Chapter 3
External Analysis: The Identification of
Industry Opportunities and Threats
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.
3-2
The Five Forces Model
3-3
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.
3-4
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.
3-5
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)
3-6
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.
3-7
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.
3-8
Substitute Products
The competitive threat of substitute products
increases as they come closer to serving
similar customer needs.
3-9
A Sixth Force: Complementors
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.
3-10
The Role of the Macroenvironment
3-11
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.
3-12
Strategic Groups in the Pharmaceutical
Industry
3-13
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.
3-14
Punctuated
Equilibrium
and
Competitive
Structure
3-15
The Industry Life Cycle Model
Stages in the industry life cycle:
3-16
Growth in Demand and Capacity
3-17
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.
3-18
Positive Feedback in the Computer
Industry
3-19
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
3-20
The Nation-State and Competitive
Advantage
The determinants of competitive advantage:
Factor
endowments
3-21
