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

Exhibit 3.1 The Firm Embedded in Its External Environment

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Political/Legal Factors

Political environment

• Processes/actions of government that can influence the decisions and behavior of firms

Legal environment

• Laws, mandates, regulations, and court decisions – all of which can have a direct bearing on a firm’s profit potential 3-3

Economic Factors

Economy-wide phenomena, consisting of the following five macroeconomic factors affecting firm strategy: • Growth rates • • • • Interest rates Levels of employment Price stability (inflation and deflation) Currency exchange rates 3-4

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.

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ChapterCase 3

Courtesy of Tesla Motors

Tesla Motors and the U.S. Automotive Industry

  There have been no new recent entrants due to the HIGH industry entry barriers.

 With high entry barriers, the BIG THREE – GM, Ford, and Chrysler – dominated the U.S. car market until the 1980s.

Tesla Motors’

Model S received outstanding market reception, and was awarded the 2013

MotorTrend

Car of the Year.

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Sociocultural Factors

Sociocultural factors

• Capture cultures, norms, and values for society; are dynamic and differ across groups. • Implications for firm strategy must be considered.

Demographic trends

• Capture population characteristics related to age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class.

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Technological Factors

Technological factors

• Capture the application of knowledge to create new processes and products.

 Innovations in process technology • Lean manufacturing, Six Sigma quality, and biotechnology.  Nanotechnology revolution • (Initial stages) Major upheaval for several industries

–

medical devices to new-age materials for earthquake resistant buildings.

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Ecological Factors

 Broad environmental issues, e.g., the natural environment, global warming, and sustainable economic growth  Business and natural worlds are interdependent and inextricably linked.  Managing these relationships in a sustainable manner directly influences the continued existence of human societies and the organizations we create.

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Exhibit 3.2 Porter’s Five Forces Model

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FIVE FORCES MODEL MICHAEL PORTER –

  This model intersects: • • Theory: industrial organization economics with Practice: hundreds of case studies  A framework for identifying the five forces that determine industry profit potential and help shape firm competitive strategy Managers can predict industry profit potential and position their firms for sustainable competitive advantage.

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3.2 Industry Structure and Firm Strategy: The Five Forces Model

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)

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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 3-13

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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 3-15

MACRO MICRO EXTERNAL ANALYSIS • PESTEL Framework INDUSTRY ANALYSIS • Five Forces Model COMPETITOR ANALYSIS • Strategic Group Mapping 3-16

MACRO MICRO EXTERNAL ANALYSIS • PESTEL Framework INDUSTRY ANALYSIS • Five Forces Model COMPETITOR ANALYSIS • Strategic Group Mapping 3-17

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. 3-18

Exhibit 3.3

Industry Competitive Structures along the Continuum from Fragmented to Consolidated 3-19

Adding a Sixth Force: The Strategic Role of Complements

COMPLEMENT • 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 3-20

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 3-21

INDUSTRY CONVERGENCE • A process whereby formerly unrelated industries begin to satisfy the same customer need   Driver: Technological advances Example: Convergence of media industries due to technological progress in IT, telecommunications, and digital media 3-22

MACRO MICRO EXTERNAL ANALYSIS • PESTEL Framework INDUSTRY ANALYSIS • Five Forces Model COMPETITOR ANALYSIS • Strategic Group Mapping 3-23

STRATEGIC GROUP

Set of firms pursuing a similar strategy within a specific industry

STRATEGIC GROUP MODEL FIRM PERFORMANCE

Determined not only by the industry to which the firm belongs, but also by its strategic group membership Framework that explains performance differences within the same industry by clustering different firms into groups based on key strategic dimensions 3-24

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.

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MAPPING STRATEGIC GROUPS 1.

Identify important strategic dimensions.

2.

3.

For the horizontal and vertical axes – select two key dimensions which expose pivotal differences among • the competitors.

These dimensions should

not

be highly correlated.

Graph the firms in their strategic groups, indicating each firm’s market share by the size of the bubble with which it is represented.

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The Threat of Entry

Entry barriers

• The risk that potential competitors will enter an industry

With new entrants, profit potential is depressed for incumbent firms:

• • Lower prices Spend more to satisfy existing customers 3-27

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 3-28

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.

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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 3-30

THE POWER OF BUYERS EXAMPLES

Google

• Faces strong buyer power from Samsung who has 40% of Android-operated smartphones

Walmart

• As the world’s largest retailer, it leverages huge buyer power from its suppliers.

CEMEX

• • Strong buyer power in the U.S. leaves it very small profits Weaker buyer power in Mexico yields much higher profits.

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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.

Substitutes limit the price that industry competitors can charge for their products/services.

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Rivalry among Existing Competitors

The intensity of rivalry among existing competitors is determined largely by the following factors: COMPETITIVE INDUSTRY STRUCTURE INDUSTRY GROWTH STRATEGIC COMMITMENTS EXIT BARRIERS 3-33

COMPETITIVE INDUSTRY STRUCTURE The structure of an industry is captured by: • • • Number and size of industry competitors Pricing power possessed by firms Products/services offered by firms  (Commodity vs. differentiated product) • Height of entry barriers 3-34

Mobility Barriers

Mobility barriers

• Restricts movement between groups; industry-specific factors that separate one strategic group from another Exhibit 3.5 – Airline industry strategic groups: • • Hub-and-spoke group with international routes Point-to-point airline groups do not 3-35

Exhibit 3.5

Strategic Groups and the Mobility Barrier in the U.S. Domestic Airline Industry 3-36

ChapterCase 3

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.

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