Business Strategy - Arunabhas Bose 3-1

EXTERNAL ANALYSIS:
THE IDENTIFICATION OF
INDUSTRY OPPORTUNITIES
AND THREATS
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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

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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
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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.
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The Five Forces Model

FIGURE 3.1 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.
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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.
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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
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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
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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)
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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.
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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.
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Substitute Products
The competitive threat of substitute products increases
as they come closer to serving similar customer needs.

Far Close
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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.
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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.
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Strategic Groups in the Pharmaceutical

Industry

FIGURE 3.3
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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.
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The Industry Life Cycle Model

Stages in the industry life cycle:

FIGURE 3.5
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Growth in Demand and Capacity

FIGURE 3.6
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Punctuated
Equilibrium
and
Competitive
Structure

FIGURE 3.4
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The Role of the Macroenvironment

FIGURE 3.2
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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.
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Positive Feedback in the Computer

Industry

FIGURE 3.7
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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
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The Nation-State and Competitive

Advantage
The determinants of competitive advantage:

Factor
endowments

FIGURE 3.8