Cengage Learning
Stage 5
Decline: Falling demand = Excess capacity Growth becomes negative due to
Technology substitution Demographics International competition
©2012 South-Western, a part of Cengage Learning
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.
©2012 South-Western, a part of Cengage Learning
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
©2012 South-Western, a part of Cengage Learning
Macro-Environment (cont’d)
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.
©2012 South-Western, a part of Cengage Learning
Macro-Environment (cont’d)
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
©2012 South-Western, a part of Cengage Learning
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.