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External Analysis:
The Identification of
Opportunities and
Threats
External Analysis:
The Identification of
Opportunities and
Threats
Chapter
Prepared by C. Douglas Professor Emeritus of Cloud Pepperdine University^ Accounting
Prepared by C. Douglas Professor Emeritus of Cloud Pepperdine University^ Accounting
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Student Version
Theory of Strategic Management Theory of Strategic ManagementTheory of Strategic ManagementTheory of Strategic Management 10th ed.10th ed.10th ed.10th ed.
GARETH R. JONES /CHARLES W. L. HILL GARETH R. JONES /CHARLES W. L. HILL
Learning Objective:chapter you should be able to review theLearning Objective: chapter you should be able to review the After reading thisAfter reading this primary technique used to analyzecompetition in an industry environment: the primary technique used to analyze competition in an industry environment: the Competitive Forces model. Competitive Forces model.
Learning Objective:chapter you should be able to review theLearning Objective: chapter you should be able to review the After reading thisAfter reading this primary technique used to analyzecompetition in an industry environment: the primary technique used to analyze competition in an industry environment: the Competitive Forces model. Competitive Forces model.
© 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.
COMPETITIVE FORCES COMPETITIVE FORCESCOMPETITIVE FORCESCOMPETITIVE FORCESMODEL MODELMODEL 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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1) The first of Porter’s Five Forces is the entry by potential competitors (companies risk of
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 a firm expands its output. occur when unit costs fall as
c) Brand loyalty preference for the product of an established exists when consumers have a company.
COMPETITIVE FORCES COMPETITIVE FORCESCOMPETITIVE FORCESCOMPETITIVE FORCESMODEL MODELMODEL MODEL
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c) An entrants cannot expect to match absolute cost advantage means that
established companies lower cost.
d) Customer switching costs customer invests time, energy, and money occur when a
switching from the products offered by one established company to the products
of a new entrant.
COMPETITIVE FORCES COMPETITIVE FORCESCOMPETITIVE FORCESCOMPETITIVE FORCESMODEL MODELMODEL MODEL
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2) The second of Porter’s Five Forces is the intense rivalry among established
companies.
a) The to the number and size distribution of industry competitive structure refers
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.
COMPETITIVE FORCES COMPETITIVE FORCESCOMPETITIVE FORCESCOMPETITIVE FORCESMODEL MODELMODEL MODEL
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b) The level of second determinant of the intensity of industry demand is the
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.
COMPETITIVE FORCES COMPETITIVE FORCESCOMPETITIVE FORCESCOMPETITIVE FORCESMODEL MODELMODEL MODEL
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d) Exit barriers emotional factors that prevent companies are economic, strategic, and
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.
COMPETITIVE FORCES COMPETITIVE FORCESCOMPETITIVE FORCESCOMPETITIVE FORCESMODEL MODELMODEL MODEL
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COMPETITIVE FORCES COMPETITIVE FORCESCOMPETITIVE FORCESCOMPETITIVE FORCESMODEL MODELMODEL MODEL
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3) The Porter’s Five Forces. It is the ability of buyers to bargaining power of buyers is the third of
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 FORCES COMPETITIVE FORCESCOMPETITIVE FORCESCOMPETITIVE FORCESMODEL MODELMODEL MODEL
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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.
Learning Objective:chapter you should be able to explore theLearning Objective: chapter you should be able to explore the After reading thisAfter reading this concept of strategic groups and illustratethe implications for industry analysis. concept of strategic groups and illustrate the implications for industry analysis.
Learning Objective:chapter you should be able to explore theLearning Objective: chapter you should be able to explore the After reading thisAfter reading this concept of strategic groups and illustratethe implications for industry analysis. concept of strategic groups and illustrate the implications for industry analysis. STRATEGIC GROUPS WITHIN INDUSTRIES STRATEGIC GROUPS WITHIN INDUSTRIESSTRATEGIC GROUPS WITHIN INDUSTRIESSTRATEGIC GROUPS WITHIN INDUSTRIES
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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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The Role of Mobility Barriers The Role of Mobility BarriersThe Role of Mobility BarriersThe Role of Mobility Barriers
Mobility barriers inhibit the movement of companies between are within-industry factors that
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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STRATEGIC GROUPS WITHIN INDUSTRIES STRATEGIC GROUPS WITHIN INDUSTRIESSTRATEGIC GROUPS WITHIN INDUSTRIESSTRATEGIC GROUPS WITHIN INDUSTRIES
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INDUSTRY LIFE-CYCLE ANALYSIS INDUSTRY LIFE-CYCLE ANALYSISINDUSTRY LIFE-CYCLE ANALYSISINDUSTRY LIFE-CYCLE ANALYSIS
Learning Objective:chapter you should be able to discussLearning Objective: chapter you should be able to discuss After reading thisAfter reading this how industries evolve over time, withreference to the industry life-cycle how industries evolve over time, with reference to the industry life-cycle model. model.
Learning Objective:chapter you should be able to discuss Learning Objective: chapter you should be able to discuss After reading thisAfter reading this how industries evolve over time, withreference to the industry life-cycle how industries evolve over time, with reference to the industry life-cycle model. model.
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(^) There are five stages in the industry life-cycle. 1) Embryonic
- Growth
- Shakeout
- Mature
- Decline
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INDUSTRY LIFE-CYCLE ANALYSIS INDUSTRY LIFE-CYCLE ANALYSISINDUSTRY LIFE-CYCLE ANALYSISINDUSTRY LIFE-CYCLE ANALYSIS
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Growth Industries^ Growth IndustriesGrowth IndustriesGrowth Industries
In a expanding rapidly. growth industry , first-time demand is
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 LIFE-CYCLE ANALYSIS INDUSTRY LIFE-CYCLE ANALYSISINDUSTRY LIFE-CYCLE ANALYSISINDUSTRY LIFE-CYCLE ANALYSIS
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(^) Explosive growth cannot be maintained indefinitely. (^) In the becomes intense. shakeout stage , rivalry between companies
Industry Shakeout Industry ShakeoutIndustry ShakeoutIndustry Shakeout
(^) The market is totally saturated, demand is limited to replacement demand, and growth is low or zero. (^) In the threat of entry from potential competitors decreases. mature stage , barriers to entry increase, and the
Mature Industries Mature IndustriesMature IndustriesMature Industries
