BS-External Environment

Strategic Management - Arunabhas Bose
EXTERNAL ANALYSIS:
THE IDENTIFICATION OF
INDUSTRY OPPORTUNITIES
AND THREATS
OT
• Eli Lilly’s Prozac –
• Sales fell from $2.67 bn in 2000 to $650m in 2003
• antidepressant drug went out of patent in 2001

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
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.
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.
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.
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
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
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)
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.
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.
Substitute Products
The competitive threat of substitute products increases
as they come closer to serving similar customer needs.
Far Close
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.
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.
Strategic Groups in the Pharmaceutical Industry
FIGURE 3.3
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.
The Industry Life Cycle Model

Stages in the industry life cycle:
FIGURE 3.5
Growth in Demand and Capacity
FIGURE 3.6
Punctuated
Equilibrium
and
Competitive
Structure
FIGURE 3.4
The Role of the Macroenvironment
FIGURE 3.2
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.
Positive Feedback in the Computer Industry
FIGURE 3.7
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
The Nation-State and Competitive

Advantage
The determinants of competitive advantage:
Factor
endowments
FIGURE 3.8

BS-External Environment

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BS-External Environment

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Strategic Management - Arunabhas Bose

• Sales fell from $2.67 bn in 2000 to $650m in 2003

• antidepressant drug went out of patent in 2001

Industry , Sector, Market-Segment

• Sector – a group of closely related industries

• Market segment – a group of potential buyers having a

Analyzing Industry Structure

The Five Forces Model

FIGURE 3.1 Source: Adapted and reprinted by permission of Harvard Business

Rivalry Among Established Companies

The intensity of competitive rivalry in an industry arises

The Bargaining Power of Buyers

The Bargaining Power of Suppliers

A Sixth Force: Complementors

Strategic Groups Within Industries

Strategic Groups in the Pharmaceutical Industry

Limitations of the Five Forces and Strategic Group

Both models are static and ignore innovation.

The Industry Life Cycle Model

Growth in Demand and Capacity

The Role of the Macroenvironment

Network Economics As a Determinant of Industry

Positive Feedback in the Computer Industry

Globalization and Industry Structure

The Nation-State and Competitive

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