GARETH R. JONES /CHARLES W. L.

HILL

Theory of Strategic Management 11th ed.

Chapter
External Analysis:

2
The Identification of
Opportunities and
Threats

Prepared by C. Douglas Cloud

Professor Emeritus of Accounting
Pepperdine University
 OVERVIEW

 An industry can be defined as a group of

companies offering products or services that
are close substitutes for each other.
 Coca-Cola, PepsiCo, and Cadbury
Schweppes in the soft drink industry.
 Dell, Hewlett-Packard, Lenovo, and
Apple in the personal computer industry.

Read more about Coke versus Pepsi consumer preference:

http://cokevspepsi.net/

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 OVERVIEW

 A sector is a group of closely related

industries.
 Market segments are distinct groups of
customers within a market that can be
differentiated from each other on the basis of
individual attributes and specific demands.
 Established: Coca-Cola, Pepsi
 Health conscious: Fruit Juices, Sports Drinks
 Premium: Tonic-Water, Canned Smoothies and
Specialty Coffees
Read more about market segments:
http://en.wikipedia.org/wiki/Market_segment 2-3
 Learning Objective: After reading this chapter you
should be able to review the primary technique
used to analyze competition in an industry
environment: the Competitive Forces model.

COMPETITIVE FORCES MODEL

 Michael E. Porter’s “The Five Forces Model”
is shown on Slide 2-5.
 An extension of his model is to add “the
power of complement providers” as another
factor to consider in analyzing competition.

Read more about Porter’s model:

http://www.businessballs.com/portersfiveforcesofcompetition.htm
COMPETITIVE FORCES MODEL

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 COMPETITIVE FORCES MODEL

 Porter’s position: As the forces grow stronger,

they limit the ability of companies to raise
prices.
 A weak competitive force allows a company
to earn greater profits.
 A strong competitive force can be regarded
as a threat because it depresses profits.
 The strength of the forces may change over
time as industry conditions change.
 COMPETITIVE FORCES MODEL

1) The first of Porter’s Five Forces is the risk of

entry by potential competitors (threat of
new entrants) (companies that are not
currently competing in the industry).
a) Economies of scale arise when unit costs
fall as a firm expands its output.
b) Brand loyalty exists when consumers have
a preference for the product of an
established company.
(continued)
Read more about economies of scale:
http://en.wikipedia.org/wiki/Economies_of_scale

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 COMPETITIVE FORCES MODEL

c) An absolute cost advantage means that

entrants cannot expect to match
established companies’ lower cost.
d) Customer switching costs arise when a
customer invests time, energy, and money
switching from the products offered by
one established company to the products
of a new entrant.
(continued)

Read more about managing customer switching costs:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=477583

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 COMPETITIVE FORCES MODEL

e) Historically, government regulations

have constituted major entry barrier into
many industries.
i) Until the mid-1990s, providers of long-
distance telephone service could not
compete for local telephone services.
ii) The Motor Carrier Act of 1980, among
other things, deregulated the routes that
carriers could use.
(continued)
Read more about the Motor Carrier Act of 1980:
http://en.wikipedia.org/wiki/Motor_Carrier_Act_of_1980
2-9
 COMPETITIVE FORCES MODEL

2) The second of Porter’s Five Forces is the intense

rivalry among established companies (Degree
of Rivalry).
a) The industry competitive structure refers to
the number and size distribution of companies
in it.
i) A fragmented industry consists of a large
number of companies that cannot determine
industry price.
ii) A consolidated industry is dominated by a
small number of large companies.
(continued)
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 COMPETITIVE FORCES MODEL

b) The level of industry demand is the

second determinant of the intensity of
rivalry.
i) Growing demand tends to reduce rivalry
because all companies can sell more
without taking market share away from
other companies.
ii) When demand declines, a company can
only grow by taking market share away
from other companies.
(continued)
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2-11
 COMPETITIVE FORCES MODEL

c) The cost structure is a third determinant

of rivalry.
i) When fixed costs are high, profitability
tends to be highly leveraged to sales
volume.
ii) Weaker firms cut prices and/or raise
promotional spending in an attempt to cover
fixed cost. The result can be intense rivalry
and lower profits.
(continued)
Read more about covering fixed costs:
http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1073790696
 COMPETITIVE FORCES MODEL

d) Exit barriers are economic, strategic, and

emotional factors that prevent companies
from leaving an industry. Common exit
barriers include the following:
i) Investment in fixed assets that are of little
or no value in alternate uses, or cannot be
sold.
ii) Emotional attachment to an industry.
iii) Bankruptcy regulations.

(continued)
 COMPETITIVE FORCES MODEL

3) The bargaining power of buyers is the third

of Porter’s Five Forces. It is the ability of
buyers to bargain down prices or demand
better service. Some examples of when
buyers are most powerful are:
a) The buyers are large and few in number.
b) The buyer purchases in large quantities.
c) The supplier depends on the buyers for a
large percentage of total orders.
(continued)

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 COMPETITIVE FORCES MODEL

4) The fourth of Porter’s Five Forces is the

bargaining power of suppliers. Examples of
when suppliers are most powerful include:
a) The product that suppliers sell has few
substitutes and is vital to the buyer.
b) The industry is not an important customer to
the supplier.
c) The suppliers threaten to enter their
customers’ industry.
(continued)
Read more about Apple’s buying power as a supplier:
http://fernstrategy.com/2011/02/17/apple-and-industry-forces/

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 COMPETITIVE FORCES MODEL

5) The final force in Porter’s model is the threat

of substitute products (threat of
substitutors): products of different
businesses that can satisfy similar customer
needs.
a) Tea versus coffee versus soft drink
b) Margarine versus butter
6) Andrew Grove argued that power, vigor, and
competence of complementors comprised a
sixth force.
Read more about the sixth force:
http://en.wikipedia.org/wiki/Six_Forces_Model
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 Learning Objective: After reading this chapter
you should be able to explore the concept of
strategic groups and illustrate the implications
for industry analysis.

STRATEGIC GROUPS WITHIN INDUSTRIES

 Within most industries, it is possible to

observe groups of companies that follow a
business model similar to companies in other
groups.
 These different groups of companies are
known as strategic groups.
 STRATEGY DECISION MAKING

Implications of Strategic Groups

1) Because all companies in a strategic group are
pursuing a similar business model, customers
tend to view such enterprises as direct
substitutes for each other.
2) Each strategic group may face a set of
opportunities and threats.
 Risk of new entrants
 Degree of rivalry among companies in the group
 Bargaining power of suppliers or buyers
Learning Objective: After reading this chapter
you should be able to discuss how industries
evolve over time, with reference to the
industry life-cycle model.

INDUSTRY LIFE-CYCLE ANALYSIS

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 INDUSTRY LIFE-CYCLE ANALYSIS

Embryonic Industries

 An embryonic industry refers to an industry just

beginning to develop.
 Examples are personal computers in the 1970s,
wireless communication in the 1980s, and internet
retailing in the 1990s.
 Growth at this stage is slow.
 Rivalry is based not so much on price as on educating
customers, opening up distribution channels, and
perfecting the design of the product.
 Such rivalry can be intense.
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 INDUSTRY LIFE-CYCLE ANALYSIS

Growth Industries

 In a growth industry, first-time demand is

expanding rapidly.
 Prices fall because experience and scale
economies have been attained, and distribution
channels developed.
 The importance of control over technological
knowledge as a barrier to entry has diminished.
 New entrants can be absorbed into an industry
without a marked increase in the intensity of
rivalry.
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 INDUSTRY LIFE-CYCLE ANALYSIS

Industry Shakeout

 Explosive growth cannot be maintained indefinitely.

 In the shakeout stage, rivalry between companies
becomes intense.

Mature Industries

 The market is totally saturated, demand is limited to

replacement demand, and growth is low or zero.
 In the mature stage, barriers to entry increase, and the
threat of entry from potential competitors decreases.

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 INDUSTRY LIFE-CYCLE ANALYSIS

Declining Industries

 In a declining industry growth becomes

negative.
 Falling demand leads to the emergence of excess
capacity.
 Companies in this category cut prices, thus
sparking a price war.
 The greater the exit barriers, the harder it is for
companies to reduce capacity (e.g., airline
industry and steel industry).
Read more about industry life-cycle analysis:
http://
http://www.ehow.com/facts_7232076_industry-life-cycle-analysis.html
2-23
 Learning Objective: After reading this chapter
you should be able to show how trends in the
macroenvironment can shape the nature of
competition in an industry.

The Macro-
environment
 THE MACROENVIRONMENT

Macroeconomic Forces

 The four most important macroeconomic forces are

the growth rate of the economy, interest rates,
currency exchange rates, and inflation (deflation)
rates.
Global Forces
 Economic growth in places such as Brazil, China, and
India have created large new markets.
 It is easier for foreign enterprises to enter the domestic
markets of many companies, thereby increasing the
intensity of competition and lowering profitability.

2-25
 THE MACROENVIRONMENT

Political and Legal Forces

 Political and legal forces are outcomes of changes in

laws and regulations, and significantly affect managers
and companies.
Technological Forces
 Technological change can make established products
obsolete overnight and simultaneously create a host of
new product possibilities.
 It can impact the height of the barrier to entry and
radically reshape industry structure.
Read more about political risk:
http://en.wikipedia.org/wiki/Political_risk
2-26
 THE MACROENVIRONMENT

Demographic Forces

 Demographic forces are outcomes of changes in

the characteristics of a population, such as age,
gender, ethnic origin, race, and social class.
Social Forces

 Social forces refer to the way in which changing

social mores and values affect an industry.
 One of the major social movements of recent
decades has been the trend toward greater health
consciousness.
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 SUSTAINABILITY AND DURABILITY
OF COMPETITIVE ADVANTAGE

 We must remember that our external environment is constantly evolving.

 The constant evolution impacts our strategies and competitive
advantage.
 Competitive advantage cannot be sustained unless we are willing and
prepared to
 Understand that change, uncertainty, and variability are inevitable
 Recognize changes
 Recognize the opportunities and the threats of these changes
 Take advantage of the opportunities and address the threats
 Recall that the strategic management process is a continuous process
that emphasizes monitoring, feedback, and corrective actions.

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