external analysis: the identification of industry opportunities and threats
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External Analysis : The Identification External Analysis : The Identification of Industry Opportunities and of Industry Opportunities and ThreatsThreats
Presented by Group (6)
Strategic Management Theory
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Content
• Analyzing Industry Structure
• Strategic Groups Within Industries
• Limitations of the Five Forces and Strategic Group Models
• Competitive Changes During an Industry’s Evolution
• Network Economics as a Determinant of Industry Conditions
• Globalization and Industry Structure
• The Nation-State and Competitive Advantage
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Analyzing Industry Structure
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Potential Competitors
• Potential competitors - not currently in market
but have capability to do if they choose
• More companies enter, more difficult to hold
market share and to generate profits
• Barriers to entry – factors make costly to enter
industry
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Potential Competitors
• Main sources of barriers to new entry
• Brand Loyalty
• Absolute Cost Advantages
• Economies of Scale
• Switching Costs
• Government Regulation
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Potential Competitors
• Brand loyalty
• Buyers prefer products of incumbent companies because of
brand loyalty (Example : Patent, Continuous Advertising etc.)
• Make difficult for new entrants
• Absolute Cost Advantages
• Derive from three main sources 1) superior production
operations, 2) control of particular inputs and 3) access to
cheaper funds
• Having absolute cast advantages can prevent from new
entrants
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Potential Competitors
• Economies of Scale
• Cost advantages associated with large output
• Because of discount on purchase, fixed cost
• New entrant face dilemma of either small scale or large scale
• Threat of entry is reduced
• Switching Cost
• Arise when customer cost to switch from one to another product
• When cost is high, consumers still use old products even new
provide better
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Potential Competitors
• Government Regulation
• Constituted a major entry barrier in many industries
• Entry Barriers and Competition
• Constituted a major entry barrier in many industries
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Rivalry Among Established Companies
• If rivalry weak, have opportunities to raise price
and earn greater profits
• Intense rivalry among established constitutes a
strong threat to profitability
• Competitive Structure
• Demand Conditions
• Exit Barriers
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Industry Competitive Structure
• Refers to number and size distribution of
companies in industry
• Vary from fragmented to consolidated
• Fragmented contains large number of small or
medium-sized
• Consolidated dominated by small number of large
companies known as oligopoly
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Industry Competitive Structure
• Fragmented industries (Example: Video Rental)
• Low entry barriers and commodity-type products that
hard to differentiate
• Result in boom-bust cycles
• Create excess capacity because of low entry barriers
and high profits
• Result in price war
• Constitute threat than opportunity
• Best strategy – cost minimization
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Industry Competitive Structure
• Consolidated industries (Example: Aerospace)
• Interdependent: competitive action of one directly affect
others
• High rivalry and price war constitute a major threat
• Try to compete on non-price factors when price war is threat
• Effectiveness depends how easy to differentiate products
although some products are not
• In practice, non-price competition can be damage and
expensive
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Demand Conditions
• Determinant of intensity of rivalry among
established
• Growing demand reduce rivalry and get high
profit
• Declining demand be major threat; increase more
rivalry between established
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Exit Barriers
• Economic, strategic and emotional factors that
keep companies in industry even returns are low
• Common exit barriers
• Investments have no alternative uses and can’t be sold
• High fixed cost
• Emotional attachments
• Economic dependence
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Bargaining Power of Buyers
• Buyer affect the industry through their ability
• Buyers are most powerful in the following
• There are many small sellers and few large buyers.
• Buyers purchase in larger quantities.
• Supplier’s industry depends on buyers’ large % of total order.
• Buyers switch order base on low cost.
• Buyers purchase from multiple sellers at once.
• Buyers can easily vertically integrate to compete with
suppliers.
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Bargaining Power of Suppliers
• Suppliers have ability to rise prices or reduce quality
over purchased products or services
• Suppliers are most powerful in the following
• Few substitutes and important to buyers
• Buyer’s industry is not an important customer to the supplier
• Costly for buyers to switch one supplier to another
• Suppliers can vertically integrate forward to compete
• Buyers cannot integrate backward to supply their own needs
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Substitute Products
• Products that serve similar consumer needs
• Existence of close substitute present strong
competitive threat
• Strategies should be designed to take advantage
of this fact
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Complementors
• Not included in Porter’s Five Forces Model
• Andrew Grove argued Porter ignores sixth force -
Complementors
• Complementors – companies that sell
complements to enterprise’s own product offerings
• Without supply of complementary result in low
demand and profit
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Complementors
• Strong foundation in economic theory
• Health of industry depend on supply of
complementary products
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Role of Macroenvironment
• Macroeconomic Environment
• Technological Environment
• Social Environment
• Demographic Environment
• Political and Legal Environment
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Role of Macroenvironment
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Macroeconomic Environment
• Determine general health and well-being of
economy
• Four important factors
• Growth rate of economy
• Interest rates
• Currency exchange
• Inflation rates
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Growth Rate of Economy
• Produce a general easing of competitive
pressures
• Give opportunities to expand company’s
operations and earn higher profits
• Economic decline
• lead to reduction in consumer expenditures
• increase competitive pressures
• cause price wars in mature industries
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Interest Rates
• Determine level of demand for company’s
products
• If interest rates low, consumers borrow money
to finance their purchases
• Rising interest rates are a threat and falling rates
an opportunity
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Currency Exchange
• Value of different national currencies against
each other
• Direct impact on competitiveness of products in
global
• Low or declining dollar reduces the threat from
foreign competitors and while creating
opportunities for increased sales overseas
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Inflation Rates
• Destabilize the economy: slower economic
growth, higher interest rates and volatile
currency movements
• Inflation increases, investment become
hazardous
• Key characteristic - makes the future less
predictable
• High inflation threat to companies
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Technological Environment
• Both creative and destructive - both opportunity
and threat
• Most important impact is that it can make height
of barriers to entry
• As result, radically reshape industry structure
• Example : Because of internet technology,
• Online Service (Opportunity)
• Travel agent (Threat)
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Social Environment
• Create opportunities and threats
• Immense impact and early recognized companies
get opportunities
• Example : Increase health consciousness in US in
1970s and 1980s
• Recognized industry (Opportunity) – low-calories beer
• Tobacco industry (Threat)
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Demographic Environment
• Changing composition of population
• Example : for Baby boomers born in 1960s
• Now – aged
• In 1980s, get married,
• Increased demand in consumer appliances,
• Threats for toy industry
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Political and Legal Environment
• Deregulation can reduce barriers to entry, and
• Lead to intense competition
• Example: Air Line industry in US
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Concept of Strategic Groups
• Strategic group - group of companies; each follows
the same basic strategy as other companies in group
• Proprietary group
• High-risk because of expensive research and development
• High-return for being monopoly on its production and sales
• Generic Group
• low-risk for not heavy investment in R & D
• Low-return means unable charge high price
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Implications of Strategic Groups
• Companies closet competitors are those in the same
strategic group
• Companies in strategic group pursue similar strategies
• Consumers can view products of such companies as
direct substitutes for others
• Example:
• Gold Roast
• Super
• Premier
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Implications of Strategic Groups
• Different strategic groups have different standing
with respect to each of competitive forces
• All five forces vary in intensity among different
strategic groups within the same industry
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Implications of Strategic Groups
• Managers must evaluate that company would be
better off competing in a different strategic group
• If environment of another group is more benign,
moving into that group which can be regarded to
gain opportunity
• Mobility barriers – factors that inhibit movement
between groups
• Include both barriers to entry and barriers to exist
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Limitations of Five Forces and Strategic Group Models
• Five forces and Strategic group provide useful way
of thinking about and analyzing nature of
competition
• Need to aware of their shortcomings
• Present a static picture of competition and slights
innovation
• De-emphasize significance of differences while
overemphasizing importance of industry and strategic
group structure
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Innovation and Industry Structure
• Many industries competition can be viewed as a process
driven by innovation
• New and small enterprises can compete with large
established by innovation
• Successful innovation can revolutionize industry
structure
• When stabilizes in its new configuration, the five forces
and strategic group concepts can once more be applied
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Innovation and Industry Structure
• Innovations seem to lower barriers to entry, allow
more companies into industry
• As a result lead to fragmentation rather than
consolidation
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Industry Structure and Company Differences
• Underemphasized importance of company
differences within an industry or strategic group
• Individual resources and capabilities of company
are far more important determinants of its
profitability than industry and strategic group
• A company will not be profitable just because it is
based in an attractive industry or strategic group
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Competitive Changes During an Industry’s Evolution
• Most industries pass through a series of stages, from
growth through maturity and eventually into decline
• Changes in potential competitors and rivalry give rise
to different opportunities and threats at each stage
1) Embryonic industry
2) Growth industry
3) Shakeout
4) Mature industry
5) Declining industry
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Stages of Industry Life Cycle
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Embryonic Industries
• Growth at this stage is slow because of buyer’s unfamiliarity and poorly
developed distribution channels
• Barriers to entry at this stage base on access to key technological
know-how
• Rivalry based on perfecting products, educating customers, and
opening up distribution channels
`
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Growth Industries
• First-time demand expands rapidly as many new
consumers enter the market
• Control over technological knowledge as barrier
diminish time
• Growth of industry increase when
• Consumers become familiar with product
• Prices fall, experience and scale economies attained
• Example: U.S cellular telephone industry
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Growth Industries
• Threat from potential competitors is highest
• Rivalry to be low
• Rapid growth in demand expands companies’
revenues and profits
• Opportunity to expand company’s operations
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Industry Shakeout
• Demand approaches saturation levels
• Demand is limited to replacement demand
• During this stage,
• Rivalry become intense
• Continue to add capacity at rate consistent with past
growth
• Use historic growth rates to forecast further growth
rates and expansion plans
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Industry Shakeout
• However, demand no longer grows at historic rates
• As a result, emergence of excess of productive capacity
• To utilize this capacity, companies cut prices that lead to
a price war
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Mature Industries
• Market is totally saturated
• Demand is limited to replacement demand
• During this stage,
• Growth is zero or low
• Entry barriers increase and the threat of entry from
potential competitors decreases
• Competition for market share develops, driving down
prices. ( in order to maintain historic growth rates)
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Mature Industries
• To survive the shakeout,
• Focus both on cost minimization and on building brand
loyalty (airlines example)
• Higher entry barriers gives the opportunity to increase
prices and profits
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Mature Industries
• As a result of shakeout,
• most companies in the mature stage have consolidated
and become oligopolies
• they tend to recognize their interdependence and try to
avoid price wars
• Stable demand gives the opportunity to enter into price-
leadership agreements
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Mature Industries
• As a benefit,
• Reduce the threat of rivalry among them
• Greater profitability
However, stability of a mature industry is always
threatened by further price wars
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Declining Industries
• Growth can be negative including technological
substitution, social changes, demographics and
international competition
• Rivalry increases
• Competitive pressures become fierce depending
on the speed of the decline and height of exit
barriers
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Declining Industries
• Main problem is falling demand leads to the
emergence of excess capacity
• Cut prices again
• The greater the exit barriers, the harder it is for
companies to reduce capacity
• The greater is the threat of severe price
competition
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Variations on the Theme
• Important to remember that industry life cycle is
generalized
• In practice, industry life cycle do not always
follow the pattern
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Network Economics as a Determinant of Industry Conditions• Primary determinant of competitive conditions in
high- technology industries
• Arise where size of “network” of complementary
products is a primary determinant of demand for
industry’s product
• Example: demand for telephones depend on size
of telephone network
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Network Economics as a Determinant of Industry Conditions• Set up positive feedback loop when increased in
demand of complementary products
• Positive feedback loop can
• generate repaid demand growth
• result in becoming very concentrated and potential
competitors being locked out by high switching cost
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Network Economics as a Determinant of Industry Conditions• Tend to be winner take all market
• Powerful network economics are
important ,positive feedback loop tend to
operation relative to buyer s and suppliers
• Trick is to find right strategy in order to set up
positive feedback loop
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Globalization And Industry Structure
• Advantage of national differences in cost and quality of
factors of production, example: Boeing
• From national markets that have distinct entities and
isolated from trade barriers, barriers of distance ,time
and culture to a system in which national markets are
merging into huge global market
• Consumer use same basic product offerings (only
global market)
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Globalization And Industry Structure
• Crucial for company to recognize that industry’s
boundary do not stop at national borders
• Shift from national to global markets has intensified
competitive rivalry in industry after industry
• Rate of innovation affect competitive intensified
• Even globalization has increased both threat of
entry and intensity of rivalry, it has also created
enormous opportunities
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The Nation-State and Competitive Advantage
• Despite globalization, many of most successful
companies still cluster in small number of
countries
• Need to understand how national factors can affect
competitive advantage
• Also known as diamond model
• Four attributes of a nation-state that have
important impact on global competitiveness
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The Nation-State and Competitive Advantage
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The Nation-State and Competitive Advantage
• Factor endowments
• Prime determinant of competitive advantage
• Basic factors (e.g.: land, labor), Advanced factors (e.g.:
physical infrastructure, managerial sophistication)
• Local demand conditions
• Get competitive advantage if local consumers are
demanding and sophisticated
• Local consumers pressure local companies to meet high
quality standard and produce innovative products.
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The Nation-State and Competitive Advantage
• Competitiveness of related and supporting industries
• Presence in country of suppliers or related industries that are
internationally competitive
• Example: technological leadership in U.S semiconductor provide
the success in personal computers
• Strategy, Structure and Rivalry
• Different management ideologies which either help or don’t help
them build national competitive advantage
• Domestic rivalry create pressures to innovate, to improve
quality
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The Nation-State and Competitive Advantage
• Nation can achieve international success in
certain industry is function of combined impact of
factor
• Government can influence each of four
components either positively or negatively
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