SUMMARY

Opportunities & Threats – Analyzing the External Environment

First, what is Industry? It is a group of companies offering products or services that are
close substitutes to each other. Whereby close substitutes are products or services that satisfy
the same basic customer needs.
Example problems of the steel industry are cost-efficient foreign producers took market
share away from once-dominant integrated steel makers, new domestic competition in the form
of mini mills and demand for steel decreased as customers switched to substitutes – aluminum,
plastics, composites.
Usually, the combination of growing supply and shrinking demand results to excess
capacity, and steel companies responded to it by slashing their prices to try and capture more
demand, and cover their fixed costs to match their rivals that results to intense price competition
and low profits.
Moreover, there is a Five Forces Model that is a simple but powerful tool for understanding
the competitiveness of your business environment, and for identifying your strategy's potential
profitability. The five forces are the following:

 Risk of new entry (By potential competitors)

Your position can be affected by people's ability to enter your market. So, think about
how easily this could be done. How easy is it to get a foothold in your industry or
market? How much would it cost, and how tightly is your sector regulated?

If it takes little money and effort to enter your market and compete effectively, or if you
have little protection for your key technologies, then rivals can quickly enter your market
and weaken your position. If you have strong and durable barriers to entry, then you can
preserve a favorable position and take fair advantage of it.

In relation to this, there are important barriers to entry:

- Economies of scale - arise when unit costs fall as a firm expands its output.
- Brand loyalty - exists when consumers have a preference for the products of
established companies.
- Absolute cost advantages – (of established companies) relative to potential entrants
who cannot match established lower cost structure.
- Customer switching costs – arise when it costs a customer time, energy, and money
to switch from the products offered by one established company to the products
offered by a new entrant.
- Government regulation - regulatory barriers to entry significantly reduced the level of
competition in both the local and long-distance phone markets, enabling them to
earn higher profits.

 Extent of rivalry (Among established firms)

The following are the factors affecting extent of rivalry:

 - Strong demand conditions – it lessens the competition among established
companies and also create opportunities for expansion, but when demand is weak,
competition can intensify intensively particularly in consolidated industries with high
exit barriers.
- Industry competitive structure – first, there’s a fragmented industry wherein there’s a
large number of small or medium-sized companies where they can’t determine the
industry prices. Examples of these are agriculture, dry cleaning, video rental, health
clubs and etc. Second, the consolidated industry where companies under oligopoly
or monopoly can determine industry prices. Example of these are aerospace, soft
drink, automobile, pharmaceutical, stockbrokerage and etc.
- Cost conditions - Where fixed costs are high, profitability tends to be highly
leveraged to sales volume, desire to grow volume can spark intense rivalry.
- Height of exit barriers – those that are economic, strategic and emotional factors that
results to prevention of companies from leaving an industry.

 Bargaining power of buyers

Buyers are most powerful when an industry is compose of small company and
the buyers are large, buyers purchase in large quantities, when the supply industry
depends on buyer’s total orders, the switching costs are low and when the buyers can
produce the products themselves. Example of these are auto component supply industry
has large auto manufacturers as buyers, and pharmaceuticals vs. hospitals.

 Bargaining power of suppliers

Suppliers are most powerful when the product have few substitutes, the industry
is not an important customers, and companies experience significant switching costs.

 Threat of substitute products

If there are many similar products in the market, the lower the price a company
can charge without losing customers to the substitute.

Strategic Groups

- They are the group of companies pursuing the same and similar strategy.

Sample Strategic Groups

Proprietary Generic
- Heavy R&D spending - Focus on low-cost copies of drugs
- Focus on developing new, developed by proprietary group
proprietary, blockbuster drugs companies whose patents
Ex. Merck, Eli Lilly, Pfixer expired. Low prices, production
efficiency.
Ex. Watson Pharmacy
Industry Life Cycle Model

- It is a useful tool for analyzing the effects of industry evolution on competitive forces
– entry of & rivalry among firms. Implications on competitive structure & set of
opportunities & threats.

Different Industries:

Embryonic Industries

- Those companies who are just beginning to develop. It is normal to have slow growth
due to buyers’ unfamiliarity with the products, high prices and poorly developed way
of distributing their products.
- Their rivalry rests on educating customers, opening up distribution channels and
perfecting product design.
- Rivalry can be intense. Usually, the first company to solve design problems has the
opportunity to gain a significant position in the market.
- Can also be a product of company’s innovative efforts.

Growth Industries

- The demand for the products begin to rise. The first-time demand expands rapidly
due to many new customers enter the market.
- The products become familiar to the customers
- Prices fall due to experience & economies of scale have been attained
- Developed distribution channels
- Early in the growth stage, threat from potential competitors is highest. However, high
growth means that new entrants can be absorbed without a marked increase in
intensity of rivalry

Industry Shakeout

- Point at which a market is no longer generating new demand for a firm's products,
due to competition, decreased need, obsolescence, or some other factor.
- In order to survive, companies lessen their cost and build brand loyalty.

Mature Industries

- They are the survivors of the industry shakeout.

- Produce brand loyalty and efficient low-cost operations.
- Most industries have consolidated and become oligopolies
- Market is totally saturated, demand is limited to replacement demand, growth is low
or zero.
- High entry barriers

Declining Industries
 - Negative growth due to technological substitution, social changes, demographics, &
international competition.
Macroenvironment

 Macroeconomic forces
 Global forces
 Technological forces
 Demographic forces
 Social forces
 Political and legal forces

“Macroeconomic forces affect the general health & well-being of a nation or the regional
economy of an organization, which in turn affect companies’ and industries’ abilities to earn an
adequate rate of return.”

Macroeconimic Forces

 Economic Growth – results into an expansion in customer expenditures, tends to

make a general easing of competitive pressures within an industry.
 Interest Rates – can be a determinant of the demand for a company’s products.
More important when customers borrow money to finance their purchase. It
should be noted that the lower the interest rates are, the lower the cost of capital
for companies will be resulting to more investment there will be.
 Currency Exchange Rates - define the value of different national currencies
against each other. It has a great effect on the competitiveness of a company’s
products in the global marketplace.
 Price Inflation – the reason for destabilization of an economy, producing slower
economic growth, higher interest rates and volatile currency movements. In here,
investments will be held back that will depress the economic activity, and will
push the economy into recession.
 Price Deflation – also the reason for destabilization of an economy. The price has
an inverse relationship with the real price of fixed payments. The increase in the
real value of debt consumes more of household and corporate cash flows,
leaving less for other purchases & depressing the overall level of economic
activity.
 Global Forces – companies will have the opportunity to enter foreign countries as
their new markets for goods and services.
 Technological Forces - process called a “perennial gale of creative destruction”.
Both creative & destructive – both opportunity & threat.
 Demographic Forces – the result of changes in the characteristics of a
population, such as age, gender, ethnic origin, race, sexual orientation, & social
class.
 Social Forces – the changes in social mores and values affect he industry. An
example is the social movement, normally toward greater health consciousness.
 Political & Legal Forces - result from political & legal developments within
society. Increase in passenger-carrying capacity led to excess capacity, intense
competition and fare wars.