New

Chapter
Two
External
Analysis:
The
Identification of
Opportunities
and Threats
Copyright Houghton Mifflin Company. All rights reserved.
2 | 2
External Analysis requires an assessment of:
+Industry environment in which company operates
Competitive structure of industry
Competitive position of the company
Competitiveness 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
Social
Government
Legal
International
Technological

External Analysis
The purpose of external analysis is to identify
the strategic opportunities and threats in the
organizations operating environment that
will affect how it pursues its mission.
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External Analysis:
Opportunities and Threats
Analyzing the dynamics of the industry in which
an organization competes to help identify:
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 companys
business
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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
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The Computer Sector:
Industries and Market Segments
Figure 2.1
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Porters Five Forces Model
Source: Adapted and reprinted by permission of Harvard Business Review. From How Competitive Forces Shape Strategy, by
Michael E. Porter, Harvard Business Review, March/April 1979 by the President and Fellows of Harvard College. All rights reserved.
Figure 2.2
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Potential 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:
Risk of Entry by Potential
Competitors
1. Economies of Scale as firms expand output unit costs fall via:
+ Cost reductions through mass production
+ Discounts on bulk purchases of raw material and standard parts
+ Cost advantages of spreading fixed and marketing costs over large volume
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 relative to new entrants
+ Accumulated experience in production and key business processes
+ Control of particular inputs required for production
+ Lower financial risks access to cheaper funds
4. Customer Switching Costs for Buyers where significant
5. Government Regulation
+ May be a barrier to enter certain industries
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1. Industry Competitive Structure
+ Number and size distribution of companies
+ Consolidated versus fragmented industries
2. Demand Conditions
+ Growing demand tends to moderate competition and reduce rivalry
+ Declining demand encourages rivalry for market share and revenue
3. Cost Conditions
+ High fixed costs profitability leveraged by sales volume
+ Slow demand and growth can result in intense rivalry and lower profits
4. Height of Exit Barriers prevents companies from leaving industry
+ Write-off of investment in assets
+ Economic dependence on industry
+ Maintain assets - to participate
effectively in an industry
Rivalry Among Established
Companies
Competitive Rivalry refers to the competitive struggle
between companies in the same industry to gain market
share from each other. Intensity of rivalry is a function of:
+ High fixed costs of exit
+ Emotional attachment to industry
+ Bankruptcy regulations allowing
unprofitable assets to remain
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Industry 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:
Bargaining Power of Buyers
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 companys total orders.
4. 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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Suppliers are organizations that provide inputs such as
material and labor into the industry. These suppliers are
most powerful when:
Bargaining Power of Suppliers
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.
4. 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 suppliers
industry.

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Substitute Products are the products from
different businesses or industries that can satisfy
similar customer needs.
Substitute Products
1. The existence 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 industrys 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
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
The basic differences between business models in
different strategic groups can be captured by a
relatively small number of strategic factors.
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Strategic Groups in the
Pharmaceutical Industry
Figure 2.3
Industry Life Cycle Analysis
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Five sequential stages:

1. Embryonic
2. Growth
3. Shakeout
4. Mature
5. Decline

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The Rise and Fall
1. Embryonic Industries
industry just beginning to develop.

Growth at this stage is slow because
buyers are still UNFAMILIAR with the
industrys product.

High prices

Company creates its innovative
efforts.

High barriers to entry: Rivalry based
on perfecting products, educating
customers, and opening up distribution
channels.

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Embryonic stage
+ 1861 - Founded by Eduard Polon.
+ 1865 - Fredrik Idestam set up his first wood pulp
mill in Southwestern Finland.
+ 1871 - opened a second mill on the banks of the
Nokian virta river, inspiring him to name his
company Nokia Ab in.
+ 1898- founded Finnish Rubber Works, a
manufacturer of rubber boots, tires and other
rubber products.
+ 1902 - Nokia added electricity generation to its
business activities
+ 1912 founded Finnish Cable Works Ltd, a
manufacturer of telephone and power cables.

+ The new Nokia Corporation had five businesses:
rubber, cable, forestry, electronics and power
generation.

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2. Growth Industries
first-time demand takes-off
with new customers

Customers become
FAMILIAR with the product

little competition and
accelerated sales

High growth: Low rivalry as
focus is on keeping up with
high industry growth.

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Growth stage
+ 1960 - Nokia first entered the
telecommunications equipment market.
+ 1970 - Nokia became more involved in the
telecommunications industry by developing
the Nokia DX 200.
+ In the early 1990s - Nokia made a strategic
decision to make telecommunications their
core business.
+ 1992 - the name was changed to Nokia
Telecommunications
+ 1989 and 1996 - Basic industry and non-
telecommunications operationsincluding
paper, personal computer, rubber, footwear,
chemicals, power plant, cable, aluminum
and television businesses
+ 1998 - 2006, Nokia was the world leader in
mobile phones.
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3. Industry Shakeout
demand approaches saturation, replacements

Rivalry between companies becomes intense
Rivalry intensifies with emergence of excess productive capacity.

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Growth in Demand and Capacity
Industry Shakeout:
Rivalry Intensifies
with growth in
excess capacity
Anticipate how forces will change and formulate appropriate strategy Figure 2.5
Industry Shakeout
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4. Mature Industries
market totally saturated
with low to no growth

Barriers to entry increase
and threat of entry from
potential competitors
decreases: Industry
consolidation based on
market share, driving down
price.

Companies begin to focus
on minimizing cost and
building brand loyalty

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Mature Stage
Loss of smartphone marketshare

2007 - Apple's iPhone continued to be outsold and
unfavoured by Nokia smartphones, most notably
the Nokia N95 for some time

In Q4 2008, Nokia retained a 40.8% share, it saw a
decline of over 10% from Q4 2007, replaced by
Apple's increasing share.

In early 2009, the Nokia N97 was released and its
closest competitor was the iPhone 3GS. However,
market share dropped from 52.4% in Q4 2008 to
46.1% a year later. RIM increased its share during
the period from 16.6% to 19.9%, but Apple
increased share from 8.2% to 14.4%. Android grew
to 3.9%.

In 2011, Nokia joined forces with Microsoft to
strengthen its position in the highly competitive
smartphone market.

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5. Declining Industries
industry growth becomes
negative

Degree of rivalry among
established companies usually
increases: Rivalry further
intensifies based on rate of
decline and exit barriers.

Falling demand leads to the
emergence of excess capacity

The greater the exit barriers, the
harder it is for companies to
reduce capacity and the greater
is the threat of severe price
competition.

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Declining Stage
+ Nokias strategy : to drive digital
convergence through their expansion into
personal electronics as well as into
content and services. It works well at
first.

+ Nokia's decline in the mobile device
industry culminated in the sale of the
handset division to Microsoft.

+ Major reasons for Nokia's decline
include:
- a pervasive bureaucracy leading to an
inability to act,
- destructive internal competition
- failure to realize the importance of
lifestyle products like the iPhone.
- inability to innovate, saying that
incompetent middle management
hampered attempts to bring innovations
to market.

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Stages in the Industry Life Cycle
O O O O O
Strength and nature of five forces change as industry evolves Figure 2.4
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Limitations of Models
for Industry Analysis
+ Life Cycle Issues
Industry cycles do not always follow the life cycle generalization.
In rapid growth situations embryonic stage is sometimes skipped.
Industry growth revitalized through innovation or social change.
The time span of the stages can vary from industry to industry.
+ Innovation and Change
Punctuated Equilibrium occurs when an industrys long term stable
structure is punctuated with periods of rapid change by innovation.
Hypercompetitive industries are characterized by permanent and
ongoing innovation and competitive change.
+ Company Differences
There can be significant variances in the profit rates of individual
companies within an industry.
In addition to industry attractiveness, company resources and
capabilities are also important determinants of its profitability.
Models provide useful ways of thinking about competition
within an industry but be aware of their limitations.
2 | 30
Punctuated Equilibrium
and Competitive Structure
Periods of long
term stability
Periods of long
term stability
Industry
Structure
revolutionized
by innovation
Figure 2.6
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The Role of the
Macroenvironment
Changes in the
forces in the macro-
environment can
directly impact:
The Five Forces
Relative Strengths
Industry
Attractiveness
Figure 2.7

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