By: Shilpa Chadichal
EXTERNAL ANALYSIS:
THE IDENTIFICATION OF
INDUSTRY OPPORTUNITIES
AND THREATS
OT
• Eli Lilly’s Prozac – antidepressant drug went out of patent
in 2001
• Sales fell from $2.67 bn in 2000 to $650m in 2003
Industry , Sector, Market-Segment
• Industry – a group of firms offering products or services
that are close substitutes for each other – that is, goods
and services that satisfy the same basic needs
• Sector – a group of closely related industries
• Market segment – a group of potential buyers having a
distinct or basic need and demand
Analyzing Industry Structure
Opportunities and threats are competitive challenges
arising for changes in industry conditions.
Analytic tools such as the
five forces model help
managers formulate
appropriate strategic
responses.
The Five Forces Model
Source: Adapted and reprinted by permission of Harvard Business
Review. An exhibit from “How Competitive Forces Shape Strategy”
by Michael E.. Porter (March-April 1979), Copyright © 1979 by the
President and Fellows of Harvard College: all rights reserved.
Potential Competitors
New entrants into an industry threaten incumbent
companies.
Barriers to entry:
• Brand loyalty
• Absolute cost advantages
• Economies of scale
• Switching costs
• Government regulation
Entry barriers reduce the threat
of new and additional competition.
e.g.
• Brand loyalty – Coka cola, Pepsi
• Absolute Cost Advantage –
by Superior production operations - HUL
Control on particular inputs
Access to cheaper funds
Economies of scale – Nirma
Switching cost – Microsoft Windows
Government regulation – Petroleum, Telecom
Rivalry Among Established Companies
The intensity of competitive rivalry in an industry arises
from:
• Industry’s competitive structure.
• Demand (growth or decline) conditions in industry.
• Height of industry exit barriers.
• Cost Conditions
Competitive Structure
Continuum of
Industry Structures
Fragmented Consolidated
Many firms, Few firms, One firm or one
no dominant shared dominance dominant firm
firm (oligopoly) (monopoly)
The Bargaining Power of Buyers
Buyers are most powerful when:
• There are many small sellers and few large buyers.
• Buyers purchase in large quantities.
• A single buyer is a large customer to a firm.
• Buyers can switch suppliers at low cost.
• Buyers purchase from multiple sellers at once.
• Buyers can easily vertically integrate to compete with suppliers.
The Bargaining Power of Suppliers
Suppliers have bargaining power when:
• Their products have few substitutes and are important to buyers.
• The buyer’s industry is not an important customer to the supplier.
• Differentiation makes it costly for buyers to switch suppliers.
• Suppliers can vertically integrate forward to compete with buyers
and buyers can’t integrate backward to supply their own needs.
Substitute Products
The competitive threat of substitute products increases
as they come closer to serving similar customer needs.
Far Close
A Sixth Force: Complementors
(Andrew Grove, CEO of Intel)
Complementors:
• Companies whose products are sold in tandem with another
company’s products.
• Increased supply of a complementary product collaterally
increases demand for the primary product.
Example:
• Faster CPU chips fuel sales
of personal computers.
Strategic Groups Within Industries
The concept of strategic groups
• Within an industry, a competitor grouping using similar strategies
that differ from other industry groups.
Implications of strategic groups
• The closest industry competitors are those in the group.
• The various industry groups are differentially and competitively
advantaged and positioned.
• Mobility barriers inhibit the movement of competitors from one
strategic group to another.
Strategic Groups in the Pharmaceutical Industry
Limitations of the Five Forces and Strategic Group Models
Both models are static and ignore innovation.
Their focus is on industry and group structures rather than
individual companies.
• Innovation creates change in
industry structures, altering the
competitive environment.
• Industry structure cannot
fully explain the performance
differences between industry
competitors.
The Industry Life Cycle Model
Stages in the industry life cycle:
Growth in Demand and Capacity
Punctuated
Equilibrium
and
Competitive
Structure
The Role of the Macroenvironment
Network Economics As a Determinant of Industry Conditions
The demand for primary industry products depends on the size
of the total market for complementary products.
• Network economics result in
positive feedback loops that
foster rapid demand increases.
• Market competitors are
protected by switching
cost entry barriers.
Positive Feedback in the Computer Industry
Globalization and Industry Structure
Globalization
• Globally dispersed production lowers
costs and increases quality.
• Global markets are replacing
national markets.
Trend implications
• No isolated national markets
• More competitors, more intense competition
• More rapid innovation and shorter product life cycles
The Nation-State and Competitive Advantage
The determinants of competitive advantage:
Factor
endowments
• Thank You
