1. 2 External Analysis: The Identification of Opportunities and Threats
GARETH R. JONES /CHARLES W. L. HILL
Theory of Strategic Management 10th ed.
External Analysis: The Identification of Opportunities and Threats
Chapter 2

2. THE EXTERNAL ENVIRONMENT

3. OVERVIEW
An industry can be defined as a group of companies offering products or services that are close substitutes for each other.
Coca-Cola, PepsiCo, and Cadbury Schweppes in the soft drink industry.
Dell, Hewlett-Packard, Lenovo, and Apple in the personal computer industry.
Compared with the general environment, the industry environment has a more direct effect on the firm’s:
Strategic Competitiveness
Ability to earn above-average returns

4. Established: Coca-Cola, Pepsi
OVERVIEW
A sector is a group of closely related industries.
Market segments are distinct groups of customers within a market that can be differentiated from each other on the basis of individual attributes and specific demands.
Established: Coca-Cola, Pepsi
Health conscious: Fruit Juices, Sports Drinks Premium: Tonic-Water, Canned Smoothies and Specialty Coffees

5. The computer sector: industries and segments

6. INDUSTRY ENVIRONMENT ANALYSIS
THE FIVE FORCES OF COMPETITION MODEL
The five forces model of competition expands the arena for competitive analysis. Historically, firms concentrated only on direct competitors.
Today, firms must study many industries, as competitors are defined more broadly. For example, the communications industry now encompasses media companies, telecoms, entertainment companies, and smartphone producers.

7. COMPETITIVE FORCES MODEL

8. COMPETITIVE FORCES MODEL
Porter’s position: 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.
A strong competitive force can be regarded as a threat because it depresses profits.
The strength of the forces may change over time as industry conditions change.

9. COMPETITIVE FORCES MODEL
Threat of entry by potential competitors (companies that are not currently competing in the industry).
a) Economies of scale arise when unit costs fall as a firm expands its output.
Brand loyalty exists when consumers have a preference for the product of an established company.
An absolute cost advantage means that entrants cannot expect to match established companies’ lower cost.
Customer switching costs arise when a customer invests time, energy, and money switching from the products offered by one established company to the products of a new entrant.
Government regulations/deregulations can constitute major entry barrier into many industries. Falling entry barriers results in significant new entry, increase in the intensity of industry competition, and lower industry profit rates

10. COMPETITIVE FORCES MODEL
Rivalry among established companies.
(Competitive struggle between companies within an industry to gain market share from each other)
The industry competitive structure refers to the number and size distribution of companies in it.
A fragmented industry consists of a large number of companies that cannot determine industry price.
A consolidated industry is dominated by a small number of large companies.
Industry demand
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.

11. COMPETITIVE FORCES MODEL
Cost structure
i. When fixed costs are high, profitability tends to be highly leveraged to sales volume.
ii. Weaker firms cut prices and/or raise promotional spending in an attempt to cover fixed cost. The result can be intense rivalry and lower profits.
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 be sold.
Emotional attachment to an industry.
Bankruptcy regulations.

12. COMPETITIVE FORCES MODEL
The bargaining power of buyers is the ability of buyers to bargain down prices or demand better service. Powerful buyers are a threat for companies. Some examples of when buyers are most powerful are:
When buyers have multiple options to buy from
When buyers purchase in large quantities
Supplier industry is dependent on them for a major portion of sales
With low switching costs and ability to purchase an input from several companies at once, buyers can pit companies against each other
Threat of entering the industry and producing the product

13. COMPETITIVE FORCES MODEL
bargaining power of suppliers
Suppliers are most powerful when:
The product that suppliers sell has few substitutes and is vital to the buyer.
The industry is not an important customer to the supplier.
Companies would incur high switching costs if they moved to a different supplier
The suppliers threaten to enter their customers’ industry.
Knowledge that companies cannot enter the suppliers’ industry

14. COMPETITIVE FORCES MODEL
Threat of substitute products: products of different businesses that can satisfy similar customer needs.
Limit the price that companies in an industry can charge for their product
Tea versus coffee versus soft drink
Margarine versus butter

15. COMPETITIVE FORCES MODEL
Complementors: Andrew Grove argued that power, vigor, and competence of complementors comprised a sixth force.
Companies that sell products that add value to(complement) the other products.
When used together, the combined products better satisfy customer demands
PC industry and High quality software applications

16. STRATEGIC GROUPS WITHIN INDUSTRIES
Companies in an industry differ in the way they strategically position products in the market
Product positioning is determined by the:
Product quality, distribution channels and market segments served
Technological leadership and customer service
Pricing and advertising policy
Promotions offered
Example:

17. Strategic groups in the commercial aerospace industry

18. Implications of Strategic Groups
Since all companies in a strategic group pursue a similar strategy:
Customers view them as direct substitutes for each other
Immediate threat to a company are rivals within its own strategic group
Different strategic groups have different relationships to each of the competitive forces
Risk of new entrants
Degree of rivalry among companies in the group
Bargaining power of suppliers or buyers

19. Stages in the Industry Life Cycle

20. Embryonic Industry Development stage Growth is slow owing to:
Buyer’s unfamiliarity with the product and poor distribution channels
High prices due to companies’ inability to reap significant scale economies
Barriers to entry are based on access to technological expertise rather than economies of scale or brand loyalty
Rivalry is based on
Creating awareness, setting distribution and designing the perfect product
Examples are personal computers in the 1970s, wireless communication in the 1980s, and internet retailing in the 1990s.

21. Growth Industry
First-time demand expands rapidly due to new customers in the market
Prices fall since:
Scale economies have been attained
Distribution channels have developed
Threat from potential competitors is highest at this stage
Rivalry is low - Companies are able to expand their revenues without taking market share away from other companies

22. Industry Shakeout Demand approaches saturation levels
There are fewer potential first-time buyers
Rivalry between companies intensifies
Price war results in bankruptcy of inefficient companies and deters new entry
Some companies leave-hence shakeout

23. Mature Industries
Market is totally saturated, demand is limited to replacement demand, and growth is low or zero
Barriers to entry increase and threat of entry from potential competitors decreases
Industries consolidate and become oligopolies

24. Declining Industries Growth becomes negative due to:
Technological substitution
Social changes
Demographics
International competition
Rivalry among established companies increases
Falling demand results in excess capacity

25. The Macro-environment

26. THE MACROENVIRONMENT Macroeconomic Forces Global Forces
The four most important macroeconomic forces are
The growth rate of the economy,
interest rates,
currency exchange rates,
inflation (deflation) rates.
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.

27. Political and Legal Forces
THE MACROENVIRONMENT
Political and Legal Forces
Political and legal forces are outcomes of changes in laws and regulations that 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.

28. THE MACROENVIRONMENT
Demographic 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.