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