Strategic Charles W. L. Hill Management Gareth R. Jones Chapter 3 External Analysis: The Identification of Industry Opportunities and Threats Strategic Charles W. L. Hill Management Gareth R. Jones Fifth Edition PowerPoint Presentation by Charlie Cook An Integrated Approach Copyright © 2001 Houghton Mifflin Company. All rights reserved.

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. Copyright © 2001 Houghton Mifflin Company. All rights reserved.

The Five Forces Model FIGURE 3.1 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 President and Fellows of Harvard College: all rights reserved. Copyright © 2001 Houghton Mifflin Company. 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. Copyright © 2001 Houghton Mifflin Company. All rights reserved.

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. Copyright © 2001 Houghton Mifflin Company. All rights reserved.

Competitive Structure Continuum of Industry Structures Fragmented Many firms, no dominant firm Few firms, shared dominance (oligopoly) Consolidated One firm or one dominant firm (monopoly) Copyright © 2001 Houghton Mifflin Company. All rights reserved.

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. Copyright © 2001 Houghton Mifflin Company. All rights reserved.

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. Copyright © 2001 Houghton Mifflin Company. All rights reserved.

Substitute Products The competitive threat of substitute products increases as they come closer to serving similar customer needs. Far Close Copyright © 2001 Houghton Mifflin Company. All rights reserved.

A Sixth Force: 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. Copyright © 2001 Houghton Mifflin Company. All rights reserved.

The Role of the Macroenvironment FIGURE 3.2 Copyright © 2001 Houghton Mifflin Company. All rights reserved.

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. Copyright © 2001 Houghton Mifflin Company. All rights reserved.

Strategic Groups in the Pharmaceutical Industry FIGURE 3.3 Copyright © 2001 Houghton Mifflin Company. All rights reserved.

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. Copyright © 2001 Houghton Mifflin Company. All rights reserved.

Punctuated Equilibrium and Competitive Structure FIGURE 3.4 Copyright © 2001 Houghton Mifflin Company. All rights reserved.

The Industry Life Cycle Model Stages in the industry life cycle: FIGURE 3.5 Copyright © 2001 Houghton Mifflin Company. All rights reserved.

Growth in Demand and Capacity FIGURE 3.6 Copyright © 2001 Houghton Mifflin Company. All rights reserved.

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. Copyright © 2001 Houghton Mifflin Company. All rights reserved.

Positive Feedback in the Computer Industry FIGURE 3.7 Copyright © 2001 Houghton Mifflin Company. All rights reserved.

Globalization and Industry Structure 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 Copyright © 2001 Houghton Mifflin Company. All rights reserved.

The Nation-State and Competitive Advantage The determinants of competitive advantage: Factor endowments FIGURE 3.8 Copyright © 2001 Houghton Mifflin Company. All rights reserved.