OPPORTUNITIES

& THREATS –
ANALYZING THE
EXTERNAL
ENVIRONMENT
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HELLO!
I am Dr. Merlita M. Durana
I am here because I love to
give presentations.
You can find me at
mmdurana@firstasia.edu.
ph
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1. Definition of
industry
A group of companies
offering products or
services that are close
substitutes to each other.
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Close substitutes are products or
services that satisfy the same basic
customer needs.
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Ex. Problems of the steel industry

▸ Cost-efficient foreign producers took

market share away from once-dominant
integrated steel makers.
▸ New domestic competition in the form of
minimills.
▸ Demand for steel decreased as customers
switched to substitutes – aluminum,
plastics, composites
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The combination of a growing

supply and shrinking demand
resulted in excess capacity.
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Response of steel cos. to the excess capacity

They slashed their Customers could easily

prices to try & capture switch demand from
more demand & cover company to company,
their fixed costs, only to & further bargain down
be matched by rivals. prices. Strong unions &
Result – intense price costs of closing a plant
competition & low impeded reducing
profits. excess capacity.
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Profit turnaround in 2008

1. Surge in demand 2. Two decades of 3. Depreciation of

for steel bankruptcies & the U.S. dollar
From rapidly consolidation > Made steel imports
developing Removed much of relatively more
economies of the excess capacity expensive &
China, India, Russia, in the U.S. & created demand for
& Brazil. worldwide. Held steel exports from
their own against the U.S.
foreign imports.
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A complex idea can be

conveyed with just a single
still image, namely making it
possible to absorb large
amounts of data quickly.
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Want big impact? USE BIG IMAGE

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Competitive environment – Prices/profits
surged Ex. Hot rolled steel plate

Ex. Nucor
June 2003 Ex. U.S. Steel
Steel
$260 per ton 2003 ($406M)
2003 $63M
June 2008 2008 $2B
2008 $1.8B
$1,225 per ton profit
profit
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Five Forces Model

Risk of new Extent of rivalry Bargaining

entry Among established power of
By potential firms
competitors
buyers

Bargaining Threat of
power of substitute
suppliers products
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The risk of entry by potential

competitors is a function of the
height of barriers to entry. The
higher the barriers to entry
are, the lower is the risk of
entry & the greater the profits
that can be earned in the
industry.
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Strategy: Build barriers to

entry (in case of incumbent
firms) or circumvent barriers
(in case of new entrants).
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Important barriers to entry

▸ Economies of scale
▸ Brand loyalty
▸ Absolute cost advantages
▸ Customer switching costs
▸ Government regulation
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Economies of scale arise when

unit costs fall as a firm
expands its output
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Sources of economies of scale

▸ Cost reductions from mass-producing a

standardized output
▸ Discounts on bulk purchases of raw
material inputs/component parts
▸ Cost savings from marketing, advertising
& other fixed costs spread over large
production volume
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Brand loyalty exists when

consumers have a preference
for the products of established
companies.
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How a company can create brand loyalty

▸ Continuous advertising of its brand-

name products & company name
▸ Patent protection of products
▸ Product innovation thru R&D programs
▸ Emphasis on high product quality
▸ Good after-sales service
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Significant brand loyalty

makes it difficult for new
entrants because taking
market share away from
established companies may be
too costly.
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Strategy: Most new entrants

have focused on the premium
segment of the industry,
where established brands have
less of a hold. (Ex. RC Cola
replaced private-label soda
drinks.)
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Absolute cost advantages – (of

established companies)
relative to potential entrants
who cannot match established
lower cost structure.
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Three main sources of absolute cost
advantages

▸ Superior operations & processes due to

accumulated experience, patents, or
secret processes
▸ Control of particular inputs required for
production – labor, materials, equipment
or management skills that are limited in
their supply
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Three main sources of absolute cost
advantages –cont’d.

▸ Access cheaper funds because existing

companies represent lower risks than
new entrants
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If established cos have an

absolute cost advantage, the
threat of entry as a
competitive force is weaker.
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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.
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The higher the switching costs

are, the higher the barrier to
entry is for a company
attempting to promote a new
operating system.
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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.
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Factors affecting extent of rivalry

▸ Competitive structure
▸ Demand conditions
▸ Cost conditions
▸ Barriers to exit
▸ [Rivalry refers to competitive struggle
between companies in an industry to
gain market share from each other.]
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Strong demand conditions
moderate the competition
among established companies
and create opportunities for
expansion. When demand is
weak, intensive competition can
develop, particularly in
consolidated industries with
high exit barriers.
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Industry competitive structure:

Fragmented industry – large
number of small or medium-
sized companies, none of which
can determine industry prices.
Ex. Agriculture, dry cleaning,
video rental, health clubs, real
estate brokerage, tanning parlor
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Industry competitive structure:

consolidated industry – oligopoly
of large cos. or monopoly.
Companies can determine
industry prices. Ex. Aerospace,
soft drink automobile,
pharmaceutical, stockbrokerage,
beer
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Industry demand:
Growing demand fr. new or
existing customers moderates
competition – greater scope for
companies to compete for
customers.
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Cost conditions:
Where fixed costs are high,
profitability tends to be highly
leveraged to sales volume,
desire to grow volume can spark
intense rivalry. Ex. FedEx cap.
investments
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Height of exit barriers:

exit barriers are economic,
strategic and emotional
factors that prevent cos.
from leaving an industry.
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Exit barriers in industry

Investments in High fixed costs of Emotional

assets exit attachments
Specific machines, Severance pay, health Refusal to exit for
equipment, & operating benefits, pensions of sentimental reasons or
facilities which will be workers. pride
written off in case of
exit Bankruptcy
At or above regulations
Economic minimum level U.S. rules allow insolvent
dependence
To participate enterprises to reorganize
Relies on a single under bankruptcy
effectively in the
industry for its revenue protection.
and profit
industry
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Circumstances – buyers are most powerful

▸ Industry composed of many small cos.,

buyers are large, few in number
▸ Buyers purchase in large quantities
▸ Supply industry depends on buyers for a
large percentage of its total orders
▸ Switching costs are low
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Circumstances – buyers are most powerful

▸ Economically feasible to purchase input

fr. several cos. at once
▸ Buyers threaten to enter the industry &
produce the product themselves
Ex. Auto component supply industry has
large auto manufacturers as buyers.
Pharmaceuticals vs. hospitals.
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Circumstances – suppliers are most
powerful

▸ Product of suppliers has few substitutes

& is vital to cos. in an industry.
▸ Industry is not an important customer to
suppliers
▸ Companies will experience significant
switching costs
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Circumstances – buyers are most powerful

▸ Suppliers threaten to enter their

customer’s industry & use their inputs to
produce products that compete with
them
▸ Cos. cannot threaten to enter supplier’s
industry
[PC firms are heavily dependent on Intel.]
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Substitute products – The

more similar the substitute
products are to each other,
the lower is the price that
companies can charge
without losing customers to
the substitutes.
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Strategic groups:
groups of companies
pursuing the same or similar
strategy
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Sample strategic groups

Proprietary Generic
Heavy R&D spending Focus on low-cost
Focus on developing copies of drugs
new, proprietary, develop –ed by
blockbuster drugs proprietary grp. cos.
Ex. Merck, Eli Lilly, whose patents expired.
Pfixer Low prices, production
efficiency.
Ex. Watson Pharma
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Industry life cycle model:

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.
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Embryonic industries:
just beginning to develop. Slow
growth due to buyers’ unfamiliarity
with the product, high prices,
poorly developed distribution
channels. Barriers – access to
key techno know-how.
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Embryonic industries:
Rivalry rests on –
educating customers
opening up distribution
channels
perfecting product design
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Embryonic industries:
Rivalry can be intense. The first
company to solve design
problems often has the
opportunity to develop a
significant market position.
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Embryonic industries:
May also be the creation of a
company’s innovative efforts. Ex.
Intel, Hoover, Xerox, FedEx,
Google.
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Growth industries:
Once demand for the industry’s
product begins to take off. First-
time demand expands rapidly as
many new customers enter the
market.
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Growth industries:
Customers become familiar with the
product; prices fall because experience
& economies of scale have been
attained; distribution channels develop.
Ex. U.S. wireless phone industry.
Growth stage in 1990s (5M
subscribers).
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Growth industries:
Importance of control over technological
knowledge as barrier to entry has diminished.
Few cos. have yet achieved significant
economies of scale or built brand loyalty.
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.
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Industry shakeout:
Demand approaches saturation levels; most
of the demand is limited to replacement
because there are few potential first-time
buyers left. Rivalry bet. cos. become intense.
Results – excess capacity, price wars,
bankruptcy of most inefficient cos. enough to
deter any new entry.
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Industry shakeout:
To survive, cos. minimize costs and build
brand loyalty. Airlines hired nonunion labor;
build brand loyalty thru frequent-flyer
programs. For PCs, excellent after-sales
service, lower cost structures.
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Mature industries:
The survivors from industry shakeout have
brand loyalty and efficient low-cost
operations. Most industries have consolidated
& become oligopolies. Market is totally
saturated, demand is limited to replacement
demand, growth is low or zero. High entry
barriers. Ex. Beer, breakfast cereal and
pharmaceutical industries.
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Declining industry:
Negative growth due to technological
substitution, social changes, demographics, &
international competition.
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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.
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Macroeconomic forces

▸ Economic growth
▸ Interest rates
▸ Currency exchange rates
▸ Price inflation
▸ Price deflation
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Economic growth
Leads to an expansion in customer
expenditures, tends to produce a general
easing of competitive pressures within an
industry.
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Interest rates
can determine the demand for a company’s
products. Important whenever customers
borrow money to finance their purchase. The
lower the interest rates are, the lower the
cost of capital for companies will be, and the
more investment there will be.
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Currency exchange rates

define the value of different national
currencies against each other. Has a direct
impact on the competitiveness of a
company’s products in the global
marketplace.
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Price inflation
can destabilize the economy, producing
slower economic growth, higher interest
rates, and volatile currency movements.
Investments are held back, depressing
economic activity, & pushing the economy
into recession.
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Price deflation
can also destabilize the economy. If prices are
falling, the real price of fixed payments goes
up. 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.
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Global Forces
Barriers to international trade & investment
have tumbled, & more & more countries have
enjoyed sustained economic growth. Cos.
have the opportunity to enter foreign
countries as new markets for goods &
services.
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Technological Forces
process called a “perennial gale of creative
destruction”. Can make established products
obsolete overnight & simultaneously create a
host of new product possibilities. Both
creative & destructive – both opportunity &
threat.
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Demographic Forces
outcomes of changes in the characteristics of
a population, such as age, gender, ethnic
origin, race, sexual orientation, & social class.
Ex. 1950s & 1960s baby boomers newly-weds
– upsurge in demand for washing machines,
dishwashers, dryers. 1990s saving for
retirement into mutual funds, 2000s boom in
retirement communities.
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Social Forces
way in which changing social mores & values
affect an industry. Social movement – toward
greater health consciousness, low-calorie
beer diet colas, fruit-based soft drinks,
decline in tobacco industry.
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Political & legal Forces

result from political & legal developments
within society. Increase in passenger-carrying
capacity led to excess capacity, intense
competition and fare wars.
69 Maps

our office
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89,526,1
24
Whoa! That’s a big number,
aren’t you proud?
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89,526,124$
That’s a lot of money

185,244 users
And a lot of users

100%
Total success!
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THANKS!
Any questions?
You can find me at mmdurana@firstasia.edu.ph