Chapter 3 (1).pdf Chapter 3 (1).pdf Chapter 3 (1).pdf Chapter 3 (1).pdf
- 1. ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. CHAPTER 3 External Analysis: Industry Structure, Competitive Forces, and Strategic Groups ©ISerg/iStock/Getty Images RF
- 2. ©McGraw-Hill Education. The AFI Strategy Framework Exhibit 1.3 Jump to Appendix 1 long image description
- 3. ©McGraw-Hill Education. Learning Objectives LO 3-1 Generate a PESTEL analysis to evaluate the impact of external factors on the firm. LO 3-2 Differentiate the roles of firm effects and industry effects in determining firm performance. 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. LO 3-5 Describe the strategic role of complements in creating positive-sum co-opetition. LO 3-6 Explain the five choices required for market entry. 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.
- 4. ©McGraw-Hill Education. How External Factors Impact a Firm General Environment • Managers have little control • Macroeconomic factors • Interest / currency exchange rates Task Environment • Managers can influence • Composition of strategic groups • Industry structure
- 5. ©McGraw-Hill Education. The PESTEL Model Groups environmental factors into six segments: 1. Political 2. Economic 3. Sociocultural 4. Technological 5. Ecological 6. Legal A straightforward way to scan, monitor, and evaluate
- 6. ©McGraw-Hill Education. The Firm Within Its External Environment Exhibit 3.1 Jump to Appendix 2 long image description
- 7. ©McGraw-Hill Education. Political Factors Processes & actions of government bodies Can be shaped through: • Lobbying • Public Relations • Contributions • Litigation Political and legal forces are closely related.
- 8. ©McGraw-Hill Education. Economic Factors Largely macro-economic Economy-wide phenomena Examples include: • Growth rates • Levels of employment • Interest rates • Price stability • Currency exchange rates
- 9. ©McGraw-Hill Education. Sociocultural Factors Society’s cultures, norms, and values • Are constantly in flux • Differ across groups Demographic trends • Population characteristics • Age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class
- 10. ©McGraw-Hill Education. Technological Factors Application of knowledge • New processes and products Innovations in process technology: • Lean manufacturing and Six Sigma quality Innovations in product technology: • Smartphones and wearable devices
- 11. ©McGraw-Hill Education. Ecological Factors Broad environmental issues: • Natural environment • Global warming • Sustainable economic growth Can provide business opportunities • Tesla cars have zero emissions
- 12. ©McGraw-Hill Education. Legal Factors Official outcomes of political processes: • Laws • Mandates • Regulations • Court decisions Many industries have been deregulated: • Airlines, telecom, energy, and trucking
- 13. ©McGraw-Hill Education. Industry vs. Firm Effects Industry Effects • Elements in common to all • Entry and exit barriers, number and size of companies, and types of products and services offered Firm Effects • The actions managers take • More important than firm effects
- 14. ©McGraw-Hill Education. Superior Firm Performance Exhibit 3.2 Jump to Appendix 3 long image description
- 15. ©McGraw-Hill Education. Industry & Industry Analysis Industry: • Group of incumbent companies • Relatively similar suppliers and buyers • Similar products and services Industry analysis, a method to: • Identify an industry’s profit potential • Derive implications for a firm’s strategic position
- 16. ©McGraw-Hill Education. Threat of Entry (1 of 2) The risk that potential competitors will enter an industry Lowers industry profit potential: • Incumbents lower prices Incumbents spend more to satisfy existing customers. Entry barriers: • Obstacles blocking others from entering • A significant predictor of industry profit potential
- 17. ©McGraw-Hill Education. Strategic Positioning A firm’s ability to: • Create value for customers (V) • Contain costs (C) Goal: Generate a large gap between: • The value the firm’s product or service creates • The cost required to produce it
- 18. ©McGraw-Hill Education. Porter’s Five Forces Model Exhibit 3.3 SOURCE: Michael E. Porter, “The five competitive forces that shape strategy,” Harvard Business Review, January 2008. Jump to Appendix 4 long image description
- 19. ©McGraw-Hill Education. Threat of Entry (2 of 2) The risk that potential competitors will enter the industry Entry barriers: • Economies of scale • Network effects • Customer switching costs • Capital requirements • Advantages independent of size • Government policy • Credible threat of retaliation
- 20. ©McGraw-Hill Education. 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 reduce quality
- 21. ©McGraw-Hill Education. Power of Buyers (Customers) Pressure customers put on an industry Lowers industry profit potential if: • Buyers obtain price discounts • Reduces revenue • Buyers demand higher quality / service • Raises production costs
- 22. ©McGraw-Hill Education. Threat of Substitutes Meet the same basic customer need • But in a different way • Available from outside the given industry Examples: • Energy drinks vs. coffee • Videoconferencing vs. business travel • E-mail vs. express mail
- 23. ©McGraw-Hill Education. Rivalry Among Competitors The intensity with which companies in the same industry jockey for market share and profitability Other forces pressure this rivalry Examples of tactics: • Price discounting • After sales service
- 24. ©McGraw-Hill Education. Competitive Industry Structure Number and size of competitors Firm’s degree of pricing power Type of product or service • Commodity or differentiated Height of entry barriers
- 25. ©McGraw-Hill Education. 4 Main Competitive Industry Structures Exhibit 3.4 Jump to Appendix 5 long image description
- 26. ©McGraw-Hill Education. 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
- 27. ©McGraw-Hill Education. Strategic Commitments Firm actions that are: • Costly • Long-term oriented • Difficult to reverse Affects intensity of rivalry among competitors Example: airline industry • Hub and spoke model requires significant investment
- 28. ©McGraw-Hill Education. Exit Barriers Obstacles that determine how easily a firm can leave that industry Mainly economic and social factors Examples: • Contractual obligations • Emotional attachments
- 29. ©McGraw-Hill Education. A Sixth Force: Complements and Co-Opetition Complements: • A product, service, or competency • Adds value when used with the original product Co-opetition: • Cooperation by competitors to achieve a strategic objective
- 30. ©McGraw-Hill Education. Entry Choices Exhibit 3.6 Source: Based on and adapted from Zachary M.A., Gianiodis P.T., Tyge Payne G., 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), Strategies to crack well-guarded markets, Harvard Business Review, May: 84-92. Jump to Appendix 6 long image description
- 31. ©McGraw-Hill Education. Industry Dynamics Provides insight about: • Changing speed of an industry • Rate of innovation Analysis must repeat over time • Industry structures aren’t stable • They are dynamic
- 32. ©McGraw-Hill Education. Industry Convergence When unrelated industries satisfy the same need Caused by technological advances Example: Media Industries • Content going online • Newspapers, magazines, TV, movies, radio, music • Will print media become obsolete?
- 33. ©McGraw-Hill Education. 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
- 34. ©McGraw-Hill Education. How to Create a Strategic Group Map 1. Identify the important strategic dimensions 2. Choose two key dimensions • For horizontal and vertical axes • Ensure they’re not highly correlated 3. Graph the firms in the strategic group • Each firm’s market share indicated by the size of the bubble
- 35. ©McGraw-Hill Education. Strategic Group Map: Domestic Airline Industry Exhibit 3.7 Jump to Appendix 7 long image description
- 36. ©McGraw-Hill Education. Insights from Strategic Group Mapping 1. Competitive rivalry: • Strongest between firms in the same strategic group 2. External environment: • Affects strategic groups differently 3. Five competitive forces: • Affect strategic groups differently 4. Profitability: • Some strategic groups more profitable than others
- 37. ©McGraw-Hill Education. Mobility Barrier Restrict movement between strategic groups Industry-specific factors Based on hard-to-reverse investments