Essentials of Strategic Management, 3/e
Charles W.L. Hill | Gareth R. Jones
Chapter 3
External Analysis:
The Identification
of Opportunities
and Threats
©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:
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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:
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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
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The competitive struggle for market share that
depends on:
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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:
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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:
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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:
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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:
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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:
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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:
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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:
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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:
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Falling demand = Excess capacity
Growth becomes negative due to
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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:
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Forces at the national or regional level
Most important forces to monitor are:
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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.
©2012 South-Western, a part of Cengage Learning