Chapter 3
External Analysis: The Identification of
Industry Opportunities and Threats
Strategic
Management
An Integrated Approach
Charles W. L. Hill
Gareth R. Jones
PowerPoint Presentation
by Charlie Cook
Fifth Edition
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Analyzing Industry Structure
Opportunities and threats are competitive
challenges arising for changes in industry
conditions.
Analytic tools such as the
five forces model help
managers formulate
appropriate strategic
responses.
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3-2
The Five Forces Model
FIGURE 3.1
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Source: Adapted and reprinted by permission of Harvard Business
Review. An exhibit from “How Competitive Forces Shape Strategy”
by Michael E.. Porter (March-April 1979), Copyright © 1979 by the
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President and Fellows of Harvard College: all rights reserved.
Potential Competitors
New entrants into an industry threaten incumbent
companies.
Barriers to entry:
 Brand loyalty
 Absolute cost advantages
 Economies of scale
 Switching costs
 Government regulation
Entry barriers reduce the threat
of new and additional competition.
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Rivalry Among Established Companies
The intensity of competitive rivalry in an
industry arises from:
 Industry’s competitive structure.
 Demand (growth or decline) conditions in industry.
 Height of industry exit barriers.
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Competitive Structure
Continuum of
Industry Structures
Fragmented
Many firms,
no dominant
firm
Few firms,
shared dominance
(oligopoly)
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Consolidated
One firm or one
dominant firm
(monopoly)
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The Bargaining Power of Buyers
Buyers are most powerful when:
 There are many small sellers and few large buyers.
 Buyers purchase in large quantities.
 A single buyer is a large customer to a firm.
 Buyers can switch suppliers at low cost.
 Buyers purchase from multiple sellers at once.
 Buyers can easily vertically integrate to compete with
suppliers.
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The Bargaining Power of Suppliers
Suppliers have bargaining power when:
 Their products have few substitutes and are important
to buyers.
 The buyer’s industry is not an important customer to
the supplier.
 Differentiation makes it costly for buyers to switch
suppliers.
 Suppliers can vertically integrate forward to compete
with buyers and buyers can’t integrate backward to
supply their own needs.
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3-8
Substitute Products
The competitive threat of substitute products
increases as they come closer to serving
similar customer needs.
Far
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Close
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A Sixth Force: Complementors
Complementors:
 Companies whose products are sold in tandem with
another company’s products.
 Increased supply of a complementary product
collaterally increases demand for the primary product.
Example:
 Faster CPU chips fuel sales
of personal computers.
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The Role of the Macroenvironment
FIGURE 3.2
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Strategic Groups Within Industries
The concept of strategic groups
 Within an industry, a competitor grouping using
similar strategies that differ from other industry
groups.
Implications of strategic groups
 The closest industry competitors are those in the
group.
 The various industry groups are differentially and
competitively advantaged and positioned.
 Mobility barriers inhibit the movement of competitors
from one strategic group to another.
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Strategic Groups in the Pharmaceutical
Industry
FIGURE 3.3
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Limitations of the Five Forces and Strategic
Group Models
Both models are static and ignore innovation.
Their focus is on industry and group
structures rather than individual companies.
 Innovation creates change in
industry structures, altering the
competitive environment.
 Industry structure cannot
fully explain the performance
differences between industry
competitors.
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Punctuated
Equilibrium
and
Competitive
Structure
FIGURE 3.4
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The Industry Life Cycle Model
Stages in the industry life cycle:
FIGURE 3.5
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Growth in Demand and Capacity
FIGURE 3.6
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Network Economics As a Determinant of
Industry Conditions
The demand for primary industry products
depends on the size of the total market for
complementary products.
 Network economics result in
positive feedback loops that
foster rapid demand increases.
 Market competitors are
protected by switching
cost entry barriers.
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Positive Feedback in the Computer
Industry
FIGURE 3.7
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Globalization and Industry Structure
Globalization
 Globally dispersed production lowers
costs and increases quality.
 Global markets are replacing
national markets.
Trend implications
 No isolated national markets
 More competitors, more intense competition
 More rapid innovation and shorter product life cycles
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The Nation-State and Competitive
Advantage
The determinants of competitive advantage:
Factor
endowments
FIGURE 3.8
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