External Analysis: The

Identification of Industry
Opportunities and Threats
The Five Forces Model
 Analyzing Industry Structure
 Opportunities and threats are competitive
challenges arising for changes in industry
conditions.
 Analytic tools such as the
five forces model help
managers formulate
appropriate strategic
responses.

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 The purpose of
Five-Forces Analysis
 The five forces are environmental forces
that impact on a company’s ability to
compete in a given market.
 The purpose of five-forces analysis is to
diagnose the principal competitive
pressures in a market and assess how
strong and important each one is.

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The Five Forces Model

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 The Threat of the entry of new
competitors
 Profitable markets that yield high returns
will draw firms. This results in many new
entrants, which will effectively decrease
profitability. Unless the entry of new firms
can be blocked by incumbents, the profit
rate will fall towards a competitive level

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 Potential Competitors
 New entrants into an industry threaten
incumbent companies.
 Barriers to entry:
 Brand loyalty
 Absolute cost advantages
 Economies of scale
 Switching costs
 Government regulation
 Entry barriers reduce the threat
of new and additional competition.

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 Threat of New Entrants
Economies of Scale

Barriers to Product Differentiation

Entry Capital Requirements
Switching Costs
Access to Distribution Channels

Cost Disadvantages Independent

of Scale
Government Policy

Expected Retaliation
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 Bargaining Power of Suppliers
Supplier industry is dominated by a
few firms
Suppliers exert power
in the industry by: Suppliers’ products have few substitutes

* Threatening to raise Buyer is not an important customer to

prices or to reduce quality supplier
Powerful suppliers Suppliers’ product is an important
can squeeze industry input to buyers’ product
profitability if firms
are unable to recover Suppliers’ products are differentiated
cost increases
Suppliers’ products have high
switching costs
Supplier poses credible threat of
forward integration 8
 The Bargaining Power of
Suppliers
 Suppliers have bargaining power when:
 Their products have few substitutes and are important
to buyers.
 The buyer’s industry is not an important customer to
the supplier.
 Differentiation makes it costly for buyers to switch
suppliers.
 Suppliers can vertically integrate forward to compete
with buyers and buyers can’t integrate backward to
supply their own needs.

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 Bargaining Power of Buyers
Buyers are concentrated or purchases
are large relative to seller’s sales
Buyers compete
Purchase accounts for a significant with the supplying
fraction of supplier’s sales
industry by:
Products are undifferentiated
* Bargaining down prices
Buyers face few switching costs * Forcing higher quality
Buyers’ industry earns low profits * Playing firms off of
each other
Buyer presents a credible threat of
backward integration
Product unimportant to quality
Buyer has full information 10
 The Bargaining Power of
Buyers
 Buyers are most powerful when:
 There are many small sellers and few large buyers.
 Buyers purchase in large quantities.
 A single buyer is a large customer to a firm.
 Buyers can switch suppliers at low cost.
 Buyers purchase from multiple sellers at once.
 Buyers can easily vertically integrate to compete with
suppliers.

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 Threat of Substitute Products

 The existence of close

Products substitute products
with similar increases the
function
limit the propensity of
prices firms customers to switch to
can charge alternatives in
response to price
increases

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 Rivalry Among Established
Companies
 The intensity of competitive rivalry in an
industry arises from:
 Industry’s competitive structure.
 Demand (growth or decline) conditions in
industry.
 Height of industry exit barriers.

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 Porter’s Five Forces
Model of Competition
Threat of
New
Entrants

Bargaining Rivalry Among Bargaining

Power of Competing Firms Power of
Suppliers in Industry Buyers

Threat of
Substitute
Products
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Components of the General Environment
Economic

Demographic
Sociocultural
Industry
Environment

Competitive
Environment
Political/
Legal Global

Technological
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The Role of the Macroenvironment

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Competitors Analysis
The follow-up to Industry Analysis is
effective analysis of a firm’s
Competitors

Industry
Environment

Competitive
Environment
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 Competitive Structure

Continuum of
Industry Structures

Fragmented Consolidated
Many firms, Few firms, One firm or one
no dominant shared dominance dominant firm
firm (oligopoly) (monopoly)

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 Pepsi Vs Coke
 Early 70’s US soft drink market was on the verge of
maturity as the products were look alike.
 Intense strategic plan for gaining competitive advantage.
 Pepsi’s all time strategy to beat the leader.
 India a battle area – pepsi had a upper edge & finally
coke took over. It entered into a deal with parle.
 Coke had a franchise driven mode, Pepsi took the
capital –intensive route owning & running its bottling
factories alongside the franchisees.

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 Pepsi Vs Coke
 Bottling became the biggest conflict area.
 Pepsi entered north and tried to take up the bottlers of
coke.
 Coke did move to the court to freeze the activity of pepsi.
 Coke & Pepsi’s promotion war. Pepsi emerged as
defender.
 The diet pepsi was also launched much before the diet
coke, but diet coke gained a better share.
 Another turf was the interference of coke in operational
areas – by poaching people.
 The freebies war was another reason of tiff.

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