2 CHARLES W. L. HILL / GARETH R. JONES Strategic Management An Integrated Approach 2d ed. External Analysis: The Identification of Opportunities and Threats Chapter 2 Student Version © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Prepared by C. Douglas Cloud , Professor Emeritus of Accounting, Pepperdine University

COMPETITIVE FORCES MODEL Learning Objective: After reading this chapter you should be able to review the primary technique used to analyze competition in an industry environment: the Competitive Forces model. COMPETITIVE FORCES MODEL Michael E. Porter’s “The Five Forces Model” assumes that as the forces grow stronger, they limit the ability of companies to raise prices. A weak competitive force allows a company to earn greater profits. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

COMPETITIVE FORCES MODEL A strong competitive force can be regarded as a threat because it depresses profits. A weak competitive force can be viewed as an opportunity because it allows a company to earn greater profits. The strength of the forces may change over time as industry conditions change. Managers face the task of recognizing how changes in the forces give rise to new opportunities and threats. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

COMPETITIVE FORCES MODEL The first of Porter’s Five Forces is the risk of entry by potential competitors (companies that are not currently competing in the industry). The risk of entry by potential competitors is a function of the height of barriers to entry, that is, factors that make it costly for companies to enter an industry. b) Economies of scale occur when unit costs fall as a firm expands its output. c) Brand loyalty exists when consumers have a preference for the product of an established company. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

COMPETITIVE FORCES MODEL An absolute cost advantage means that entrants cannot expect to match established companies lower cost. d) Customer switching costs occur when a customer invests time, energy, and money switching from the products offered by one established company to the products of a new entrant. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

COMPETITIVE FORCES MODEL Historically, government regulations have constituted major entry barrier into many industries. i) Until the mid-1990s, providers of long-distance telephone service could not compete for local telephone services. ii) The Motor Carrier Act of 1980, among other things, deregulated the routes that carrier could use. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

COMPETITIVE FORCES MODEL The second of Porter’s Five Forces is the intense rivalry among established companies. The industry competitive structure refers to the number and size distribution of companies in it. i) A fragmented industry consists of a large number of companies that cannot determine industry price. ii) A consolidated industry is dominated by a small number of large companies. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

COMPETITIVE FORCES MODEL The level of industry demand is the second determinant of the intensity of rivalry. i) Growing demand tends to reduce rivalry because all companies can sell more without taking market share away from other companies. ii) When demand declines, a company can only grow by taking market share away from other companies. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

COMPETITIVE FORCES MODEL The cost structure is a third determinant of rivalry. i) When fixed costs are high, profitability tends to be highly leveraged to sales volume, and the desire to grow can spark intense rivalry. ii) Research suggests that when sales volume is low, weaker firms cut prices and/or raise promotional spending as they struggle to cover fixed cost. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

COMPETITIVE FORCES MODEL d) Exit barriers are economic, strategic, and emotional factors that prevent companies from leaving an industry. Common exit barriers include the following: Investment in fixed assets that are of little or no value in alternate uses, or cannot later be sold. Severance pay, health benefits, or pensions that must be paid to workers when a company ceases to operate. iii) Emotional attachment to an industry. iv) Bankruptcy regulations. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

COMPETITIVE FORCES MODEL The bargaining power of buyers is the third of Porter’s Five Forces. It is the ability of buyers to bargain down prices or demand better service. Some examples of when buyers are most powerful are: When there are many small sellers of the particular product and the buyers are large and few in number. When the buyer purchases in large quantities and uses its power to bargain for price reductions. When the supplier industry depends on the buyers for a large percentage of total orders. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

COMPETITIVE FORCES MODEL The fourth of Porter’s Five Forces is the bargaining power of suppliers. Examples of when suppliers are most powerful include: The product that suppliers sell has few substitutes and is vital to the buyer. The industry is not an important customer to the supplier. Suppliers threaten to enter their customers’ industry. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

COMPETITIVE FORCES MODEL The final force in Porter’s model is the threat of substitute products: products of different businesses that can satisfy similar customer needs. Tea versus coffee versus soft drink Margarine versus butter Andrew Grove argued that power, vigor, and competence of complementors comprised a sixth force. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

STRATEGIC GROUPS WITHIN INDUSTRIES Learning Objective: After reading this chapter you should be able to explore the concept of strategic groups and illustrate the implications for industry analysis. STRATEGIC GROUPS WITHIN INDUSTRIES Within most industries, it is possible to observe groups of companies that follow a business model similar to companies in other groups. These different groups of companies are known as strategic groups. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

STRATEGIC GROUPS WITHIN INDUSTRIES Implications of Strategic Groups Because all companies in a strategic group are pursuing a similar business model, customers tend to view such enterprises as direct substitutes for each other (for example, Wal-Mart, Kmart, and Target). Each strategic group may face a set of opportunities and threats. Risk of new entrants Degree of rivalry among companies in the group Bargaining power of suppliers or buyers © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

STRATEGIC GROUPS WITHIN INDUSTRIES The Role of Mobility Barriers Mobility barriers are within-industry factors that inhibit the movement of companies between strategic groups. These barriers could bar entry into a group or bar exit from the company’s existing group. Managers must determine if it is cost-effective to overcome mobility barriers before deciding whether the move is worthwhile. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY LIFE-CYCLE ANALYSIS Learning Objective: After reading this chapter you should be able to discuss how industries evolve over time, with reference to the industry life-cycle model. INDUSTRY LIFE-CYCLE ANALYSIS There are five stages in the industry life-cycle. Embryonic Growth Shakeout Mature Decline © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY LIFE-CYCLE ANALYSIS Embryonic Industries An embryonic industry refers to an industry just beginning to develop. Examples are personal computers in the 1970s, wireless communication in the 1980s, and Internet retailing in the 1990s. Growth at this stage is slow. Rivalry is based not so much on price as on educating customers, opening up distribution channels, and perfecting the design of the product. Such rivalry can be intense. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY LIFE-CYCLE ANALYSIS Growth Industries In a growth industry, first-time demand is expanding rapidly. Prices fall because experience and scale economies have been attained, and distribution channels developed. The importance of control over technological knowledge as a barrier to entry has diminished. New entrants can be absorbed into an industry without a marked increase in the intensity of rivalry. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY LIFE-CYCLE ANALYSIS Industry Shakeout Explosive growth cannot be maintained indefinitely. In the shakeout stage, rivalry between companies becomes intense. Mature Industries The market is totally saturated, demand is limited to replacement demand, and growth is low or zero. In the mature stage, barriers to entry increase, and the threat of entry from potential competitors decreases. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY LIFE-CYCLE ANALYSIS Declining Industries In a declining industry growth becomes negative. Falling demand leads to the emergence of excess capacity. Companies in this category cut prices, thus sparking a price war. The greater the exit barriers, the harder it is for companies to reduce capacity, e.g. airline industry and steel industry. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objective: After reading this chapter you should be able to show how trends in the macroenvironment can shape the nature of competition in an industry. THE MACROENVIRONMENT Macroeconomic Forces The four most important macroeconomic forces are the growth rate of the economy, interest rates, currency exchange rates, and inflation (deflation) rates. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE MACROENVIRONMENT Global Forces Economic growth in places such as Brazil, China, and India have created large new markets. It is easier for foreign enterprises to enter the domestic markets of many companies, thereby increasing the intensity of competition and lowering profitability. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Political and Legal Forces THE MACROENVIRONMENT Political and Legal Forces Political and legal forces are outcomes of changes in laws and regulations, and significantly affect managers and companies. Technological Forces Technological change can make established products obsolete overnight and simultaneously create a host of new product possibilities. It can impact the height of the barrier to entry and radically reshape industry structure. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE MACROENVIRONMENT Demographic Forces Social Forces Demographic forces are outcomes of changes in the characteristics of a population, such as age, gender, ethnic origin, race, and social class. Social Forces Social forces refer to the way in which changing social mores and values affect an industry. One of the major social movements of recent decades has been the trend toward greater health consciousness. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.