14 Chapter 2: External Analysis: The Identification of Industry Opportunities and Threats

CHAPTER 2
External Analysis: The Identification of Industry
Opportunities and Threats
SYNOPSIS OF CHAPTE
The purpose of this chapter is to familiarize students with the forces that shape competition in a companys
external environment and to discuss techniques for identifying strategic opportunities and threats. The central
theme is that, if a company is to survive and prosper, its management must understand the implications that
environmental forces have for strategic opportunities and threats.
The chapter first defines industry, sector, and market segments. The next section offers a detailed look at the
forces that shape competition in a companys industry environment, using Porters Five Forces odel as an
overall framework. !n addition, a sixth force"complementors"is introduced and discussed.
The chapter moves on to explore the concepts of strategic groups and mo#ility #arriers. The competitive changes
that take place during the evolution of an industry are then examined.
$ext the chapter considers some of the limitations inherent in the five forces, strategic group, and industry life
cycle models. These limitations do not render the models useless, #ut managers need to #e aware of them as they
employ these models.
The next section provides a review of the significance that changes in the macroenvironment have for strategic
opportunities and threats. Finally, the chapter deals with the trend toward glo#alization that has occurred in many
industries in recent years. The central o#%ective here is to demonstrate how the national context within which a
company is #ased can impact that companys competitive position and performance in the glo#al marketplace.
TEACHIN! O"#ECTI$ES
&. 'tress the importance of understanding the forces that shape competition in a companys external
environment.
(. !llustrate how change in the external environment gives rise to strategic opportunities and threats.
). *iscuss the strategic importance of each of Porters five forces, including potential new entrants, degree of
rivalry, the power of #uyers and suppliers, and the threat of su#stitutes.
+. ,nderstand the emergence of a sixth competitive force"complementors.
-. *escri#e the concepts of strategic groups and mo#ility #arriers, highlighting their competitive implications.
.. *iscuss the industry life cycle, including the different stages of industry evolution and review the
competitive implications of each stage, paying particular attention to how rivalry and #arriers to entry
change as an industry evolves.
/. *iscuss the limitations of the five forces, strategic group, and industry life cycle models.
0. *iscuss the different forces in the wider macroenvironment that give rise to strategic opportunities and
threats.
1. !dentify the forces that have resulted in the glo#alization of production and markets, and identify the
competitive implications of glo#alization.
&2. 3ighlight the link #etween national context and competitive advantage.
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15 Chapter 2: External Analysis: The Identification of Industry Opportunities and Threats
OPENIN! CASE: "OO% AN& "'ST IN TE(ECO%%'NCATIONS
!n the mid4&112s, the telecommunications industry faced three significant changes. !ncreased use of the !nternet
increased demand for telecommunication services, deregulation intensified competition and eased access for new
competitors, and wireless services #ecame much more prominent. The anticipated increase in demand created a
flood of new entrants into the industry, who then invested heavily in new equipment, increasing industry spending
#y (- percent each year from &11. to (222. 5quipment makers, such as 6ucent, 7isco, and 7orning increased
production to meet surging demand and even #egan to make loans to #uyers in order to increase sales. These loans
seemed like a sure #et in the optimistic and growing industry. 3owever, network capacity grew rapidly as the
technology #ecame more efficient and #y (22& the industry had ten times more capacity than needed. The newer
entrants, including 8lo#al 7rossing and 9instar, suffered drastic reverses and even #ankruptcies. The pro#lems
occurred #ecause telecommunications firms over4estimated demand, under4estimated the impact of technological
improvements, and failed to consider the consequences of a dramatic increase in competitive intensity. :s demand
slowed, competitors #egan a price war, which, when com#ined with their heavy #urden of de#t, intensified the
financial crisis. ;verall, the industry and its suppliers experienced a drastic change of fortune, from #oom to #ust
in %ust a few years.
Teaching Note: This case introduces many of the themes of 7hapter (, including the impact that competitive
forces have on industry #ehavior and profita#ility, concepts a#out market segmentation and strategic groups, and
the changing nature of competition over an industrys life cycle. ;ne of the most important lessons of this chapter
and this case, and one that may #e somewhat surprising to students, is the very strong influence that external
environments can have on firm performance. uch of what is discussed in the popular #usiness literature focuses
on the achievements or shortcomings of individual managers and other forces internal to the firm. <ut it is
worthwhile to remind students that external forces can have %ust as much impact and can even cause the demise of
firms with competent managers.
(ECT'E O'T(INE
!. ;verview
:. For a company to succeed, its strategy must either fit the industry environment in which it operates, or
the company must #e a#le to reshape the industry environment in which it operates to its advantage
through its choice of strategy. 7ompanies typically fail when their strategy no longer fits the
environment in which they operate.
<. To achieve a good fit, managers must understand the forces that shape competition in their external
environment. This understanding ena#les them to identify strategic opportunities and threats.
Opportunities arise when a company can take advantage of conditions in its environment to
formulate and implement strategies that ena#le it to #ecome more profita#le. Threats arise when
conditions in the external environment endanger the integrity and profita#ility of the companys
#usiness.
!!. *efining an !ndustry
:. :n industry can #e defined as a group of companies offering products or services that are close
su#stitutes for each other. 7lose su#stitutes are products or services that satisfy the same #asic
consumer need. Firms within the same industry are rivals, also called competitors.
&. : correct industry definition can #e the difference #etween success and failure.
(. anagers must define industries #ased on the customer need =the demand side of the market>
and not the products the industry offers =the supply side of the market>.
<. 'everal industries com#ine to create a sector. For example, the P7 industry, the handheld industry,
and the mainframe industry together create the computer sector.
Show Transparency 7
Figure 2.1: The Computer Sector: Industries and Segments
7. 9ithin industries, customers with a common need group together to form a market segment. For
example, the soft drink industry contains regular, diet, and caffeine4free market segments.
*. !ndustry #oundaries are not fixed, #ut can change over time. !ndustries may fragment into a set of
smaller industries, such as when the auto industry fragmented into the car and ',? industries.
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Chapter 2: External Analysis: The Identification of Industry Opportunities and Threats 16
!ndustries may also consolidate, such as the #lurring of the #oundary #etween the handheld computer
and cell phone industries.
!!!. Porters Five Forces odel
:. This model was devised #y ichael Porter to descri#e forces that shape competition within an
industry and help to identify strategic opportunities and threats. The stronger each of these forces is,
the more esta#lished companies are limited in their a#ility to raise prices and earn greater profits. :
strong competitive force is a threat #ecause it depresses profits. : weak competitive force is an
opportunity #ecause it allows the company to earn greater returns.
Show Transparency 8
Figure 2.2: Porters Fie Forces !ode"
<. ;ne of Porters Five Forces is the risk of entry #y potential competitors. Potential competitors are
companies that are currently not competing in the industry #ut have the capa#ility to do so. $ew entry
into an industry expands supply. This in turn depresses prices and profits. Thus a high risk of new
entry constitutes a strategic threat. : low risk of new entry allows esta#lished companies to raise their
prices, so it constitutes an opportunity. The risk of entry #y potential competitors is a function of the
height of barriers to entry. The height of #arriers to entry is determined #y several factors.
&. The extent to which esta#lished companies have brand loyalty from their customers is one
factor. 6oyal customers would discourage potential competitors.
(. Potential competitors are also discouraged when esta#lished companies en%oy an absolute cost
advantage over potential entrants. 7ost advantages might include factors such as patents,
control of a specific raw material, or access to cheaper funds.
). Potential competitors are also discouraged when esta#lished companies have economies of
scale, that is, when esta#lished companies are a#le to produce at a lower cost than the new
entrants due to their larger size and greater experience.
+. 9hen customer switching costs, that is costs that accrue to a consumer that intends to switch
from the product offering of an esta#lished company to the product offering of a new entrant,
are high, potential new entrants are discouraged.
-. 8overnment regulation, such as esta#lishing a protected monopoly, tends to protect esta#lished
firms, and thus to constitute a #arrier to entry. 9hen industries are deregulated, new entrants
usually proliferate.
STATE!Y IN ACTION )*+: ENTY "AIES INTO THE #APANESE "E,IN!
IN&'STY
The @apanese consume a lot of #eer =as much as :ustralia, 8ermany, or <ritain> and the market is dominated #y
%ust four players with a com#ined market share of 1/ percent and one of the highest profit rates of any @apanese
industry. !t seems that new entrants would try to enter this desira#le industry, #ut few have, therefore effective
#arriers to entry must exist. First, the competitors have #uilt high #rand loyalty through advertising and new
product development. 'econd, for years the @apanese government limited #rewing licenses to very large firms,
which means that any potential entrant would have to start with a high capital outlay. Third, the large #rewers
have created high switching costs, #y threatening to withhold products from any distri#utors who also sell lesser4
known #rands. 3owever, entry #arriers are declining as foreign #eers #ecome more popular, large discount store
chains replace small distri#utors, and government policy #ecomes more li#eral. 5ven with lower #arriers to entry,
there have #een few new entrants, #ut the industry has #een attacked #y wine makers, whose products are
increasing in popularity with @apans younger consumers.
Teaching Note: :s this case illustrates, entry #arriers can #e effective in discouraging new entrants, and the effects
of high entry #arriers can #e long4lasting. !n this case, the effects lasted for decades, and did not lessen until other
forces changed, leading to a weakening of the #arriers. Aou can use this case in a classroom discussion to identify
entry #arriers in other industries. :nother approach to classroom discussion is to ask students to consider the
lessons that other industries might learn from the @apanese #rewers. 9hat did the #rewers do to raise entry
#arriers, and how could those tactics #e used in another contextB
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17 Chapter 2: External Analysis: The Identification of Industry Opportunities and Threats
7. :nother of Porters Five Forces is rivalry among esta#lished companies. 'trong rivalry tends to
lower prices and raise costs, which constitutes a threat to esta#lished companies, whereas weak
rivalry creates an opportunity to earn greater returns. The extent of rivalry among esta#lished firms
depends on several factors.
&. ;ne factor is industry competitive structure, which refers to the num#er and size distri#ution of
companies within an industry. 'tructures vary from fragmented =made up of many small4 and
medium4sized companies> to consolidated =dominated #y a small num#er of large companies>.
*ifferent competitive structures have different implications for rivalry.
a. any fragmented industries are characterized #y low entry #arriers and commodity4type4
products that are hard to differentiate. These characteristics tend to result in #oom4and4
#ust cycles, with a flood of new entrants, excess capacity, and price wars, leading to low
industry profits and exit from the industry. The more commodity4like an industrys
product, the more vicious will #e the price war. The C#ustD part of the cycle will continue
until overall industry capacity is #rought into line with demand =through #ankruptcies>, at
which point prices may sta#ilize again.
#. 7onsolidated industries are interdependent, so that the competitive actions of one
company directly affect the profita#ility of competitors, forcing a response from them.
The consequence can #e price wars like those the airline industry has experienced. Thus
interdependence is a ma%or threat. This threat can #e reduced when tacit price4leadership
agreements exist within the industry and when companies are successful in emphasizing
nonprice competition.
STATE!Y IN ACTION )*): PICE ,AS IN THE "EA-FAST CEEA(
IN&'STY
The #reakfast cereal industry in the ,.'. was one of the most profita#le and desira#le competitive environments,
with steadily rising demand, #rand loyalty, and close relationships with #uyers =grocery retailers>. <est of all, the
industry was dominated #y %ust three competitors, and one, Eelloggs, controlled +2 percent of the market share.
Eelloggs was a price leader, raising prices a #it each year, and the smaller companies followed suit. Then the
industry structure changed. 3uge discounters #egan to promote cheaper private #rands, %ust as #agels or muffins
replaced cereal as the preferred #reakfast food. ,nder pressure, the #ig manufacturers #egan a price war, ending
the tacit price collusion that had kept the industry sta#le and profita#le. :lthough profit margins were slashed in
half, the #ig three continued to lose market share to private #rands. 9hat was once a desira#le industry is now
exactly like most others, competitive, unsta#le, and far less profita#le.
Teaching Note: This case illustrates the sad outcomes that result when industry competitors react to increased
pressure #y #reaking off tacit price collusion. Aou should #e sure to emphasize to students the difference #etween
tacit price collusion, which is indirect and therefore legal, and price fixing, which is overt and therefore illegal.
:gain, the message here is that well4run industry, with sustained high profita#ility and sta#ility for all
competitors, fell victim to powerful external forces. ;ne interesting discussion question would #e to ask students,
C!s there any action the #ig three competitors can take now to undo the damage and recover their profita#ilityBD !f
students suggest any action that they #elieve will restore the situation, ask them how the other competitors would
#e likely to react. For example, if students suggest a one4sided price increase, ask them if competitors would #e
likely to follow suit. 'tudents may #e surprised to realize how difficult it is to Cput the genie #ack in the #ottleD"
once trust is destroyedF an industry may never #e a#le to recreate sta#ility and prosperity.
(. *emand conditions also determine the intensity of rivalry among esta#lished companies.
8rowing demand moderates competition #y providing room for expansion. *eclining demand
results in more competition as companies fight to maintain revenues and market share.
). 5xit #arriers are a serious competitive threat, especially when demand is declining. 5conomic,
strategic, and emotional factors can keep companies competing in an industry even when
returns are low. This in turn leads to excess capacity and price wars. 5xit #arriers includeG
a. investments in specialized assets
#. high fixed costs of exit such as severance pay
c. emotional attachments to an industry
d. economic dependence on a single industry
e. the need to maintain expensive assets in order to compete effectively in that industry.
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Chapter 2: External Analysis: The Identification of Industry Opportunities and Threats 1
*. : third factor in Porters Five Forces odel is the bargaining power of buyers. <uyers can #e
individual consumers, other #usinesses, wholesalers, or retailers. <uyers can #e viewed as a
competitive threat when they force down prices or when they raise expenses #y demanding higher
quality and #etter service. The a#ility of #uyers to make demands on a company depends on their
power relative to that of the company. <uyers tend to #e powerful whenG
&. they are in industries that are more highly consolidated than the companys industry
(. they purchase in large quantities or constitute a significant #uyer for that industry
). #uyers can easily switch to su#stitute product or an alternate supplier
+. #uyers can readily produce the product themselves.
5. : fourth factor is the bargaining power of suppliers. 'uppliers are any organization that supplies
materials, services, or la#or =such as la#or unions> to the company. 'uppliers are a threat when they
are a#le to force up the price the company must pay for inputs or to reduce the quality of goods
supplied. The a#ility of suppliers to make demands on a company depends on their power relative to
that of the company. 'uppliers tend to #e powerful whenG
&. the suppliers product has no su#stitutes or is vital to the company
(. the company is not important to the supplier
). the company has a switching cost to change suppliers
+. suppliers can readily enter the companys industry
-. the company cannot readily enter the suppliers industry.
F. : fifth factor is the threat of substitute products. The existence of adequate su#stitute products limit
the price that companies in an industry can charge without losing their customers to makers of
su#stitutes. The threat of su#stitutes tends to #e greater whenG
&. the su#stitute is a close one, equally adequate in filling customers needs
(. the price of the su#stitute is equal to or less than the companys products.
8. Hecently, !ntel 75; :ndy 8rove proposed a sixth forceG complementors, or companies that sell
products that are used in addition to and along with the enterprises own products. 9hen there is a
weak supply of complementary products, demand in the industry will #e weak, and revenues and
profits will #e low. The threat from a lack of complementors tends to #e greater whenG
&. few complementary products exist
(. the existing complementary products are not attractive to customers, due to high prices,
inadequate features, and so on.
'NNIN! CASE: &E((.CHAN!IN! I$A(Y IN THE PESONA( CO%P'TE
IN&'STY
Throughout the &112s, the personal computer industry was profita#le, en%oying entry #arriers in the form of #rand
loyalty, economies of scale, and expertise in the sophisticated technology. Hivalry was moderate, due to the
industry growthF individual consumers, corporations, and small retailers were not strong #uyersF there were no
adequate su#stitutes for personal computersF and complementors, such as new P7 software and accessories, were
a#undant and attractive. There were two strong suppliersG !ntel controlled the supply of microprocessors, a vital
component, and icrosoft provided the operating system that was necessary for virtually every P7. 3owever,
starting in (222, the industry #ecame more consolidated, creating more interdependence among the competitors.
P7s #ecame more Ccommodity4likeD and were harder to differentiate. Then, computer sales #egan to slow as the
market #ecame saturated and the rate of development of new complementors stalled. *ell, the low cost provider,
#egan a price war, and soon was the only profita#le company in the industry. *ells strategy appears to #e one of
driving competitors out of #usiness, and thus far, it has #een a successful one. !< has exited the industry,
8ateway has lost most of its market share, and 3ewlett Packard and 7ompaq merged, with an accompanying
reduction in P7 production capacity.
Teaching Note: This case details some of the recent changes in the P7 industry and their competitive implications.
Aou could point out to students the parallels #etween this situation and the situation of icrosofts operating
system software in the early days of P7 use. *ell has emerged as a dominant player, and its success has given it
enormous resources, all of which seem to #e focused on eliminating competition. 9ith that in mind, ask students
what will #e the likely end result for *ell, for other competitors, and for consumers. Aou can also ask students to
analyze this case using Porters five forces and complementors, the sixth force. *escri#ing the competitive forces
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1! Chapter 2: External Analysis: The Identification of Industry Opportunities and Threats
in class would give you an idea a#out the students understanding of the concepts underlying the competitive
industry analysis.
!?. 'trategic 8roups 9ithin !ndustries
:. : strategic group is a group of companies within an industry that are pursuing the same #asic
strategy as the companies with the group, #ut different strategies from companies outside the group.
The strategies may #e #ased on a variety of factors, such as differences in quality, market segment
served, or distri#ution channel utilized. $ormally, a limited num#er of strategic groups capture the
essence of strategic differences among companies within an industry.
Show Transparency #
Figure 2.$: Strategic %roups in the Pharmaceutica" Industry
<. 'trategic groups have several implications for internal analysis.
&. : companys immediate competitors are those in its strategic group. <ecause all companies in a
strategic group are pursuing similar strategies, consumers tend to view the products of such
enterprises as direct su#stitutes for each other.
(. *ifferent strategic groups can have a different standing with respect to the threats and
opportunities they face from each of Porters five competitive forces. 'ome strategic groups are
more desira#le than others, insofar as they are characterized #y a lower level of threats andIor
#y greater opportunities.
). Mobility barriers are factors that inhi#it movement #etween groups. They are analogous to
industry entry #arriers and are #ased on the same factorsG #rand loyalty, a#solute cost
advantages, and economies of scale. o#ility #arriers make it difficult for companies to move
into another strategic group, and they also protect group mem#ers from entry #y companies
from other groups.
?. Industry Life Cycle :nalysis
:. ;ver time, industries pass through a series of well4defined stages with different implications for the
nature of competition. Porters five competitive forces and competitive dynamics change as an
industry evolves. anagers must learn to anticipate the changes that will occur as the industry
develops over time.
Show Transparency 1&
Figure 2.': Stages in the Industry (i)e Cyc"e
<. :n embryonic industry is one that is %ust #eginning to develop. 8rowth is slow #ecause of #uyer
unfamiliarity with the industrys products, poor distri#ution channels, and high prices stemming from
the ina#ility of companies to reap economies of scale.
&. <arriers to entry at this stage tend to #e #ased on access to key technological know4how, rather
than cost economies or #rand loyalty. Hivalry in em#ryonic industries is #ased on educating
customers, opening up distri#ution channels, and perfecting the design of the product.
(. 5m#ryonic industries provide a good opportunity for firms to capture loyal customers,
capitalizing on the lack of rivalry.
7. : growth industry is one where first4time demand is expanding rapidly as new consumers enter the
marketplace. Typically, demand takes off when consumers #ecome familiar with the product, prices
fall with the attainment of economies of scale, and distri#ution channels develop.
&. *uring an industrys growth stage, there tends to #e little rivalry. Hapid growth in demand
ena#les companies to expand their revenues and profits without taking market share away from
competitors.
(. 8rowth industries provide opportunities for firms to expand their market share and revenues in
a relatively low rivalry situation. Firms entering at this stage avoid the high expenses of initial
product development.
*. :n industry shakeout occurs when the rate of industry growth slows down as demand approaches
saturation levels. : saturated market is one where there are few first4time #uyers left. ost of the
demand is limited to replacement demand.
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Chapter 2: External Analysis: The Identification of Industry Opportunities and Threats 2"
&. :s an industry enters the shakeout stage, rivalry #etween companies #ecomes intense, with
excess productive capacity and severe price discounting. any firms exit the industry at this
point.
(. !ndustry shakeout provides an opportunity for those firms that are dedicated to success in this
particular industry to consolidate their power, often #y acquiring the assets of firms exiting the
industry.
Show Transparency 11
Figure 2.*: %rowth in +emand and Capacity
5. : mature industry is one where the market is totally saturated, growth is very low or near zero, and
demand is limited to replacement demand. ost competitors have exited the industry, creating an
oligopoly dominated #y a few, large companies.
&. :s an industry enters maturity, #arriers to entry increase and the threat of entry from potential
competitors decreases. !ntense competition for market share can develop, driving down prices.
(. !n mature industries, companies tend to recognize their interdependence and try to avoid price
wars if possi#le. 'ta#le demand gives them the opportunity to enter into price4leadership
agreements, reducing the intensity of rivalry and allowing greater profita#ility. 3owever, the
sta#ility of a mature industry is always threatened #y further price wars, especially in an
economic downturn.
F. !n the decline stage growth #ecomes negative. ?irtually all companies exit the industry.
&. *epending on the speed of the decline and the height of exit #arriers, competitive pressures can
#ecome as fierce as in the shakeout stage.
(. Falling demand leads to excess capacity, causing companies to engage in price wars. The
greater the exit #arriers, the harder it is for companies to reduce capacity and the greater is the
threat of severe price competition.
?!. 6imitations of odels for !ndustry :nalysis
:. The Five Forces, strategic groups, and industry life cycle models constitute very useful ways of
thinking a#out and analyzing the nature of competition within an industry. 3owever, these models
have limitations. !t does not mean the models are useless. 3owever, it does mean that managers must
#e aware of the limitations as they apply these models to their firms.
<. ;ne important limitation of the life cycle model is that industry life cycles vary considera#ly,
skipping or repeating stages, moving slowly or rapidly through the stages or remaining CstuckD at a
particular stage.
7. :nother limitation of all of these models is the lack of attention paid to the consequences of
innovation. ;ver time, innovation in many industries competition leads to new products, processes, or
strategies that can #e very successful and transform the nature of competition within an industry.
!nnovation can fragment or consolidate an industry, create new strategic groups or market segments,
speed or slow an industrys life cycle, and otherwise disrupt the orderly predictions of all three of the
models for industry analysis.
&. ichael Porter, the originator of the Five Forces model, has recently shifted focus to
acknowledge the role of innovations as CunfreezingD and CreshapingD industry structure. Porter
descri#es a model of punctuated equili#rium, in which an innovation triggers a period of
tur#ulence, followed #y a period of sta#ility. The punctuated equili#rium theory allows Porters
Five Forces odel to continue to #e somewhat useful, in spite of limitation. This theory asserts
that the Five Forces odel is not a good predictor of the changes that take place in the short
time %ust after an important innovation, #ut it is useful in the longer periods of sta#ility that
follow the tur#ulence.
Show Transparency 12
Figure 2.,: Punctuated -.ui"i/rium and Competitie Structure
(. 3owever, there are those who question the validity of the punctuated equili#rium approach.
Hichard *:veni has argued that many industries are hypercompetitive, #eing characterized #y
permanent and ongoing innovation. !n such industries, industry structure is constantly #eing
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21 Chapter 2: External Analysis: The Identification of Industry Opportunities and Threats
revolutionized #y innovationF there are no periods of equili#rium. Thus, the three models of
internal analysis are not useful.
*. :nother limitation of the models for internal analysis is the lack of attention paid to firm4specific
factors. 'tudies point to enormous variance in the profit rates of individual companies within an
industry, with industry effects accounting for only &2 to (2 percent of the variance. These studies
suggest that the individual resources and capa#ilities of a company are far more important
determinants of that companys profita#ility than the industry or the strategic group of which the
company is a mem#er.
?!!. The Hole of the acroenvironment
:. The macroenvironment refers to the #roader economic, technological, demographic, social, and
political environment within which an industry is em#edded. !t is apparent that changes in this
macroenvironment can have a direct impact on any one of the five forces in Porters model, there#y
altering the relative strength of these forces and with it, the attractiveness of an industry.
<. There are five important forces in the macroenvironment.
Show Transparency 1$
Figure 2.7: The 0o"e o) the !acroenironment
&. Macroeconomic forces include changes in the growth rate of the economy, interest rates,
currency exchange rates, and inflation ratesF these are all ma%or determinants of the overall level
of demand. :dverse changes in any of these can threaten profita#ility in an industry, whereas
positive changes tend to increase profita#ility.
(. Technological forces are characterized #y an accelerated pace of innovation and change.
Technological change can make esta#lished products o#solescent overnight, #ut at the same
time, it can create new products and processes. Thus technological change is #oth an
opportunity and a threatF it is creative and destructive.
). !emographic forces consist of any trends related to population, such as the aging of the ,.'.
population and the movement of people across national #oundaries. 7hanging demographics
create #oth opportunities and threats, spawning new industries and products while eliminating
others.
+. "ocial forces consist of changes in societal preferences and values. $ew social movements also
create opportunities and threats. For example, the impact of the trend toward greater health
consciousness has #een a #oon to the fitness equipment and organic foods industries, while it
has hurt the #eef and cigarette industries.
-. Political and legal forces are shaped #y changing laws and regulations. Factors such as
deregulation, insurance reform, and even the political party makeup of the 7ongress can create
opportunities and threats for companies in many industries.
?!!!. The 8lo#al and $ational 5nvironments
:. The 8lo#alization of Production and arkets
&. !nternational trade and foreign direct investment have grown rapidly in the last few years,
driven #y lower tariffs and non4tariff #arriers. This has led to the glo#alization of production
and markets.
a. The glo#alization of production has occurred, as firms are increasingly a#le to disperse
parts of their production operations around the world, reducing costs.
#. The glo#alization of markets has led to decreased emphasis on national markets, and
increased focus on one huge glo#al marketplace. The tastes and preferences of consumers
in different nations are #eginning to converge at some glo#al norm.
(. There are several implications of the glo#alization of products and markets that are important to
managers.
a. !mplications of the glo#alization of production and markets include the need for
companies to recognize that industry #oundaries do not stop at national #orders, and
competitors can #e found in other national markets.
#. :nother implication is that competitive rivalry will increase as relatively protected
national markets are transformed into segments of fragmented glo#al industries where a
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Chapter 2: External Analysis: The Identification of Industry Opportunities and Threats 22
large num#er of companies #attle one another for market share and profits in country
after country around the glo#e.
c. : third implication is that the rate of innovation will continue to skyrocket, compressing
product life cycles, and perhaps, reducing the importance of static models of external
analysis, such as Porters Five Force odel or strategic groups.
d. : final implication is that, in spite of the increased threats due to glo#alization, it has also
created enormous opportunities. The decline in trade #arriers has opened up many once4
protected markets to companies #ased outside those markets.
<. $ational 7ompetitive :dvantage
&. The national context of a country influences the competitiveness of companies #ased within that
nation. *espite the glo#alization of production and markets, many of the most successful
companies in certain industries are still clustered in a small num#er of countries. !ndividual
companies need to understand the link #etween national context and competitive advantage in
order to identify where their most significant competitors are likely to come from and to
identify where they might want to locate certain productive activities.
(. !n a study of national competitive advantage, ichael Porter identified four attri#utes of a
national state that have an important impact upon the glo#al competitiveness of companies
located within that nation. Porter speaks of these four attri#utes as constituting the diamond.
3e argues that firms are most likely to succeed in industries or industry segments where
conditions with regard to the four attri#utes are favora#le. 3e also argues that the diamonds
attri#utes form a mutually reinforcing system in which the effect of one attri#ute is dependent
on the state of others.
Show Transparency 1'
Figure 2.8: 1ationa" Competitie 2dantage
a. ;ne attri#ute is factor endowments, which include the cost and quality of factors of
production. Factors of production include basic factors such as land, la#or, capital, and
raw materials, along with advanced factors such as technological know4how,
managerial sophistication, and physical infrastructure =for example, roads, railways, and
ports>. 7ompanies gain competitive advantage when their home countries are rich in
factor endowments.
#. :nother attri#ute is local demand conditions. 7ompanies are typically most sensitive to
the needs of their closest customers. Thus the characteristics of home demand are
particularly important in shaping the attri#utes of domestically made products and in
creating pressures for innovation and quality. 7ompanies gain competitive advantage if
their domestic consumers pressure them to meet high standards of product quality and to
produce innovative products.
c. : third attri#ute is the presence of related and supporting industries that are
internationally competitive. The #enefits of investments in advanced factors of production
#y related and supporting industries can spill over into an industry, there#y helping it
achieve a strong competitive position internationally. 'uccessful industries within a
country tend to #e grouped into CclustersD of related industries.
d. : fourth attri#ute is the strategy structure and rivalry of companies within the nation.
*ifferent nations are characterized #y different Cmanagement ideologies,D which either
help them or do not help them to #uild national competitive advantage. :lso, companies
that experience a vigorous domestic rivalry look for ways to improve efficiency, which in
turn makes them #etter international competitors. *omestic rivalry creates pressures to
innovate, to improve quality, to reduce costs, and to invest in upgrading advanced factors.
STATE!Y IN ACTION )*/: FIN(AN&0S NO-IA
The cellular phone industry consists of two very large competitors. $okia, which is headquartered in Finland, has
a )- percent market share, whereas the second4largest firm, :merican4#ased otorola, has a#out &( percent. 3ow
did a Finnish company come to #e a world player in this sophisticated high4tech industryB !n the &102s, $okia
was a diversified conglomerate with #usinesses such as paper and tire manufacturing, in addition to consumer
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2# Chapter 2: External Analysis: The Identification of Industry Opportunities and Threats
electronics and telecommunications equipment. 9ith its inhospita#le climate and many remote towns,
'candinavia was the perfect environment for early adoption of cellular phone technology. The region does have
the highest rate of cell phone ownership"a#out /2 percent, as compared to the second most saturated market, the
,.'., with a#out )) percent. !n addition, Finland has never had a national telephone monopoly, and so $okia was
forced to compete on price against many local, autonomous phone providers. This high competitive intensity
created a firm that is strongly aware of the need for #oth low costs and cutting4edge technology. That advantage
has continued to this day, when $okia remains the most profita#le of any firm in this industry.
Teaching Note: This case provides an excellent example of the advantages that international firms can o#tain
when their national context fosters strengths that lead to competitive advantage. !n this case, $okia #enefits from
favora#le factor endowments such as infrastructure, including the cooperation of the $ordic countries in creating
the first international telephone network. !n addition, managerial sophistication in the cellular telephone industry
could #e developed early on #ecause the 'candinavian states #ecame the first nations in the world who took
cellular telecommunications seriously. :lso, sophisticated and demanding local customers in 'candinavia helped
push $okia to invest in cellular phone technology long #efore demand for cellular phones took off in other
developed nations. :nother favora#le factor was the presence of suppliers and related industries that were
internationally competitive. Finally, $okia was exposed to the stimulating effects of strong domestic competition,
competing with many local telephone companies, #oth on technology capa#ility and price.
ANS,ES TO &ISC'SSION 1'ESTIONS
&. ,nder what environmental conditions are price wars most likely to occur in an industryB 9hat are the
implications of price wars for a companyB 3ow should a company try to deal with the threat of a price warB
Price wars are most likely to occur when the following conditions are present in an industryG the product is a
commodity, exit #arriers are su#stantial, excess capacity exists, the industry is consolidated, and demand is
declining. : price war constitutes a strong threat. !t is difficult for companies that market commodity4type
products to #uild #rand loyaltyF therefore, competition tends to focus on price. 3igh exit #arriers make it
hard for companies to eliminate excess capacity through plant closings. !n 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. !n a consolidated industry, interdependence implies that one companys price cuts
will elicit a response from its rivals, producing a downward spiral of prices. :nd it is declining demand that
produces excess capacity and sparks off a price war in the first place. !f all these conditions are present, a
severe price war is likely.
'urvival depends on a companys a#ility to reduce operating costs and #uild #rand 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 #e reduced if the company can successfully enter into tacit price agreements
with its competitors and if it can stress nonprice factors when competing. :s demand declines, however,
tacit price agreements can #e difficult to maintain. Finally, if excess capacity is the ma%or reason for a price
war, capacity reduction agreements #etween competitors, or mergers #etween competitors followed #y the
elimination of excess capacity, may #e suita#le strategies for attacking this pro#lem.
(. *iscuss Porters Five Forces odel with reference to what you know a#out the ,.'. airline industry. 9hat
does the model tell you a#out the level of competition in this industryB
Potential Competitors. *eregulation in &1/1 su#stantially reduced the #arriers to entry into the airline
industry and encouraged a flood of new entrants. 5ntry continues to #e relatively frequent. !t is facilitated
#y the availa#ility of landing slots at regional airports =#ut not at ma%or airports> and the excess supply of
used %et aircraft =which drives down leasing rates>.
Rivalry among established companies. :irline travel is a commodity4type product, with limited potential for
differentiation. This has made it difficult for the airlines to #uild #rand loyalty. :lthough frequent4flyer
programs and added emphasis given to on4time arrival and safety have helped esta#lish limited #rand
loyalty, competition still centers on price. This makes the airline industry vulnera#le to a price war. The
consolidated nature of the industry and the interdependence of the ma%or carriers have reinforced this
tendency.
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Chapter 2: External Analysis: The Identification of Industry Opportunities and Threats 24
The flood of new entrants after &1/1 and the su#sequent emergence of significant excess carrying capacity
in the early &102s sparked a severe price war in the industry. From the early &102s until &112 the excess
capacity was #eing reduced through #ankruptcy and mergers. The ma%or carriers also appeared to have
entered into tacit price agreements with each other. Thus the prices charged for flights #etween ma%or hu#s
were all remarka#ly similar. <y the early &112s, however, slumping demand had once more plunged the
industry into a price war, which continues to this day.
Bargaining power of buyers. For a num#er of years the consumer has #een king in the airline industry.
Faced with su#stantial choices among the suppliers of a commodity4type product, consumers have #een a#le
to force down airline prices. 3owever, consolidation of the industry has resulted in only two or three ma%or
carriers serving many #usy routes. <y engaging in tacit price fixing, the ma%or carriers may #e a#le to
gradually increase prices on many routes.
Bargaining power of suppliers. 3istorically, the suppliers of la#or have #een very powerful in the airline
industry. ,nionized mechanics and pilots have forced up wages and salaries, creating a high cost structure.
The price war of the early &102s #roke union power at a num#er of airlines. :s a consequence, operating
costs were su#stantially reduced. 3owever, there is always the possi#ility that as general competitive
pressures in the industry decline, union power will increase again. 7urrently, those airlines that have not
fully succeeded in limiting union power face the highest cost structure.
Threat of substitute products. 'u#stitutes for airline travel include auto, #us, rail, and ship travel. $one of
these su#stitutes can compete with airlines when it comes to speed and convenience. 7ustomer safety fears,
sparked #y the events of 'eptem#er &&, (22&, caused a temporary spike in demand for alternate means of
travel, especially rail, #ut that effect lasted less than six months. :s long as airline prices remain reasona#le,
this competitive force is unlikely to pose much of a threat.
!n sum, the Five Forces odel suggests that the overall intensity of competition in the airline industry is
likely to #e severe. <ack in the early &102s, competition was very intense. *uring the late &102s, the
monopolization of ma%or routes #y a few ma%or carriers, the limited availa#ility of free landing spots at
ma%or hu#s, and the emergence of limited #rand loyalty and tacit price agreements have all helped reduce
the intensity of competition. 3owever, as already mentioned, slumping demand has plunged the industry
once more into a severe price war.
). !dentify a growth industry, a mature industry, and a declining industry. For each industry, identify the
followingG =a> the num#er and size distri#ution of companiesF =#> the nature of #arriers to entryF =c> the
height of #arriers to entryF and =d> the extent of product differentiation. 9hat do these factors tell you a#out
the nature of competition in each industryB 9hat are the implications for the company in terms of
opportunities and threatsB
'tudents 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.
ature industries include the auto industry, the airline industry, and the #eer industry. *eclining industries
include the to#acco industry, the sugar industry, and the steel industry.
8rowth industries tend to have many firms and #e relatively fragmented. <arriers to entry may center on
access to technological know4how, #ut overall, are low. Product differentiation also tends to #e relatively
low. ature and declining industries have fewer firms and more consolidated than growth industries. !n
addition, they have much higher #arriers to entry, in the form of cost economies and #rand loyalties. Product
differentiation in mature and declining industries #ecomes 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. 'pecifically, a growth industry is characterized #y relatively
#enign competitive pressures. ature industries are characterized #y an emphasis on nonprice competition
as a means of avoiding damaging price wars, although price wars may #reak out from time to time.
7ompetition in a declining industry depends on the speed of decline and the height of exit #arriers. The
faster the decline and the higher the exit #arriers, the more intense is the competition within a declining
industry.
!n summary, the availa#ility of opportunities decreases and the intensity of competitive threats increases as
an industry passes from growth through maturity and into decline.
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25 Chapter 2: External Analysis: The Identification of Industry Opportunities and Threats
+. :ssess the impact of macroenvironmental factors on the likely level of enrollment at your university over
the next decade. 9hat are the implications of these factors for the %o# security and salary level of your
professorsB
The most significant macroenvironmental factor here is to #e found in the demographic environment. !n the
&102s and early &112s, many universities experienced a decline in enrollments due to the declining #irthrate
in the &1.2s and &1/2s. 'tarting in the late &112s, however, enrollments have risen as a result of the C#a#y
#oomletD that occurred when the children of the <a#y <oomers entered their late teen years. Hising
enrollments have led to increased demand for higher education, with the resulting shortages. ,niversities
are now a#le to increase their admission standards and smaller, regional schools are a#sor#ing some of the
excess demand. !n addition, the economic downturn has led to an increase in older students returning to
school for degrees, especially in #usiness and the other professions. ;n the negative side, legislative
spending is lower, #ecause state tax revenues are less. ,niversities are thus stuck in the position of trying to
increase offerings while also reducing costs. any colleges are responding #y hiring more faculty #ut
paying less, which they can accomplish #y increasing the num#er of temporary, ad%unct or graduate student
faculty mem#ers.
S%A((2!O'P E3ECISE: CO%PETIN! ,ITH %ICOSOFT
'tudents are asked to #reak into small groups, develop a solution, and then present their solution to the class. The
exercise requires the students to assume a role as an engineer or manager at a small computer software firm that
has developed an operating system that could rival icrosofts 9indows software. The students are asked to
analyze the nature of competition in the market for computer operating systems, using Porters Five Forces odel
and the sixth competitive force"complementors. The group is also asked to prepare strategies that might #e used
to compete successfully against icrosoft, #ased on what they have learned a#out the competitive environment.
Teaching Note: This case will serve as a powerful illustration to students that even the #est product will not
succeed in a severely hostile environment. :lthough some of the five forces are favora#le in this case"low power
of #uyers, lack of su#stitutes"others are extremely negative, such as the very high #arriers to entry and the
intense rivalry. 3owever, the most important factor is the lack of complementors. 'tudents will discover that, even
though the innovative operating system is superior to icrosofts 9indows, without complementing software
=e.g. word processing, spreadsheet, graphics, data#ase>, the new operating system will have no chance to succeed.
'oftware developers will have no incentive to write for this new operating system, and without sufficient
software, the product will fail to gain a foothold in the industry.
Thus, the strategic goal of the start4up should #e to create an as large as possi#le installed #ase of computers using
its operating system. The start4up can either decide to give the operating system away for free or sell it for a
nominal fee to original equipment manufactures like 7ompaq in the hope that software developers will start
writing software for this new operating system. ;n the other hand, given that icrosoft has all the necessary
complementary assets in house, it might #e wiser for the start4up to cooperate with icrosoft.
ATIC(E FI(E )
'tudents should find an example of an industry that has #ecome more competitive in recent years. They should
identify the reasons for the increase in competitive pressure.
Teaching Note: 7ompletion of this exercise will help students to see that the intensity of competition is increasing
in most industries. They should have no trou#le identifying industries with increasing competition.
Heasons for the increased competition are many. First, many of the factors mentioned in Porters Five Forces
odel are changing across many industries in ways that will increase competition. For example, the ,.'. and
many other national governments are reducing industry regulation, lowering #arriers to entry and opening up
industries that were formerly monopolistic to competition. !nternational regulation is also decreasing, raising
competitive intensity for multinational firms. :nother change is the consolidation that resulted from the merger4
and4acquisition fever of the &102s and &112s. 3igher consolidation has led to increased competition. 3igher
consolidation in the #uyer and supplier industries, such as the increased power of giant discount retailers, has also
put competitive pressure on many firms. 'econd, industries, especially in developing countries are starting to
mature, which tends to increase competitive intensity.
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Chapter 2: External Analysis: The Identification of Industry Opportunities and Threats 26
STATE!IC %ANA!E%ENT PO#ECT: %O&'(E )
This module requires students to analyze the industry environment in which their companies are #ased, in order to
reinforce the concepts a#out industry analysis that are presented in this chapter.
Teaching Note: <ecause this is the first module of the strategic management pro%ect that requires the gathering of
a great deal of information, you should ensure that students are a#le to access sufficient data to perform a detailed
analysis of their firms external opportunities and threats.
'tudents may tend to rush through this section of the strategic management pro%ect, #ecause it appears to #e a
fairly mechanical exercise in information gathering. 3owever, students should #e encouraged to do a thorough
and careful %o# in this section, for three reasons. First, this analysis, along with the analysis of strengths and
weaknesses that will #e performed in 7hapter ), serves as the foundation for all of the remaining sections of the
pro%ect. : poor %o# in this section will make it very difficult to do well in future assignments. 'econd, a hurried
pro%ect may not aid students in understanding the concepts of the chapter in detail. For example, there are five
ma%or components to Porters model, and each consists of several su#4components, each of which must #e
analyzed individually in order to provide an accurate overall assessment. Third, you can point out to students that
this section is most merely a mechanical exercise, #ut does involve higher4level analytical skills. The students
must first gather data, #ut then they must interpret that data. !n particular, deciding whether a specific fact conveys
more of a threat or more of an opportunity can #e challenging and requires some careful thought. 9hat threatens
one industry, may #enefit another. For example, the aging population has constituted a threat for #a#y food
manufacturers, #ut it has proven to #e a #oon for the home nursing care industry.
!t is also important in this section that students use as many different analytical tools as possi#le, including
Porters five forces and complementors, strategic groups, and macroenvironmental analysis. Aou should
emphasize to students that each of these tools provides a different type of insight to a firms managers, and that
use of every availa#le tool will provide the most well4rounded and realistic picture of the industry.
E3P(OIN! THE ,E": $ISITIN! "OEIN! AN& AI"'S
3ere the students are asked to visit the 9e# sites of <oeing and :ir#us =www.#oeing.com and www.air#us.com>
and to view the news releases, company profile, and company history portions of the site. They are then asked to
use Porters Five Forces odel to analyze the nature of competition in the glo#al commercial %et aircraft market.
The students are also asked to give an outlook for competition over the next ten years in this market, focusing on
potential new entry, demand, and #uyers. !n the 8eneral Task, they are asked to perform a similar analysis of the
market for personal computers.
Teaching Note: :nother useful source that you can suggest to students is 3oovers ;nline =www.hoovers.com>.
This site contains firm and industry profiles, some of which are sold on a fee #asis, #ut many of which can #e
accessed for free.
This exercise is helpful #ecause the students will #e analyzing a classical oligopoly =or perhaps even a duopoly>.
The key competitive feature in this mature market is the interdependence #etween the ma%or players in the market.
:ir#us is the industry leader, closely followed #y <oeing, which acquired c*onnell *ouglas in &11/. The
existence of only two players in this industry can #e in part explained #y enormous #arriers to entry. !n addition,
the air manufacturing industry has experienced drastically falling orders for new products since the events of
'eptem#er &&, (22&, which intensified the decline in the air travel industry. 6ow demand has led to low
profita#ility, which discourages potential entrants.
To answer the second part of the question, students should consider whether demand will grow or shrink, how
powerful #uyers are likely to #ecome, and what the implications of all this are for the nature of competition ten
years from now. This dynamic analysis demands a clear set of assumptions upon which a scenario can #e #uilt.
The role of governmental influence as a force in the macroenvironment can also #e discussed in this light.
!n completing the 8eneral Task, students should access the we# sites of the ma%or competitors in the P7 industry,
primarily *ell and 3ewlett Packard47ompaq. 3oovers ;nline will also #e useful.
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27 Chapter 2: External Analysis: The Identification of Industry Opportunities and Threats
C(OSIN! CASE: HO, THE INTENET E$O('TIONI4E& THE
STOC-"O-EA!E IN&'STY
'ince its #eginning, online trades on the ,.'. stock exchanges could #e made only #y professional account
managers with specialized computer equipment. 7ommissions were often (.- percent of the value of the trade.
3owever, the rise of the !nternet has lowered #arriers to entry into the stock#rokerage industry, allowing upstarts
like 5JTrade and :meritrade to compete head4to4head with incum#ents such as errill 6ynch for the #usiness of
individual investors. :s hordes of these new enterprises entered the industry, prices =fees and commissions>
plunged and demand shifted from high4priced full4service stock#rokers toward discount on4line #rokers. The
revolutionary nature of this process was illustrated #y errill 6ynchs decision in @une &111 to offer its clients on4
line trading for a flat fee of K(1.1- per trade of &,222 shares or less. !n effect, errill su#stantially reduced the
price it charged individual investors and altered the way it delivered its services so that it might maintain its
revenues and profits in the face of a fundamental change in the environment of the stock#rokerage industry. !n a
new twist on this success story, the drastic decline in the stock market that occurred in (22& has reduced demand
for online #rokerage firms, which have yet to recover.
Teaching Note: The 7losing 7ase illustrates the impact that changing market conditions can have on prices and
strategies in an industry.
Ans5ers to Case &iscussion 1uestions
&. 3ow did the rise of the !nternet alter competitive forces in the #rokerage industryB
The rise of the !nternet ena#led new entrants to enter the #rokerage industry. oreover, the new entrants
were quite different from traditional #rokerages, with fewer employees and much lower expenses, which
ena#led the new entrants to price their products at a much lower level than the traditional competitors. The
!nternet also increased the power of the #uyers, who now had more choices. The !nternet also increased the
product differentiation in the market, creating in effect two important market segmentsG one to serve the
wealthier or more conservative, traditional investor, and one to serve the newer, younger or more risk4taking
investor.
(. 3ow does the rise of online #rokers change the likely long4term profita#ility in the stock#rokerage industryB
:lthough the stock#rokerage industry was essentially operating as an oligopoly in the pre4!nternet era, the
industry now has many more competitors and much lower #arriers to entry. The tacit price agreements of
the pre4!nternet days are gone, pro#a#ly forever. !n the new industry structure, competitors will continue to
#e vulnera#le to price competition, which will inhi#it long4term profita#ility for everyone in the industry.
). 3ow did the change in competitive forces in the #rokerage industry change the strategies required for
success in that industryB
ost o#viously, an important new strategy for success is price competition. errill 6ynch and other ;ld
5conomy #rokers recognized that their traditional pricing was no longer competitive, and reduced prices to
#e closer to those of online #rokers. ;ther strategies that emerged in response to this macroenvironmental
change are to appeal to various market segments #y offering differing levels of service and advice, to
increase the value added for customers.
+. *o you think the decline in online trading volumes o#served in (22& represents the highwater mark for the
rise of online trading, or is it simply a temporary set#ackB
!ts unlikely that the current downturn in the economy will have more than a temporary effect on online
trading. 9hile the economy remains soft, online trading can #e successful #y offering a #etter value for the
consumers money. 9hen the economy returns to growth, new investors will #e attracted to the stock
market, and online trading will present many advantages for them.
-. 9hat was errill 6ynchs strategy for gaining the #usiness of individual investors in the pre4!nternet eraB
9hat should #e the strategy in the futureB
errill 6ynch originally offered investors sta#ility and expert advice, as well as access to the stock market
that was limited to %ust a few firms. Their #rand name reputation also #rought customers who tended to #e
older, wealthier, and more conservative than the average :merican. 3owever, the advent of online trading
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Chapter 2: External Analysis: The Identification of Industry Opportunities and Threats 2
changed the fundamental nature of the industry, #reaking it into at least three segments. 'ome of the more
conservative customers continue to prefer to work with a full4service #roker and depend on their advisors
expertise. : second segment consists of some of the traditional consumers, who now prefer to make their
own investment decisions, #ut would still like to have an enhanced level of service. : third segment is made
up of younger, less wealthy, and more risk4taking investors, who prefer to make their own decisions and
dont require a high level of service, #ut instead will choose a #roker primarily #ased on price. !n this era,
errill 6ynch =and others> can provide products that appeal to each segment, tailoring the amount of advice
and service that each receives, and pricing the different products accordingly. !n addition to this suggestion,
students may have novel suggestions of their own to recommend.
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