External Analysis: The Identification of Industry Opportunities and Threats

Chapter 2

External Analysis
Analyzing the dynamics of the industry in which an organization competes to help identify:
Opportunities: conditions in the environment that a company can take advantage of to become more profitable Threats: conditions in the environment that endanger the integrity and profitability of the companys business

Defining an Industry
Industry
A group of companies offering products or services that are close substitutes for each other

Competitors
Rival companies that serve the same basic customer needs

Defining an Industry (contd)

Sector
A group of closely related industries

Market segments
Distinct groups of customers within a market that can be differentiated from each other based on their distinct attributes and demands

Changing industry boundaries

The Computer Sector

Example of a Sector on p.39

The Computer Sector: Industries and Segments

The Computer Sector

Where is the customer?

Strategic Groups Within Industries

Formed within an industry when some companies follow the same basic product positioning strategy, which is different from that of other companies in other groups Companies can position their products in terms of distribution channels, market segments, product quality, technological leadership, customer service, pricing policy, advertising policy, promotions

Strategic Groups in the Pharmaceutical Industry

Insert Figure 2.3

Implications of Strategic Groups

A companys closest competitors are those in its strategic group Each strategic group may face a different set of opportunities and threats

The Role of Mobility Barriers

A company may decide to move from one strategic group to another where the five forces are weaker and higher profits are possible Mobility barriers are similar to industry entry and exit barriers and must be weighed carefully

Industry Analysis: Background

Industrial economics: focus on common good or competitive pricing Selected measures of competition (high, if)
Level of concentration (low)
Concentration percent of total sales controlled by largest 4, 8, 12 players in the industry

Presence of economies of scale (high) Product differentiation (low) Natural barriers, i.e. fixed supply (low)

The Computer Sector: Industries and Segments

Porters Five Forces Model

Source: Adapted and reprinted by permission of Harvard Business Review. From How Competitive Forces Shape Strategy, by Michael E. Porter, Harvard Business Review, March/April 1979 by the President and Fellows of Harvard College. All rights reserved.

Porters Five Forces Model

An industry is competitive (if . . .)
Risk of entry (high, low barriers) Intensity of Rivalry (high) Bargaining power of buyers (high) Bargaining power of suppliers (high) Presence of substitute products (yes)

Complementors added later

Risk of Entry
Natural barriers - oil fields, mines Barriers created over time
Brand loyalty (due to advertising, etc.) Cost advantage (due to cheap funds, control of inputs, production) Economies of scale (production and distribution susceptible to scale economies) Switching costs (microsoft to apple, oil to coal) Regulation

Intensity of Rivalry: Industry characteristics

Industry demand
Is long-term demand growing? stagnant? declining?

Exit barriers
Cost of shutting down business and/or moving to another.

Intensity of Rivalry: Due to industry structure

Fragmented (large number of competitors)
retailing

Consolidated (4, 8, 12 competitors control 80% of the industry)

cement

Monopoly
AT&T before the break-up

Power of Buyers:
High if . . .

Numerous participants selling to few buyers Buyers purchase large quantities Participants depend on a set of buyers for a large percent of their business Buyers have low switching costs Buyers can purchase from more than one Buyers can threaten to enter the industry

Power of Suppliers:
High if . . .

Product of suppliers few substitutes Profitability of supplier not dependent on industry purchases Industry has switching cost problems if they move to a new set of suppliers Suppliers can threaten to enter Industry can not threaten to enter suppliers industry

Substitutes
Distinction between competing and substitute products
Coke and Pepsi are not substitutes; they are close substitutes but not within this definition Coffee is a substitute for tea or caffeine drink Substitute for a car when going to Las Vegas? San Francisco? Substitute for a computer?

Complementors
Adds value to an industrys products
Software industry and computer industry

Others:
Hotel and airlines Malls will group movies and restaurants in same sector of the mall Mobile phones and developers of messages to be texted

Exercise: Strategy in Action 2.1 (p.44)

What are the barriers to entry in the Japanese brewing industry? What are the barriers to entry for an American company? What would you recommend to an American beer company seeking to sell its products in Japan?

Industry Life Cycle Analysis

The strength and nature of the five forces change as an industry evolves through its life cycle Managers must anticipate how the forces will change as the industry evolves and formulate appropriate strategies

Stages in the Industry Life Cycle

Industry Life Cycle

Addresses industry demand (intensity of rivalry) Emergence of industry standard normally propels industry into growth phase
At the development or embryonic phase, different configurations compete As a standard emerges, industry demand goes through a period of higher rate of growth

Shakeout: Growth in Demand and Capacity

Limitations of Models for Industry Analysis

Life cycle issues
The embryonic stage can sometimes be skipped or short Industry growth can be revitalized The time span of the stages can vary

Innovation and change

Innovation can unfreeze and reshape industry structure An industry may be hypercompetitive, with permanent and ongoing change

Limitations of Models for Industry Analysis (contd)

Company differences
The importance of company differences within an industry or strategic group can be underemphasized The individual resources and capabilities of a company may be more important in determining profitability than the industry or strategic group

Exercise: Strategy in Action 2.2 (p.47)

Why was it necessary for pricing discipline to emerge? Are consumers better off?

The Role of the Macroenvironment

Rate of change?
Economic indicators interest rates, etc. Technological changes Political/Regulatory Demographic changes Social forces Are these in some order?

The Global and National Environments

Globalization of production and markets
Lower barriers to cross-border trade and investment National differences in the cost and quality of factors of production Home and foreign markets and competitors are blurring Intensified rivalry Intensified rate of innovation Many new markets are open

Additional Thoughts
Multi-nation and Global Factor conditions, industry structure in other countries allow for innovation These innovation often travel across borders
The internet is obviously one reason Personal travel Companies finding limited growth options at home

Entry barriers
Tariff Non-tariff

National and Competitive Advantage

Source: Adapted from M.E. Porter, The Competitive Advantage of Nations, Harvard Business Review, March-April, 1990, p. 77.