2

External Analysis:
The Identification of Industry
Opportunities and Threats

1
External Analysis
 Analyzing the dynamics of the industry in which
an organization competes to help identify:
 Opportunities: conditions in the environment that a
company can take advantage of to become more
profitable
 Threats: conditions in the environment that
endanger the integrity and profitability of the
company’s business

2
Defining an Industry
 Industry
A group of companies offering products or
services that are close substitutes for each
other
 Competitors
 Rivalcompanies that serve the same basic
customer needs

3
Defining an Industry (cont’d)
 Sector
A group of closely related industries
 Market segments
 Distinctgroups of customers within a market
that can be differentiated from each other
based on their distinct attributes and demands
 Changing industry boundaries

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The Computer Sector:
Industries and Segments

5
Porter’s Five Forces Model & The
Sixth Force of Complementors
Complementors

Source: Adapted and reprinted by permission of Harvard Business Review. From “How Competitive
Forces Shape Strategy,” by Michael E. Porter, Harvard Business Review, March/April 1979 © by the
President and Fellows of Harvard College. All rights reserved. 6
Risk of Entry by Potential
Competitors
 Barriers to entry
 Brand loyalty
 Absolute cost advantage
 Superior production operations and processes
 Control of particular inputs required for production
 Access to cheaper funds because existing companies
represent lower risks than new entrants

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Risk of Entry by Potential
Competitors (cont’d)
 Barriers to entry (cont’d)
 Economies of scale
 Cost reductions from mass producing a standardized output
 Discounts on bulk purchases of inputs
 Advantages of spreading fixed costs over a large production
volume
 Cost savings from marketing and advertising for a large
volume of output
 Customer switching costs
 Government regulation

8
Rivalry Among Established
Companies
 Industry competitive structure
 Fragmented vs. consolidated (oligopoly or
monopoly)
 Industry demand

9
Rivalry Among Established
Companies
 Exit barriers
 Investments in assets of little or no alternative
value or that cannot be sold
 High fixed costs of exit
 Emotional attachments to an industry
 Economic dependence
 Need to maintain an expensive collection of
assets in order to participate effectively in an
industry

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The Bargaining Power of Buyers
 Buyers are most powerful when
 The industry that is supplying a particular product or
service is composed of many small companies and
the buyers are large and few in number
 Buyers purchase in large quantities
 The supply industry depends on the buyers for a large
percentage of its total orders
 Switching costs are low
 It is economically feasible for buyers to play one
supplier against another
 Buyers can threaten to produce the product
themselves

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The Bargaining Power of Suppliers
 Suppliers are most powerful when
 There are few substitute products
 The industry is not an important customer to the
supplier
 Switching costs are high for companies switching to a
different supplier
 Suppliers can threaten to compete directly with
buyers by entering their industry
 Buyers cannot threaten to enter the suppliers’ industry

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Substitute Products
 Many substitute products
 Are a threat and limit the price that companies
in one industry can charge for their product,
and thus industry profitability
 Few or weak close substitutes
 Gives the industry the opportunity to raise
prices and earn additional profits

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A Sixth Force: Complementors
 When complementors are important and
their number is increasing
 Demand and profits in the industry are
boosted
 When complementors are weak
 Industry growth can slow and profits can be
limited

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Strategic Groups Within Industries
 Formed within an industry when some
companies follow the same basic product
positioning strategy, which is different from
that of other companies in other groups
 Companies can position their products in
terms of distribution channels, market
segments, product quality, technological
leadership, customer service, pricing policy,
advertising policy, promotions

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Strategic Groups in the
Pharmaceutical Industry

Insert Figure 2.3

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Implications of Strategic Groups

 A company’s closest competitors are

those in its strategic group
 Each strategic group may face a different
set of opportunities and threats

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The Role of Mobility Barriers
 A company may decide to move from one
strategic group to another where the five
forces are weaker and higher profits are
possible
 Mobility barriers are similar to industry
entry and exit barriers and must be
weighed carefully

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Industry Life Cycle Analysis
 The strength and nature of the five forces
change as an industry evolves through its
life cycle
 Managers must anticipate how the forces
will changes as the industry evolves and
formulate appropriate strategies

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Stages in the Industry Life Cycle

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Shakeout: Growth in Demand
and Capacity

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Limitations of Models for Industry
Analysis
 Life cycle issues
 The embryonic stage can sometimes be skipped
 Industry growth can be revitalized
 The time span of the stages can vary
 Innovation and change
 Innovation can unfreeze and reshape industry
structure
 An industry may be hypercompetitive, with permanent
and ongoing change

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Punctuated Equilibrium and
Competitive Structure

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Limitations of Models for
Industry Analysis (cont’d)
 Company differences
 The importance of company differences within
an industry or strategic group can be
underemphasized
 The individual resources and capabilities of a
company may be more important in
determining profitability than the industry or
strategic group

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The Role of the
Macroenvironment

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The Macroenvironment
 Changes in these forces can have a direct
impact on Porter’s five forces:
 Economic
 Technological
 Demographic
 Social
 Political and Legal

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The Global and National
Environments
 Globalization of production and
markets
 Lower barriers to cross-border trade and
investment
 National differences in the cost and quality of
factors of production

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The Global and National
Environments
 Globalization of production and
markets
 “Home” and “foreign” markets and competitors
are blurring
 Intensified rivalry
 Intensified rate of innovation
 Many new markets are open

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National and Competitive Advantage

Source: Adapted from M.E. Porter, “The Competitive Advantage of Nations,” Harvard Business Review,
March-April, 1990, p. 77. 29