Because learning changes everything.

Chapter 3
External Analysis: Industry
Structure, Competitive
Forces, and Strategic
Groups

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No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
 Learning Objectives
1. Generate a PESTEL analysis to evaluate the impact of external
factors on the firm.
2. Differentiate the roles of firm effects and industry effects in
determining firm performance.
3. Apply Porter’s five competitive forces to explain the profit potential of
different industries.
4. Examine how competitive industry structure shapes rivalry among
competitors.
5. Describe the strategic role of complements in creating positive-sum
co-opetition.
6. Explain the five choices required for market entry.
7. Appraise the role of industry dynamics and industry convergence in
shaping the firm’s external environment.
8. Generate a strategic group model to reveal performance differences
between clusters of firms in the same industry.
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 How External Factors Impact a Firm

General environment:
• Managers have little control.

• Macroeconomic factors are included.

• Examples: interest, exchange rates, etc.

Task environment:
• Managers can influence.

• Includes the composition of strategic groups.

• Includes the structure of the industry.

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 The PESTEL Model

Groups environmental factors into six segments:

1. Political.

2. Economic.

3. Sociocultural.

4. Technological.
A straightforward way to
5. Ecological. scan, monitor, and evaluate
external factors.
6. Legal.

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 The Firm within Its External Environment, Industry, and
Strategic Group, Subject to PESTEL Factors

Exhibit 3.1

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 Political Factors

Processes and actions of government bodies that

influence the firm can be shaped through:
• Lobbying.

• Public Relations.

• Contributions.

• Litigation.

Political and legal forces are closely related.

• Political pressure often results in changes in legislation.

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 Economic Factors

Largely macroeconomic. Examples include:

Affect economy-wide • Growth rates.

phenomena. • Levels of employment.

• Interest rates.

• Price stability.

• Currency exchange rates.

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 Sociocultural Factors
Society’s cultures, norms, and values:
• Are constantly in flux.

• Differ across groups.

• Trends should be monitored.

Demographic trends:
• Population characteristics.

• Age, gender, family size, ethnicity, sexual orientation,

religion, and socioeconomic class.

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 Technological Factors

Application of knowledge:
• New processes and products.

Innovations in process technology:

• Lean manufacturing, Six Sigma quality and biotechnology.

Innovations in product technology:

• Smartphones, wearable devices, high-performing electric
cars.

Advances in artificial intelligence and machine

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 Ecological Factors

Broad environmental The relationship

issues: between organizations
• Natural environment. and the environment
• Global warming. can be:
• Sustainable economic • Adversarial.
growth. • Can provide business
opportunities.

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 Legal Factors

Official outcomes of political

processes:
Legal factors
• Laws. often coexist
• Mandates. with or result
from political will.
• Regulations.

• Court decisions.

Many industries have been

deregulated.
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 Industry vs. Firm Effects

Industry Effects: Firm Effects:

• Describe the economic • Attribute firm performance
structure of the industry. to the manager’s actions.

• Elements in common to • More important than

all. industry effects.

• Entry and exit barriers,

number and size of
companies, and types of
products and services
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 Industry, Firm, and Other Effects Explaining Firm
Performance

Exhibit 3.2

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 Industry and Industry Analysis

Industry: Industry analysis, a

• Group of incumbent method to:
companies. • Identify an industry’s profit
• Relatively similar suppliers potential.
and buyers. • Derive implications for a
• Similar products and firm’s strategic position.
services.

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 Strategic Positioning

Goal.
A firm’s ability to:
• Create value for
To generate a large gap

customers (V). between:

• While containing costs • The value the firm’s

(C). product or service creates.

• The cost required to

produce it.

• V minus C.

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 The Five Forces Model

The Five Forces Model helps strategic leaders

understand:
• The profit potential of different industries.

• How they can position their firms to gain and sustain

competitive advantage.
Two key insights about this model:
• Competition is viewed more broadly in the five forces model.

• Profit potential is a function of the five competitive forces.

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 Porter’s Five Forces Model
Exhibit 3.3
Source: Porter, M. E. (2008, Jan.). “The five
competitive forces that shape strategy,” Harvard
Business Review.

© McGraw Hill
 Threat of Entry

The risk that potential Entry barriers:

• Economies of scale.
competitors will enter an
• Network effects.
industry:
• Customer switching costs.
• Lowers industry profit
• Capital requirements.
potential.
• Advantages independent of
• Increases spending size.

among incumbent firms. • Government policy.

• Credible threat of
retaliation.
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 Power of Suppliers

Pressures that industry suppliers can exert on an

industry’s profit potential.

Lowers industry profit potential if:

• Suppliers demand higher prices for their inputs.

• Suppliers capture part of the economic value created.

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 Power of Buyers (Customers)

Lowers industry profit potential if: Buyers are

• Buyers obtain price discounts, which reduces the
revenue. customers
• Buyers demand higher quality / service, which of an
raises production costs. industry.
Situations when buyers are price
sensitive:
• The buyer’s purchase represents a significant
portion of its procurement budget.

• Buyers earn low profits or are strapped for

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 Threat of Substitutes

Meet the same basic Examples:

customer need: • Software vs. professional

services.
• In a different way.
• Energy drinks vs. coffee.
• Available from outside the
• Videoconferencing vs.
given industry.
business travel.

• Wireless phone services vs.

internet-based services
(Skype).
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 Rivalry Among Competitors

The intensity with which companies in the same

industry jockey for market share and profitability.
• Can range from genteel to cut-throat.

• The other forces in the model pressure this rivalry.

• The stronger the forces, the stronger the competitive

intensity.

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 Competitive Industry Structure is Defined By

Number and size of competitors.

Firm’s degree of pricing power.

Type of product or service

(commodity or differentiated product).
Height of entry barriers.

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 Industry Competitive Structures along the Continuum from
Fragmented to Consolidated

Exhibit 3.4

Access the text alternative for slide image.

© McGraw Hill
 Industry Growth
Affects intensity of rivalry among competitors.

During periods of high growth:

• Consumer demand rises.

• Price competition among firms decreases.

During periods of negative growth:

• Rivalry is fierce.

• Rivals can only gain at the expense of one another.

• Price discounts, promotional campaigns, and retaliation

abound.
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 Strategic Commitments

Firm actions that are:

• Costly, long-term oriented and difficult to reverse.

Can stem from:

• Large, fixed cost requirements.

• Non-economic considerations.

Affects intensity of rivalry among competitors.

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 Exit Barriers

Obstacles that determine how easily a firm can

leave that industry.

Mainly economic and social factors.

Include fixed costs that must be paid.

Examples: employee health care and retirement

benefits.

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 A Sixth Force: Complements

A product, service, or competency that adds value

when used with the original product.
• Complements increase demand for the primary product.

• Enhances the profit potential for the industry and the firm.

Co-opetition:
• cooperation among competitors to achieve a strategic
objective.

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 Entry Choices
Exhibit 3.6
Source: Based on and
adapted from M.A.,
Zachary, P.T. Gianiodis,
G. Tyge Payne, and
G.D. Markman (2014),
“Entry timing: enduring
lessons and future
directions,” Journal of
Management 41: 1409;
and Bryce, D.J., and
J.H. Dyer (2007, May),
“Strategies to crack
well-guarded markets,”
Harvard Business
Review: 84–92.

Access the text alternative for slide image.

© McGraw Hill
 Industry Dynamics

A weakness of other models is that they are static

(point-in-time snapshot).

Industry dynamics provides insight about:

• Changing speed of an industry.

• Rate of innovation.

• Help capture structural changes in the industry.

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 Industry Convergence

When unrelated Example:

industries begin to satisfy • Media Industries:
the same customer need. • Content going online.

Caused by technological • Newspapers,

advances. magazines, TV, movies,
radio, music.

• Will print media

become obsolete?
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 Strategic Groups

Strategic groups:
• A set of companies.

• Pursue a similar strategy.

• In the same industry.

The strategic group model (framework):

• Clusters different firms into groups.

• Is based on key strategic dimensions.

© McGraw Hill
 How to Create a Strategic Group Model

Identify the important strategic dimensions.

Choose two key dimensions:

• For horizontal and vertical axes.

• Ensure they’re not highly correlated.

Graph the firms in the strategic group.

• Each firm’s market share indicated by the size of the
bubble.

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 Strategic Groups and Mobility Barrier in U.S. Domestic Airline
Industry

Exhibit 3.8

Jump to Appendix 3.6 long image

description

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 Insights from Strategic Group Mapping

Competitive rivalry is strongest between firms in the

same strategic group.
External environment affects strategic groups differently.

Five competitive forces affect strategic groups differently.

Some strategic groups more profitable than others.

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 Mobility Barriers

Restrict movement between strategic groups.

Industry-specific factors that separate one group

from another.

Based on hard-to-reverse investments (strategic

commitments).

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 End of Main Content

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No reproduction or further distribution permitted without the prior written consent of McGraw Hill.