1-1

Chapter Two
External Analysis:
The Identification of
Opportunities and Threats
1-2
External Analysis requires an assessment of:
• Industry environment
• The country or national environments
• The wider socioeconomic or macroenvironment
– Social
– Government
– Legal
– International
– Technological
– Macroeconomic
External Analysis
The purpose of external analysis is to identify the
strategic opportunities and threats in the organization’s
operating environment.
1-3
External Analysis:
Opportunities and Threats
Opportunities
Conditions in the
environment that a
company can take
advantage of to
become more
profitable
Threats
Conditions in the
environment that
endanger the integrity
and profitability of
the company’s
business
1-4
ROIC Across Industries in
the US: 1992-2006
1-5
ROIC Across Industries in
China (2006)
数据来源:Wind
1-6
Industry Analysis:
Defining an Industry
• Industry
– A group of companies offering products or services that are close
substitutes for each other and that satisfy the same basic customer
needs
– Industry boundaries may change as customer needs evolve
and technology changes
• Sector
– A group of closely related industries
• Market Segments
– Distinct groups of customers within an industry
– Can be differentiated from each other with distinct attributes and
specific demands
Industry analysis begins by focusing on the overall industry –
before considering market segment or sector-level issues
1-7
The Computer Sector:
Industries and Segments
1-8
Porter’s Five Forces Model
Risk of entry
by potential
competitors
Rivalry
Among
Established
Firms
Threat of
substitute
products
Bargaining
power of
suppliers
Bargaining
power of
buyers
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.

1-9
How the Five Forces Shape
Competition within an Industry
The stronger that each of these five forces is, the more
limited is the ability of established companies to raise
prices and earn greater profits within their industry.
– A weak competitive force
• may be viewed as an opportunity as it allows company to
earn greater profits
– A strong competitive force
• may be viewed as a threat as it depresses industry profits
– Strength of forces may change as industry conditions
change


1-10
Barriers to new entrants include:
C Risk of Entry by
Potential Competitors
Cost reductions
Discounts on bulk
purchases
Cost advantages/savings
Economies of Scale
well-established customer
preferences
Difficult for new entrants to
take market share from
established brands
Brand Loyalty
Accumulated experience
Control of particular
inputs required for
production
Lower financial risks
Absolute Cost Advantage
Customer Switching Costs
Government Regulation
1-11
C Rivalry Among
Established Companies
Intensity of rivalry is a function of:
Cost reductions
Discounts on bulk
purchases
Cost advantages/savings
Industry Competitive
Structure
Growing demand
Declining demand
Demand Conditions
High fixed costs
Slow demand and growth
Cost Conditions
Height of Exit Barriers
Write-off of investment in
assets
Economic dependence on
industry
Maintain assets
High fixed costs of exit
Emotional attachment to
industry
Bankruptcy regulations
1-12
Buyers are most powerful when:
C Bargaining Power of Buyers
Buyers are large and few
in number.
The industry supplying
the product is composed
of many small companies.
Buyers are dominant
Buyers have purchasing
power as leverage for price
reductions
Purchase in large quantities
Buyers purchase a large
percentage of a company’s
total orders
The industry is dependant
on the buyers
low switching costs Buyers can play off the
supplying companies against
each other.
Purchase from several
supplying companies at
once
Threaten to enter the
industry themselves
Buyers produce
themselves and supply
their own product.
1-13
Suppliers are most powerful when:
C Bargaining Power of Suppliers
The product is vital to the
industry and has few
substitutes
Suppliers are not significantly
affected by the industry
The industry is not an
important customer to
suppliers
Companies in the industry
cannot play suppliers against
each other
Significant switching costs
Threaten to enter their
customers’ industry
Suppliers can use their inputs
to produce and compete with
companies already in the
industry
Companies cannot threaten
to enter their suppliers’
industry
1-14
C Substitute Products
Substitutes limit the price that
companies can charge for
their product
The existence of close
substitutes is a strong
competitive threat
Other things being equal,
companies in the industry
have the opportunity to raise
prices and earn additional
profits
Substitutes are a weak
competitive force if an
industry’s products have few
close substitutes
1-15
Applying the Five Forces Model:The
China Southern Sky Pearl Club
• Three membership levels: Sky Pearl Gold card,
Silver card and Base card.
• Elite Qualification: Earning 80k mileages or 40
segments within a year (between Jan. 1 and Dec.
31) for a gold card, 40k mileages or 20 segments for
a silver card
• The same standards applying to the case of
retaining the membership level!!!
• China Southern Elite benefits - Lounge Access,
Extra baggage allowance, etc.
Any Impact on Competition of the Airline Industry?
1-16
Applying the Five Forces Model:The
China Southern Sky Pearl Club
Potential Threat to Entry
• Harder to steal customers away
from incumbent airlines
• Slightly higher barriers to entry
• Fewer potential threat to entry
Industry Rivalry
• Airlines will compete less
aggressively with others for built
up customers
• Decrease in rivalry
Threat of Substitutes
• Driving, bus, train
• Virtually no change
Buyer Power
• Customer decision different after
accumulating miles
• Less likely to defect from SC – Lock
in
• Business travelers value the MOST!
• Choices of decision makers and
institutions different
• Lower buyer power
Supplier Power
• Labor, fuel, aircraft manufacturers,
airports
• Virtually no change
1-17
Strategic Groups Within
Industries
Strategic Groups are groups of companies that follow a
business model similar to other companies within their
strategic group – but are different from that of other
companies in other strategic groups.
• Implications of Strategic Groups –
1. The closest competitors are within the same strategic group and may be
viewed by customers as substitutes for each other.
2. Each strategic group can have different competitive forces and may face a
different set of opportunities and threats.
• Mobility Barriers – factors within an industry that inhibit the movement of
companies between strategic groups
– Include barriers to enter another group or exit existing group
1-18
Strategic Group Mapping
• Firms in same strategic group have two or more
competitive characteristics in common
– Sell in same price/quality range
– Cover same geographic areas
– Be vertically integrated to same degree
– Have comparable product line breadth
– Emphasize same types of distribution channels
– Offer buyers similar services
– Use identical technological approaches
1-19
Procedure for Constructing a
Strategic Group Map
STEP 1: Identify competitive characteristics that
differentiate firms from one another
STEP 2: Plot firms on a two-variable map using pairs
of these differentiating characteristics
STEP 3: Assign firms that fall in about the same
strategy space to same strategic group
STEP 4: Draw circles around each group
1-20
Strategic Groups in the
Pharmaceutical Industry
1-21
Strategic Barriers in the
Pharmaceutical Industry
Strategic Barrier
Lack of R&D Skills
to develop new
proprietary drugs
1-22
Strategic Groups of the
Video Game Industry
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e

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Overall Cost to Players of Video Games
Low
(Coin-operated
equipment)
Medium
(Console players cost
$100-$300)
High
(Use PC)

Arcades

Home PCs
Video game
consoles
Online/Internet
Sony, Sega,
Nintendo, several
others
Arcade
operators
Publishers
of games on
CD-ROMs
MSN Gaming Zone,
Pogo.com,
America Online,
HEAT, Engage,
Oceanline, TEN
1-24
Interpreting Strategic Group Maps
• Driving forces and competitive pressures often favor
some strategic groups and hurt others
• Profit potential of different strategic groups varies
due to strengths and weaknesses in each group’s
market position
• The closer strategic groups are on map, the stronger
the competitive rivalry among member firms tends to
be
1-25
Industry Life Cycle Model analyzes the affects of industry
evolution on competitive forces over time and is characterized
by five distinct life cycle stages:
Industry Life Cycle Analysis
1. Embryonic – industry just beginning to develop
2. Growth – first-time demand takes-off with new
customers
3. Shakeout – demand approaches saturation,
replacements
4. Mature – market totally saturated with low to no
growth
5. Decline – industry growth becomes negative
1-26
Stages in the Industry
Life Cycle
O O O O O
Strength and nature of five forces change as industry evolves
Rivalry based on perfecting products,
educating customers, and opening up
distribution channels
Low rivalry as focus is on
keeping up with high industry
growth
Rivalry intensifies with
emergence of excess
productive capacity
Industry consolidation based
on market share, driving
down price
Rivalry further intensifies
based on rate of decline and
exit barriers
1-27
Growth in Demand and
Capacity
Industry Shakeout:
Rivalry Intensifies
with growth in
excess capacity
Anticipate how forces will change and formulate appropriate strategy
1-28
Limitations of Models
for Industry Analysis
• Life Cycle Issues
– Industry cycles do not always follow the life cycle generalization
– In rapid growth situations
– Industry growth revitalized through innovation or social change
– The time span of the stages
• Innovation and Change
– Punctuated Equilibrium
– Hypercompetitive industries
• Company Differences
– There can be significant variances in the profit rates of individual companies within
an industry
– Company resources and capabilities are also important
1-29
Punctuated Equilibrium
and Competitive Structure
Periods of long
term stability
Periods of long
term stability
Industry
Structure
revolutionized
by innovation
1-30
The Macroenvironment
• Macroeconomic Forces: growth rates, interest rates,
currency exchange rates, inflation or deflation rates
• Global Forces: barriers to international trade and
investment
• Technological Forces: new technologies
• Demographic Forces: changes in characteristics of a
population
• Social Forces: social values and mores
• Political & Legal Forces: laws and regulations
1-31
The Role of the
Macroenvironment
Changes in one or more forces in the
macroenvironment can affect:
– The competitiveness of the industry (Porter’s Five
Forces)
– The attractiveness of the industry
– Relative strengths (or weaknesses) of a given
company


1-32
The Role of the
Macroenvironment
Political and Legal
Environment
Technological
Environment
Demographic
Environment
Social Environment
Macro-Economic
Environment
Risk of entry
by potential
competitors
Rivalry
Among
Established
Firms
Threat of
substitute
products
Bargaining
power of
suppliers
Bargaining
power of
buyers
1-33
Globalization and Industry
Structure
_Globalization
of Markets
1-34
The Determinants of National
Competitive Advantage



Factor
Conditions
Competitiveness
of Related and
Supporting Industries
Local
Demand
Conditions
Intensity
of
Rivalry
National
Competitive
Advantage
1-35
“Strategy is a choice
on how to compete.”
- Michael Porter
© RoyaltyFree/ Stockdisc/ Getty Images
Who Says What

External Analysis
The purpose of external analysis is to identify the strategic opportunities and threats in the organization’s operating environment.

External Analysis requires an assessment of:
• Industry environment • The country or national environments • The wider socioeconomic or macroenvironment
– – – – – – Social Government Legal International Technological Macroeconomic
1-2

External Analysis: Opportunities and Threats
Opportunities
Conditions in the environment that a company can take advantage of to become more profitable

Threats
Conditions in the environment that endanger the integrity and profitability of the company’s business

1-3

ROIC Across Industries in the US: 1992-2006 1-4 .

ROIC Across Industries in China (2006) 数据来源:Wind 1-5 .

Industry Analysis: Defining an Industry • Industry – A group of companies offering products or services that are close substitutes for each other and that satisfy the same basic customer needs – Industry boundaries may change as customer needs evolve and technology changes – A group of closely related industries – Distinct groups of customers within an industry – Can be differentiated from each other with distinct attributes and specific demands • Sector • Market Segments Industry analysis begins by focusing on the overall industry – before considering market segment or sector-level issues 1-6 .

The Computer Sector: Industries and Segments 1-7 .

Porter’s Five Forces Model Risk of entry by potential competitors Rivalry Among Established Firms Threat of substitute products 1-8 Bargaining power of suppliers Bargaining power of buyers Source: Adapted and reprinted by permission of Harvard Business Review. Porter (March-April 1979. Copyright 1979 by the President and Fellows of Harvard College: all rights reserved. . An exhibit from How Competitive Forces Shape Strategy?by Michael E.

– A weak competitive force • may be viewed as an opportunity as it allows company to earn greater profits – A strong competitive force • may be viewed as a threat as it depresses industry profits – Strength of forces may change as industry conditions change 1-9 .How the Five Forces Shape Competition within an Industry The stronger that each of these five forces is. the more limited is the ability of established companies to raise prices and earn greater profits within their industry.

 Risk of Entry by Potential Competitors Barriers to new entrants include: Economies of Scale Brand Loyalty Absolute Cost Advantage Customer Switching Costs Cost reductions Discounts on bulk purchases well-established customer Cost advantages/savings preferences Difficult for new entrants to take market share from Accumulated experience established brands Control of particular inputs required for production Lower financial risks Government Regulation 1-10 .

 Rivalry Among Established Companies Intensity of rivalry is a function of: Industry Competitive Structure Cost reductions Discounts on bulk purchases Growing demand Cost advantages/savings Declining demand High fixed costs Slow demand and growth Write-off of investment in assets Economic dependence on industry Maintain assets High fixed costs of exit Emotional attachment to industry Bankruptcy regulations Demand Conditions Cost Conditions Height of Exit Barriers 1-11 .

 Bargaining Power of Buyers Buyers are most powerful when: Buyers are dominant Buyers are large and few in number. Purchase in large quantities The industry is dependant on the buyers low switching costs Purchase from several supplying companies at once Threaten to enter the industry themselves Buyers produce themselves and supply their own product. 1-12 . The industry supplying Buyers have purchasing the product is for price power as leverage composed of purchase a large Buyersmany small companies. reductions percentage of a company’s total orders Buyers can play off the supplying companies against each other.

 Bargaining Power of Suppliers Suppliers are most powerful when: The product is vital to the industry and has few substitutes The industry is not an important customer to suppliers Suppliers are not significantly affected by the industry Significant switching costs Threaten to enter their customers’ industry Companies cannot threaten to enter their suppliers’ industry Companies in the industry cannot play suppliers against Suppliers can use their inputs each other to produce and compete with companies already in the industry 1-13 .

companies in the industry have the opportunity to raise prices and earn additional profits 1-14 . Substitute Products The existence of close substitutes is a strong competitive threat Substitutes are a weak competitive force if an industry’s products have few close substitutes Substitutes limit the price that companies can charge for their product Other things being equal.

31) for a gold card. • Elite Qualification: Earning 80k mileages or 40 segments within a year (between Jan. Silver card and Base card.Applying the Five Forces Model:The China Southern Sky Pearl Club • Three membership levels: Sky Pearl Gold card. 1 and Dec.Lounge Access. Any Impact on Competition of the Airline Industry? 1-15 . 40k mileages or 20 segments for a silver card • The same standards applying to the case of retaining the membership level!!! • China Southern Elite benefits . Extra baggage allowance. etc.

airports • Virtually no change 1-16 . fuel. bus. aircraft manufacturers.Applying the Five Forces Model:The China Southern Sky Pearl Club Potential Threat to Entry • • • • • • • Harder to steal customers away from incumbent airlines Slightly higher barriers to entry Fewer potential threat to entry Airlines will compete less aggressively with others for built up customers Decrease in rivalry Driving. train Virtually no change Buyer Power • Customer decision different after accumulating miles • Less likely to defect from SC – Lock in • Business travelers value the MOST! • Choices of decision makers and institutions different • Lower buyer power Industry Rivalry Threat of Substitutes Supplier Power • Labor.

2. • Implications of Strategic Groups – 1. Each strategic group can have different competitive forces and may face a different set of opportunities and threats.Strategic Groups Within Industries Strategic Groups are groups of companies that follow a business model similar to other companies within their strategic group – but are different from that of other companies in other strategic groups. The closest competitors are within the same strategic group and may be viewed by customers as substitutes for each other. • Mobility Barriers – factors within an industry that inhibit the movement of companies between strategic groups – Include barriers to enter another group or exit existing group 1-17 .

Strategic Group Mapping • Firms in same strategic group have two or more competitive characteristics in common – – – – – – – Sell in same price/quality range Cover same geographic areas Be vertically integrated to same degree Have comparable product line breadth Emphasize same types of distribution channels Offer buyers similar services Use identical technological approaches 1-18 .

Procedure for Constructing a Strategic Group Map STEP 1: Identify competitive characteristics that differentiate firms from one another STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics STEP 3: Assign firms that fall in about the same strategy space to same strategic group STEP 4: Draw circles around each group 1-19 .

Strategic Groups in the Pharmaceutical Industry 1-20 .

Strategic Barriers in the Pharmaceutical Industry Strategic Barrier Lack of R&D Skills to develop new proprietary drugs 1-21 .

several others Publishers of games on CD-ROMs Video game consoles MSN Gaming Zone. Nintendo. TEN Online/Internet Low (Coin-operated equipment) Medium (Console players cost $100-$300) High (Use PC) Overall Cost to Players of Video Games 1-22 .Strategic Groups of the Video Game Industry Types of Video Game Suppliers/Distribution Channels Arcades Arcade operators Home PCs Sony. Sega.com. Engage. HEAT. Pogo. Oceanline. America Online.

the stronger the competitive rivalry among member firms tends to be 1-24 .Interpreting Strategic Group Maps • Driving forces and competitive pressures often favor some strategic groups and hurt others • Profit potential of different strategic groups varies due to strengths and weaknesses in each group’s market position • The closer strategic groups are on map.

Industry Life Cycle Analysis Industry Life Cycle Model analyzes the affects of industry evolution on competitive forces over time and is characterized by five distinct life cycle stages: 1. Growth – first-time demand takes-off with new customers 3. replacements 4. Decline – industry growth becomes negative 1-25 . Mature – market totally saturated with low to no growth 5. Embryonic – industry just beginning to develop 2. Shakeout – demand approaches saturation.

driving rate of decline and focus is on capacity based on down price exit barriers keeping up with high industry growth Rivalry based on perfecting products.Stages in the Industry Life Cycle Strength and nature of five forces change as industry evolves      Rivalry intensifies with emergence of excess Rivalry based intensifies Industry consolidation further on Low rivalry as productivemarket share. and opening up distribution channels 1-26 . educating customers.

Growth in Demand and Capacity Anticipate how forces will change and formulate appropriate strategy Industry Shakeout: Rivalry Intensifies with growth in excess capacity 1-27 .

Limitations of Models for Industry Analysis • Life Cycle Issues – – – – Industry cycles do not always follow the life cycle generalization In rapid growth situations Industry growth revitalized through innovation or social change The time span of the stages • Innovation and Change – Punctuated Equilibrium – Hypercompetitive industries • Company Differences – There can be significant variances in the profit rates of individual companies within an industry – Company resources and capabilities are also important 1-28 .

Punctuated Equilibrium and Competitive Structure Industry Structure revolutionized by innovation Periods of long term stability Periods of long term stability 1-29 .

interest rates.The Macroenvironment • Macroeconomic Forces: growth rates. currency exchange rates. inflation or deflation rates • Global Forces: barriers to international trade and investment • Technological Forces: new technologies • Demographic Forces: changes in characteristics of a population • Social Forces: social values and mores • Political & Legal Forces: laws and regulations 1-30 .

The Role of the Macroenvironment Changes in one or more forces in the macroenvironment can affect: – The competitiveness of the industry (Porter’s Five Forces) – The attractiveness of the industry – Relative strengths (or weaknesses) of a given company 1-31 .

The Role of the Macroenvironment Political and Legal Environment Risk of entry by potential competitors Technological Environment Bargaining power of suppliers Rivalry Among Established Firms Threat of substitute products Bargaining power of buyers Demographic Environment Social Environment Macro-Economic Environment 1-32 .

Globalization and Industry Structure Globalization of Markets 1-33 .

The Determinants of National Competitive Advantage Intensity of Rivalry Factor Conditions National Competitive Advantage Local Demand Conditions Competitiveness of Related and Supporting Industries 1-34 .

Who Says What “Strategy is a choice on how to compete.Michael Porter 1-35 © RoyaltyFree/ Stockdisc/ Getty Images .” .

Michael Porter 1-35 © RoyaltyFree/ Stockdisc/ Getty Images .” .Who Says What “Strategy is a choice on how to compete.

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