1. EXTERNAL ANALYSIS: THE IDENTIFICATION OF OPPORTUNITIES AND THREATS
Chapter 2
EXTERNAL ANALYSIS: THE IDENTIFICATION OF OPPORTUNITIES AND THREATS

2. Learning Objectives Analyzing competition in an industry environment
Explore the concept of strategic groups and illustrate its implications for industry analysis
Discuss how industries evolve over time- industry life cycle
Show how trends can shape the nature of competition in an industry
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3. “To assure victory, always carefully survey the field before battle.”
- Sun Tzu
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4. Industry
“…a group of companies offering products or services that are close substitutes for each other… that satisfy the same basic customer need.”
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5. “…a group of closely related industries.”
Sector
“…a group of closely related industries.”
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6. The Computer Sector: Industries and Segments
Figure 2.1
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7. Market Segments
“…distinct groups of customers within a market that can be differentiated from each other on the basis of their distinct attributes and specific demands..”
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8. External Analysis
Identifies strategic opportunities & threats in an organization’s operating environment that will affect how it pursues its mission.
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9. External Analysis Requires assessment of: Industry environment
Competitive structure of industry
Competitive position of the company
Competitiveness and position of major rivals
Country/national environments in which a company competes
Wider socioeconomic/macroenvironment that may affect company and its industry
Social
Governmental
Legal
International
Technological
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10. External Analysis: Opportunities and Threats
Analyzing the dynamics of the industry in which an organization competes to help identify:
Opportunities
Conditions in the environment a company can take advantage of to become more profitable
Threats
Conditions in the environment endanger the integrity and profitability of the company’s business
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11. Porter’s Five Forces Model
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12. Porter’s Five Forces Model
Risk of Entry by Potential Competitors
Industry Rivalry
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of Substitutes
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13. How the Five Forces Shape Competition
“…the stronger each of these five forces is, the more limited is the ability of established companies to raise prices and earn greater profits.”
Weak competitive force- viewed as an opportunity as it allows company to earn greater profits
Strong competitive force- viewed as a threat as it depresses industry profits
Strength of forces may change as industry conditions change
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14. Risk of Entry by Potential Competitors
“…companies… not currently competing in an industry but have the capability to do so...” Barriers include:
Economies of Scale – unit costs fall
Cost reductions
Bulk purchase discounts
Cost savings
Brand Loyalty = creating customer preferences
Absolute Cost Advantages v. New Entrants
Experience, patents, processes
Control of production inputs
Lower financial risks
Customer Switching Costs
Government Regulation
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15. Rivalry Among Established Companies
“…competitive struggle between companies in same industry to gain market share...” Function of:
Industry Competitive Structure- Number/size of companies, consolidated vs. fragmented
Industry Demand Conditions
Growing demand – reduces rivalry
Declining demand – encourages rivalry
Cost Conditions
High fixed costs – profitability leveraged by volume
Slow demand/growth – intense rivalry/lower profits
Exit Barriers
Write-off assets
Economic dependence
Maintain assets
High fixed cost
Emotional attachment
Bankruptcy regulations
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16. Bargaining Power of Buyers
“…consumers/end-users who…use product or intermediaries that distribute or retail the products.” Buyers most powerful when:
Suppliers = many small companies, buyers large/few
Purchase in large quantities
Suppliers depend on buyers for large % of orders
Buyers switching costs are low
Buyer can purchase from several
Buyers supply own needs
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17. Bargaining Power of Suppliers
“…provide inputs… in the industry.” Suppliers most powerful when:
Few substitutes
Industry not important to suppliers
Buyers- purchase large % of orders
Buyers experience significant switching costs
Suppliers can threaten to enter industry
Produce/supply own product
Buyers cannot threaten to make own inputs
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18. Substitute Products
“…products from different businesses or industries…can satisfy similar customer needs.”
Existence of close substitutes a strong threat - Substitutes limit price that companies can charge for product
Substitutes a weak competitive force
Few close substitutes
Companies in industry can raise prices and earn additional profits.
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19. Sixth Force: Complementors
“…sell products that add value to the products.. In an industry… when use together….”
Substitutes/complements influence demand
Important in demand & profitability in many hi-tech industries
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20. Strategic Groups Within Industries
“…follow a business model… similar to other companies within… group, but are different from the business model of other companies in other… groups.
Implications
Closest competitors in same strategic group viewed as substitutes for each other
Different competitive forces and may face different set of opportunities/threats
Mobility Barriers
Inhibit movement between strategic groups
Include barriers to enter another group or exit existing
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21. Strategic Groups in Pharmaceutical Industry
Figure 2.3
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22. Strategic Barriers Pharmaceutical Industry
Lack of R&D Skills to develop new proprietary drugs
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23. Industry Life Cycle Analysis
“…analyzes the effects of industry evolution on competitive forces over time…characterized by five distinct life cycle stages:
Embryonic- beginning to develop; perfecting products, educating customers, opening distribution channels
Growth- demand takes-off; focus on keeping up with high industry growth
Shakeout- demand approaches saturation, replacements; emergence of excess productive capacity
Mature- saturated with low/no growth; consolidation based on market share, driving down price
Decline- growth becomes negative; rivalry further intensifies based on rate of decline/exit barriers
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24. Stages in Industry Life Cycle
Strength and nature of five forces change as industry evolves     
Figure 2.4
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25. Growth in Demand/Capacity
Industry Shakeout: Rivalry Intensifies with growth in excess capacity
Figure 2.5
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26. Limitations of Models for Industry Analysis
Life Cycle Issues
Cycles not always follow generalization
Rapid growth situations may skip embryonic
Growth revitalized by innovation/social change
Time span of stages can vary
Innovation and Change
Punctuated Equilibrium- industry’s long term stable structure punctuated with periods of rapid change/innovation
Hypercompetitive industries- permanent, ongoing innovation & competitive change
Company Differences
Significant variances in profit rates
Resources/capabilities determinants of profit
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27. Punctuated Equilibrium & Competitive Structure
Industry Structure revolutionized by innovation
Periods of long term stability
Periods of long term stability
Figure 2.6
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28. The Macroenvironment
Macroeconomic Forces: rates of; interest, currency exchange, inflation/deflation
Global Forces: barriers to international trade and investment
Technological Forces: new technologies
Demographic Forces: changes in characteristics of a population
Social Forces: social values and mores
Political & Legal Forces: laws/regulations
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29. Role of Macro Environment

30. The Role of the Macroenvironment
Changes in one or more forces in the macroenvironment can affect:
Competitiveness of the industry (Porter’s Five Forces)
Attractiveness of the industry
Relative strengths (or weaknesses) of a given company
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31. “Strategy is a choice on how to compete.”
- Michael Porter
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