CHARLES W. L. HILL / GARETH R.

JONES

Strategic
StrategicManagement
Management An
AnIntegrated
IntegratedApproach
Approach2d
2ded.
ed.

External
External Analysis:
Analysis: The
The
Chapter
Identification
Identification of
of
2 Opportunities
Opportunities and
Threats
Threats
and

Student Version
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Prepared
Prepared by
by C.
C. Douglas
Douglas Cloud
Cloud ,, Professor
Professor Emeritus
Emeritus of
of Accounting,
Accounting, Pepperdine
Pepperdine University
University
 Learning
Learning Objective:
Objective: After
After reading
reading this
this chapter
chapter you
you
should
should be
be able
able to
to review
review the
the primary
primary technique
technique
used
used to
to analyze
analyze competition
competition in in an
an industry
industry
environment:
environment: thethe Competitive
Competitive Forces
Forces model.
model.

COMPETITIVE
COMPETITIVE FORCES
FORCES MODEL
MODEL
 Michael E. Porter’s “The Five Forces Model”
assumes that as the forces grow stronger,
they limit the ability of companies to raise
prices.
 A weak competitive force allows a company
to earn greater profits.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 COMPETITIVE
COMPETITIVE FORCES
FORCES MODEL
MODEL
 A strong competitive force can be regarded
as a threat because it depresses profits.
 A weak competitive force can be viewed as
an opportunity because it allows a company
to earn greater profits.
 The strength of the forces may change over
time as industry conditions change.
 Managers face the task of recognizing how
changes in the forces give rise to new
opportunities and threats.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 COMPETITIVE
COMPETITIVE FORCES
FORCES MODEL
MODEL
1) The first of Porter’s Five Forces is the risk of
entry by potential competitors (companies
that are not currently competing in the industry).
a) The risk of entry by potential competitors is a
function of the height of barriers to entry, that is,
factors that make it costly for companies to enter
an industry.
b) Economies of scale occur when unit costs fall as
a firm expands its output.
c) Brand loyalty exists when consumers have a
preference for the product of an established
company.
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 COMPETITIVE
COMPETITIVE FORCES
FORCES MODEL
MODEL
c) An absolute cost advantage means that
entrants cannot expect to match
established companies lower cost.
d) Customer switching costs occur when a
customer invests time, energy, and
money switching from the products
offered by one established company to
the products of a new entrant.

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 COMPETITIVE
COMPETITIVE FORCES
FORCES MODEL
MODEL
e) Historically, government regulations
have constituted major entry barrier into
many industries.
i) Until the mid-1990s, providers of long-
distance telephone service could not
compete for local telephone services.
ii) The Motor Carrier Act of 1980, among
other things, deregulated the routes that
carrier could use.

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 COMPETITIVE
COMPETITIVE FORCES
FORCES MODEL
MODEL
2) The second of Porter’s Five Forces is the
intense rivalry among established
companies.
a) The industry competitive structure refers
to the number and size distribution of
companies in it.
i) A fragmented industry consists of a large
number of companies that cannot determine
industry price.
ii) A consolidated industry is dominated by a
small number of large companies.
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 COMPETITIVE
COMPETITIVE FORCES
FORCES MODEL
MODEL
b) The level of industry demand is the
second determinant of the intensity of
rivalry.
i) Growing demand tends to reduce rivalry
because all companies can sell more
without taking market share away from other
companies.
ii) When demand declines, a company can
only grow by taking market share away from
other companies.

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 COMPETITIVE
COMPETITIVE FORCES
FORCES MODEL
MODEL
c) The cost structure is a third determinant of
rivalry.
i) When fixed costs are high, profitability
tends to be highly leveraged to sales
volume, and the desire to grow can spark
intense rivalry.
ii) Research suggests that when sales
volume is low, weaker firms cut prices
and/or raise promotional spending as
they struggle to cover fixed cost.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 COMPETITIVE
COMPETITIVE FORCES
FORCES MODEL
MODEL
d) Exit barriers are economic, strategic, and
emotional factors that prevent companies
from leaving an industry. Common exit
barriers include the following:
i) Investment in fixed assets that are of little or no
value in alternate uses, or cannot later be sold.
ii) Severance pay, health benefits, or pensions that
must be paid to workers when a company
ceases to operate.
iii) Emotional attachment to an industry.
iv) Bankruptcy regulations.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 COMPETITIVE
COMPETITIVE FORCES
FORCES MODEL
MODEL
3) The bargaining power of buyers is the third of
Porter’s Five Forces. It is the ability of buyers to
bargain down prices or demand better service.
Some examples of when buyers are most
powerful are:
a) When there are many small sellers of the particular
product and the buyers are large and few in
number.
b) When the buyer purchases in large quantities and
uses its power to bargain for price reductions.
c) When the supplier industry depends on the buyers
for a large percentage of total orders.
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 COMPETITIVE
COMPETITIVE FORCES
FORCES MODEL
MODEL
4) The fourth of Porter’s Five Forces is the
bargaining power of suppliers. Examples of
when suppliers are most powerful include:
a) The product that suppliers sell has few
substitutes and is vital to the buyer.
b) The industry is not an important customer
to the supplier.
c) Suppliers threaten to enter their customers’
industry.

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 COMPETITIVE
COMPETITIVE FORCES
FORCES MODEL
MODEL
5) The final force in Porter’s model is the threat
of substitute products: products of different
businesses that can satisfy similar customer
needs.
a) Tea versus coffee versus soft drink
b) Margarine versus butter
6) Andrew Grove argued that power, vigor, and
competence of complementors comprised a
sixth force.

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 Learning
Learning Objective:
Objective: After
After reading
reading this
this chapter
chapter
you
you should
should be
be able
able to
to explore
explore the
the concept
concept ofof
strategic
strategic groups
groups and
and illustrate
illustrate the
the implications
implications
for
for industry
industry analysis.
analysis.

STRATEGIC
STRATEGIC GROUPS
GROUPS WITHIN
WITHIN INDUSTRIES
INDUSTRIES

 Within most industries, it is possible to

observe groups of companies that follow a
business model similar to companies in other
groups.
 These different groups of companies are
known as strategic groups.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 STRATEGIC
STRATEGIC GROUPS
GROUPS WITHIN
WITHIN INDUSTRIES
INDUSTRIES
Implications
Implications of
of Strategic
Strategic Groups
Groups
1) Because all companies in a strategic group are
pursuing a similar business model, customers tend to
view such enterprises as direct substitutes for each
other (for example, Wal-Mart, Kmart, and Target).
2) Each strategic group may face a set of opportunities
and threats.
 Risk of new entrants
 Degree of rivalry among companies in the group
 Bargaining power of suppliers or buyers

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 STRATEGIC
STRATEGIC GROUPS
GROUPS WITHIN
WITHIN INDUSTRIES
INDUSTRIES
The
The Role
Role of
of Mobility
Mobility Barriers
Barriers
 Mobility barriers are within-industry factors that
inhibit the movement of companies between
strategic groups.
 These barriers could bar entry into a group or
bar exit from the company’s existing group.
 Managers must determine if it is cost-effective to
overcome mobility barriers before deciding
whether the move is worthwhile.

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 Learning
Learning Objective:
Objective: After
After reading
reading this
this chapter
chapter
you
you should
should be be able
able to
to discuss
discuss how
how industries
industries
evolve
evolve over
over time,
time, with
with reference
reference to
to the
the
industry
industry life-cycle
life-cycle model.
model.

INDUSTRY
INDUSTRY LIFE-CYCLE
LIFE-CYCLE ANALYSIS
ANALYSIS
 There are five stages in the industry life-cycle.
1) Embryonic
2) Growth
3) Shakeout
4) Mature
5) Decline
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 INDUSTRY
INDUSTRY LIFE-CYCLE
LIFE-CYCLE ANALYSIS
ANALYSIS

Embryonic
Embryonic Industries
Industries
 An embryonic industry refers to an industry just
beginning to develop.
 Examples are personal computers in the 1970s,
wireless communication in the 1980s, and Internet
retailing in the 1990s.
 Growth at this stage is slow.
 Rivalry is based not so much on price as on
educating customers, opening up distribution
channels, and perfecting the design of the product.
 Such rivalry can be intense.
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 INDUSTRY
INDUSTRY LIFE-CYCLE
LIFE-CYCLE ANALYSIS
ANALYSIS

Growth
Growth Industries
Industries
 In a growth industry, first-time demand is
expanding rapidly.
 Prices fall because experience and scale
economies have been attained, and distribution
channels developed.
 The importance of control over technological
knowledge as a barrier to entry has diminished.
 New entrants can be absorbed into an industry
without a marked increase in the intensity of
rivalry.
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 INDUSTRY
INDUSTRY LIFE-CYCLE
LIFE-CYCLE ANALYSIS
ANALYSIS

Industry
Industry Shakeout
Shakeout
 Explosive growth cannot be maintained indefinitely.
 In the shakeout stage, rivalry between companies
becomes intense.

Mature
Mature Industries
Industries
 The market is totally saturated, demand is limited to
replacement demand, and growth is low or zero.
 In the mature stage, barriers to entry increase, and the
threat of entry from potential competitors decreases.

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 INDUSTRY
INDUSTRY LIFE-CYCLE
LIFE-CYCLE ANALYSIS
ANALYSIS

Declining
Declining Industries
Industries
 In a declining industry growth becomes
negative.
 Falling demand leads to the emergence of excess
capacity.
 Companies in this category cut prices, thus
sparking a price war.
 The greater the exit barriers, the harder it is for
companies to reduce capacity, e.g. airline industry
and steel industry.
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 Learning
Learning Objective:
Objective: After
After reading
reading this
this chapter
chapter
you
you should
should be
be able
able to
to show
show how
how trends
trends inin the
the
macroenvironment
macroenvironment can can shape
shape the
the nature
nature ofof
competition
competition in
in an
an industry.
industry.
THE
THE MACROENVIRONMENT
MACROENVIRONMENT
Macroeconomic
Macroeconomic Forces
Forces
 The four most important macroeconomic
forces are the growth rate of the economy,
interest rates, currency exchange rates, and
inflation (deflation) rates.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 THE
THE MACROENVIRONMENT
MACROENVIRONMENT

Global
Global Forces
Forces
 Economic growth in places such as Brazil,
China, and India have created large new
markets.
 It is easier for foreign enterprises to enter the
domestic markets of many companies, thereby
increasing the intensity of competition and
lowering profitability.

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 THE
THE MACROENVIRONMENT
MACROENVIRONMENT

Political
Political and
and Legal
Legal Forces
Forces
 Political and legal forces are outcomes of changes
in laws and regulations, and significantly affect
managers and companies.
Technological
Technological Forces
Forces
 Technological change can make established
products obsolete overnight and simultaneously
create a host of new product possibilities.
 It can impact the height of the barrier to entry and
radically reshape industry structure.
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 THE
THE MACROENVIRONMENT
MACROENVIRONMENT

Demographic
Demographic Forces
Forces
 Demographic forces are outcomes of changes in the
characteristics of a population, such as age, gender,
ethnic origin, race, and social class.
Social
Social Forces
Forces
 Social forces refer to the way in which changing social
mores and values affect an industry.
 One of the major social movements of recent decades
has been the trend toward greater health
consciousness.

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