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In 2000 there were 109 million wireless subscribers in the United States. By 2014 the number had risen to
almost 360 million, representing a penetration rate of 108% (some people had multiple phones). Moreover,
smartphone penetration had risen from 37% of the population in 2010 to 83% by 2014. Today four companies
dominate the industry; Verizon with 38% of the market, AT&T with 33%, Sprint with 15% and T-Mobile
also with 15%. Much of the consolidation has been achieved through mergers and acquisitions. With the
market now saturated, and regulators blocking any further merger attempts, competition is increasingly based
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2
Chapter 2: External Analysis: The Identification of Opportunities and Threats
on price. In signs that the price war is starting to hurt the industry, in December both AT&T and Verizon
warned investors that their profits might take a hit going forward due to declining average revenues per
customer and high capital expenditures.
Teaching Note:
Companies in the wireless telecommunications industry must analyze the forces that shape competition and
the external industry environment.
• What are the threats and opportunities for the four major players in this field?
• With competition increasingly based on price, how do companies respond and remain profitable?
• Discuss how service providers are dealing market saturation.
Lecture Outline
I. Overview
Strategy formulation begins with an analysis of the forces that shape competition within the industry in which
a company is based. The goal is to understand the opportunities and threats confronting the firm, and to use
this understanding to identify strategies that will enable the company to outperform its rivals. Opportunities
arise when a company can take advantage of conditions in its industry environment to formulate and
implement strategies that enable it to become more profitable. Threats arise when conditions in the external
environment endanger the integrity and profitability of the company’s business.
II. Defining an Industry
An industry can be defined as a group of companies offering products or services that are close substitutes
for each other - that is, products or services that satisfy the same basic customer needs. A competitor’s closest
competitors - its rivals - are those that serve the same basic consumer needs. External analysis begins by
identifying the industry within which a company competes. To do this, managers must start by looking at the
basic customer needs their company is serving - that is, they must take a customer-oriented view of their
business rather than a product-oriented view.
A. Industry and Sector
A distinction can be made between an industry and a sector. A sector is a group of closely related
industries. For example, the computer sector comprises several related industries - the computer
component industries, the computer hardware industries, and the computer software industry (Figure
2.1).
Figure 2.1: The Computer Sector: Industries and Segments
A. Industry and Market Segments
It is also important to recognize the difference between an industry and the market segments within that
industry. Market segments are distinct groups of customers within a market than can be differentiated
3
from each other on the basis of their individual attributes and specific demands.
B. Changing Industry Boundaries
Industry boundaries may change over time as customer needs evolve, or as emerging new technologies
enable companies in unrelated industries to satisfy established customer needs in new ways. Industry
competitive analysis begins by focusing upon the overall industry in which a firm competes before
market segments or sector-level issues are considered.
III. Competitive Forces Model
Once boundaries of an industry have been identified, managers face the task of analyzing competitive forces
within the industry environment in order to identify opportunities and threats. Michael E. Porter’s well-
known framework, the Five Forces model, helps managers with this analysis. An extension of his model,
shown in Figure 2.2, focuses on six forces that shape competition within an industry:
• The risk of entry by potential competitors
• The intensity of rivalry among established companies within an industry
• The bargaining power of buyers
• The bargaining power of suppliers
• The closeness of substitutes to an industry’s products
• The power of complement providers (Porter did not recognize this sixth force)
Figure 2.2: Competitive Forces
As each of these forces grows stronger, it limits the ability of established companies to raise prices and earn
greater profits. Within this framework, a strong competitive force can be regarded as a threat because it
depresses profits.
A. Risk of Entry by Potential Competitors
Potential competitors are companies that are not currently competing in an industry, but have the
capability to do so if they choose. Established companies already operating in an industry often attempt
to discourage potential competitors from entering the industry because as more companies enter, it
becomes more difficult for established companies to protect their share of the market and generate
profits. A high risk of entry by potential competitors represents a threat to the profitability of
established companies. If the risk of new entry is low, established companies can take advantage of this
opportunity, raise prices, and earn greater returns.
The risk of entry by potential competitors is a function of the height of the barriers to entry, that is,
factors that make it costly for companies to enter an industry. The greater the costs potential
competitors must bear to enter an industry, the greater the barriers to entry, and the weaker this
competitive force. High entry barriers may keep potential competitors out of an industry even when
industry profits are high. Important barriers to entry include economies of scale, brand loyalty, absolute
cost advantages, customer switching costs, and government regulation.
4
1. Economies of scale
Economies of scale arise when unit costs fall as a firm expands its output. Sources of economies
include:
• Cost reductions gained through mass-producing a standardized output
• Discounts on bulk purchases of raw material inputs and component parts
• The advantages gained by spreading fixed production costs over a large production
volume
• The cost savings associated with distributing marketing and advertising costs over a large
volume of output
2. Brand Loyalty
Brand loyalty exists when consumers have a preference for the products of established
companies. A company can create brand loyalty by continuously advertising its brand-name
products and company name, patent protection of its products, product innovation achieved
through company research and development programs, an emphasis on high quality products,
and exceptional after-sales service. Significant brand loyalty makes it difficult for new entrants
to take market share away from established companies.
3. Absolute Cost Advantages
Sometimes established companies have an absolute cost advantage relative to potential

entrants, meaning that entrants cannot expect to match the established companies’ lower cost
structure. Absolute cost advantages arise from three main sources:
• Superior production operations and processes due to accumulated experience, patents, or
trade secrets
• Control of particular inputs required for production, such as labor, materials, equipment,
or management skills that are limited in their supply
• Access to cheaper funds because existing companies represent lower risks than new
entrants
4. Customer Switching Costs
Switching Costs arise when a customer invests time, energy, and money switching from the
products offered by one established company to the products offered by a new entrant. When
switching costs are high, customers can be locked in to the product offerings of established
companies, even if new entrants offer better products.
5. Government Regulations
Historically, government regulation has constituted a major entry barrier for many industries.
The competitive forces model predicts that falling entry barriers due to government deregulation
will result in significant new entry, an increase in the intensity of industry competition, and
5
lower industry profit rates.
If established companies have built brand loyalty for their products, have an absolute cost
advantage over potential competitors, have significant scale economies, are the beneficiaries of
high switching costs, or enjoy regulatory protection, the risk of entry by potential competitors is
greatly diminished; it is a weak competitive force. Consequently, established companies can
charge higher prices, and industry profits are therefore higher.
Strategy in Action 2.1

Circumventing Entry Barriers into the Soft Drink Industry
The soft drink industry has long been dominated by two companies, Coca-Cola and PepsiCo. Both companies
have historically spent large sums of money on advertising and promotion, which has created significant
brand loyalty and made it very difficult for prospective new competitors to enter the industry and take market
share away from these two giants. When new competitors do try and enter, both companies have shown
themselves capable of responding by cutting prices, forcing the new entrant to curtail expansion plans.
However, in the early 1990s the Cott Corporation, then a small Canadian bottling company, worked out a
strategy for entering the soft drink market. The company used a deal with RC Cola to enter the cola segment
of the soft drink market. Cott next introduced a private label brand for a Canadian retailer. Both of these
offerings took share from Coke and Pepsi. Cott then decided to try and convince other retailers to carry
private label cola. Cott spent almost nothing on advertising and promotion. These cost savings were passed
onto retailers in the form of lower prices. For their part, the retailers found that they could significantly
undercut the price of Coke and Pepsi colas, and still make better profit margins on private label brands than
on branded colas.
Despite the savings, many retailers were leery of offending Coke and Pepsi and declined to offer a private
label. Cott was able to establish a relationship with Walmart as it was entering the grocery market. The
“President’s Label” became very popular. Cott soon added other flavors to its offering, such as a lemon lime
soda that would compete with Seven Up and Sprite. Moreover, pressured by Walmart, by the late 1990s other
U.S. grocers also started to introduce private label sodas, often turning to Cott to supply their needs.
By 2010, Cott had grown to become a $1.8 billion company, capturing over 6% of the U.S. soda market up
from almost nothing a decade earlier, and held onto a 15% share of sodas in grocery stores, its core channel.
The losers in this process were Coca-Cola and Pepsi Cola, who were now facing the steady erosion of their
brand loyalty and market share as consumers increasingly came to recognize the high quality and low price of
private label sodas.
6
Teaching Note:
As this case illustrates, entry barriers can be effective in discouraging new entrants; however, they can be
circumvented. Cott was able to enter a much closed industry through a combination of its own efforts and the
changes brought to the industry environment by the advent of Walmart. You can use this case in a classroom
discussion to identify entry barriers in other industries. Another approach is to ask students to consider the
lessons that other industries might learn from Cott. What did Cott do to lower entry barriers, and how could
those tactics be used in another context?
B. Rivalry Among Established Companies
The second competitive force is the intensity of rivalry among established companies within an
industry. Rivalry refers to the competitive struggle between companies within an industry to gain
market share from each other. Four factors have a major impact on the intensity of rivalry among
established companies within an industry:
• Industry competitive structure
• Demand conditions
• Cost conditions
• The height of exit barriers in the industry
1. Industry Competitive Structure
The competitive structure of an industry refers to the number and size distribution of companies
in it, something that strategic managers determine at the beginning of an industry analysis.
Industry structures vary, and different structures have different implications for the intensity of
rivalry. A fragmented industry consists of a large number of small or medium-sized companies.
A consolidated industry is dominated by a small number of large companies (an oligopoly) or, in
extreme cases, by just one company (a monopoly), and companies often are in a position to
determine industry prices.
Low-entry barriers and commodity-type products that are difficult to differentiate characterize
many fragmented industries. This combination tends to result in boom-and-bust cycles as
industry profits rapidly raise and fall. Low-entry barriers imply that new entrants will flood the
market, hoping to profit from the boom that occurs when demand is strong and profits are high.
Often the flood of new entrants into a booming, fragmented industry creates excess capacity, and
companies start to cut prices in order to use their spare capacity. The difficulty company’s face
when trying to differentiate their products from those of competitors can exacerbate this
tendency. The result is a price war, which depresses industry profits, forces some companies out
of business, and deters potential new entrants.
A fragmented industry structure, then, constitutes a threat rather than an opportunity. Economic
boom times in fragmented industries are often relatively short-lived because the ease of new
entry can soon result in excess capacity, which in turn leads to intense price competition and the
failure of less efficient enterprises.
7
In consolidated industries, companies are interdependent because one company’s competitive

actions (changes in price, quality, etc.) directly affect the market share of its rivals, and thus their
profitability. When one company makes a move, this generally “forces” a response from its
rivals, and the consequence of such competitive interdependence can be a dangerous competitive
spiral.
Companies in consolidated industries sometimes seek to reduce this threat by following the
prices set by the dominant company in the industry. However, companies must be careful, for
explicit face-to-face price-fixing agreements are illegal.
Strategy in Action 2.2

Price Wars in the Breakfast Cereal Industry
The breakfast cereal industry in the U.S. was one of the most profitable and desirable competitive
environments, with steadily rising demand, brand loyalty, and close relationships with buyers (grocery
retailers). Best of all, the industry was dominated by just three competitors, Kellogg’s, General Mills, and
Kraft Foods. Kellogg’s, controlled 40% of the market share and was a price leader. It raised prices a bit each
year, and the smaller companies followed suit. Then the industry structure changed. Huge discounters began
to promote cheaper private brands and bagels or muffins replaced cereal as the preferred breakfast food.
Under pressure, the big manufacturers began a price war, ending the tacit price collusion that had kept the
industry stable and profitable. Although profit margins were slashed in half, the big three continued to lose
market share to private brands. What was once a desirable industry is now exactly like most others -
competitive, unstable, and far less profitable.
Teaching Note:
This case illustrates the sad outcomes that result when industry competitors react to increased pressure by
breaking off tacit price collusion. You should be sure to emphasize to students the difference between tacit
price collusion, which is indirect and therefore legal, and price fixing, which is overt and therefore illegal.
The message here is that a well-run industry, with sustained high profitability and stability for all competitors,
can fall victim to powerful external forces. An interesting discussion question would be to ask students, “Is
there any action the big three competitors can take now to undo the damage and recover their profitability?”
If students suggest any action that they believe will restore the situation, ask them how the other competitors
would be likely to react. For example, if students suggest a one-sided price increase, ask them if competitors
would be likely to follow suit. Students may be surprised to realize how difficult it is to “put the genie back in
the bottle”; once trust is destroyed, an industry may never be able to recreate stability and prosperity.
2. Industry Demand
The level of industry demand is another determinant of the intensity of rivalry among established
companies. Growing demand tends to reduce rivalry because all companies can sell more
without taking market share away from other companies. Demand declines when customers exit
the marketplace, or when each customer purchases less.
8
2. Cost Conditions
The cost structure of firms in an industry is a third determinant of rivalry. In industries where
fixed costs are high, profitability tends to be highly leveraged to sales volume, and the desire to
grow volume can spark intense rivalry. In situations where demand is not growing fast enough
and too many companies are simultaneously engaged in the same actions, the result can be
intense rivalry and lower profits.
3. Exit Barriers
Exit Barriers are economic, strategic, and emotional factors that prevent companies from leaving
an industry. If exit barriers are high, companies become locked into an unprofitable industry
where overall demand is static or declining. The result is often excess productive capacity,
leading to even more intense rivalry and price competition as companies cut prices attempting to
obtain the customer orders needed to use their idle capacity and cover their fixed costs. Common
exit barriers include the following:
• Investments in assets such as specific machines, equipment, or operating facilities that are
of little or no value in alternative uses, or cannot be later sold.
• High fixed costs of exit, such as severance pay, health benefits, or pensions that must be
paid to workers, who are being laid off when a company ceases to operate.
• Emotional attachments to an industry, such as when a company’s owners or employees are
unwilling to exit from an industry for sentimental reasons or because of pride.
• Economic dependence on the industry because a company relies on a single industry for
its entire revenue and all profits.
• The need to maintain an expensive collection of assets at or above a minimum level in
order to participate effectively in the industry.
• Bankruptcy regulations, particularly in the United States, where bankruptcy provisions
allow insolvent enterprises to continue operating and to reorganize under this protection.
These regulations can keep unprofitable assets in the industry, result in persistent excess
capacity, and lengthen the time required to bring industry supply in line with demand.
C. The Bargaining Power of Buyers
The third competitive force is the bargaining power of buyers. An industry’s buyers may be the
individual customers who consume its products (end-users) or the companies that distribute an
industry’s products to end-users, such as retailers and wholesalers. The bargaining power of buyers
refers to the ability of buyers to bargain down prices charged by companies in the industry, or to raise
the costs of companies in the industry by demanding better product quality and service. Powerful
buyers, therefore, should be viewed as a threat. Buyers are most powerful in the following
circumstances:
• When the buyers have choice of who to buy from.
• When the buyers purchase in large quantities. In such circumstances, buyers can use their
purchasing power as leverage to bargain for price reductions.
9
• When the supply industry depends upon buyers for a large percentage of its total orders.
• When switching costs are low and buyers can pit the supplying companies against each other to
force down prices.
• When it is economically feasible for buyers to purchase an input from several companies at once
so that buyers can pit one company in the industry against another.
• When buyers can threaten to enter the industry and independently produce the product, thus
supplying their own needs, also a tactic for forcing down industry prices.
D. The Bargaining Power of Suppliers
The fourth competitive force is the bargaining power of suppliers - the organizations that provide
inputs into the industry, such as materials, services, and labor (which may be individuals, organizations
such as labor unions, or companies that supply contract labor). The bargaining power of suppliers
refers to the ability of suppliers to raise input prices, or to raise the costs of the industry in other ways,
for example, by providing poor-quality inputs or poor service. Powerful suppliers squeeze profits out of
an industry by raising the costs of companies in the industry. Thus, powerful suppliers are a threat. As
with buyers, the ability of suppliers to make demands on a company depends on their power relative to
that of the company. Suppliers are most powerful in these situations:
• The product that suppliers sell has few substitutes and is vital to the companies in an industry.
• The profitability of suppliers is not significantly affected by the purchases of companies in a
particular industry, in other words, when the industry is not an important customer to the
supplier.
• Companies in an industry would experience significant switching costs if they moved to the
product of a different supplier because a particular supplier’s products are unique or different.
• Suppliers can threaten to enter their customers’ industry and use their inputs to produce products
that would compete directly with those of companies already in the industry.
• Companies in the industry cannot threaten to enter their suppliers’ industry and make their own
inputs as a tactic for lowering the price of inputs.
E. Substitute Products
The final force in Porter’s model is the threat of substitute products - the products of different
businesses or industries that can satisfy similar customer needs. The existence of close substitutes is a
strong competitive threat because this limits the price that companies in one industry can charge for
their product, which also limits industry profitability.
F. Complementors
Complementors are 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. When the number of complementors is increasing and producing attractive complementary
products, demand increases and profits in the industry can broaden opportunities for creating value.
Conversely, if complementors are weak, and are not producing attractive complementary products,
they can become a threat, slowing industry growth and limiting profitability. It’s also possible for
10
complementors to gain so much power that they are able to extract profit out of the industry they are
providing complements to. Complementors this strong can be a competitive threat.
G. Summary: Why Industry Analysis Matters
The analysis of forces in the industry environment using the competitive forces framework is a
powerful tool that helps managers to think strategically. It is important to recognize that one
competitive force often affects others, and all forces need to be considered when performing industry
analysis. Industry analysis inevitably leads managers to think systematically about strategic choices.
An analysis of industry opportunities and threats leads directly to a change in strategy by companies
within the industry. This is the crucial point - analyzing the industry environment in order to identify
opportunities and threats leads logically to a discussion of what strategies should be adopted to exploit
opportunities and counter threats.
IV. Strategic Groups within Industries
Companies in an industry often differ significantly from one another with regard to the way they strategically
position their products in the market. Factors such as the distribution channels they use, the market segments
they serve, the quality of their products, technological leadership, customer service, pricing policy,
advertising policy, and promotions affect product position.
Figure 2.3: Strategic Groups in the Commercial Aerospace Industry
Normally, the basic differences between the strategies that companies in different strategic groups use can be
captured by a relatively small number of factors.
A. Implications of Strategic Groups
The concept of strategic groups has a number of implications for the identification of opportunities and
threats within an industry:
• Because all companies in a strategic group are pursuing a similar strategy, customers tend to
view the products of such enterprises as direct substitutes for each other. Thus, a company’s
closest competitors are those in its strategic group.
• Different strategic groups can have different relationships to each of the competitive forces; thus,
each strategic group may face a difference set of opportunities and threats.
B. The Role of Mobility Barriers
Some strategic groups are more desirable than others because competitive forces open up greater
opportunities and present fewer threats for those groups. Managers, after analyzing their industry,
might identify a strategic group where competitive forces are weaker and higher profits can be made.
Sensing an opportunity, they might contemplate changing their strategy and move to compete in that
strategic group. However, taking advantage of this opportunity may be difficult because of mobility
barriers between strategic groups.
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Mobility barriers are within-industry factors that inhibit movement of companies between strategic
groups. They include the barriers to entry into a group and the barriers to exit from a company’s
existing group. Managers should be aware that companies based in another strategic group within their
industry might ultimately become their direct competitors if they can overcome mobility barriers.
V. Industry Life-Cycle Analysis
Changes that take place in an industry over time are an important determinant of the strength of the
competitive forces in the industry( and of the nature of opportunities and threats). The similarities and
differences between companies in an industry often become more pronounced over time, and its strategic
group structure frequently changes. The strength and nature of each of the competitive forces also change as
an industry evolves, particularly the two forces of risk of entry by potential competitors and rivalry among
existing firms.
A useful tool for analyzing the effects that industry evolution has on competitive forces is the industry life-
cycle model. This model identifies five sequential stages in the evolution of an industry that lead to five
distinct kinds of industry environment - embryonic, growth, shakeout, mature, and decline (Figure 2.4).
Figure 2.4: Stages in the Industry Life Cycle
A. Embryonic Industries
An embryonic industry refers to an industry just beginning to develop. Growth at this stage is slow
because of factors such as buyers’ unfamiliarity with the industry’s product, high prices due to the
inability of companies to reap any significant scale economies, and poorly developed distribution
channels. Barriers to entry tend to be based on access to key technological knowhow, rather than cost
economies or brand loyalty. Rivalry in embryonic industries is based not so much on price as on
educating customers, opening up distribution channels, and perfecting the design of the product.
B. Growth Industries
Once demand for the industry’s product begins to increase, the industry develops the characteristics of
a growth industry. In a growth industry, first-time demand is expanding rapidly as many new
customers enter the market. Typically, an industry grows when customers become familiar with the
product, prices fall because scale economies have been attained, and distribution channels develop.
High growth usually means that new entrants can be absorbed into an industry without a marked
increase in the intensity of rivalry. Thus, rivalry tends to be relatively low. Rapid growth in demand
enables companies to expand their revenues and profits without taking market share away from
competitors.
C. Industry Shakeout
Explosive growth cannot be maintained indefinitely. Sooner or later, the rate of growth slows, and the
industry enters the shakeout stage. In the shakeout stage, demand approaches saturation levels - more
12
and more of the demand is limited to replacement because fewer potential first-time buyers remain.
As an industry enters the shakeout stage, rivalry between companies can become intense. Typically,
companies that have become accustomed to rapid growth continue to add capacity at rates consistent
with past growth. However, demand is no longer growing at historic rates, and the consequence is the
emergence of excess productive capacity. This condition is illustrated in Figure 2.5, where the solid
curve indicates the growth in demand over time and the broken curve indicates the growth in
productive capacity over time.
Figure 2.5: Growth in Demand and Capacity
D. Mature Industries
The shakeout stage ends when the industry enters its mature stage - the market is totally saturated,
demand is limited to replacement demand, growth is low or zero. Typically, the growth that remains
comes from population expansion, bringing new customers into the market or increasing replacement
demand. As an industry enters maturity, barriers to entry increase, and the threat of entry from potential
competitors decreases. As growth slows during the shakeout, companies can no longer maintain
historic growth rates merely by holding on to their market share. As a result of the shakeout, most
industries in the maturity stage consolidate and become oligopolies. In mature industries, companies
tend to recognize their interdependence and try to avoid price wars.
E. Declining Industries
Eventually, most industries enter a stage of decline - growth becomes negative for a variety of reasons,
including technological substitution, social changes, demographics, and international competition.
Within a declining industry, the degree of rivalry among established companies usually increases.
Depending on the speed of the decline and the height of exit barriers, competitive pressures can
become as fierce as in the shakeout stage.
F. Summary
A third task of industry analysis is to identify the opportunities and threats that are characteristic of
different kinds of industry environments in order to develop effective strategies. Managers have to
tailor their strategies to changing industry conditions.
VI. Limitations of Models for Industry Analysis
The competitive forces, strategic groups, and life-cycle models provide useful ways of thinking about and
analyzing the nature of competition within an industry to identify opportunities and threats. However, each
has its limitations, and managers must be aware of their shortcomings.
A. Life-Cycle Issues
It is important to remember that the industry life-cycle model is a generalization. In practice, industry
13
life-cycles do not always follow the pattern illustrated in Figure 2.4. In some cases, growth is so rapid
that the embryonic stage is skipped altogether. In others, industries fail to get past the embryonic stage.
Industry growth can be revitalized after long periods of decline through innovation or social change.
The time span of these stages can also vary significantly from industry to industry. Some industries can
stay in maturity almost indefinitely if their products are viewed as basic necessities, as is the case for
the car industry. Other industries skip the mature stage and go straight into decline, as in the case of the
vacuum tube industry.
B. Innovation and Change
Over any reasonable length of time, in many industries competition can be viewed as a process driven
by innovation. Innovation is frequently the major factor in industry evolution and causes a company’s
movement through the industry life-cycle. Innovation is attractive because companies that pioneer new
products, processes, or strategies can often earn enormous profits.
Successful innovation can transform the nature of industry competition. In recent decades, one frequent
consequence of innovation has been to lower the fixed costs of production, thereby reducing barriers to
entry and allowing new, and smaller, enterprises to compete with large established organizations.
Michael Porter, talks of innovations as “unfreezing” and “reshaping” industry structure. He argues that
after a period of turbulence triggered by innovation, the structure of an industry once more settles down
into a fairly stable pattern, and the five forces and strategic group concepts can once more be applied.
This view of the evolution of industry structure is often referred to as “punctuated equilibrium.” The
punctuated equilibrium view holds that long periods of equilibrium (refreezing), when an industry’s
structure is stable, are punctuated by periods of rapid change (unfreezing), when industry structure is
revolutionized by innovation.
Figure 2.6 shows what punctuated equilibrium might look like for one key dimension of industry
structure: competitive structure. During a period of rapid change when industry structure is being
revolutionized by innovation, value typically migrates to business models based on new positioning
strategies.
Figure 2.6: Punctuated Equilibrium and Competitive Structure
C. Company Differences
Another criticism of industry models is that they overemphasize the importance of industry structure as
a determinant of company performance, and underemphasize the importance of variations or
differences among companies within an industry or a strategic group. Research by Richard Rumelt and
his associates, for example, suggests that industry structure explains only about 10% of the variance in
profit rates across companies. This implies that individual company differences explain much of the
remainder. Other studies have estimated the explained variance at about 20%, which is still not a large
figure. These studies suggest that a company’s individual resources and capabilities may be more
important determinants of its profitability than the industry or strategic group of which the company is
14
a member.
Although the findings do not invalidate the competitive forces and strategic group models, they do
imply that the models are imperfect predictors of enterprise profitability. A company will not be
profitable just because it is based in an attractive industry or strategic group.
VII. The Macroenvironment
Just as the decisions and actions of strategic managers can often change an industry’s competitive structure,
so too can changing conditions or forces in the wider macroenvironment; that is, the broader economic,
technological, demographic, social, and political context in which companies and industries is embedded
(Figure 2.7). Changes in the forces within the macroenvironment can have a direct impact on any or all of the
forces in Porter’s model, thereby altering the relative strength of these forces as well as the attractiveness of
an industry.
Figure 2.7: The Role of the Macroenvironment
A. Macroeconomic Forces
The four most important macroeconomic forces are the growth rate of the economy, interest rates,
currency exchange rates, and inflation (or deflation) rates.
• Economic growth, because it leads to an expansion in customer expenditures, tends to ease
competitive pressures within an industry. This gives companies the opportunity to expand their
operations and earn higher profits.
• Interest rates can determine the demand for a company’s products. Interest rates are important
whenever customers routinely borrow money to finance their purchase of these products.
• Currency exchange rates define the comparative value of different national currencies.
Movement in currency exchange rates has a direct impact on the competitiveness of a company’s
products in the global marketplace.
• Price inflation can destabilize the economy, producing slower economic growth, higher interest
rates, and volatile currency movements. If inflation continues to increase, investment planning
will become hazardous.
o Price deflation also has a destabilizing effect on economic activity. If prices fall, the real
price of fixed payments goes up. This is damaging for companies and individuals with a
high level of debt who must make regular fixed payments on that debt. In a deflationary
environment, the increase in the real value of debt consumes more household and
corporate cash flows, leaving less for other purchases and depressing the overall level of
economic activity.
B. Global Forces
Over the last half-century there have been enormous changes in the world’s economic system. The
important points to note are that barriers to international trade and investment have tumbled, and more
and more countries have enjoyed sustained economic growth. Falling barriers to international trade and
investment have made it much easier to enter foreign nations. By the same token, however, falling
15
barriers to international trade and investment have made it easier for foreign enterprises to enter the
domestic markets of many companies (by lowering barriers to entry), thereby increasing the intensity
of competition and lowering profitability. Because of these changes, many formerly isolated domestic
markets have now become part of a much larger, more competitive global marketplace, creating both
threats and opportunities for companies.
C. Technological Forces
Over the last few decades the pace of technological change has accelerated... This has unleashed a
process that has been called a “perennial gale of creative destruction.” Technological change can make
established products obsolete overnight, and simultaneously create a host of new product possibilities.
Thus technological change is both creative and destructive - both an opportunity and a threat. The
impacts of technological change can affect the height of barriers to entry and therefore radically
reshape industry structure.
D. Demographic Forces
Demographic forces are outcomes of changes in the characteristics of a population, such as age,
gender, ethnic origin, race, sexual orientation, and social class. Like the other forces in the general
environment, demographic forces present managers with opportunities and threats and can have major
implications for organizations.
E. Social Forces
Social forces refer to the way in which changing social mores and values affect an industry. Like the
other macroenvironmental factors, social change creates opportunities and threats.
F. Political and Legal Forces
Political and legal forces are outcomes of changes in laws and regulations, and significantly affect
managers and companies. Political processes shape a society’s laws, which constrain the operations of
organizations and managers and thus create both opportunities and threats.
Answers to Discussion Questions
1. Under what environmental conditions are price wars most likely to occur in an industry? What are the
implications of price wars for a company? How should a company try to deal with the threat of a price
war? Price wars are most likely to occur when the following conditions are present in an industry:
• The product is a commodity
• Exit barriers are substantial
• Excess capacity exists
• The industry is consolidated
• Demand is declining
16
A price war constitutes a strong threat. It is difficult for companies that market commodity-type
products to build brand loyalty; therefore, competition tends to focus on price. High exit barriers make
it hard for companies to eliminate excess capacity through plant closings. In turn, the persistence of
excess capacity leads to price cuts, as companies strive to generate enough demand to utilize their ideal
capacity and cover fixed costs. In a consolidated industry, interdependence implies that one company’s
price cuts will elicit a response from its rivals, producing a downward spiral of prices. And it is
declining demand that produces excess capacity and sparks off a price war in the first place. If all these
conditions are present a severe price war is likely.
Survival depends on a company’s ability to reduce operating costs and build brand loyalty so that it can
retain its customers and still make profits when those of its competitors have dried up. Furthermore, the
risk of a damaging price war can be reduced if the company can successfully enter into tacit price
agreements with its competitors and if it can stress non-price factors when competing. As demand
declines, however, tacit price agreements can be difficult to maintain. Finally, if excess capacity is the
major reason for a price war, capacity reduction agreements between competitors, or mergers between
competitors followed by the elimination of excess capacity, may be suitable strategies for attacking this
problem.
2. Discuss the competitive forces model with reference to what you know about the global market for
commercial jet aircraft (see the Opening Case). What does the model tell you about the level of
competition in this industry?
Potential competitors:
Recent high profitability and an enormous surge in demand for new aircraft are driven primarily by
demand for air travel worldwide and there is room for new entrants. Barriers to entry are that Embraer
and Bombardier are focused primarily on regional market, and the market for aircraft with more than
100 seats has been totally dominated by Boeing and Airbus.
Rivalry among established companies:

Rivalry between Boeing, Airbus and the three new entrants is minimal. All three are building narrow-
bodied jets with a seat capacity between 100 and 190. Boeing’s 737 and the Airbus A320 currently
dominate the narrow-bodied segment. The Commercial Aircraft Corporation of China (Comac) is
building a 170- to 190-seat narrow-bodied jet, scheduled for introduction in 2016.
Bargaining power of buyers:

Consumers have little power in the large commercial jet aircraft industry. However, when substitutes
are available they are able bargain down prices as was done historically in the industry.
Bargaining power of suppliers:

Suppliers in the large commercial jet aircraft have little power. Suppliers are also threatened by
potential and existing substitutes.
17
3. Identify a growth industry, a mature industry, and a declining industry. For each industry, identify the
following: (a) the number and size distribution of companies; (b) the nature of barriers to entry; (c) the
height of barriers to entry; and (d) the extent of product differentiation. What do these factors tell you
about the nature of competition in each industry? What are the implications for the company in terms
of opportunities and threats?
Students’ answers will vary depending on the companies they select. For example, growth industries
might include the personal computer industry, the computer software industry, and the nursing home
industry. Mature industries include the auto industry, the airline industry, and the beer industry.
Declining industries include the tobacco industry, the sugar industry, and the steel industry.
Growth industries tend to have many firms and are relatively fragmented. Barriers to entry may center
on access to technological know-how, but overall, are low. Product differentiation also tends to be
relatively low. Mature and declining industries have fewer firms and are more consolidated than
growth industries. In addition, they have much higher barriers to entry, in the form of cost economies
and brand loyalties. Product differentiation in mature and declining industries becomes much greater as
an industry approaches maturity.
These changes reveal that the nature of competition in an industry also changes as the industry moves
from growth through maturity and into decline. Specifically, a growth industry is characterized by
relatively benign competitive pressures. Mature industries are characterized by an emphasis on
nonprice competition as a means of avoiding damaging price wars, although price wars may break out
from time to time. Competition in a declining industry depends on the speed of decline and the height
of exit barriers. The faster the decline and the higher the exit barrier, the more intense is the
competition within a declining industry.
4. Assess the impact of macroenvironmental factors on the likely level of enrollment at your university
over the next decade. What are the implications of these factors for the job security and salary level of
your professors?
The most significant macroenvironmental factor on the likely level of enrollment at a university is to be
found in the demographic environment. In the 1980s and early 1990s, many universities experienced a
decline in enrollments due to the declining birthrate in the 1960s and 1970s. Starting in the late 1990s,
however, enrollments had risen as a result of the “baby boomlet” that occurred when the children of the
Baby Boomers entered their late teen years.
Rising enrollments led to increased demand for higher education. Universities are now able to increase
their admission standards and smaller, regional schools are absorbing some of the excess demand. In
addition, the economic downturn has led to an increase in older students returning to school for
degrees, especially in business and other professions. On the negative side, legislative spending is
lower, because state tax revenues are less. Universities are thus stuck in the position of trying to
increase offerings while also reducing costs. Many colleges are responding by hiring more faculty, but
paying less, which they can accomplish by increasing the number of temporary, adjunct, or graduate
student faculty members.
18
MindTap
Cengage offers additional online activities, assessments and resources inside MindTap, our online learning
platform. The following activities can be assigned within MindTap for students to complete.
Branching Exercise
Branching Exercises are real-world activities that allow each student to work through challenges by choosing
from different decision-making options. These exercises provide students with the opportunity to practice
strategic management in a business scenario utilizing company case studies. Students are placed in the role of
a decision maker and asked to consider the needs and priorities of stakeholders as they determine strategy
recommendations for a company.
Air Express Industry
The small package express delivery industry is that segment of the broader postal and cargo industries that
specialize in rapid delivery (1-3 days) of small packages (under 150lbs). By the 1990s, the industry had
stabilized with four organizations. Gr8 Ship (pronounced Great Ship) is a brand new company that is
considering entering the air express industry. The company’s leadership team has asked you to provide an
industry analysis, providing insights from the past 40 years to serve as a foundation for the new business’
strategic plan.
Students will be asked to assess the life-cycle stage of the industry and to provide an industry analysis,
providing insights from the past 40 years to serve as a foundation for the new business’ strategic plan. After
the initial decision is made, students will be presented with several more opportunities to make decisions that
will include identifying and handling different types of competitive forces and choosing a business-level
strategy based on the effects of competitive forces.
Students will review these concepts:

• Industry life-cycle
• The power of buyers
• Substitution business model
• Macroenvironment
The ideal path that earns a perfect score is the following:

• Identify the express delivery industry as a mature consolidated industry
• Competitive force is the bargaining power of buyers
• Maximize impact of technological forces
• Choose to integrate better with customers
19
Experiential Exercise
Legalization of Marijuana
The purpose of this exercise is to practice utilizing Porter’s Five Forces Model and the life cycle model
of industry analysis. You will also identify relevant macroenvironment factors. You may also consider
using the SWOT checklist table to identify some common environmental opportunities and threats.
You live in Colorado, which legalized the sale of marijuana for recreational use in 2012. The change in
laws has offered you an opportunity to open a business that sells marijuana and legal accessories. You
have a group that is considering investment in your new company. They want to see that you understand
an industry’s life-cycle and that you have planned on how to manage your company as the industry
moves through the Embryonic stage into the Growth stage. As one of the most crucial components of the
business plan, your potential investors have requested an external analysis. Your external analysis has
the purpose of identifying the opportunities and threats for this new industry and your new business.
Teams must integrate the information from your analysis into a 3 -5 page summary and make a
recommendation on how:
1. You will overcome any barriers to entry into this industry
2. You will raise the entry barriers to this industry in order to reduce the threat of new competition
3. You will modify the intensity of competition in the industry?
Media Quiz
The media quiz offers additional opportunities for students to apply the concepts in the chapter to a real -
world scenario as it is described in news reports.
Craft Brewing
The media quiz involves the craft brewing industry. The video demonstrates the challenges startups face
when competing with larger, more established brands and the competition for shelf space. This quiz will
reinforce concepts learned in this chapter including the competitive force of risk of entry by potential
competitors, understanding the industry macroenvironment, and the competitive forces model.
Closing Case
The Market for Large Commercial Jet Aircraft
Just two companies, Boeing and Airbus, have long dominated the market for large commercial jet air-craft. In
early 2012, Boeing planes accounted for 50% of the world’s fleet of commercial jet aircraft, and Airbus
planes accounted for 31%. The reminder of the global market was split between several smaller players,
including Embraer of Brazil and Bombardier of Canada, both of which had a 7% share. The overall market is
large and growing. Demand for new aircraft is driven primarily by demand for air travel, which has grown at
5% per annum compounded since 1980. Looking forward, Boeing predicts that between 2011 and 2031 the
world economy will grow at 3.2% per annum, and airline traffic will continue to grow at 5% per annum as
20
more and more people from the world’s emerging economies take to the air for business and pleasure trips.
Clearly, the scale of future demand creates an enormous profit opportunity for the two main incumbents,
Boeing and Airbus. With five producers rather than two in the market, it seems likely that competition will
become more intense in the narrow-bodied segment of the industry, which could well drive prices and profits
down for the big two incumbent producers.
Teaching Note:
This case illustrates how two companies, Boeing and Airbus, have dominated the market, the new entrants,
and their future in the market. The case also talks about the scale of future demands and the profit
opportunities. A class discussion could include the following questions:
1. Given future projections for demand, how do you think the industry as a whole will do over the next
twenty years? How might your forecast differ for the wide-bodied and narrow-bodied segments?
2. What can Boeing and Airbus do to deter further entry into this industry?
Answers to Case Discussion Question
1. Conduct a competitive forces analysis of the U.S. airline industry. What does this analysis tell you
about the causes of low profitability in this industry?
Students’ answers may vary. However, some of them may include the following points:
• Potential competitors: New entrants include building smaller, narrow-body jets.
• Bargaining power of buyers: Consumers have little power in the U.S airline industry.
However, when substitutes are available they are able to bargain down prices as was done
historically in the industry.
• Bargaining power of suppliers: Suppliers in the U.S airline industry have little power.
Suppliers are also threatened by potential and existing competitors.
2. Do you think there are any strategic groups in the U.S. airline industry? If so, what might they be? How
might the nature of competition vary from group to group?
Students answer will vary. While answering this question, they should keep in mind that within most
industries, it is possible to observe groups of companies in which each company follows a strategy that
is similar to that pursued by other companies in the group, but different from the strategy pursued by
companies in other groups. These different groups of companies are known as strategic groups.
3. Given your analysis, what strategies do you think an airline should adopt in order to improve its
chances of being persistently profitable?
Students’ answer will vary. In response to threats, Boeing and Airbus are developing new, fuel-
efficient versions of the 737 and A320 to try to keep operating costs down.
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organizations, I ask the Tribunal for permission, after the record has
been received, to state my attitude, if necessary, to just a few other
points today; first of all, to the question of the time during which the
Gestapo is to be considered criminal. In this connection I must
assert that at least until the year 1939 the Gestapo was a lawful,
legally established institution. It is also true that the Indictment
refers to crimes which can be charged to the Gestapo only after the
autumn of 1939, that is, after the beginning of the war.
Today the Prosecution have furthermore excluded secretarial and
office workers from the Indictment. I am in agreement with this. It is
in accordance with the motion made by me already in December. I
submit further that not only the secretarial and office personnel but
also all other employees be excepted, because the reason for
dropping the charges against the office personnel is doubtless that
the Prosecution are convinced that this office personnel had nothing
to do with the crimes of which the Gestapo is accused.
It should also be considered whether the administrative officials
of the Gestapo, who represented about 70 percent of the personnel
of the Gestapo, should be excluded from the Indictment. All of the
500 applications received so far are from such administrative
officials. These officials were trained only in the field of
administration. They had neither the training nor the knowledge for
the making of criminal investigators. They could not be used for the
execution of any criminal actions, because they had no executive
power. They were active only in matters of personnel and finance—
personnel matters such as the appointment of officials, promotions,
dismissals, and so forth; matters of finance such as the
administering of budget funds, figuring out and compiling salary and
wage lists, renting of offices, et cetera. These are all things which
have nothing to do with executive power, and especially not with the
crimes imputed to the Gestapo by the Prosecution. In my opinion
these people are just as entitled to exemption as the secretarial and
office personnel, who have already been exempted by the
Prosecution.
I should like to touch briefly on one other point of view, that is,
the question of voluntary joining of an organization—a question
which has played an important role. On 7 June 1945 Mr. Justice
Jackson, in his statement to the President of the United States, said,
among other things, the following: Units such as the Gestapo and SS
were fighting units and consisted of volunteers—people especially
suited for and fanatically inclined to the plans of violence of these
units. To what extent that is true of the SS, I do not know. As far as
the Gestapo is concerned, it certainly is not true, for the Gestapo
was a State organization founded by the Defendant Göring on the
basis of the law of 23 April 1933. It was a police authority just as
was the Criminal Police whose duty it was to track down crimes or
the Regular Police who were responsible for controlling traffic. The
personnel consisted mostly of life-long career officials, some of
whom had been in the police service many years before the creation
of the Gestapo, and who, when this police organization was created
and in the ensuing years, were ordered to, detailed to, or transferred
to this police authority. According to the German law affecting civil
servants these officials were obliged to follow such orders. They had
never come voluntarily to the Gestapo. At the most there might
perhaps have been 1 percent who were voluntary members; but 99
percent of the members were forcibly ordered on the basis of this
law.
That is what I have to say at the moment. I should like, however,
to reserve for myself the right to speak some time later about
today’s discussions.
THE PRESIDENT: Yes, certainly. We will adjourn now.
[The Tribunal adjourned until 1 March 1946 at 1000 hours.]
SEVENTY-FIRST DAY
Friday, 1 March 1946
Morning Session
THE PRESIDENT: At the conclusion of the argument on the
organizations, which the Tribunal anticipates will finish before the
end of today’s session, the Tribunal will adjourn into closed session.
Tomorrow morning at 10 o’clock the Tribunal will sit in open session
for consideration of the applications for witnesses and documents by
the second four defendants. Will the defendant’s counsel who was in
the middle of his argument now continue? Dr. Merkel, had you
finished?
DR. MERKEL: Yes, Sir.
DR. MARTIN LÖFFLER (Counsel for the SA): May it please the
Tribunal: The objections and misgivings expressed yesterday by the
Defense regarding the criminal proceedings against the six accused
organizations are particularly applicable when judging the SA.
No other organization is so much exposed to the danger of a
sentence contrary to our sense of justice as is the SA. I ask the
Tribunal’s permission to submit the reasons for this fact.
The demand of the Prosecution that the SA should be declared a
criminal organization affects at least 4 million people at a
conservative estimate. The limitation according to groups approved
yesterday by Justice Jackson was gratifying and welcome; but it will
have no appreciable effect on the numbers since the groups
eliminated yesterday, the armed SA units and the bearers of the SA
Sports Badge, were not full members of the SA. The only persons so
far eliminated, therefore, are the SA Reserves. As no limitation
according to time was made, these criminal proceedings will include
everyone who ever belonged to the SA, even for a very short time,
during the 24 years between its establishment in 1921 and its
dissolution in 1945, that is to say, during a period of almost a
quarter of a century.
We heard yesterday from the Prosecution that the criminal acts
charged to the organizations are the same as those charged to the
main defendants, namely, Crimes against Peace, crimes against the
laws or customs of war, and Crimes against Humanity, as well as
participation in the common conspiracy.
If we now contemplate the possible participation of these 4
million former SA men in these four important categories of crime,
we get the following picture:
Crimes against the laws or customs of war are not charged to the
SA. It is true that the Prosecution presented an affidavit saying that
the SA also took part in guarding concentration camps and prisoner-
of-war camps and in supervising forced labor; but, according to the
presentation of the Prosecution, this did not occur until 1944 within
the framework of the total war raging at that time, and it has not
been charged that this activity of the SA involved any excesses or ill-
treatment.
In none of the atrocities reported here by witnesses and
documents did the SA with its 4 million members participate. The
few offenses against humanity charged to the SA by the Prosecution
and committed by individual members in the course of almost a
quarter of a century can in no way be compared with the serious
crimes against humanity of which we have heard here.
The occupation of the trade-union buildings by the SA, adduced
by the Prosecution as another point, took place on the order of
Reichsleiter Ley, who used the SA for this operation, and this
happened after the seizure of power.
Even the Prosecution did not assert that any outrages, ill-
treatment, or excesses occurred when this operation was carried
out. The fact that in connection with the seizure of power in the
spring of 1933 individual excesses occurred, and that the American
citizens Rosemann and Klauber, according to the affidavits submitted
by the Prosecution, were beaten on this occasion is certainly
regrettable. However, such excesses on the part of individual
persons are unavoidable in organizations comprising millions of
people and, considered by themselves, are hardly proper grounds for
declaring the entire organization criminal.
The participation, finally, of the SA as guard troops in
concentration camps is, according to the presentation of the
Prosecution, restricted to single exceptions and ended anyway in
1934. The commandant of the Concentration Camp Oranienburg,
according to the presentation of the Prosecution, was an SA Führer.
However it is not asserted that he committed any atrocities.
The second case, the ill-treatment of prisoners in the camp of
Hohnstein by SA and SS members in 1934 led to criminal
proceedings and the SA men guilty were sentenced to imprisonment
of up to 6 years.
As a last individual act there remains the participation of the SA
in the excesses during the night of 10 and 11 November 1938, when
the windows of Jewish stores were broken and the synagogues were
burned. Here, too, the plan and the order did not originate with the
SA. The SA was simply commissioned by the highest Party leadership
to carry out this order. Finally if we consider that during the political
struggles of 1921 to 1933 the old SA was involved in brawls—often
purely defensive—with political opponents and that it did not
develop into an organization with millions of members until after the
seizure of power, we arrive at the following conclusion, expressed in
figures:
On the basis of the presentation of the Prosecution at most 2
percent of all the indicted former SA members participated in
punishable individual actions; 98 percent of the 4 millions, according
to their conviction, kept their hands clean of any such punishable
individual acts.
Here, too, the Prosecution will not want to insist that the
excesses of these 2 percent considered by themselves should brand
the entire organization as criminal. These 98 percent, that is in
round numbers 3,900,000 former SA members, must nevertheless
defend themselves here against the charge of having participated in
the preparation of the war of aggression or in the planning or
execution of the common conspiracy, or, formulated more strongly,
against the charge of having belonged to organizations which
pursued these criminal purposes.
What is the result if we apply the definition of the criminal nature
of an organization as formulated yesterday by Justice Jackson and
Sir David Maxwell-Fyfe?
The SA members will acknowledge that the criteria under Points
1 and 2 as defined yesterday are also true for the SA, namely, that
the SA was an aggregation of numerous persons with collective aims
and a membership which was voluntary in principle. However, they
will strenuously deny the application of the Criteria 3, 4, and 5. Point
3 requires that the organization pursued objectively criminal aims in
the sense of Article 6 of the Charter. The millions of members, if
testifying here, would state that neither in the programs nor in the
speeches of their leaders had they been called upon to pursue such
criminal aims or methods. Whether the leaders of the SA pursued
such criminal aims in secret or not these people are not in a position
to judge. Whether such criminal aims were pursued secretly by the
leadership of the SA can be determined only by the Tribunal, and
only now when the archives have been opened, witnesses can
testify, and the documents are laid open to the Court.
Now, Point 4 of the Prosecution’s definition, if I understood
Justice Jackson correctly yesterday, requires, beyond this, as an
element of crime involving subjective guilt, that the aims and
methods of this organization were of such character that a
reasonable, normal man may properly be charged with knowledge of
them.
I should like at this point to emphasize particularly that I, in
agreement with my colleagues, do not consider this definition an
adequate protection, since it means that a member may be punished
even if he did not recognize the criminal nature of the organization
but ought to have recognized it by application of reasonable care. I
know of no system of penal law in any modern civilized state which
holds that negligence, even of a gross or serious nature, is sufficient
to constitute guilt of an infamous common crime, that is, of a crime
belonging to the group of severest offenses. A crime of this category
can be committed only with intention. Perhaps the Prosecution can
later discuss this question on the basis of their knowledge of the
particulars of Anglo-Saxon and other foreign legal systems.
This point seems of particular importance to me because—if it is
neglected—there is the danger that the judges, particularly the
Anglo-Saxon judges, will apply the political standards of their
countries to German conditions. The sober political instinct that is
characteristic of the citizens of England and America is nonexistent
in the Germans. We are a politically immature people, credulous,
and consequently especially susceptible to political misguidance. The
Court should not overlook this dissimilarity when passing its
judgment on the good faith of the individual members of the
organizations. According to the impressions which the Defense of
the SA has received to date from its visits to camps and from
numerous letters, the majority of SA members are convinced that
they did not belong to any criminal organization. Among other
reasons are the following subjective ones:
It was generally known and has been specifically stated in the
Organization Book of the Party—Document 1893-PS, Page 365—that
only a person whose character was unobjectionable could join the
SA. It is further stated verbatim, and I quote: “Unobjectionable
reputation and no criminal record.” The members of the SA maintain
that they know of no case in which a gang of criminals or
conspirators required in their statutes similar conditions for
membership.
Part of the essence of a conspiracy is the idea that its criminal
aims be kept secret from its opponents. An organization of several
millions is, by its very nature, not suited to carrying out a plot. The
leaders of the SA emphasized in numerous addresses that they
wanted to maintain peace under all circumstances. They pointed out
that Germany would be rather a danger to European peace if she
were without defense and arms in the heart of Europe and that
being in a state of preparedness was the best guarantee for securing
future peace in Europe. The simple members point again and again
to the fact that foreign powers gave diplomatic recognition to the
leaders of National Socialism. They consider this fact not simply an
act of “international courtesy” but are convinced that foreign
governments would not have entered into relations with the German
Government if that German Government had consisted of open
criminals.
I might mention a particularly characteristic example: the
Indictment against the SA is substantiated by a number of
documents. These are Documents 2822- and 2823-PS. According to
these documents, as early as May 1933 Lieutenant Colonel Auleb, a
deputy of the Reich War Ministry of that time, was detailed to the
high command of the SA in order to assure liaison between the
heads of the two organizations. But the whole affair is treated as
strictly secret, and it is ordered that Auleb should wear the SA
uniform for the purpose of “camouflage.” How, I ask, should or could
a simple SA member have known anything of such affairs? I have
mentioned here only a few points put forward by SA members
which, in the opinion of the Defense, do not constitute unfounded
subterfuges, but which show that the majority of these people never
thought of participating in a criminal conspiracy.
Also the fifth criterion set up yesterday by the Prosecution to
define a criminal organization—the close connection between the
main defendants and the SA—is in the case of no organization so
difficult to prove as in the case of the SA. This may, at first, sound
surprising; of the main defendants here, six were high-ranking
members of the SA. Nevertheless, a closer scrutiny shows that there
were no close connections at all. Except for Göring, none of the main
defendants ever exercised command authority over the entire SA.
The rank which these main defendants had in the SA was an
honorary rank; and, so to speak, merely decorative. Consequently,
the Prosecution has mentioned only Göring’s connection with the SA
in its recent list of the criminal elements. But even Göring’s
connection with the SA curiously enough is very slight and is actually
confined to a period of three quarters of a year—that is—9 months,
namely, from February 1923 to 9 November 1923, that is to say, 23
years ago. Göring was never, as stated in Appendix A of the
Indictment, Reichsführer of the SA. That is an error. Rather, in
February 1923 Göring was commissioned to take over the command
of the then existing Party group for the protection of meetings—the
so-called Sturmabteilung. Göring led the SA until the November
Putsch of 9 November 1923. On that day his command power over
the SA came to an end and was never revived. Later Göring was
given by Hitler honorary command of the unit Feldherrnhalle. He
was the honorary commander, not the active commander of this
unit. I believe the difference between honorary and active command
of a regiment is known in all states. I do not have to give any further
explanation. Honorary command has a purely decorative
significance.
The task which the SA had to carry out under Göring in the year
1923 was the protection of meetings. Anyway, it cannot be charged
that at that time the SA, in co-operation with Göring, already
planned the crimes stated in Article 6 of the Charter or that these
aims could have been anticipated at that time in any tangible form.
Neither can it be charged that Göring ever made use of the SA after
1923 for carrying out any criminal plan. The man who led the SA
from 1930 to 1934, Ernst Röhm, was an embittered opponent of
Göring’s. After his death the SA was led by Victor Lutze from 1934 to
1943 and from 1943 until its dissolution, by Wilhelm Schepmann.
According to Article 9, Paragraph 1, of the Charter, an
organization can be declared criminal only in connection with any act
of which a main defendant may be convicted. From a legal and
factual point of view I have the gravest doubts as to whether the
facts of the case in 1923, as described by me, are sufficient to
comply with the requirements of the Charter as far as the SA is
concerned. This could be done only if the Tribunal had reason now
to pass sentence on Göring’s activity as leader of the SA group for
protecting meetings 23 years ago, including the November Putsch,
as a special crime. This, however, would be at variance with the fact
that this entire action was settled with legal effect by the amnesty of
the democratic Reich Government, whereby the matter was, at the
time, disposed of in this fashion.
May it please the Tribunal, if it is a fact in the case of any
organization, then certainly it is a fact in the case of the SA, that its
being listed among the criminal organizations is contrary to the real
picture. Large circles abroad, particularly those who were forced to
leave Germany in 1933, knew nothing of the complete change of
structure which the SA underwent during the following years. The
foreign countries heard at every Reichstag session the traditional
song, “The SA Marches,” while, as a matter of fact, the SA had long
since lost all political influence and had been transformed en masse
into an association with a huge membership, the very size of which
rendered it harmless as far as conspiracy was concerned and which
showed all the characteristics of the so-called German club-
mindedness. I refer in full here to the statements made by Colonel
Storey, himself, in his speech for the Prosecution. This is on Page
1546 of the Court’s Record (Volume IV, Page 138). The organization
through which the SA was then eliminated from political life was, as
is well known, the SS, and this happened on the occasion of the so-
called Röhm Putsch in 1934. That, indeed, the SA and SS always
confronted each other like rival brothers is a fact which, in the
interest of truth, should not remain unmentioned. For all these
reasons the SA is judged on a completely different basis, even by
German opponents of National Socialism; and this has already led to
contradictory results, the speedy elimination of which by the
Prosecution or the Court would be highly desirable.
At this opportunity the following facts should be pointed out: The
SA, up to the higher ranks, is not, as a matter of principle, subject to
arrest, which is at variance with probably all the other organizations.
The new denazification law which recently came into force after
thorough consultation between German circles and the Military
Government and which is now the law in force throughout the entire
American Zone, regards all SA members of a rank lower than that of
Sturmführer neither as active Nazis nor much less as criminals.
According to the electoral procedure now in force in the American
Zone of Occupation, which recently was the basis for elections in
thousands of German communities under the directives of the
Military Government, the ordinary SA members, insofar as they were
not Party members, were not only permitted to vote, but were also
eligible for election. The same people who are before the Court
accused of serious crimes may at the same time, according to the
law in force, be elected as community councillors, and, in fact, are
being so elected.
I talked personally about two weeks ago to an SA man and asked
him whether, following the notice of the Court, he had reported here
for interrogation. He declared that he saw no reason for doing that,
because in the meantime he had been elected and approved as
community councillor.
The regulations of Law Number 30, regarding the application of
the German community order of 20 December 1945, namely, Articles
36 and 37, which show that SA men are eligible for election, also
confirm the fact, which is known in Germany, but apparently not in
foreign countries, that an ordinary Party member had—only by
comparison, naturally—a more active political position than the
completely uninfluential SA member. Whoever was a Party member
before 1937 cannot vote, and whoever at any time was a Party
member cannot be elected.
A comparison of Party members, who are not indicted here, and
SA members, who are indicted here, shows the following facts:
If at the time of National Socialism one was politically
incriminated or suspected one could, without difficulty, become an
SA member but under no circumstances a Party member, because in
regard to Party membership—and even ordinary Party membership—
much higher political qualifications were required than in the case of
SA members. There were certainly many SA members who joined
this organization only to escape to some extent the persecution they
had to expect because of their incriminating political record in the
past.
May it please the Tribunal, I have tried by means of these
examples to show the extraordinary danger existing in the particular
case of the SA, if all its members, including its millions of ordinary
SA men, are legally declared criminals by the Tribunal. I am sorry I
cannot share the opinion expressed yesterday by Justice Jackson
that the verdict sought from this Court would be a purely declaratory
one with no penalties involved. On the contrary I know that
hundreds and thousands of SA members, who were simple followers
and were not even Party members, have been dismissed from their
positions, and their future and their existence will depend on the
verdict of this Court. A declaratory judgment of this Court is
sufficient to make them outlaws and to exclude them from positions
and professions in the future. Therefore the members of the SA are
correct in pointing out that they are denied the right of judicial
hearing. There is no direct evidence and no direct trial. A court does
not decide the fate of lifeless creatures of the law or formal
organizations that have long since ceased to exist; it passes
judgment on living human beings, and no court should forego the
opportunity of seeing in person those whom it is trying. A good
judge is always a good psychologist and soon can tell what kind of
person is on trial—whether he is a criminal or somebody who has
been deceived and misled.
No law on earth since time immemorial ever allowed the passing
of judgment against an organization instead of against its single
members. The laws and precedents quoted yesterday by the
Prosecution regarding criminal gangs and conspiracy certainly
recognize to a large extent the collective responsibility for acts of
accomplices, but two requirements must be fulfilled there too:
Firstly, the member must know that he is party to a criminal
conspiracy or criminal association; secondly, the indictment is not
directed against the conspiracy as such, and the conspiracy will not
be judged, but the persons of the individual participants. It is the
conviction of the Defense that the Charter did not intend to stand in
contradiction to these legal principles of all states.
The late President Roosevelt, whom Justice Jackson named the
spiritual father of the Charter, has in his great speeches, particularly
in those of 25 October 1941 and 7 October 1942, stated clearly that
the leaders and instigators shall be called to account. Permit me, Mr.
President, to read two sentences from the speech by President
Roosevelt taken from the official collection, Speeches and Essays by
President Roosevelt, published on order of the government of the
United States.
I quote from the speech of 25 October 1941:
“Civilized peoples long ago adopted the basic principle that
no man should be punished for the deed of another.”
The second quotation is from the speech of President Roosevelt
on 7 October 1942, and I quote:
“The number of persons eventually found guilty will
undoubtedly be extremely small compared to the total
enemy populations. It is not the intention of this
Government or of the Governments associated with us to
resort to mass reprisals. It is our intention that just and
sure punishment shall be meted out to the ringleaders
responsible for the organized murder of thousands of
innocent persons and the commission of atrocities which
have violated every tenet of the Christian faith.”
In addition to these fundamental objections to such a separation
of the proceedings there is also an important technical objection. If
the Tribunal passes a declaratory judgment against the
organizations, as requested, all these millions of members of the
organizations will automatically become outlaws pending the definite
legal decision in the subsequent trials. Until that date every
individual is under serious suspicion of being a criminal, since it is
questionable whether he will succeed in exonerating himself in the
subsequent trial. Since, however, an individual person, without such
exoneration will probably not be able to return to his profession—
and will also be excluded from the ranks of honorable citizens until
he is exonerated—the right to have such a subsequent trial should
not be denied to him. I believe that Justice Jackson will agree with
me in this. But if, as desired by the Prosecution, 7 million members
of organizations, according to a conservative estimate, are affected
by the declaratory judgment of the Tribunal and thus temporarily
become outlaws, then millions of subsequent trials will have to take
place. We shall have to assume that in the course of 1 year, perhaps
100,000 trials can be completed. I believe that this is a very
optimistic estimate, as our German courts will not be able to
participate; it is well known that they are completely overworked
since they have now only a small portion of their former personnel.
Of these millions of cases, the courts will probably have to deal first
with those of the most criminal nature. The accused, whose
existence is at stake, will defend themselves during the subsequent
trials with all legal means at their disposal. There is the danger that
the really innocent people will have to wait for many years, even for
decades, before they will have an opportunity to rehabilitate
themselves through a process of exoneration. I believe that it would
have been possible to find some sort of solution. For instance, if the
Control Council had passed a law to the effect that, since there is
the suspicion that offenses and crimes against peace and humanity
have been committed with the aid of these organizations, the courts
have the right and the duty to try those of whom it can be proved
that they participated in these crimes as principals or accessories in
some way or other—if such a formula could be found, then I believe
that both the Prosecution and the Defense would consider that a just
solution. The effect would be limited to those who are actually guilty.
The Defense objects in no way to the punishment of those who are
actually guilty, provided that their guilt is determined in regular
unobjectionable proceedings.
Should the Court, however, adhere to a verdict against the
organizations, as requested by the Prosecution, then I request for all
the reasons adduced, arising as they do from the presentation of the
Prosecution and from the impressions made by those applications
which have been filed, that judgment not be passed against the
entire SA. The point of view brought forward by Justice Jackson in
the case of the other organizations, namely, that in the face of so
many murders and atrocities the individual members of an
organization can no longer be determined as perpetrators, this point
of view, noteworthy as it is, does not apply to the SA. The few
excesses which, according to the presentation of the Prosecution,
took place here, happened in Germany in public. The perpetrators
are known. Some regional courts have already opened proceedings
of this kind. I have heard, for example, that the city of Bamberg has
opened proceedings against the destroyers of the synagogue there
and against the perpetrators of the action of 10 and 11 November
1938.
But should the Tribunal be of the opinion that judgment is
nevertheless to be passed against the SA as an organization, then I
ask the Tribunal as far as possible to make use of the right to
provide certain limitations in regard to periods of time and
categories of members, as both the Prosecution and the Defense
agree that the Tribunal has the power to make such limitations.
Very important distinctions are to be made here, first as to the
different periods of time. The SA men who joined the SA after the
seizure of power in 1933 joined an organization that on its face bore
the stamp of approval by the state. Admittedly not even a state
authority can declare crimes against humanity legal; but when
weighing the degree of guilt and the severity of the penalty it is,
nevertheless, of considerable importance whether the perpetrator
acted outside the bounds of the laws in force and committed
offenses against the positive law, or whether his acts, although they
may offend a higher moral order, are not contrary to the laws of his
country. Therefore an exemption should be made at any rate of all
those SA members who joined after 1933, and who can be proved to
have had no part in the events of 10 and 11 November 1938.
In regard to categories, I urgently request, in the interest of
justice, a double limitation:
1. Simple SA members up to the rank of Sturmführer should be
exempted at any rate and, if possible, very soon. I mentioned
previously why this appears imperative in the interests of justice, at
least in the American Zone. Perhaps—and I should welcome this
tremendously—Justice Jackson would have the kindness to pay
special attention to this matter once more. The idea of such
limitation is also supported by the fact that it would considerably
reduce the numbers by eliminating the simple followers; and in this
way the technical difficulties, which seem almost insurmountable,
would also be considerably simplified.
2. It was gratifying that the Prosecution yesterday agreed to
separate proceedings against the SA Wehrmannschaften, the
bearers of the SA Sports Badge, and the members of the SA Reserve
—or rather, to exempt them altogether. In the interest of equality
and justice as recognized by the law and by this Tribunal, it would be
fair to separate from the SA all those special sport units which had
only a loose organizational connection with the SA. These are the
Navy SA (Marine-SA) and the Cavalry SA (Reiter-SA).
There are a number of applications before the Court, and it is
well known in Germany to everybody involved that these particular
units were exclusively devoted to their respective sports, namely,
sailing and rowing on the one hand, and horsemanship and holding
of tournaments on the other hand. When in 1933 the Party came to
power, it attempted to take charge of all sport activities in Germany.
Consequently, the various navy clubs and the so-called country
riding clubs became affiliated with the Party, but both clubs had
hardly anything to do with the political SA, even after their
regrouping. Only their chiefs were, according to the organizational
system, subordinate to the SA. They are very well suited for
separate proceedings because they constituted a completely closed
group within the SA.
None of the main defendants present here was ever a member of
one of these sport groups. Members of the Cavalry SA feel that they
are at a particular disadvantage because the Prosecution has not
indicted the NS Kraftfahrkorps (National Socialist Motor Corps) and
the NS Fliegerkorps (National Socialist Flier Corps), which is perfectly
justified, since it is known that they were by nature sport
organizations. The NS Kraftfahrkorps and the NS Fliegerkorps were,
however, until the year 1934, exactly like the Reiterkorps, sport
divisions of the SA. The NS Kraftfahrkorps succeeded in gaining
organizational independence since 1934 or 1935, due to the political
influence of its leader Hühnlein. The NS Fliegerkorps also succeeded
in doing so. The NS Reiterkorps, however, did not have such
influence and merely succeeded in 1936 in being recognized as an
independent NS Reiterkorps; but it still remained formally connected
through its leadership with the SA, since Litzmann, the Chief of the
Reiterkorps, was subordinate to the Chief of the SA. For this purely
formal reason about 100,000 farmers and farmhands who enjoyed
education in horsemanship through these country riding clubs are
indicted here. It can be proved that they never took part in politics
or in any activities against Jews or people of other beliefs. Likewise a
pursuit of militaristic aims is out of question in the case of the
Cavalry SA. Already after the First World War it was evident that the
horse had no further role in war. This charge would rather be in
point as far as the Kraftfahrkorps and the Fliegerkorps are
concerned. The Prosecution stated correctly that these organizations
were by nature predominantly sport organizations.
For this reason I should be grateful to the Prosecution if they
would once more examine the cases I have mentioned in order to
find out whether or not the same conditions exist in this case as in
the case of the SA Reserve and the armed SA units.
As the last group I mention the SA university units (SA
Hochschulstürme), because they were almost without exception
obligatory organizations for those students who would not have
been admitted to the state examinations without a record of activity
in such organizations. The same thing applies to the SA health units
(SA Sanitätsstürme), which represented an obligatory activity for
many physicians who were applying for positions.
I should like to correct myself on one point, because it has been
called to my attention that I wanted to set a time limit for those SA
members joining after 1933. I should have said, “after 30 January
1933,” the day of the seizure of power.
In conclusion, I should like to say a few words about the hearing
of SA members. Most of the members of the SA are free. If only a
few so far have written to the Court, this is almost exclusively due to
the fact that, since the SA in this country is generally considered
inoffensive, they can hardly imagine that a Court with the experience
and the high standing of this Tribunal could reach a decision which
would differ from public opinion. Should the Court, however, adhere
to its conception of the SA, then I should like to support the
suggestion made yesterday by the Prosecution to the effect that the
notice be published once more for the members to make an effort to
defend their interests. However, I share the opinion of counsel for
the Leadership Corps, that it would not serve the interests of the
proceedings if the direct contact between the Defense Counsel and
his client were destroyed. In the case of the SA men who are free, a
technically simple method could be used by having the main Defense
Counsel in Nuremberg appoint deputies, preferably lawyers, in every
province, for example, Baden, Bavaria, and Württemberg. The
provincial press should make mention of these men. Every individual
member of an organization could, with the help of these lawyers,
answer by means of an affidavit those questions which the Court has
found to be relevant.
In a very gratifying manner the American Chief Prosecutor stated
yesterday, if I understood him correctly, that in the trial of the
organizations, because of its fateful importance for millions of
people, the principle of justice is much more important than the
question of speedy proceedings. I should therefore like to join in the
request made by Counsel for the Leadership Corps, that the trial of
the organizations, which is to be regarded from different points of
view, be separated from the trial of the main defendants.
Members of the Tribunal, I am at the conclusion of my remarks. I
should like, however, to reply to the words, words worth heeding,
spoken by Justice Jackson yesterday at the beginning of his address.
He said that for the first time in history a modern state had
completely collapsed, and that this surrender created for the
victorious nations completely novel problems; that one of the most
important tasks was to destroy the structure of those organizations
and to prevent this country forever from waging wars of aggression
or carrying out pogroms. All people of good will must sincerely
welcome this aim and support Justice Jackson. It is, however,
questionable whether the right way toward that end is to defame all
members of organizations as such, involving millions of people.
I ask the Tribunal to consider that there is hardly a family in this
country which did not have near relatives in some one of these
organizations at some time. The organizations are dead, the system
of terror and falsehood has disintegrated, millions of misled and
deceived people have turned away from their leaders and seducers.
But if they find themselves ostracized and stigmatized along with
them the effect might easily be the opposite of that which we all
hope for.
Justice Jackson correctly pointed out in his speech yesterday that
the Control Council will possibly change the method of denazification
used so far, which has been rather mechanical, and make it more
individual. Present experience that mechanical treatment evokes the
feeling of injustice and thereby a false solidarity, might contribute to
this. The millions of simple misled camp followers of the
organizations would consider such a verdict an act of revenge rather
than a manifestation of justice. The ringleaders, however, could
conceal their actual guilt behind the backs of millions of people. The
educational and corrective effect of a verdict as well as the idea of
just atonement would consequently be weakened.
THE PRESIDENT: The Tribunal will adjourn now for 10 minutes.
[A recess was taken.]
DR. LÖFFLER: I ask the Tribunal that I be permitted to make one

more remark.
In my previous request I did not ask for the exemption of one
particular group, namely, the Stahlhelm; this was only because,
according to my information, the Stahlhelm was transferred in its
entirety to the SA Reserve after the seizure of power and therefore,
in my opinion, is included in the declaration made yesterday by
Justice Jackson exempting the SA Reserve.
HERR BABEL: May it please the Tribunal, I should have
considered it appropriate in the interest of a speedy trial that the
Defense not answer the inquiries of the Tribunal and reply to the
arguments of the Prosecution until they have received in writing the
extensive and important arguments of the Prosecution and are
thereby in a position to deal with the whole complex of problems
comprehensively and conclusively.
Since a number of Defense Counsel for the organizations have
already spoken, I feel prompted to do the same, insofar as I am in a
position to do so at this time and consider it necessary and
appropriate.
The Tribunal desire to have a discussion in order to define the
legal concept of the criminal organization and desire in particular to
examine the question of which qualifying elements of a factual
nature are necessary in order to declare an organization criminal.
The Defense believe that a final and basic definition of this concept,
which is entirely new to any legal system, can be given only at the
end of the proceedings by means of a special hearing of evidence
after all necessary factual information has been collected and
examined.
The Prosecution have already presented a definition, which,
however, raises very serious objections, because it is derived from
legal ideas which have grown in countries other than Germany,
under different conditions and circumstances, and which involve far
less important legal consequences than those now considered by the
Tribunal, the public opinion of the world, the German people and
jurisprudence, and jurisdiction in general.
The organizations now indicted are mostly large mass
organizations, without aims and ideas of their own, organizations
whose Party-political aims and purposes and Party activities
developed to national dimensions.
A just and pertinent definition can be found for these
organizations only on the basis of the evidence to be presented
concerning the nature and aims of these organizations and the
knowledge, intentions, and activities of their members. Considering
the basic difference of the organizations which have been and are
now being investigated, it is more than questionable whether it will
be possible to take the legal basis applied so far to single cases as a
basis for proceedings against political organizations comprising
millions of people.
The Prosecution and the Defense are probably agreed that the
Indictment is actually not directed against the organizations, which
do not exist any more anyhow, but in fact against the former
membership. Likewise the opinion seems to be held unanimously
that the Tribunal as a matter of principle will give the members an
actual opportunity, not only a theoretical one, to be heard on the
question of the criminal character of the organizations; that follows
all the more since, according to Law Number 10, the possibility
seems to be excluded that the members may make essential
objections in regard to the organizations and their own person
during the subsequent individual trials. If the Tribunal does not
measure the responsibility of the entire organization on the basis of
the responsibility of the individuals comprising it, the danger of
collective liability arises, which would create such a degree of
injustice affecting individuals in such a way that it would be much
worse than the justly attacked Sippenhaftung of the Third Reich,
which in a criminal way aimed at involving innocent members of the
family in proceedings taken against any one of its members.
In order to define a criminal organization, evidence and
information as to the knowledge, intentions, and actions of the
members of the organizations must be provided; similarly, before
convicting individuals, either singly or in the mass, justice and
human dignity alike demand that they should each be informed of
the indictment and should each have an opportunity to be heard in
his own defense. This requirement is imperative in view of the
serious legal consequence threatening the members of the
organizations in case of a verdict against them, such as loss of
property, long-term imprisonment, and even the death penalty.
Last but not least, the hearing of all members of the
organizations is also necessary because the unrestricted compilation
of judicial evidence appears to be inevitable in order to work out the
legal definition of criminal character.
The Defense do not ignore the fact that, considering the scope of
the Trial, these basic demands are confronted with tremendous
difficulties. The scope of the Trial, however, should not reduce the
thoroughness of the procedure but, on the contrary, should increase
it.
May it please the Tribunal, there are businessmen who are
owners of several firms. If, now, the owner uses one of these firms
to commit criminal acts, can we say that the other firms and their
employees are also criminal? On the basis of this principle, I consider
it necessary to point out which organizations, according to the
reasons given by the Prosecution so far, are affected by the
Indictment as units of the SS. They are:
1. The General SS—strength at the beginning of the war, about
350,000 men. This number includes the variety of special units like
cavalry, motor, information, music, and medical units.
2. The Waffen-SS, of which, at the end of the war, there were
still under arms about 600,000 men. In the over-all number of
Waffen-SS must be included about 36 divisions of the combat troops
and a large number of reserve units of the reserve of the Armed
Forces, as well as all those who were discharged from the Waffen-SS
or who left in some other way. The verdict in this Trial would also
affect the honor of the dead and the fate of their surviving relatives,
so that the dead also will have to be included in this number which
demonstrates the far-reaching significance of this Trial.
Consequently, the total number of members of the Waffen-SS,
especially when including those discharged as unfit for war service,
would be many times larger than the figure representing the final
strength.
On the basis of investigations under way the Defense will submit
still more accurate figures, unless this is to be done by the
Prosecution, which in my opinion ought to submit to the Court the
information necessary for a verdict.
3. The Death’s-Head Units—before 1939, about 6,000 men.
4. SS troops for special employment, including the Adolf Hitler
Bodyguard—before 1939, about 9,000 men.
5. Honorary Führer of the SS, whose number will probably turn
out to be very large, as, for instance, the Farmer Leaders
(Bauernführer) of the Reich Food Estate down to the District Farmer
Leaders (Kreisbauernführer) were for the most part appointed
honorary Führer of the SS. Similar conditions prevail with respect to
the chiefs of several branches of the state administration, who were
often made honorary Führer of the SS without any initiative on their
part and without being able to do anything about it. Likewise many
leaders of the Reich Veterans’ League received honorary ranks in the
SS.
6. The “supporting members” of the SS, among whom were also
many non-Party members; their number is not yet known but it is
certainly very considerable.
7. SS Front Line Auxiliaries of the Reich Post Office.
8. SS Construction Units.
9. SS Front laborers.
10. The entire Regular Police, to which belonged:
(a) The Municipal Police of the Reich with several special units,
such as traffic squads, accident squads, information, cavalry, police
dog squads, radio, and medical units; (b) the Gendarmerie with
innumerable stations and posts, distributed all over the country,
even in the smallest villages, which had rendered service without
essential changes since Napoleon’s time—the motorized
Gendarmerie supervised traffic; (c) the Municipal Police of smaller
communities; (d) the Water Police; (e) the Fire Police; (f) the
Technical Auxiliary Police Units, the Technical Emergency Service. . .
THE PRESIDENT: Dr. Babel, you are going rather fast if you want
us to take down these categories.
HERR BABEL: Mr. President, I shall submit a copy to the Tribunal.
THE PRESIDENT: Personally, I prefer to understand the argument
when I hear it.
HERR BABEL: I repeat: (f) the Technical Emergency Service, the
Compulsory, Industrial, and Voluntary Fire Brigades; (g) Police and
Gendarmerie Reserves; (h) the Air Raid Police, with security and
auxiliary service; (i) the Town and Country Guard.
Further, there belonged to the Regular Police a great many
central institutions, such as the State Hospital for Police, the Police
Officers’ Schools, the Technical Police School, the Police Sports and
Cavalry Schools, Police and Gendarmerie Schools, the Water Police
School and the Reich Fire Brigade School, the Driving and Traffic
Schools, the Air Raid Precautions Teaching Staff, the School and
Experimental Station for Police Dogs, and the Horse Depot of the
Police.
In 1942 all the above-named units of the Regular Police,
including the police troop units, totaled about 570,000 men. If we
follow the presentation of the Prosecution, then all the groups,
institutions, and organizations enumerated so far belong to the SS.
11. All those units of the Security Police which did not belong to
the separately indicted Gestapo and SD, that is, offices and officials
of the Criminal Police.
12. The Volksdeutsche Mittelstelle.
13. The Offices of the Reich Commissioner for the Preservation of
German Nationality.
14. National Political Institutes.
15. The Lebensborn Association.
16. The SS women auxiliaries.
All these groups, institutions, and suborganizations were under
the administration and jurisdiction of the SS.
By way of summary, the Defense estimate the group of persons
indicted as SS members at several millions. The verdict, however,
will also affect the members of the families of all SS members, at
least indirectly, so that additional millions will be affected personally,
morally, and financially. Since, besides the SS, the mass
organizations of the SA and the Leadership Corps are also indicted, a
verdict against the indicted organizations would amount to a
considerable part of the German nation’s being considered criminal.
According to Law Number 10 of the Control Council, of 20
December 1945, every member may be subject to any penalty,
including the death penalty, merely because he was a member of an
organization which has been declared criminal.
The question put to discussion by the Court as to what objections
can be made in this collective Trial and what objections can be made
later in the individual trials has, in my opinion, been decided already
by Law Number 10 to the effect that in the individual objections of a
defendant, for example, ignorance of the criminal aims of the
organization, cannot be given any consideration.
It is, therefore, necessary that evidence in this present Trial
should be admitted to the widest extent possible. It should be made
possible for the Defense to rebut, by means of evidence of the
factual situation at the date of the respective act, the conclusions
drawn by the Prosecution retrospectively from individual acts and
facts.
When evidence on behalf of the individual defendants was
submitted, the Tribunal declared its readiness to admit evidence if
there is only the slightest degree of relevancy. Considering the
significance of the decision of this Court for the millions of people
affected and for their families, it appears to be an absolutely
necessary condition that evidence be admitted to the largest extent
possible in order to permit a just verdict, to clarify the facts, and
especially to find out to what extent members of the SS participated
in any criminal acts according to Article 6 of the Charter.
To clarify the question of whether it is permissible to conclude
from the fact of the extent of the indicted actions, as maintained by
the Prosecution, that the members of the SS had knowledge of these
actions, it will also be necessary to admit evidence to the widest
extent possible about the question as to whether or not and, if so, to
what extent the members of the SS knew of these actions, as well
as evidence of the facts which prove that the members of the SS,
like the majority of the German people, did not know anything about
these matters, owing to the precautions taken to keep them secret.
The discussions initiated by the Tribunal make it necessary to
anticipate essential parts of the final pleadings. A ruling by the
Tribunal on the question of evidence would at this time signify a
ruling by the Tribunal on an essential part of its future decisions,
without any hearing of the evidence on the objections of the
Defense having taken place. The Charter has a gap, insofar as it has
not defined the facts which qualify an organization as criminal. This
gap cannot be filled by admitting evidence only in a certain direction.
By doing so the Tribunal would anticipate an essential part of its final
verdict.
According to what I have said, I believe that it will be necessary
for the evidence to include all elements which might influence the
decision of the question as to whether the organization of the SS
was criminal. This, however, would hardly be possible within the
framework of this Trial which, according to the Charter, is to be
conducted as expeditiously as feasible. Therefore, I consider it
necessary to separate the procedure against the SS and the SD from
the trial of the individual defendants.
On 15 January 1946, partly for other reasons, I made a motion
for separation. As far as I know, no ruling has yet been given. I
repeat this motion as follows:
Judging from the course of the Trial and the procedure up to
now, I have come to the opinion that the Indictment against the
organizations of the SS and the SD—for which I have been
appointed Defense Counsel by an order of the International Military
Tribunal of 22 November 1945—and probably against the other
indicted organizations also, cannot be dealt with within the
framework of this Trial for factual and legal reasons.
1. So far as the legal aspect is concerned, I restrict myself to a
few brief points reserving for myself the right to present additional
arguments at a later date:
(a) The International Military Tribunal has no jurisdiction. To this
point I should like to remark that a few days ago I learned from a
newspaper article that the objection of lack of jurisdiction has
already been raised during the session of 20 November 1945 and
has been overruled by the Court. I asked for a copy of the record of
20 November 1945—and also of the following days—but I have not
received it to date. Therefore, I could not take note either of the
motion and the reasons given or of the decision of the Tribunal and
its reasons.
(b) A criminal procedure against an organization is not possible
or permissible, especially against an organization which has been
dissolved.
(c) To appoint a Defense Counsel for a dissolved organization,
that is, for something non-existing, is not possible and admissible.
2. As to the facts, I am compelled to make more detailed
statements in support of my motion.
On 19 November 1945 I was told orally that the International
Military Tribunal intended my nomination as counsel for the
organization of the Leadership Corps. After discussion I declared in
writing my agreement to take over the obligatory defense. On 20
November 1945 I was told orally that I should take over the defense
of the organizations of the SS and SD. On 21 November 1945 I was
told orally that I had been appointed counsel for the SS and SD, and
that I would receive the written appointment very soon. On 23
November 1945 I received the letter of appointment, dated 22
November 1945, and in the English language, and a few days later I
received the German translation which I had requested. This letter,
in the translation which I received, reads as follows:
“Pursuant to the direction of the International Military
Tribunal you are hereby appointed to serve as counsel in
the case of United States et al. v. Göring et al. for the
members of the defendant organizations, the Schutzstaffeln
der Nationalsozialistischen Arbeiterpartei (commonly known
as the SS) and the Sicherheitsdienst (commonly known as
the SD), who may make application to the General
Secretary under the order of the International Military
Tribunal attached hereto.”
A few days later a file was handed to me with about 25 letters
addressed to the General Secretary of the International Military
Tribunal, partly from members of the SS and partly from relatives of
such members. When I asked about my position and the position of
these applicants in the Trial, I was told orally that these applications
were to be submitted by me to the Tribunal in proper form.
On 23 November 1945 there was a conference, during which a
number of questions and suggestions were brought up concerning
the position and rights of these members of the indicted
organizations, who had applied for and been granted leave to be
heard, and of the defense counsel provided for them.
From 28 November 1945 until 11 December 1945 I was not able
to obtain the applications filed by members of the SS and SD
although I asked for them several times each day. At that time about
25 applications were handed to me each day, upon request, and I
had to return them in the evening of the same day. I was told every
time that the Tribunal needed them and that they had not yet been
returned. When I received the folder again on 11 December 1945
the number of petitions had increased considerably.
By notice of 10 December 1945, according to the German
translation which I received on 11 December 1945, the Tribunal
made known its view that a member of an indicted organization who
has applied to be heard on the question of the criminal character of
the organization is not to be considered a defendant but will have
the individual status of a witness only, although he will be permitted
to give evidence; furthermore, that counsel representing any group
or organization may, for this group or organization, exercise the
rights accorded by the Charter to counsel for individual defendants.
After a closed session of the Court on 11 December 1945, in
which counsel for the indicted organizations also took part, the
Tribunal by notice of 17 December 1945—of which I did not receive
a German translation until a few days later—directed that the
respective counsel, that is, counsel for the organizations, should
represent only the indicted groups and organizations and not
individual applicants.
Not until this date was the extent of my duties unambiguously
stated and defined.
THE PRESIDENT: The Tribunal would like to know what your
application now is. The object of this session is to have an argument
from Counsel for the Prosecution and Counsel for the Defense in
order that the legal questions with reference to these organizations
should be clear, and what your personal experience during
November and December of 1945 has to do with it the Tribunal is
unable to see.
HERR BABEL: Mr. President, before I started reading this motion,
I pointed out that already on 15 January of this year I made a
motion to separate the procedure, and to my knowledge no ruling
has yet been given. I have tried to repeat in part the reasons for this
motion which I made at the time. If the Court does not think it
desirable or necessary, I shall refrain from doing so.
THE PRESIDENT: I don’t see any relevance in what you have
been reading to us now, either to the question of whether there
should be a separate trial or to any other questions with reference to
the criminal organizations.
HERR BABEL: Mr. President, under these circumstances I shall
not read those further arguments, which may be known to the Court
from my written motion, and I shall come to the conclusion of what I
still wish to say.
THE PRESIDENT: Dr. Babel, the Court will, of course, consider the
suggestion which has been made, I think, by other counsel for the
organizations as well as the suggestion which I understand you are
now making, that it is necessary to have a separate trial. The Court
will consider that. But what you have been saying to us does not
appear to me to have any relevance to that.
HERR BABEL: Mr. President, in my former motion I merely
wanted to point out the difficulties I had—since I was still alone and
had no assistance—before I was in a position to devote myself to my
real assignment; for that reason also, in my opinion, my motion for
separating the trial was well founded at that time. Part, or the
greater part, of what I said then has been repeated now. What I
have read just now, and the remainder of my motion, might have
more significance today, but I shall refrain from reading it, since the
question of the separation of the trial has already been brought up
and argued by others. Therefore, for the rest, I can also join in the
arguments brought forward by my colleagues in this regard. In this
connection I should like to point out that on 19 January 1946 I made
a motion to be relieved of the defense of the SD because of
conflicting interests.

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II. Defining an Industry

A. Industry and Sector

A. Industry and Market Segments

B. Changing Industry Boundaries

III. Competitive Forces Model

A. Risk of Entry by Potential Competitors

3. Absolute Cost Advantages

Sometimes established companies have an absolute cost advantage relative to potential

4. Customer Switching Costs

lower industry profit rates.

Strategy in Action 2.1

B. Rivalry Among Established Companies

1. Industry Competitive Structure

In consolidated industries, companies are interdependent because one company’s competitive

Strategy in Action 2.2

C. The Bargaining Power of Buyers

D. The Bargaining Power of Suppliers

G. Summary: Why Industry Analysis Matters

IV. Strategic Groups within Industries

A. Implications of Strategic Groups

B. The Role of Mobility Barriers

V. Industry Life-Cycle Analysis

VI. Limitations of Models for Industry Analysis

B. Innovation and Change

VII. The Macroenvironment

F. Political and Legal Forces

Answers to Discussion Questions

Rivalry among established companies:

Bargaining power of buyers:

Bargaining power of suppliers:

Air Express Industry

Students will review these concepts:

The ideal path that earns a perfect score is the following:

Answers to Case Discussion Question

DR. LÖFFLER: I ask the Tribunal that I be permitted to make one

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Strategic Management Theory & Cases An Integrated