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

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

4. Tesla Motors and the U.S. Automotive Industry
ChapterCase 3
Courtesy of Tesla Motors
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.

5.  
EXTERNAL ANALYSIS
PESTEL Framework
INDUSTRY ANALYSIS
Five Forces Model
COMPETITOR ANALYSIS
Strategic Group Mapping
MACRO
MICRO

6. 3.1 The PESTEL Framework
KEY CONCEPTS
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.

7. Exhibit 3.1 The Firm Embedded in Its External Environment

8. How the Eurozone Crisis Is Hurting Companies
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.

9. 3.2 Industry Structure and Firm Strategy: The Five Forces Model
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)

10. The Five Forces in the Airline Services Industry
Strategy Highlight 3.2
The Five Forces in the Airline Services 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.

11. INDUSTRY FORCES IMPACT FIRM PROFITABILITY
ATTRACTIVE INDUSTRY
Sustainable Competitive Advantage Easier
High profit potential
The weaker the five forces
UNATTRACTIVE INDUSTRY
Sustainable Competitive Advantage Harder
Low profit potential
The stronger the five forces

12. ANALYZING INDUSTRY STRUCTURE USING FIVE – FORCES
Threat of New Entrants (and Entry Barriers)
Absolute cost advantages
Proprietary learning curve
Access to inputs
Government policy
Economies of scale
Capital requirements
Brand identity
Switching costs
Access to distribution
Expected retaliation
Proprietary products
Complementors
Number of complements
Relative value added
Barriers to complement entry
Engagement of complements
Buyer perception of complements
Complement exclusivity
Industry value chain – from raw materials and other inputs, to channel to end consumer
Supplier Power
Supplier concentration
Importance of volume to supplier
Differentiation of inputs
Impact of inputs on cost or differentiation
Switching costs of firms in the industry
Presence of substitute inputs
Threat of forward integration
Cost relative to total purchases in industry
Degree of Rivalry
Exit barriers
Industry concentration
Fixed costs/value added
Industry growth
Intermittent overcapacity
Product differences
Switching costs
Brand identity
Diversity of rivals
Corporate stakes
Buyer Power (Channel and End consumer)
Bargaining leverage
Buyer volume
Buyer information
Brand identity
Price sensitivity
Threat of backward integration
Product differentiation
Buyer concentration vs. industry
Substitutes available
Buyer’s incentives
Threat of Substitutes
Switching costs
Buyer inclination to substitute
Price-performance tradeoff of substitutes
Varity of substitutes
Necessity of product or service

13. 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

14. Strength & Degree of Competitive Rivalry
Exit barriers in the industry
Quantity and variability of strength in competitive dynamics
Stage if the industry life-cycle
Industry fragmentation vs. consolidation
Perceptions of customer switching costs

15. The Power of Suppliers Can demand higher prices for their inputs.
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.

16. The bargaining power of buyers impacts industry profit potential.
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
Credible threat of backwards integration

17. The Threat of Substitutes
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
Breadth/availability of substitute options
Substitutes limit the price that industry competitors can charge for their products/services.

18. Exhibit 3.3 Industry Competitive Structures Along The Continuum From Fragmented To Consolidated

19. Adding a Sixth Force: The Strategic Role of Complements
A product, service, or competency that adds value when used in tandem with the original product offering
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

20. 3.3 Changes over Time: Industry Dynamics
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

21. Exhibit 3. 5 Strategic Groups and the Mobility Barriers in the U. S
Exhibit 3.5 Strategic Groups and the Mobility Barriers in the U.S. Domestic Airline Industry

22. 3.4 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.

23. 3.5 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.

24. ChapterCase 3 Consider This…
Courtesy of Tesla Motors
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.