BA 469 Lecture Ch2 (2)

7/27/2019 BA 469 Lecture Ch2 (2)

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External Analysis:

The Identification of IndustryOpportunities and Threats

Chapter 2

7/27/2019 BA 469 Lecture Ch2 (2)


External Analysis

• Analyzing the dynamics of the industry in

which an organization competes to help

identify:

– Opportunities: conditions in the environment

that a company can take advantage of to

become more profitable

– Threats: conditions in the environment thatendanger the integrity and profitability of the

company’s business

7/27/2019 BA 469 Lecture Ch2 (2)


Defining an Industry

• Industry

– A group of companies offering products or

services that are close substitutes for each

other

• Competitors

– Rival companies that serve the same basic

customer needs

7/27/2019 BA 469 Lecture Ch2 (2)


Defining an Industry (cont’d)

• Sector

– A group of closely related industries

• Market segments – Distinct groups of customers within a market

that can be differentiated from each other

based on their distinct attributes and demands

• Changing industry boundaries

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The Computer Sector Example of a Sector on p.39

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The Computer Sector:

Industries and Segments

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The Computer Sector Where is the customer?

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Strategic Groups Within

Industries• Formed within an industry when some

companies follow the same basic productpositioning strategy, which is different

from that of other companies in other groups

• Companies can position their products interms of distribution channels, marketsegments, product quality, technologicalleadership, customer service, pricingpolicy, advertising policy, promotions

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Strategic Groups in the

Pharmaceutical Industry

Insert Figure 2.3

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Implications of Strategic Groups

• A company’s closest competitors are

those in its strategic group

• Each strategic group may face a different

set of opportunities and threats

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The Role of Mobility Barriers

• A company may decide to move from one

strategic group to another where the five

forces are weaker and higher profits are

possible

• Mobility barriers are similar to industry

entry and exit barriers and must be

weighed carefully

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Industry Analysis:Background

• Industrial economics: focus on “common

good” or competitive pricing

• Selected measures of competition (high, if)

– Level of concentration (low)

• Concentration – percent of total sales controlled by

largest 4, 8, 12 players in the industry

– Presence of economies of scale (high) – Product differentiation (low)

– Natural barriers, i.e. fixed supply (low)

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The Computer Sector:

Industries and Segments

7/27/2019 BA 469 Lecture Ch2 (2)


Porter’s Five Forces Model

Source: Adapted and reprinted by permission of Harvard Business Review. From “How Competitive

Forces Shape Strategy,” by Michael E. Porter, Harvard Business Review, March/April 1979 © by the

President and Fellows of Harvard College. All rights reserved.

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Porter’s Five Forces Model • An industry is competitive (if . . .)

– Risk of entry (high, low barriers)

– Intensity of Rivalry (high)

– Bargaining power of buyers (high)

– Bargaining power of suppliers (high)

– Presence of substitute products (yes)

• Complementors added later

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Risk of Entry • Natural barriers - oil fields, mines

• Barriers created over time –

– Brand loyalty (due to advertising, etc.)

– Cost advantage (due to cheap funds, controlof inputs, production)

– Economies of scale (production anddistribution susceptible to scale economies)

– Switching costs (microsoft to apple, oil to coal)

– Regulation

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Intensity of Rivalry:Industry characteristics

• Industry demand

– Is long-term demand growing? stagnant?

declining?

• Exit barriers

– Cost of shutting down business and/or movingto another.

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Intensity of Rivalry:Due to industry structure

• Fragmented (large number of competitors)

– retailing

• Consolidated (4, 8, 12 competitors control

80% of the industry)

– cement

• Monopoly

– AT&T before the break-up

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Power of Buyers:High if . . .

• Numerous participants selling to few

buyers

• Buyers purchase large quantities

• Participants depend on a set of buyers for

a large percent of their business

• Buyers have low switching costs• Buyers can purchase from more than one

• Buyers can threaten to enter the industry

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Power of Suppliers:High if . . .

• Product of suppliers few substitutes

• Profitability of supplier not dependent on

industry purchases

• Industry has switching cost problems if

they move to a new set of suppliers

• Suppliers can threaten to enter • Industry can not threaten to enter

suppliers’ industry

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Substitutes • Distinction between competing and

substitute products

– Coke and Pepsi are not substitutes; they are

close substitutes but not within this definition

– Coffee is a substitute for tea or caffeine drink

– Substitute for a car when going to Las Vegas?

San Francisco? – Substitute for a computer?

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Complementors • Adds value to an industry’s products

– Software industry and computer industry

• Others:

– Hotel and airlines

– Malls will group movies and restaurants in

same sector of the mall

– Mobile phones and developers of messagesto be texted

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Exercise:Strategy in Action 2.1 (p.44)

• What are the barriers to entry in the

Japanese brewing industry?

• What are the barriers to entry for an

American company?

• What would you recommend to an

American beer company seeking to sell its

products in Japan?

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Industry Life Cycle Analysis

• The strength and nature of the five forces

change as an industry evolves through its

life cycle

• Managers must anticipate how the forces

will change as the industry evolves and

formulate appropriate strategies

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Stages in the Industry Life Cycle

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Industry Life Cycle • Addresses industry demand (intensity of

rivalry)

• Emergence of industry standard normally

propels industry into growth phase

– At the development or embryonic phase,

different configurations compete

– As a standard emerges, industry demandgoes through a period of higher rate of growth

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Shakeout: Growth in Demand

and Capacity

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Limitations of Models for

Industry Analysis• Life cycle issues

– The embryonic stage can sometimes beskipped or short

– Industry growth can be revitalized – The time span of the stages can vary

• Innovation and change

– Innovation can unfreeze and reshape industrystructure

– An industry may be hypercompetitive, withpermanent and ongoing change

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Limitations of Models for

Industry Analysis (cont’d)

• Company differences

– The importance of company differences

within an industry or strategic group can

be underemphasized

– The individual resources and

capabilities of a company may be more

important in determining profitability

than the industry or strategic group

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Exercise:Strategy in Action 2.2 (p.47)

• Why was it necessary for pricing discipline

to emerge?

• Are consumers better off?

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The Role of the

Macroenvironment

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Rate of change? • Economic indicators – interest rates, etc.

• Technological changes

• Political/Regulatory• Demographic changes

• Social forces

• Are these in some order?

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The Global and National

Environments• Globalization of production and markets

– Lower barriers to cross-border trade andinvestment

– National differences in the cost and quality of factors of production

– “Home” and “foreign” markets andcompetitors are blurring

– Intensified rivalry – Intensified rate of innovation

– Many new markets are open

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Additional Thoughts • “Multi-nation” and “Global”

• Factor conditions, industry structure in other countries allow for innovation

• These innovation often travel across borders – The internet is obviously one reason

– Personal travel

– Companies finding limited growth options at home

• Entry barriers – Tariff

– Non-tariff

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National and Competitive

Advantage

Source: Adapted from M.E. Porter, “The Competitive Advantage of Nations,” Harvard Business Review,

March April 1990 p 77

BA 469 Lecture Ch2 (2)

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