Competitive Strategy
PMBA6011 A&B
External analysis
Prof. Shipeng YAN
Assistant Professor of Management and Strategy
The University of Hong Kong
1: Purpose and
strategy
Foundations 2: External analysis
3: Internal analysis
4: Competitive
tactics
Business-level
strategy
Strategy
5: Innovation
Market strategy
6: Diversification
Corporate-level 7: Make, buy, or
strategy borrow
9: Political strategy 8: Going global
Non-market strategy
10: ESG and
sustainability
Firm and its external environment
Societal environment
Industry environment
Political Technological
factors factors
Firm
Buyers, suppliers, potential
Ecological Sociocultural
new entrants, substitutes,
factors factors
rivalries
Economic
factors
Firm and its external environment
Societal environment
Industry environment
Political Technological
factors factors
Firm
Buyers, suppliers, potential
Ecological Sociocultural
new entrants, substitutes,
factors factors
rivalries
Economic
factors
2020: 600 million
Chinese live under
1000 RMB of
income per month
Example: understanding China
Example: understanding China
• Percentage of Chinese with a passport: 10%
• Percentage of Chinese with high English proficiency: 1%
• Most common academic credential (70%): high school diploma
• If your Chinese friend is not
• junior high or lower
• making less than 8k per month
• Fluent in Chinese or local dialect only
• and never been abroad
• Then you are disconnected from the majority.
Firm and its external environment
Watch this video
https://www.youtube.com/watch?v=HmXY
Sb3bHTA
Industry environment
Political Technological Which factor on the left presents the greatest
factors factors threat and which one the greatest
Firm opportunity? Why?
Buyers, suppliers, potential
Ecological new entrants, substitutes, Sociocultural
factors
rivalries factors Which factor presents the greatest
threat/opportunity in your current industry?
Economic
factors
Firm and its external environment
Societal environment
Political Industry Technological
factors environment factors
Firm
Ecological Sociocultural
factors factors
Economic
factors
Compare industry profitability
Compare industry profitability - 2025
Number of After-tax Operating
Industry name firms Margin Sales/ Invested Capital (LTM) Return on Capital
Advertising 54 10.53% 4.19 44.19%
Aerospace/Defense 67 7.03% 2.62 18.41%
Air Transport 24 4.95% 1.75 8.64%
Apparel 37 8.84% 1.73 15.34%
Auto & Truck 34 3.24% 1.15 3.73%
Auto Parts 33 4.75% 2.43 11.51%
Beverage (Alcoholic) 18 20.99% 0.85 17.86%
Beverage (Soft) 29 18.74% 1.67 31.37%
Broadcasting 22 11.17% 1.14 12.68%
Building Materials 39 11.08% 2.66 29.43%
Business & Consumer Services 152 10.91% 2.66 29.03%
Cable TV 9 16.25% 0.85 13.82%
Chemical (Basic) 31 5.75% 1.59 9.11%
Chemical (Diversified) 4 4.38% 1.31 5.74%
Chemical (Specialty) 60 10.91% 1.13 12.37%
Coal & Related Energy 16 10.73% 1.24 13.31%
Drugs
(Pharmaceutical) 231 25.00% 1.01 25.38%
Compare industry profitability - 2023
After-tax Operating
Industry name Number of firms Margin Sales/Capital Return on Capital
Advertising 58 10.43% 3.51 36.62%
Aerospace/Defense 77 8.17% 1.87 15.25%
Air Transport 21 1.92% 1.60 3.08%
Apparel 39 9.78% 2.10 20.57%
Auto & Truck 31 6.84% 0.95 6.46%
Auto Parts 37 5.20% 1.97 10.26%
Bank (Money Center) 7 0.08% 0.32 0.03%
Banks (Regional) 557 -0.08% 0.47 -0.04%
Beverage (Alcoholic) 23 18.28% 0.80 14.66%
Beverage (Soft) 31 17.92% 1.60 28.72%
Broadcasting 26 12.42% 1.09 13.52%
Brokerage & Investment
Banking 30 0.21% 0.26 0.06%
Building Materials 45 11.67% 2.96 34.60%
Drugs
(Pharmaceutical) 281 25.98% 0.75 19.58%
Five forces model
Threat of new entrants
Bargaining power of Bargaining power of
Threat of existing rivalry
suppliers buyers
Threat of substitutes
Five forces model
Threat of new entrants
Bargaining power of Bargaining power of
Threat of existing rivalry
suppliers buyers
Threat of substitutes
Threat of Entry (1 of 2)
• The risk that potential competitors will enter an industry
• Lowers industry profit potential due to price war
• Incumbents spend more to satisfy existing customers
• Entry barriers:
• Obstacles blocking others from entering
• A significant predictor of industry profit potential
Threat of Entry (2 of 2)
• Discuss: Which entry barriers can deter competition?
Threat of Entry (2 of 2)
• Discuss: Which entry barriers can deter competition?
• Economies of scale
• Network effects
• Customer switching costs
• Capital requirements
• Advantages independent of size (e.g., brand value)
• Government policy
• Credible threat of retaliation
The threat of entry is high when
• The minimum efficient scale to compete in an industry is low
• Network effects are not present
• Customer switching costs are low
• Capital requirements are low
• Incumbents do not have:
• Brand loyalty.
• Proprietary technology.
• Preferential access to raw materials.
• Preferential access to distribution channels.
• Favourable geographic locations.
• Cumulative learning and experience effects.
• Restrictive government regulations do not exist
• New entrants expect that incumbents will not or cannot retaliate
Five forces model
Threat of new entrants
Bargaining power of Bargaining power of
Threat of existing rivalry
suppliers buyers
Threat of substitutes
Power of Suppliers
• Lowers industry profit potential if:
• Suppliers demand higher prices for their inputs
• Suppliers reduce quality
The power of suppliers is high when
• Supplier’s industry is more concentrated than the industry it sells to.
• Suppliers do not depend heavily on the industry for their revenues.
• Incumbent firms face significant switching costs when changing suppliers.
• Suppliers offer products that are differentiated.
• There are no readily available substitutes for the products or services that the suppliers
offer.
• Suppliers can credibly threaten to forward-integrate into the industry.
Five forces model
Threat of new entrants
Bargaining power of Bargaining power of
Threat of existing rivalry
suppliers buyers
Threat of substitutes
Power of Buyers
• Lowers industry profit potential if:
• Buyers obtain price discounts
• Buyers demand higher quality / service
Mini-case: follow Wal-Mart or not?
• You sell your products to Wal-Mart which begins to require all
suppliers should follow Wal-Mart’s new sustainability
standards.
• Suppliers refusing to do so will be of a lower priority for Wal-
Mart
• What are the costs and benefits to be sustainable following Wal-
Mart?
• Benefit
• Suppliers may reach new environmentally conscious consumers and
sell at a higher premium
• Increasing sustainability may thus translate into cost savings because
fewer purchased inputs, such as energy and waste management
services, are needed
• Cost
• Addressing Wal-Mart's sustainability mandate requires supplier
investments in time and money
• Superficial compliance can backfire
• Wal-Mart is facing the consumers and is more likely to reap the reward
• 64% were harmed by the sustainability mandate, but the others
36% receive net benefit
• The 36% do more advertising to reap the benefit
Five forces model
Threat of new entrants
Bargaining power of Bargaining power of
Threat of existing rivalry
suppliers buyers
Threat of substitutes
Threat of Substitutes
• Meet the same basic customer need
• But in a different way
• Available from outside the given industry
• Examples:
• Energy drinks vs. coffee
• Videoconferencing vs. business travel
• E-mail vs. express mail
The threat of substitute is high when
• The substitute offers an attractive price-performance trade-off.
• The buyer’s cost of switching to the substitute is low.
Five forces model
Threat of new entrants
Bargaining power of Bargaining power of
Threat of existing rivalry
suppliers buyers
Threat of substitutes
Rivalry Among Competitors
• The intensity with which companies in the same industry
jockey for market share and profitability
• Examples of tactics:
• Price discounting
• After sales service
The rivalry among existing competitors
is high when
• There are many competitors in the industry.
• The competitors are roughly of equal size.
• Industry growth is slow, zero, or even negative.
• Exit barriers are high.
• Incumbent firms are highly committed to the business.
• Incumbent firms cannot read or understand each other’s strategies
well.
• Products and services are direct substitutes.
• Fixed costs are high and marginal costs are low.
• Excess capacity exists in the industry.
• The product or service is perishable.
New entrants are threatening
Five • The minimum efficient scale to compete in an industry is low
• Network effects are not present
Force • Customer switching costs are low
• Capital requirements are low
Check • Incumbents do not possess
Brand loyalty. Proprietary technology. Preferential access to raw materials. Preferential access to distribution
List channels. Favourable geographic locations. Cumulative learning and experience effects.
• Restrictive government regulations do not exist
• New entrants expect that incumbents will not or cannot retaliate
Suppliers are threatening when Rivalries are threatening when Buyers are threatening when
• There are many competitors in the industry. • There are a few buyers and each
• Supplier’s industry is more
concentrated than the industry • The competitors are roughly of equal size. buyer purchases large quantities
it sells to. • Industry growth is slow, zero, or even negative. relative to the size of a single
• Exit barriers are high. seller
• Suppliers do not depend
heavily on the industry for • Incumbent firms are highly committed to the • The industry’s products are
their revenues. business. standardized or undifferentiated
• Incumbent firms cannot read or understand each commodities.
• Incumbent firms face
significant switching costs other’s strategies well. • Buyers face low or no switching
when changing suppliers. • Products and services are direct substitutes. costs.
• Fixed costs are high and marginal costs are low. • Buyers can credibly threaten to
• Suppliers offer products that
are differentiated. • Excess capacity exists in the industry. backwardly integrate into the
• The product or service is perishable. industry
• There are no readily available
substitutes for the products or
services that the suppliers Substitutes are threatening when
offer. • The substitute offers an attractive price-performance
• Suppliers can credibly trade-off.
threaten to forward-integrate • The buyer’s cost of switching to the substitute is low.
into the industry.
Discussion
1: Mobile phone (global) 2: Bubble tea (Mainland China) 3: Food delivery (HK) 4: Fast fashion (global)
Group: 2, 4 Group: 1, 3,9 Group: 5, 8 Group: 6,7
Threat of new
entrants 1. What is the average ROA or
ROE of this industry (your best
guess)?
Bargaining power Threat of existing Bargaining power
of suppliers rivalry of buyers
2. According to the five-force
model, which force is posing
Threat of
the greatest challenge to this
substitutes
industry’s profitability?
