1. Topic 2: External Analysis
The Identification of Opportunities and Threats

2. Learning Objectives
Review the primary technique used to analyze competition in an industry environment: the Five/Six Forces model.
Explore the concept of strategic groups and illustrate the implications for industry analysis.
Discuss how industries evolve over time, with reference to the industry life-cycle model.
Show how trends in the macroenvironment can shape the nature of competition in an industry.

3. Analyzing the External Environment
Macro
Environment
Political/Legal
Demographic
Sociocultural
Technological
Economic
Global
Opportunities
Sources of revenue and profit
Industry
Environment
Competitors
Customers
Suppliers
The Firm
Threats
Factors endangering revenue and profit

4. Industry Levels of Profitability, 1996-2006
The Industry Context
Industry Levels of Profitability,
Industry
ROIC
Beverages
25.0%
Bottlers
4.0%
Cigarettes
18.5%
Computers
Pharmaceuticals
15.5%
Agricultural
3.0%
Steel
5.5%
Airlines
- 2.0%
Railroads
Wireless
- 3.5%
Trucking
5.0%
Strategy Implications
The industry environment in which firms compete exerts strong influence on firms’ profitability.
Firms should choose and compete in profitable industries

5. What Is an Industry? Industry Sector Market Segments
A group of firms that produce or sell the same or similar products to the same market
Sector
Group of closely related industries.
Market Segments
Distinct groups of customers within a market that can be differentiated on the basis of their: a) individual attributes; b) specific demands.
Defining industry boundaries
SIC and NAIC codes
Product-based
Function-based

6. The Industry Environment: Three Players
Suppliers
Competitors
Customers
Supplier Analysis
Who are important suppliers?
Are they concentrated?
Are suppliers’ products easily available?
Competitor Analysis
Who are important competitors?
What are their goals and objectives?
What are their strategies?
How many strategic groups are there?
What resources and capabilities do they possess?
Customer Analysis
Who are important customer groups (existing and potential)?
What are their needs?
How are their needs satisfied?
Are their needs satisfied well?

7. Porter’s Competitive Forces Model
Threat
Five forces +
The sixth force

8. Threat of Entry Entry barriers are influenced by following factors in
Degree to which potential competitors can enter an industry and intensify rivalry and measured by the height of entry barriers.
Entry barriers are influenced by following factors in
the focal industry:
Economies of scale
Brand loyalty
Absolute cost advantage
Capital requirements
Customer switching costs
Access to distribution channels
Government regulations

9. Bargaining Power of Buyers
Buyer power
The ability of buyers to bargain down prices or to raise costs by demanding better product quality and service
Buyer power increases when:
Buyers have choices.
Buyers purchase in large quantities.
The industry depends upon buyers for a large percentage of its total orders.
Buyers’ switching costs are low.
Buyers can pose threat to integrate backward into the sellers’ industry.

10. Bargaining Power of Suppliers
Supplier Power
The ability of suppliers to raise input prices, or to raise the costs of the industry in other ways, e.g., by providing poor-quality inputs or poor service.
Supplier power increases when:
Suppliers are large and few in number (supplier concentration)
Suitable substitute products are not available
Suppliers control a scarce input
Suppliers’ products are critical to the buyers’ success
Suppliers’ products create high switching costs
Suppliers pose a threat of forward integration

11. Threat of Substitute Products
Threat of substitutes
Degree to which products in other industries can satisfy similar customer needs
The threat of substitutes increases when:
The substitute’s price is lower
The substitute’s quality is equal to or greater than the existing product
Buyers face few switching costs (financial and non-financial)

12. Rivalry Among Established Companies
The competition between companies within an industry to gain market share. Competition takes two forms: price competition and non-price competition. Price competition destroys industry profitability.
The intensity of rivalry are affected by four factors:
Industry competitive structure (the number and size distribution of competitors)
Industry demand
Cost conditions
Exit barriers

13. The Five Forces and Industry Attractiveness
Interpreting the individual force analysis
Assessing the profitability of the industry
The combining effect of all forces
Attractive Industry
Threat of Entry
Bargaining power of suppliers and buyers
Threats from substitutes
Rivalry among established firms
Low
High profit potential

14. The Sixth Force Power of Complement Providers
Power of Complementors
Companies that sell products that add value to (complement) the products of companies in an industry because, when used together, the combined products better satisfies customer demands.
Can limit the price that companies in an industry can charge for their product
Two Examples
Strong complementors Provide an increased opportunity for creating value
Weak complementors Slow industry growth and limit profitability
Hot dogs +
Buns
More sales
DVD +
DVD player
More attractive offering

15. Competitive Forces and Opportunities/Threats
Potential Opportunities
Low buyer power
Low supplier power
Low threat of entry
Low threat of substitutes
Low rivalry
Strong complementors
Threats
High buyer power
High supplier power
High threat of entry
High threat of substitutes
High rivalry
Weak complementors

16. Strategic Groups Implications Strategic groups
A set of firms emphasizing similar strategic dimensions and using similar strategies
Implications
Intra-strategic group competition is more intense than is inter- strategic group competition due to:
Similar market positions
Similar products
Similar strategic actions
The strengths of the competitive forces differ across industry strategic groups
Mobility barriers exist between strategic groups

17. Strategic Groups: Example

18. Industry Life Cycle

19. Industry Life Cycle Analysis
Embryonic/Emerging Industries
Demand: Low (limited buyers; unfamiliar with the product)
Product price: High
Production: limited
Distribution channel: Poor
Entry Barrier: Based on access to key technological knowhow
Rivalry: Low; focusing on non- price dimensions
Growth Industries
Demand: Increasing (more first-time buyers; more familiar with the product)
Product price: Gradually decreasing
Production: Expanding
Distribution channel: Developing
New Entry: Increasing
Rivalry: Relatively low

20. Industry Life Cycle Analysis (cont.)
Shakeout
Demand: Saturation Level (fewer first-time buyers)
Rivalry: High (price wars)
Exit: High (bankruptcy of inefficient companies)
New Entry: Deterred

21. Industry Life Cycle Analysis (cont.)
Mature Industries
Demand: Saturated (replacement purchases)
Growth Opportunity: Population expansion
Production: Large scale
Distribution channel: Well- developed
Entry barrier: High
Rivalry: High; trying to avoid price wars
Industry Structure: Consolidated
Declining Industries
Demand: Decreasing
Industry Growth: Negative
Rivalry: High

22. Some Important Variables to be Monitored
The Macro Environment
Dimensions
Some Important Variables to be Monitored
Economic
General domestic product
Interest rates
Inflation rates
Fuel prices
Disposable income
Unemployment rate ……
Demographic
Population size
Age structure
Geographic distribution
Ethnic mix
Income distribution
Sociocultural
Local lifestyle trends
Workforce diversity
Women in workfoce
Attitude toward work and leisure
Attitude toward consumerism
Technological
Communication technology
Application of knowledge
R&D support
Political/Legal
Political environment
Taxation laws
Deregulation philosophies
Antitrust laws
Private property laws
Global
Important political events
Important global markets
Newly industrialized countries
Different cultural attributes
…….

23. The Industry Environment
Summary
Opportunities
Threats
Superior
Returns
Strategy
The Macro Environment
(The Six-Component Model)
The Industry Environment
Industry competitive forces (five/six forces)
Strategic groups
Industry boundary and players
Industry life cycle