Theory of Strategic Management

with Cases, 8e

 

Chapter Two



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 h ternal Analysis
The purpose of e ternal analysis is to identify
the strategic Y Y
 and 
  in the
organization¶s operating environment.
h ternal Analysis requires an assessment of:
^ undustry environment in which company operates
ΠCompetitive structure of industry
ΠCompetitive position of the company
ΠCompetitiveness and position of major rivals
^ The country or national environments
in which company competes
^ The wider socioeconomic or macroenvironment
that may affect the company and its industry
ΠSocial ΠLegal ΠTechnological
ΠGovernment Πunternational ΠMacroeconomic

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 h ternal Analysis:
Opportunities and Threats
Analyzing the dynamics of the industry in which
an organization competes to help identify:
Opportunities Threats
Conditions in the Conditions in the
environment that a environment that
company can take endanger the integrity
advantage of to and profitability of
become more the company¶s
profitable business

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 undustry Analysis:
Defining an undustry
^ undustry
ΠA group of companies offering products or services that are
close substitutes for each other and that satisfy the same
basic customer needs
Πundustry boundaries may change as customer needs evolve
and technology changes
^ Sector
ΠA group of closely related industries
^ Market Segments
ΠDistinct groups of customers within an industry
ΠCan be differentiated from each other with distinct attributes
and specific demands
undustry analysis begins by focusing on
the overall industry ±
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 The Computer Sector:
undustries and Segments
Figure 2.1

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 Õorter¶s Five Forces Model

^isk of hntry by Õotential Competitors

^undustry ivalry
^Bargaining Õower of Buyers
^Bargaining Õower of Suppliers
^Threat of Substitutes

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 ow the Five Forces Shape
Competition within an undustry
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.
ΠA weak competitive force

may be viewed as an opportunity as it
allows company to earn greater profits
ΠA strong competitive force

may be viewed as a threat as it
depresses industry profits
ΠStrength of forces may change
as industry conditions change

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 - isk of hntry by Õotential
Competitors
Õotential Competitors are companies that are not
currently competing in an industry but have the capability
to do so if they choose. Barriers to new entrants include:
1. hconomies of Scale ± "
 
% +
^ Cost reductions ±  
 % 
^ Discounts on bulk purchases ± ,

^ Cost advantages/savings ± 
%   
2. Brand Loyalty
^ Achieved by creating well-established customer preferences
^ Difficult for new entrants to take market share from established brands
3. Absolute Cost Advantages ±  ,
^ Accumulated e perience ± 
 % & 
 %
^ Control of particular inputs required for production
^ Lower financial risks ± %% %

m. Customer Switching Costs for Buyers ± ,%
5. Government egulation
^ May be a barrier to enter certain industries

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 - ivalry Among hstablished
Companies
Competitive ivalry refers to the competitive struggle
between companies in the same industry to gain market
share from each other. untensity of rivalry is a function of:
1. undustry Competitive Structure
^ rumber and size distribution of companies
^ Consolidated versus fragmented industries
2. Demand Conditions
^ Growing demand ±   % 
 %
^ Declining demand ± %  &
3. Cost Conditions
^ igh fi ed costs ±
    
^ Slow demand and growth ± % ,
 
m. eight of h it Barriers ±
% 
 
^ ‰rite-off of investment in assets ^ igh fi ed costs of e it
^ hconomic dependence on industry ^ hmotional attachment to industry
^ Maintain assets ^ Bankruptcy regulations

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 - Bargaining Õower of Buyers
undustry Buyers may be the consumers or end-users who
ultimately use the product or intermediaries that distribute or
retail the products. These buyers are most powerful when:
1. Buyers are dominant.
^ Buyers are large and few in number.
^ The industry supplying the product is composed of many small companies.
2. Buyers purchase in large quantities.
^ Buyers have purchasing power as leverage for price reductions.
3. The industry is dependant on the buyers.
^ Buyers purchase a large percentage of a company¶s total orders.
m. Switching costs for buyers are low.
^ Buyers can play off the supplying companies against each other.
5. Buyers can purchase from several supplying companies at once.
6. Buyers can threaten to enter the industry themselves.
^ Buyers produce themselves and supply their own product.
^ Buyers can use threat of entry as a tactic to drive prices down.

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 - Bargaining Õower of Suppliers
Suppliers are organizations that provide inputs such as
material and labor into the industry. These suppliers are
most powerful when:

1. The product supplied is vital to the industry and has few

substitutes.
2. The industry is not an important customer to suppliers.
^ Suppliers are not significantly affected by the industry.
3. Switching costs for companies in the industry are significant.
^ Companies in the industry cannot play suppliers against each other.
m. Suppliers can threaten to enter their customers¶ industry.
^ Suppliers can use their inputs to produce and compete with
companies already in the industry.
5. Companies in the industry cannot threaten to enter their
suppliers¶ industry by making their own inputs.

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 - Substitute Õroducts
Substitute Õroducts are the products from
different businesses or industries that can satisfy
similar customer needs.

1. The e istence of close substitutes is

a strong competitive threat.
^ Substitutes limit the price that companies
can charge for their product.

2. Substitutes are a weak competitive

force if an industry¶s products have few
close substitutes.
^ Other things being equal, companies in the
industry have the opportunity to raise
prices and earn additional profits.

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 Strategic Groups ‰ithin undustries
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.

^ umplications 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. hach 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
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 Strategic Groups in the
Õharmaceutical undustry
Figure 2.3

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 undustry Life Cycle Analysis
undustry Life Cycle Model analyzes the affects of
industry evolution on competitive forces over time
and is characterized by five distinct life cycle stages:
1. hmbryonic ± /  

- ivalry based on perfecting products, educating customers, and
opening up distribution channels
2. Growth ± & ,,% 
- Low rivalry as focus is on keeping up with high industry growth
3. Shakeout ± 

 % 
%
- ivalry intensifies with emergence of e cess productive capacity
m. Mature ± & , ,   ,
- undustry consolidation based on market share, driving down price
5. Decline ±  , % 
- ivalry further intensifies based on rate of decline and e it barriers

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 Stages in the undustry Life Cycle
r  %%  Figure 2.m

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 Growth in Demand and Capacity
Anticipate how forces will change and formulate appropriate strategy Figure 2.5

undustry Shakeout:
ivalry untensifies
with growth in
e cess capacity

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 Limitations of Models
for undustry Analysis
^ Life Cycle ussues
Πundustry cycles do not always follow the life cycle generalization
Πun rapid growth situations embryonic stage is sometimes skipped
Πundustry growth revitalized through innovation or social change
ΠThe time span of the stages can vary from industry to industry
^ unnovation and Change
Œ Õ
  
 occurs when an industry¶s long term stable
structure is punctuated with periods of rapid change by innovation
Œ  

Y 
 are characterized by permanent and
ongoing innovation and competitive change
^ Company Differences
ΠThere can be significant variances in the profit rates of individual
companies within an industry
Πun addition to industry attractiveness, company resources and
capabilities are also important determinants of its profitability

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 Õunctuated hquilibrium
and Competitive Structure
Figure 2.6


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 The Macroenvironment
^Macroeconomic Forces:  ,
%%"%  
 
^Global Forces:   

^Technological Forces: ,%  
^Demographic Forces: %%%%


 
^Social Forces:  % 
^Õolitical & Legal Forces: , 

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 The ole of the
Macroenvironment
Changes in one or more forces in the
macroenvironment can affect:
ΠThe competitiveness of the industry
(Õorter¶s Five Forces)
ΠThe attractiveness of the industry
Πelative strengths (or weaknesses) of a
given company

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