Global Strategic Management

Department of International Business

University of Economics, the University of Danang

Part 2

Global Strategic Analysis

Chapter 3
Global Business Environment:
The Industry Environment

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 Learning Outcomes

After this lecture you should be able to:

• Understand the significance of the global industry
environment for the strategies of multinational firms
• Apply Market Segmentation Analysis and Strategic Group
Analysis
• Apply the Five Forces Model
• Evaluate the importance of industry evolution and the
International Product Life Cycle for an industry
• Advise a multinational firm on the techniques for
understanding the future of an industry

Understanding Your Industry

• What industry are you in?

• A focus on a broad industry may lead to an inaccurate
understanding of the market and the nature of competition.
Indeed, using the word “industry” may be unhelpful
because it is very broad.
• A focus on a too narrow industry may lead to an
incomplete understanding of the market and its competitive
nature, limiting understanding of business expansion
possibilities.
• Firms need to identify a precise market, which can be
achieved by conducting a market segmentation analysis
and strategic group analysis.

Market Segmentation Analysis

• Market segmentation analysis identifies similarities and

differences between groups of people who buy and use
your goods and services.
• Doyle (1997) argued that strategists should ask three key
questions:
– customer segmentation: which customer segments are
to be served by the strategy?
– customer needs: what is the range of customer needs to
be met?
– technology: which technologies are required to touch
customers’needs in these segments?

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 Strategic Group Analysis

• Strategic group analysis is about identifying firms with

similar strategies or those competing on similar bases.
• A strategic group is a group of companies with similar
strategies or companies that compete on similar
competitive bases.
• It helps to understand the nature of competition and
profitability within an industry sub-group and provides
better information about where to invest or what type of
strategic action to expect from competitors.

Strategic group analysis

• A common tool for identifying strategic groups is the
analysis of mobility barriers, which are barriers in the
industry that make it difficult for businesses outside the
strategic group to enter the group or pose threats to current
members of the group.
• Competitor analysis tool: Porter's "Four-corners analysis,
these four pillars should be understood:
- Drivers
- Management assumptions
- Current strategy
- Strategic capabilities.
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Strategic groups in the global car industry

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 The Five Forces Model

• Michael Porter suggested that managers must understand

the underlying economic and technical characteristics of
the industry or strategic group in which their firms operate.
• Porter believed that the key determinant of a firm’s
profitability was industry attractiveness. As a result of the
way a specific industry operates, some industries are
inherently more profitable than other industries.
• The Five Forces Model assumes that industry
attractiveness and the firm’s competitive position in an
industry are influenced by five competitive forces.
• The Five Forces model can be used to analyse a firm’s
competitive position in a specific market segment or
similar market segments.
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Five Forces

1. Suppliers
2. Buyers
3. Substitutes
4. New entrants
5. Existing competitors

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Measuring the threat of the five forces

1. Bargaining power of suppliers

2. Bargaining power of buyers
3. Substitution threats of substitutes
4. Barriers of entry to potential entrants
5. Rivalry of existing competitors

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 Barriers of Entry
• Barriers to entry are obstacles, which potential newcomers would
encounter when entering the market.
• High barriers to entry mean low threat from potential competitors,
high profitability in the industry for businesses.
• Barriers to entry factors - criteria commonly used to measure
barriers to entry:
▪ Capital Requirements
▪ Economies of Scale
▪ Product Differentiation
▪ Access to Distribution Channels
▪ Government Policy
▪ Expected Retaliation

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Bargaining Power of Buyers/Suppliers

• Buyers push firms to sell products at the lowest possible
price. Suppliers push firms to buy at the highest possible
price.
• The higher the bargaining power of buyers/suppliers, the
higher the threat of the industry to the firm, the lower the
profitability of the industry to the firm.

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Bargaining Power of Buyers/Suppliers

Criteria for measuring buyer/supplier bargaining

power
▪ Buyer/Supplier Concentration
▪ Buyer Switching Costs
▪ Product Differentiation
▪ Price/Total Purchases
▪ Threat of vertical integration
▪ Buyer information
▪ Impact on Quality/Performance
▪ International expansion

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 Threat of Substitutes
• A substitute product is a good or service, which is regarded
as interchangeable by buyers. If substitutes are available,
buyers will switch to substitutes when the price of the
product increases.
• The existence of substitutes provides a limit as to how
much the seller can charge for a product, so the threat of
substitutes ultimately constrains the profitability of a firm.
• The threat of substitutes depends on:
▪ relative price performance of a substitute
▪ switching costs for the buyer
▪ buyer’s propensity to substitute

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Rivalry
• Rivalry encourages innovation, but it also reduces profits.
In intensely competitive markets, firms are forced to lower
prices or invest in new R&D, just to keep up with
competitors; so intense rivalry leads to lower profits.
• The intensity of rivalry is influenced by:
▪ Concentration
▪ Diversity of Rivals
▪ Product Differentiation and Switching Costs
▪ Industry Growth
▪ Fixed Costs and Storage Costs
▪ Exit Barriers
▪ Excess Capacity

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Industry Evolution

• The five forces and market conditions change over

time as a result of industry evolution.
• Industry evolution can make an industry more or
less attractive and it often forces firms to adjust
their strategies.
• The Product Life Cycle Model helps to understand
the course of industry evolution.

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 Product Life Cycle Model

The Product Life Cycle model suggests that every basic product
evolves through a cycle of roughly four stages – introduction,
growth, maturity and decline – which correspond to the rate of
growth of industry sales.
• Market entry stage: Low sales growth, high initial prices;
• Growth stage: Sales increase rapidly and prices decrease;
• Maturity stage: Market saturation, slow or no growth,
increased competition;
• Decline stage: Demand decreases, sales decrease,
substitute products appear.

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The International Product Life Cycle Model

• The International Product Life Cycle (IPLC) model

suggests that many manufactured products go through an
international life cycle, during which a developed country
is initially an exporter, but then loses its export markets
and finally could become an importer of the product from
developing countries.
• According to Vernon (1966), products have an
international life cycle of 5 stages.

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Stages in the IPLC Model

Phase 1 Introduction in the Home Market: According to the
IPLC Model, most new products are first introduced
in rich developed countries
Phase 2 Export to Developed Countries: product market widens
as demand develops in other high-income countries
Phase 3 Export by Developed Countries to Developing
Countries: late movers begin to export and even
produce the new product in developing countries
Phase 4 Developed Countries Export to Home Country
Phase 5 Developing Countries Export to Developed Countries

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 Limitations of the IPLC model

• The role of IPLC as a strategic management tool

may vary from industry to industry: Industries
have different life cycles, the transition between
stages is often unclear and may not go through all
stages; sometimes there is a return to a previous
stage.
• The model may not be evident in the context of
globalization of the global economy and the role
of multinational corporations.

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Limitations of the IPLC model

• The model only focuses on explaining the case of new

products or the results of new innovations, but does not
explain the life cycle of products that undergo a continuous
process of technological innovation. In addition, the role of
developing countries in developing or imitating technology
has not been considered.
• The model focuses on explaining conventional, standard
products, but is not suitable for non-standard products
(high-end consumer goods, manufactured goods requiring
technology, knowledge, specialized human resources, etc.)

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Forecasting the Future

• Understanding industry evolution and forecasting

future change is crucial as the cost of changing
strategy increases as the need for change becomes
more obvious.
• Two popular techniques: Forecasting and scenario
analysis
• Forecasts are educated assumptions about future
trends and events.
• Strategic forecasts are used to understand the
future changes in the industry environment which
may require a change in the firm’s use of resources.

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 Forecasting Techniques

• Forecasting is based on a set of assumptions

• Faulty underlying assumptions are the most frequent

cause of forecasting errors

Useful forecasting techniques

• Extrapolation • Delphi technique

• Brainstorming • Statistical modeling
• Expert opinion • Prediction markets
• Industry Scenario • Cross impact analysis

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Alternative: Scenario analysis

• Scenario is ‘a hypothetical sequence of events

constructed for the purpose of focusing attention on
causal processes and decision points’.
• Scenarios explore possible future events by looking at
particular causes and seek to understand and explain
why certain events might or might not occur.
• Scenario analysis does not try to predict what will
actually happen – it tries to identify several possible
futures (typically, 2-4 scenarios), each of which is
plausible but not assured.

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Main difference
between a forecast and a scenario analysis

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