Essentials of Strategic Management, 3/e

Charles W.L. Hill | Gareth R. Jones

Chapter 3

External Analysis:
The Identification
of Opportunities
and Threats

2012 South-Western, a part of Cengage Learning

What Is an Industry?
An industry is a group of companies offering
products or services that are close substitutes
for each other.
Example: The soft drink industry includes all
beverages that can quench a customers
thirst. The industry is defined in terms of the
customer needs that the company wishes to
satisfy. Coca Cola is not just competing with
other sodas, but with all beverages, including
soft drinks.

2012 South-Western, a part of Cengage Learning

Analysis of Industry
Goals of industry analysis:
To gain an understanding of the opportunities
and threats confronting the firm
To use this understanding to identify
strategies that will enable the company to
outperform rivals

2012 South-Western, a part of Cengage Learning

Beginning the Analysis
Starting point:
Identify the industry that the company is
competing in.
Determine the industrys boundaries which
are the basic customer needs that are served

2012 South-Western, a part of Cengage Learning

Porters 5 Point Analysis
Risk of entry by potential competitors
The intensity of rivalry among established
companies
The competitive struggle for market share that
depends on:
the industrys competitive structure
industry demand
cost conditions
exit barriers

2012 South-Western, a part of Cengage Learning

Porters 5 Point Analysis (contd)
Bargaining power of buyers
The ability of buyers to drive prices down
or quality up
Bargaining power of suppliers
The ability of suppliers to raise the costs of
the industry
Closeness of product substitutes
How many other products can satisfy the
same customer need?

2012 South-Western, a part of Cengage Learning

Competitive Forces
Weak competitive forces = Opportunity
Allows a company to earn greater profit
Strong competitive forces = Threat
Depress a companys profits

2012 South-Western, a part of Cengage Learning

Strategic Groups
Groups of companies within an industry that
follow a similar strategy
Example:
High-risk, High-return Strategy
Low-risk, Low-return Strategy
The closest competitors for a company are
those in its strategic group
The most immediate threat to profitability
comes from rivals within the strategic group

2012 South-Western, a part of Cengage Learning

Strategic Groups (contd)
Each strategic group may face a different set
of opportunities and threats
Varied threats include:
Risk of new entry
Degree of rivalry
Bargaining power of buyers and sellers
Competitive force of substitute and
complementary goods

2012 South-Western, a part of Cengage Learning

Changing Strategic Groups
Moving from one strategic group to another
may be difficult or impossible.
Mobility Barriers: Within-industry factors that
inhibit movement between strategic groups
Example:
Forest Labs entering the pharmaceutical
industry: they would encounter barriers
because they lack resources and
competencies necessary to compete

2012 South-Western, a part of Cengage Learning

Industry Life Cycle
The industry life cycle is important in analyzing
the strength of competition in an industry.
There are five sequential stages:
Embryonic
Growth
Shakeout
Mature
Decline
Competition increases as the industry
progresses through the cycle.

2012 South-Western, a part of Cengage Learning

Stage 1
Embryonic:
The industry is just beginning to develop
Development is slow
Buyers are unfamiliar with product
High prices

2012 South-Western, a part of Cengage Learning

Stage 2
Growth:
Demand takes off
Many new customers
First-time demand
Prices fall with development and higher
volume
Entry barriers are relatively low
Relatively low competition

2012 South-Western, a part of Cengage Learning

Stage 3
Shakeout:
Rate of growth slows
Demand approaches saturation levels
Few potential first-time buyers
Rivalries become intense
Excess capacity may exist

2012 South-Western, a part of Cengage Learning

Stage 4
Mature:
Market is totally saturated
Demand is limited to replacement demand
Growth is low or zero
Barriers increase
Threat of new entries decrease
Competition drives prices down

2012 South-Western, a part of Cengage Learning

Stage 5
Decline:
Falling demand = Excess capacity
Growth becomes negative due to
Technology substitution
Demographics
International competition

2012 South-Western, a part of Cengage Learning

Macro-Environment

The broader economic, global, technological,

demographic, social, and political contexts of
business.
The macro-environment impacts the strength
of forces in Porters model and ultimately, the
attractiveness of the industry.
It is important for managers to pay close
attention to external forces on their industry
due to their direct impact.

2012 South-Western, a part of Cengage Learning

Macro-Environment (contd)
Macro-Economic Forces:
Forces at the national or regional level
Most important forces to monitor are:
growth rate of the economy
interest rate
currency exchange rates
price inflation

2012 South-Western, a part of Cengage Learning

Macro-Environment (contd)
Global Forces
Many countries experiencing economic growth
since barriers to international trade have tumbled.
Growth in places like Brazil, China, and India is
creating large new markets for goods and services.
Technological Forces
Technological changes are destructive to some
companies (threats) and creative for others
(opportunities.)
They can effect the height of barriers of entry and
reshape an industry.

2012 South-Western, a part of Cengage Learning

Macro-Environment (contd)
Demographic Forces
Outcomes of change in characteristics of the
population such as
Age - Race
Gender - Sexual orientation
Ethnic origin - Social class
Currently there is a growing aging population,
which is an opportunity for organizations to cater
to an older age group

2012 South-Western, a part of Cengage Learning

Macro-Environment (contd)
Social Forces
Changing social mores and values affect industry, such
as the trend toward health conscientiousness that
causes customers to pay attention to different
characteristics of products.
Political and Legal Forces
Changes in laws and regulations that impact managers
and companies
Result from political and legal developments within
society and significantly affect businesses.
Firms and industries strive to influence the regulations
that government enacts.

2012 South-Western, a part of Cengage Learning