External Analysis

r m
f o
a t
P l
External Analysis: Industry
A
Structure, Competitive Forces,
B and Strategic Groups
Copyright © McGraw-Hill Education MJ Maalej | SM

Learning Objectives m
o r
t f
LO 3-1 Generate a PESTEL analysis to evaluate the impact of external factors on the firm.
a
LO 3-2 Differentiate the roles of firm effects and industry effects in determining firm performance.
l
P
LO 3-3 Apply Porter’s five competitive forces to explain the profit potential of different industries.
LO 3-4 Explain how competitive industry structure shapes rivalry among competitors.
B
LO 3-6 Explain the five choices required for market entry.
A
LO 3-5 Describe the strategic role of complements in creating positive-sum co-opetition.
LO 3-7 Appraise the role of industry dynamics and industry convergence in shaping the firm’s external
environment.
LO 3-8 Generate a strategic group model to reveal performance differences between clusters of firms in
the same industry.
General Environment
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How
f o
• Managers have little control
• Macroeconomic factors
External t
• Interest / currency exchange
rates a
Factors
P l
Impact a Task Environment
Firm •B
A
Managers can influence
• Composition of strategic groups
• Industry structure

•Groups environmental factors into six
segments:
r m
• Political
f o
•
The
•
Economic
Socioculturala
t
PESTEL • P l
Technological
Model • Ecological
•
A
BLegal
•A straightforward way to scan, monitor,
and evaluate

m
The Firm
r
o
Within Its
fExternal
a tEnvironment
P l
B A

•Processes & actions of government
bodies
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•Can be shaped through:
f o
•
Political •
Lobbying
a
Public Relations
t
Factors • P l
Contributions
• Litigation
B
•Political
Aand legal forces are closely
related.

•Largely macro-economic
r
•Economy-wide phenomena
m
f o
•Examples include:
t
Economic a
• Growth rates
l
Factors P
• Levels of employment
A
• Interest rates
B
• Price stability
• Currency exchange rates
•Society’s cultures, norms, and
values r m
o
• Are constantly in flux
f
Sociocultural a t
• Differ across groups
Factors P l
•Demographic trends
• Population characteristics
B A
• Age, gender, family size,
ethnicity, sexual orientation,
religion, and socioeconomic class

•Application of knowledge
r m
• New processes and products
f o
•Innovations in process technology:
Technological a t
• Lean manufacturing and Six Sigma
Factors quality P l
•Innovations
A in product
B
technology:
• Smartphones and wearable devices
m
•Broad environmental issues:
r
o
• Natural environment
f
Ecological
• Global warming
a t
Factors P l
• Sustainable economic growth
•Can provide business
A
opportunities
B
• Tesla cars have zero emissions

•Official outcomes of political m
processes:
o r
• Laws
t f
Legal • Mandates a
Factors • Regulations
P l
• Court decisions
A
•ManyBindustries have been deregulated:
• Airlines, telecom, energy, and trucking

•Industry Effects
• Elements in common to r m
all
f o
• Entry and exit barriers, number
Industry vs. and size of a t
companies, and types
Firm l
of products
P and services offered
Effects •Firm Effects
A
B actions managers take
• The
• More important than firm effects

r m
Superior
o
t f Firm
laPerformance
P
B A

•Industry:
r m
o
• Group of incumbent companies
f
• Relatively similar suppliers and buyers
Industry &
a t
• Similar products and services
Industry l
P a method to:
•Industry analysis,
Analysis
B A
• Identify an industry’s profit potential
• Derive implications for a firm’s
strategic position

•The risk that potential competitors will
m
enter an industry
o r
•Lowers industry profit potential:
t f
• Incumbents lower prices
Threat of •Incumbents spendamore to satisfy existing
Entry customers.
P l
•Entry barriers:
B A
• Obstacles blocking others from entering
• A significant predictor of industry profit
potential

•A firm’s ability to: m
r
• Create value for customers (V)
o
• Contain costs (C)
t f
Strategic •Goal: Generate
l a
a large gap
Positioning between: P
A
• The value the firm’s product or
B
service creates
• The cost required to produce it
m
Porter’s
r
Five
f o Forces
a t Model
Pl Exhibit 3.3
B A

•The risk that potential competitors will
enter the industry
•Entry barriers: r m
• Economies of scale
f o
Threat of
• Network effects
a t
Entry
• l
Customer switching costs
P
• Capital requirements
• A
Advantages independent of size
B
• Government policy
• Credible threat of retaliation

•Pressures that industry suppliers
m r
can exert on an industry’s profit
o
potential
t f
Power of •Lowers industry
a profit potential
Suppliers if: P l
• Suppliers demand higher prices
A
B their inputs
for
• Suppliers reduce quality

•Pressure customers put on an
industry
r m
o potential if:
•Lowers industry profit
f
Power of • Buyers obtain t
price discounts
Buyers
a
• Reduceslrevenue
(Customers) P
• Buyers demand higher quality /
A
service
B
• Raises production costs

•Meet the same basic customer
need
r m
• But in a different way
f o
• Available from outside the given
Threat of industry a t
Substitutes •Examples:P l
• Energy
A drinks vs. coffee
B
• Videoconferencing vs. business
travel
• E-mail vs. express mail
•The intensity with whichm
r
companies in the same industry
o
jockey for market share and
f
Rivalry profitability
a t
Among •Other forces
P lpressure this rivalry
Competitors •Examples
BA of tactics:
• Price discounting
• After sales service
•Number and size of m
competitors o r
Competitive •Firm’s degree t f
of pricing
Industry power l a
Structure P
•Type of product or service
B A
• Commodity or differentiated
•Height of entry barriers
4 Main Competitive Industry Structures
r m
f o
a t
P l
B A

•Affects intensity of rivalry among
competitors
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•During periods of high growth:
f
• Consumer demand rises
o
Industry • Price competition
a tamong firms
decreases l
Growth P of negative growth:
•During periods
B A
• Rivalry is fierce
• Rivals can only gain at the expense of
one another

•Firm actions that are:
• Costly r m
• Long-term oriented
f o
Strategic a t
• Difficult to reverse
•Affects intensity of rivalry among
Commitments competitors P
l
•Example: airline industry
A
B and spoke model requires
• Hub
significant investment

•Obstacles that determinemhow
r
easily a firm can leaveothat industry
•Mainly economic t f
and social
Exit factors l a
Barriers •Examples: P
B A
• Contractual obligations
• Emotional attachments

•Complements: m
r
• A product, service, or
o
A Sixth Force: competency
t f
Complements
l a
• Adds value when used with the
and Co- originalP
product
Opetition •Co-opetition:
B A
• Cooperation by competitors to
achieve a strategic objective

r m
fEntry
o
t
a Choices
P l
B A

m
•Provides insight about:
r
o
• Changing speedfof an industry
Industry a t
• Rate of innovation
Dynamics
l
•Analysis Pmust repeat over time
B A
• Industry structures aren’t stable
• They are dynamic

•When unrelated industries
m satisfy
the same need o r
t f
•Caused by technological advances
Industry a
•Example: Media
l Industries
Convergence P
• Content going online
A
B• Newspapers, magazines, TV,
movies, radio, music
• Will print media become obsolete?
•Strategic groups:
• A set of companies
r m
o
• Pursue a similar strategy
f
Strategic a t
• In the same industry
Groups •The strategiclgroup model

(framework):
P
A
B different firms into groups
• Clusters
• Is based on key strategic
dimensions
dimensions r m
• Identify the important strategic
How to • f o
Choose two key dimensions
Create a • For horizontal andtvertical axes
Strategic l
• Ensure they’re
a
not highly correlated
Group • P
Graph the firms in the strategic group
Map • EachAfirm’s market share indicated by

B size of the bubble
the

r m
o
Strategic Group
f
tMap: Domestic
la Airline Industry
P Exhibit 3.7
B A

• Competitive rivalry:
•
r m
Strongest between firms in the same
Insights strategic group
f o
• External environment:
from
a
• Affects strategic
t
groups differently
Strategic •
l
P forces:
Five competitive
Group • Affect strategic groups differently
Mapping • B A
Profitability:
• Some strategic groups more profitable
than others

m
•Restrict movementr between
strategic groupsf o
Mobility a t
•Industry-specific factors
Barrier P l
•Based on hard-to-reverse
A
investments
B

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Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Groups •The strategiclgroup model

Map • EachAfirm’s market share indicated by

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

Copyright © McGraw-Hill Education MJ Maalej | SM

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