Module 2
External Analysis:
The Identification of
Opportunities and Threats
Housekeeping Items
• No Class Week 3: Happy Chinese New Year
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Learning Objectives
• Review the primary technique used to analyze competition in an
industry environment: the Five Forces model
• Explore the concept of strategic groups and illustrate the implications
for industry analysis
• Discuss how industries evolve over time, with reference to the
industry life-cycle model
• Show how trends in the macroenvironment can shape the nature of
competition in an industry
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Opportunities and Threats
Opportunities
•Elements in a company’s environment that allow it to
formulate and implement strategies to become more
profitable.
Threats
•Elements in the external environment that could
endanger a firm’s integrity and profitability.
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Defining an Industry
• Industry - Group of companies offering products or services
that are close substitutes for each other.
• Products or service satisfy the same basic customer needs.
• Rival - A company’s closest competitor.
• External analysis identifies the company’s industry.
• Industry boundaries - Basic customer needs served by a
market.
• Boundaries can change.
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Porter’s Competitive Forces model a roadmap for the rivalry in the industry
Micro Environment Equally important
consider all five
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Risk of Entry by Potential Competitors (1st Competitive Force) (1 of 2)
Potential Competitors someone plan to come into the industry
• Companies that are currently not competing in the industry but have the potential
to do so.
Ways to stop potential competitors
Economies of Scale
• Reductions in unit costs attributed to a larger output.
Brand Loyalty
• Preference of consumers for the products of established companies.
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Risk of Entry by Potential Competitors (1st Competitive Force) (2 of 2)
Absolute Cost Advantage
• Enjoyed by incumbents in an industry and that new entrants cannot expect to match.
Switching Costs
• Costs that consumers must bear to switch from the products offered by one established company to
the products offered by a new entrant.
Government Regulations
• Falling entry barriers due to government regulation results in significant new entry, increase in the
intensity of industry competition, and lower industry profit rates.
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Rivalry Among Established Companies (2nd Competitive Force) (1 of 2)
⻛⽔轮流转
• Rivalry - Competitive struggle between companies within an
industry to gain market share from each other.
• Intense rivalry among established companies constitutes a
strong threat to profitability.
• Factors that impact the intensity of rivalry among established
companies within an industry are:
• Industry competitive structure - Number and size
distribution of companies in it.
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Rivalry Among Established Companies (2nd Competitive Force) (2 of 2)
• Industry demand - Increasing demand moderates
competition by providing greater scope for companies to
compete for customers.
• Cost conditions - When fixed costs are high, profitability is
highly leveraged to sales volume.
• Exit barriers - Economic, strategic, and emotional factors
that prevent companies from leaving an industry.
• High exit barriers - Companies become locked into an
unprofitable industry where overall demand is static or
declining.
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The freedom to choose a company
Bargaining Power of Buyers (3rd Competitive Force)
• Buyers’ power to bargain down prices or raise costs by demanding
better quality and service.
• Power includes:
• buyers can choose sellers and purchase in large quantities.
• supplier industry is dependent on buyers for a major portion of sales.
• with low switching costs and ability to purchase input from several companies at
once, buyers can pit companies against each other.
• buyers can threaten to enter the industry and produce the product.
A Hotel B Customer
Greater Power and Control u have, the better u can drive more business and lower cost （定价权
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Bargaining Power of Suppliers (4th Competitive Force)
• Suppliers’ power to raise input prices or industry costs through various
means.
• Power includes:
• product has few substitutes and is vital to the buyer.
• supplier is not dependent on one particular industry for their sales.
• companies would incur high switching costs if they moved to a different supplier.
• supplier can threaten to enter a customers’ industry.
• companies cannot enter their suppliers’ industry to lower prices.
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Substitute Products and Complementors (5th and 6th Competitive
Forces)
• Substitute products - Those of different businesses that satisfy similar
customer needs.
• Limit the price that companies in an industry can charge for their product.
• Complementors - Companies that sell products that add value to the
other products.
• Strong complementors provide a increased opportunity for creating value.
• Weak complementors slow industry growth and limit profitability.
Substitute Product: Complementors
airbnb
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Strategic Groups within Industries (1 of 2) Go back to this slide
• Companies in an industry differ in the way they strategically position
products in the market.
• Product positioning is determined by the: Many ways, but easiest way is x-y map
• distribution channels and market segments served.
• product quality. e.g. Quality-Price Map 价格透明是很重要的 price transparency
• technological leadership.
• customer service.
• pricing and advertising policy.
• promotions offered.
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Strategic Groups within Industries (2 of 2)
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Implications of Strategic Groups
• Since all companies in a strategic group pursue a similar strategy:
• customers view them as direct substitutes for each other.
• immediate threat to a company are rivals within its own strategic group.
• Different strategic groups have different relationships to each of the
competitive forces.
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Mobility Barriers
• Mobility barriers - Within-industry factors that inhibit the movement of
companies between strategic groups.
• Managers must:
• Determine if it is cost-effective to overcome mobility barriers.
• Realize that companies in other strategic groups become their competitors if they
overcome mobility barriers.
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Industry life-cycle pattern
Quiz Questions 需求供给平衡
需求供给配平
⼤众有新需求
⼤众不熟悉
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Embryonic industry
• Embryonic stage - Development stage
• Growth is slow due to:
• buyer’s unfamiliarity with the product and poor distribution channels.
• high prices due to companies’ inability to reap significant scale economies.
• Barriers to entry are based on access to technological expertise.
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Growth Industry Quiz Questions
• Growth stage - First-time demand expands rapidly due to new
customers in the market.
• Prices fall since:
• scale economies have been attained.
• distribution channels have developed.
• Threat from potential competitors is highest at this stage.
• Rivalry is low - Companies are able to expand their revenues without taking
market share away from other companies.
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洗牌
Industry Shakeout (1 of 2)
• Shakeout stage - Demand approaches saturation levels.
• There are fewer potential first-time buyers.
• Rivalry between companies intensifies.
• Price war results in bankruptcy of inefficient companies and deters
new entry.
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Industry Shakeout (2 of 2)
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Mature Industries
• Mature stage - Market is totally saturated, demand is limited to
replacement demand, and growth is low or zero.
• Barriers to entry increase and threat of entry from potential competitors
decreases.
• Industries consolidate and become oligopolies.
• Companies try to avoid price wars.
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Declining Industries
• Decline stage - Growth becomes negative due to:
• technological substitution.
• social changes.
• demographics.
• international competition.
• Rivalry among established companies increases.
• Falling demand results in excess capacity.
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Limitations of Models for Industry Analysis (1 of 2)
• Life-cycle issues
• Industries do not always follow the pattern of the industry life-cycle model.
• Time span of the stages vary from industry to industry.
• Innovation
• Punctuated equilibrium - Long periods of equilibrium are punctuated by periods
of rapid change.
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Limitations of Models for Industry Analysis (2 of 2)
• Change
• Because competitive forces and strategic group models are static, they cannot
capture periods of rapid change in the industry environment when value is
migrating.
• Company differences
• Overemphasize importance of industry structure as a determinant of company
performance.
• Underemphasize importance of variations among companies within a strategic
group.
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Punctuated equilibrium
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The Macroenvironment
PESTEL Analysis
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Macroeconomic Forces
Growth rate of the Interest rates
economy
Currency exchange Inflation or
rates deflation rates
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Global and Technological Forces
• Global forces - Falling barriers to international trade have enabled:
• Domestic markets enter to foreign markets.
• Foreign enterprises to enter the domestic markets.
• Technological forces - Technological change can:
• Make products obsolete.
• Create a host of new product possibilities.
• Impact the height of the barrier to entry and reshape industry structure.
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Demographic, social, and political Forces
• Demographic forces - Outcomes of changes in the characteristics of a
population.
• Social forces - Way in which changing social morals and values affect
an industry.
• Political and legal forces - Outcomes of changes in laws and
regulations.
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Thank You
Discussion:
• Under what environmental conditions are price wars most likely to
occur in an industry? How should a company try to deal with the threat
of a price war?
• Identify a growth industry, a mature industry, and a declining industry.
• Assess the impact of macroenvironmental factors on the likely level of
enrollment at your university over the next decade. What are the
implications of these factors for the job security and salary level of your
professors?
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