Chapter 3
External Analysis:
Identification of
Opportunities and
Threats
“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.
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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
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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
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Figure 3.1: Porter’s Five Forces Model
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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
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Porter’s 5 Point Analysis
• 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
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Porter’s 5 Point Analysis
• Bargaining power of buyers
– The ability of buyers to drive prices down
or quality up
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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?
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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
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Competitive Forces
• Weak competitive forces = Opportunity
– Allows a company to earn greater profit
• Strong competitive forces = Threat
– Depress a company’s profits
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Figure 3.2: Strategic Groups
in the Pharmaceutical Industry
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Strategic Groups
• Groups of companies within an industry that
follow a similar strategy
• Example:
– High-risk, High-return Strategy
– Low-risk, Low-return Strategy
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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
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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
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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
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Figure 3.3: Stages
in the Industry Life Cycle
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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.
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Industry Life Cycle Stages
Embryonic
Decline
Growth
Shakeout
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Mature
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Stage 1
• Embryonic:
–
–
–
–
The industry is just beginning to develop
Development is slow
Buyers are unfamiliar with product
High prices
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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
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Figure 3.4: Growth in
Demand and Capacity
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Stage 3
• Shakeout:
–
–
–
–
–
Rate of growth slows
Demand approaches saturation levels
Few potential first-time buyers
Rivalries become intense
Excess capacity may exist
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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
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Stage 5
• Decline:
– Falling demand = Excess capacity
– Growth becomes negative due to
• Technology substitution
• Demographics
• International competition
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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.
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Figure 3.5: The Role
of the Macroenvironment
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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.
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Macro-Environment (cont’d)
•
•
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
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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.
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Video Clip: Psychographics & BMW
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Macro-Environment
Global Forces
Macro-Economic Forces
Technological Forces
FIRM
Political & Legal Forces
Demographic Forces
Social Forces
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