Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 3 External Analysis: Industry Structure, Competitive Forces, and Strategic Groups

3-2

3-3 Chapter Outline 3.1 The PESTEL Framework 3.2 Industry Structure and Firm Strategy: The Five Forces Model 3.3 Changes over Time: Industry Dynamics 3.4 Explaining Performance Differences within the Same Industry: Strategic Groups 3.5 Implications for the Strategist 3.1 The PESTEL Framework 3.2 Industry Structure and Firm Strategy: The Five Forces Model 3.3 Changes over Time: Industry Dynamics 3.4 Explaining Performance Differences within the Same Industry: Strategic Groups 3.5 Implications for the Strategist

3-4 ChapterCase 3 Tesla Motors and the U.S. Automotive Industry  With high entry barriers, the BIG THREE – GM, Ford, and Chrysler – dominated the U.S. car market until the 1980s.  There have been no new recent entrants due to the HIGH industry entry barriers.  Tesla Motors’ Model S received outstanding market reception, and was awarded the 2013 MotorTrend Car of the Year. Tesla Motors and the U.S. Automotive Industry  With high entry barriers, the BIG THREE – GM, Ford, and Chrysler – dominated the U.S. car market until the 1980s.  There have been no new recent entrants due to the HIGH industry entry barriers.  Tesla Motors’ Model S received outstanding market reception, and was awarded the 2013 MotorTrend Car of the Year. Courtesy of Tesla Motors

3-5 MACRO MICRO

3-6  Managers mitigate threats and exploit opportunities by analyzing the external environmental forces.  Factors are interdependent.  Framework to scan, monitor, and evaluate important external factors/trends impacting a firm in its quest for competitive advantage. 3.1 The PESTEL Framework KEY CONCEPTS

3-7 Exhibit 3.1 The Firm Embedded in Its External Environment

3-8 Strategy Highlight 3.1 How the Eurozone Crisis Is Hurting Companies  The EU (European Union) began its formation in the early 1950s.  Today – The euro is the common currency used by 17 of the 27 EU member states.  2009 – Several European countries took on too much debt and were unable to repay their credit obligations.  Strict austerity programs were enacted.  Banks tightened credit hampering firms worldwide. How the Eurozone Crisis Is Hurting Companies  The EU (European Union) began its formation in the early 1950s.  Today – The euro is the common currency used by 17 of the 27 EU member states.  2009 – Several European countries took on too much debt and were unable to repay their credit obligations.  Strict austerity programs were enacted.  Banks tightened credit hampering firms worldwide.

3-9 Industry A group of (incumbent) firms that face the same set of suppliers and buyers Industry Analysis Identifies the industry's profit potential Derive implications for a firm’s strategic position within an industry Strategic Position A firm’s ability to create value (V) for customers while containing costs (C) Competitive Advantage = a large value gap (V - C) 3.2 Industry Structure and Firm Strategy: The Five Forces Model

3-10 Strategy Highlight 3.2 The Five Forces in the Airline Industry  Low Entry Barriers  Powerful Suppliers  Powerful Buyers  Strong Substitute Threat  Intense Rivalry  RESULTS – Low overall industry profit potential, thus an “unattractive” industry for investment. The Five Forces in the Airline Industry  Low Entry Barriers  Powerful Suppliers  Powerful Buyers  Strong Substitute Threat  Intense Rivalry  RESULTS – Low overall industry profit potential, thus an “unattractive” industry for investment.

3-11 INDUSTRY FORCES IMPACT FIRM PROFITABILITY

3-12 The Threat of Entry Incumbent firms can benefit from several important sources of entry barriers: Economies of scale Network effects Customer switching costs Capital requirements Advantages independent of size Government policy Credible threat of retaliation

3-13 The Power of Suppliers POWERFUL SUPPLIERS  Can demand higher prices for their inputs.  Capture part (sometimes a large part) of the economic value created. Signs of Strong Suppliers -Suppliers industry is concentrated. -They don’t depend heavily on the incumbent’s industry. -Incumbent firms face high switching costs. -Suppliers’ products are differentiated. -Limited substitutes -Suppliers have credible forward integration threats.

3-14 The Power of Buyers The bargaining power of buyers impacts industry profit potential. POWERFUL BUYERS  Can demand a lower price or higher product quality  Reduce industry profit potential: Through price discounts (limited revenue) Through increased quality / better service (higher costs) As they capture part of the economic value created

3-15 This threat derives from products/services fulfilling the needs of current customers from outside the industry. POWERFUL SUBSTITUTES: THE POWER OF SUBSTITUTES is HIGH when: Price-performance: Has an attractive trade-off. The buyer’s switching cost is low. Substitutes limit the price that industry competitors can charge for their products/services. The Threat of Substitutes

3-16 Exhibit 3.3 Industry Competitive Structures Along The Continuum From Fragmented To Consolidated

3-17 Adding a Sixth Force: The Strategic Role of Complements  Complementor – A firm that provides a good/service that leads customers to value your firm’s offering more when the two are combined  Co-opetition – Cooperation by competitors to achieve a strategic objective

3-18  The static five forces model cannot determine the speed of change for an industry.  As consolidated industries tend to be more profitable than fragmented ones, firms tend to change their industry structures toward being more consolidated through (horizontal) mergers and acquisitions. Industry Profitability Consolidation 3.3 Changes over Time: Industry Dynamics

3-19 Exhibit 3.5 Strategic Groups and the Mobility Barriers in the U.S. Domestic Airline Industry

Explaining Performance Differences Within the Same Industry: Strategic Groups  Firms in the same strategic group follow a similar strategy.  Strategic group differences identify business-level strategies.  Direct competitors – same strategic group firms.  Intra-group rivalry exceeds inter-group rivalry: Rivalry among firms within a strategic group is more intense than the rivalry between strategic groups.

Implications for the Strategist  PESTEL analysis guiding consideration: How the external factors identified affect the firm’s industry environment  Porter’s five forces model identifies industry profit potential and firm positioning for gaining and sustaining competitive advantage.  Strategic group map helps to find performance differences within the focal industry.

3-22 ChapterCase 3 Consider This… Recent dynamics in the automotive industry have lowered the profit potential, reducing its attractiveness. Tesla Motors has demonstrated how new technology can be used to circumvent entry barriers. However, incumbent firms are also introducing hybrid or all- electric cars, further increasing rivalry in the industry. Consider This… Recent dynamics in the automotive industry have lowered the profit potential, reducing its attractiveness. Tesla Motors has demonstrated how new technology can be used to circumvent entry barriers. However, incumbent firms are also introducing hybrid or all- electric cars, further increasing rivalry in the industry. Courtesy of Tesla Motors

3-23