STRATEGIC MANAGEMENT, 13E

An Integrated Approach
Theory & Cases
Hill – Schilling - Jones

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 CHAPTER 2
External Analysis: The Identification of
Opportunities and Threats

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copied or duplicated, or posted to a publicly accessible website, in whole or part.
LEARNING OBJECTIVES
 Review the primary technique used to analyze
competition in an industry environment: the Five
Forces model
 Explore the concept of strategic groups and
illustrate the implications for industry analysis
 Discuss how industries evolve over time, with
reference to the industry life-cycle model
 Show how trends in the macroenvironment can
shape the nature of competition in an industry

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OPPORTUNITIES AND THREATS
Opportunities
• Elements in a company’s environment that
allow it to formulate and implement strategies
to become more profitable.

Threats
• Elements in the external environment that
could endanger a firm’s integrity and
profitability.

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DEFINING AN INDUSTRY
 Industry - Group of companies offering products
or services that are close substitutes for each
other.
 Products or service satisfy the same basic customer
needs.
 Rival - A company’s closest competitor.
 External analysis identifies the company’s
industry.
 Industry boundaries - Basic customer needs
served by a market.
 Boundaries can change.
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PORTER’S COMPETITIVE FORCES
MODEL
Figure 2.1 Competitive Forces

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RISK OF ENTRY BY POTENTIAL
COMPETITORS (1st Competitive Force) (1 of 2)
Potential competitors
• Companies that are currently not competing in the
industry but have the potential to do so.

Economies of scale
• Reductions in unit costs attributed to a larger output.

Brand loyalty
• Preference of consumers for the products of
established companies.
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RISK OF ENTRY BY POTENTIAL
COMPETITORS (1st Competitive Force) (2 of 2)
Absolute cost advantage
• Enjoyed by incumbents in an industry and that new entrants cannot
expect to match.

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.
Government regulations
• Falling entry barriers due to government regulation results in
significant new entry, increase in the intensity of industry
competition, and lower industry profit rates.
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RIVALRY AMONG ESTABLISHED
COMPANIES (2nd Competitive Force) (1 of 2)
 Rivalry - Competitive struggle between
companies within an industry to gain market
share from each other.
 Intense rivalry among established companies
constitutes a strong threat to profitability.
 Factors that impact the intensity of rivalry among
established companies within an industry are:
 Industry competitive structure - Number and size
distribution of companies in it.
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RIVALRY AMONG ESTABLISHED
COMPANIES (2nd Competitive Force) (2 of 2)
 Industry demand - Increasing demand moderates
competition by providing greater scope for companies
to compete for customers.
 Cost conditions - When fixed costs are high, profitability
is highly leveraged to sales volume.
 Exit barriers - Economic, strategic, and emotional
factors that prevent companies from leaving an
industry.
High exit barriers - Companies become locked into an
unprofitable industry where overall demand is static or
declining.

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BARGAINING POWER OF BUYERS
(3rd Competitive Force)
 Buyers’ power to bargain down prices or raise
costs by demanding better quality and service.
 Power includes:
 buyers can choose sellers and purchase in large quantities.
 supplier industry is dependent on buyers for a major portion
of sales.
 with low switching costs and ability to purchase input from
several companies at once, buyers can pit companies against
each other.
 buyers can threaten to enter the industry and produce the
product.
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BARGAINING POWER OF SUPPLIERS
(4th Competitive Force)
 Suppliers’ power to raise input prices or industry
costs through various means.
 Power includes:
 product has few substitutes and is vital to the buyer.
 supplier is not dependent on one particular industry for
their sales.
 companies would incur high switching costs if they moved to
a different supplier.
 supplier can threaten to enter a customers’ industry.
 companies cannot enter their suppliers’ industry to lower
prices.
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SUBSTITUTE PRODUCTS AND
COMPLEMENTORS
(5th and 6th Competitive Forces)
 Substitute products - Those of different
businesses that satisfy similar customer needs.
 Limit the price that companies in an industry can
charge for their product.
 Complementors - Companies that sell products
that add value to the other products.
 Strong complementors provide a increased opportunity
for creating value.
 Weak complementors slow industry growth and limit
profitability.
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STRATEGIC GROUPS WITHIN
INDUSTRIES (1 of 2)
 Companies in an industry differ in the way they
strategically position products in the market.
 Product positioning is determined by the:
 distribution channels and market segments served.
 product quality.
 technological leadership.
 customer service.
 pricing and advertising policy.
 promotions offered.

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STRATEGIC GROUPS WITHIN
INDUSTRIES (2 of 2)
Figure 2.2 Strategic Groups in the Commercial Aerospace Industry

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IMPLICATIONS OF STRATEGIC GROUPS
 Since all companies in a strategic group pursue a
similar strategy:
 customers view them as direct substitutes for each
other.
 immediate threat to a company are rivals within its own
strategic group.
 Different strategic groups have different
relationships to each of the competitive forces.

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MOBILITY BARRIERS
 Mobility barriers - Within-industry factors that
inhibit the movement of companies between
strategic groups.
 Managers must:
 determine if it is cost-effective to overcome mobility
barriers.
 realize that companies in other strategic groups become
their competitors if they overcome mobility barriers.

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INDUSTRY LIFE-CYCLE PATTERN
Figure 2.3 Stages in the Industry Life Cycle

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EMBRYONIC INDUSTRY
 Embryonic stage - Development stage
 Growth is slow due to:
 buyer’s unfamiliarity with the product and poor
distribution channels.
 high prices due to companies’ inability to reap
significant scale economies.
 Barriers to entry are based on access to
technological expertise.

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GROWTH INDUSTRY
 Growth stage - First-time demand expands
rapidly due to new customers in the market.
 Prices fall since:
 scale economies have been attained.
 distribution channels have developed.
 Threat from potential competitors is highest at
this stage.
 Rivalry is low - Companies are able to expand their
revenues without taking market share away from other
companies.
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INDUSTRY SHAKEOUT (1 of 2)
 Shakeout stage - Demand approaches saturation
levels.
 There are fewer potential first-time buyers.
 Rivalry between companies intensifies.
 Price war results in bankruptcy of inefficient
companies and deters new entry.

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INDUSTRY SHAKEOUT (2 of 2)
Figure 2.4 Growth in Demand and Capacity

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MATURE INDUSTRIES
 Mature stage - Market is totally saturated,
demand is limited to replacement demand, and
growth is low or zero.
 Barriers to entry increase and threat of entry
from potential competitors decreases.
 Industries consolidate and become oligopolies.
 Companies try to avoid price wars.

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DECLINING INDUSTRIES
 Decline stage - Growth becomes negative due to:
 technological substitution.
 social changes.
 demographics.
 international competition.
 Rivalry among established companies increases.
 Falling demand results in excess capacity.

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LIMITATIONS OF MODELS
FOR INDUSTRY ANALYSIS (1 of 2)
 Life-cycle issues
 Industries do not always follow the pattern of the
industry life-cycle model.
 Time span of the stages vary from industry to industry.
 Innovation
 Punctuated equilibrium - Long periods of equilibrium
are punctuated by periods of rapid change.

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LIMITATIONS OF MODELS
FOR INDUSTRY ANALYSIS (2 of 2)
 Change
 Because competitive forces and strategic group models
are static, they cannot capture periods of rapid change
in the industry environment when value is migrating.
 Company differences
 Overemphasize importance of industry structure as a
determinant of company performance.
 Underemphasize importance of variations among
companies within a strategic group.

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PUNCTUATED EQUILIBRIUM
Figure 2.5 Punctuated Equilibrium and Competitive Structure

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THE MACROENVIRONMENT
Figure 2.6 The Role of the Macroenvironment

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MACROECONOMIC FORCES

Growth rate of
Interest rates
the economy

Currency Inflation or
exchange rates deflation rates

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GLOBAL AND TECHNOLOGICAL FORCES
 Global forces - Falling barriers to international
trade have enabled:
 domestic markets enter to foreign markets.
 foreign enterprises to enter the domestic markets.
 Technological forces - Technological change can:
 make products obsolete.
 create a host of new product possibilities.
 impact the height of the barrier to entry and reshape
industry structure.

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DEMOGRAPHIC, SOCIAL, AND
POLITICAL FORCES
 Demographic forces - Outcomes of changes in
the characteristics of a population.
 Social forces - Way in which changing social
morals and values affect an industry.
 Political and legal forces - Outcomes of changes
in laws and regulations.

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 APPENDIX
NOTE TO INSTRUCTOR: Choose from the following questions (also found in the text at the end of the chapter)
to conduct in-class discussions around key chapter concepts.

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copied or duplicated, or posted to a publicly accessible website, in whole or part. 32
DISCUSSION:
 Under what environmental conditions are price
wars most likely to occur in an industry? What
are the implications of price wars for a company?
How should a company try to deal with the
threat of a price war?

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DISCUSSION:
 Discuss the competitive forces model with
reference to what you know about the U.S.
market for wireless telecommunications services
(see the Opening Case). What does the model
tell you about the level of competition in this
industry?

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copied or duplicated, or posted to a publicly accessible website, in whole or part. 34
DISCUSSION:
 Identify a growth industry, a mature industry, and a
declining industry. For each industry, identify the
following: (a) the number and size distribution of
companies, (b) the nature of barriers to entry, (c) the
height of barriers to entry, and (d) the extent of
product differentiation. What do these factors tell
you about the nature of competition in each
industry? What are the implications for the company
in terms of opportunities and threats?

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DISCUSSION:
 Assess the impact of macroenvironmental factors
on the likely level of enrollment at your
university over the next decade. What are the
implications of these factors for the job security
and salary level of your professors?

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