Outline:
Strategy formulation begins with an
analysis of the forces that shape
competition within the industry in which a
company is based.
Assessing the opportunities and risks that
the organization is facing can help us design
strategies that will help us surpass our
competitors.
Opportunities Elements and conditions in a
company’s environment that allow it to
formulate and implement strategies that
enable it to become more profitable.
Threats Elements in the external
environment that could endanger the
integrity and profitability of the company’s
business.
Explanation: Opportunities exist when a
business can make the most of factors in its
surroundings to create and put into action
plans that help it increase its profitability.
Threats occur when factors in the outside
environment compromise the honesty and
profitability of the company's operations.
The viability of carriers in the American
airline business is seriously threatened by
rising oil prices and, consequently, the cost
of jet fuel. The viability of carriers in the
American airline business is seriously
threatened by rising oil prices and,
consequently, the cost of jet fuel.
Begins with Industry analysis
• First, it examines concepts and tools
for analyzing the competitive
structure of an industry and
identifying industry opportunities
and threats.
• Second, it analyzes the competitive
implications that arise when groups
of companies within an industry
pursue similar or different kinds of
competitive strategies.
• Third, it explores the way an
industry evolves over time, and the
changes present in competitive
conditions.
• Fourth, it looks at the way in which
forces in the macroenvironment
affect industry structure and
influence opportunities and threats.
Defining an Industry
• An industry can be defined as a
group of companies offering
products or services that are close
substitutes for each other that is,
products or services that satisfy the
same basic customer needs.
• A company’s closest competitors.
Explanation: For Example, Fashion
Industry ( Chanel and Dior) both of this
company offers same variety of product
and because of that they share same
market.
Industry and Sector
 • Explanation: An important
distinction should be made
between an industry and a
sector. A sector is a group of
closely related industries.
For example, as illustrated in
Figure 2.1, the computer
sector comprises several
related industries: the
computer component
industries (e.g., the disk
drive industry, the
semiconductor industry, and
the modem industry), the
computer hardware
industries (e.g., the personal
computer industry, the
hand-held computer
industry, which includes
smart phones such as the
Apple iPhone and slates
such as Apple’s iPad, and the
mainframe computer
industry), and the computer
software industry.
Industry and Market Segments
It is also important to recognize the
difference between an industry and the
market segments within that industry.
Market segments are distinct groups of
customers within a market that can be
differentiated from each other on the
basis of their individual attributes and
specific demands.
Changing Industry Boundaries
Industry boundaries may change
over time as customer needs evolve, or
as emerging new technologies enable
companies in unrelated industries to
satisfy established customer needs in
new ways.
Explanation: Industry competitive
analysis begins by focusing upon the
overall industry in which a firm competes.
Tools that managers can use to perform
industry analysis include the competitive
forces model, strategic group analysis,
and industry life-cycle analysis. For an
example of how change can alter industry
boundaries, consider the convergence
between the computer and
telecommunications industries.
Competitive Forces Model
Once the boundaries of an industry
have been identified, managers face the
task of analyzing competitive forces
within the industry environment in
order to identify opportunities and
threats. Michael E. Porter’s well-known
framework, known as “The Five Forces
Model,” has helped managers with this
analysis.

Risk of Entry by Potential Competitors
Potential competitors are
companies that are not currently
competing in an industry but have the
capability to do so if they choose.
For example, cable television
companies have recently emerged as
potential competitors to traditional phone
companies. New digital technologies have
allowed cable companies to offer
telephone service over the same cables that
transmit television shows.
Established companies already
operating in an industry often attempt to
discourage potential competitors from
entering the industry because as more
companies enter, it becomes more difficult
for established companies to protect their
share of the market and generate profits.
Economies of scale Reductions in unit costs
attributed to a larger output.
Sources of scale economies include:
(1) cost reductions gained through mass
producing a standardized output.
(2) discounts on bulk purchases of raw
material inputs and component parts;
(3) the advantages gained by spreading
fixed production costs over a large
production volume; and
(4) the cost savings associated with
distributing marketing and advertising
costs over a large volume of output.
For example: 10 pesos unit cost and the
company can product 5 pcs. And on the
other hand, other manufacturing company
produce 10 pcs for 5 pesos unit cost. And
take note both companies produced same
product. So, the company who produce a
product with low cost is better because the
organization can reduce cost with the same
product, and have the privilege of discount
for mass-purchase supplies, gaining fixed
production cost and cost advantage.
Brand loyalty Preference of consumers for
the products of established companies.
Explanation: A company can create brand
loyalty by continuously advertising its
brand-name products and company name,
patent protection of its products, product
innovation achieved through company
research and development programs, an
emphasis on high quality products, and
exceptional after-sales service.
Absolute cost advantage
A cost advantage that is enjoyed by
incumbents in an industry and that new
entrants cannot expect to match.
Explanation: meaning that entrants cannot
expect to match the established companies’
lower cost structure. Absolute cost
advantages arise from three main sources:
(1) superior production operations and
processes due to accumulated experience,
patents, or trade secrets; (2) control of
particular inputs required for production,
such as labor, materials, equipment, or
management skills, that are limited in their
supply; and (3) access to cheaper funds
because existing companies represent
lower risks than new entrants. If
established companies have an absolute
cost advantage, the threat of entry as a
competitive force is weaker.
Switching costs
Costs that consumers must bear to switch
from the products offered by one
established company to the products
offered by a new entrant
Explanation: If a person currently uses
Microsoft’s Windows operating system and
has a library of related software
applications (e.g., word-processing
software, spreadsheet, games) and
document files, it is expensive for that
person to switch to another computer
operating system. To effect the change, this
person would need to purchase a new set
of software applications and convert all
existing document files to the new system’s
format. Faced with such an expense of
money and time, most people are unwilling
to make the switch unless the competing
operating system offers a substantial leap
forward in performance. Thus, the higher
the switching costs, the higher the barrier
to entry for a company attempting to
promote a new computer operating
system.
Rivalry Among Established Companies
• The second of Porter’s Five
Forces is the intensity of
rivalry among established
companies within an
industry.
• Rivalry refers to the
competitive struggle
between companies within
an industry to gain market
share from each other.
The competitive struggle can be fought
using:
• Price
• product design
• advertising and promotional
spending,
• direct-selling efforts, and after-
sales service and support.
Industry Competitive Structure
• The competitive structure of an
industry refers to the number and
size distribution of companies in it,
something those strategic managers
determine at the beginning of an
industry analysis.
Explanation: Industry structures vary,
and different structures have different
implications for the intensity of rivalry.
A fragmented industry consists of many
small or medium-sized companies, none
of which is in a position to determine
industry price.
 Exit Barrier

Industry Demand are economic, strategic, and emotional

factors that pre vent companies from
• Growing demand from new leaving an industry
customers or additional purchases
by existing customers tend to Explanation: If exit barriers are high,
moderate competition by providing companies become locked into an
greater scope for companies to unprofitable industry where overall
compete for customers. demand is static or declining. The result
• Growing demand tends to reduce is often excess productive capacity,
rivalry because all companies can leading to even more intense rivalry.
sell more without taking market
share away from other companies.
High industry profits are often the
result.
• Demand declines when customers
exit the marketplace, or when each
customer purchases less. When this
is the case, a company can only grow
by taking market share away from
other companies.

Cost Conditions

The cost structure of firms in an industry

is a third determinant of rivalry.

Explanation: In industries where the

fixed costs of production are high,
firms cannot cover their fixed costs
and will not be profitable if sales
volume is low. For example, cable TV
companies must lay cable in the
ground; the cost of doing so is a fixed
cost. Similarly, to offer express
courier service, a company such as
FedEx must first invest in planes,
package-sorting facilities, and
delivery trucks.