©2012 south-western, a part of cengage learning identifying opportunities and threats through...

©2012 South-Western, a part of Cengage Learning

Identifying Opportunities and Threats Through External Analysis

Chapter 3

Strategic Management Essentials, 3/e

Gareth R. Jones | Charles W.L. Hill


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 customer’s 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.


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


Beginning the Analysis

Starting point: Identify the industry that the company is

competing in. Determine the industry’s boundaries which

are the basic customer needs that are served


Porter’s 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 industry’s competitive structure industry demand cost conditions exit barriers


Porter’s 5 Point Analysis (cont’d)

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?


Competitive Forces

Weak competitive forces = Opportunity Allows a company to earn greater profit

Strong competitive forces = Threat Depress a company’s profits


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


Strategic Groups (cont’d)

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


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


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.


Stage 1

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


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


Stage 3

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


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


Stage 5

Decline: Falling demand = Excess capacity Growth becomes negative due to

Technology substitution Demographics International competition


Macro-Environment

The broader economic, global, technological, demographic, social, and political contexts of business.

The macro-environment impacts the strength of forces in Porter’s 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.


Macro-Environment (cont’d)

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



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.



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



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 identifying opportunities and threats through...

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