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

1. External Analysis: Industry Structure,Competitive Forces, and StrategicGroups

2. Part 1 Strategy Analysis

3. LO 3-1Apply the PESTEL model to organize and assess the impact of external forces on the firm. LO 3-2 Apply the structure-conduct-performance (SCP) model to explain the effect of industry structure on firm profitability. LO 3-3Apply the five forces model to understand the profit potential of the firm’s industry. LO 3-4 Describe the strategic role of complements in creating positive-sum co-opetition. LO 3-5 Understand the role of industry dynamics and industry convergence in shaping the firm’s external environment. LO 3-6 Apply the strategic group model to reveal performance differences between clusters of firms in the same industry.

4. Build Your Dreams to Sidestep Entry Barriers ChapterCase3 • Changing U.S. car market • More competition from outside the U.S. • However, NO new entry firms in the last 2 decades • High barriers to entry • BYD in China is entering the car market • Batteries to cars…bypassing many hurdles • Electric cars have fewer parts • BYD has the battery technology • Selling in China, Africa, & S. America Hybrid Car Video

5. THE PESTEL FRAMEWORK • Key forces in the external environment • Simple way to categorize & analyze external forces • Forces embedded in global environment • Creates BOTH opportunities and threats

6. PESTEL Framework • Political • Gov’t pressures • Subsidies & incentives • Differences in countries, states, Countries & regions • Economic • Growth rates • Interest rates • Employment levels • Currency exchange • Sociocultural • Norms, culture, values • Demographics • Lifestyle changes • Technological • Innovation • Diffusion • Research & development • Environmental • Global warming • Sustainability • Pollution • Legal • Court system • Legislation • Hiring laws, ADA, SBOX

7. THE STRUCTURE-CONDUCT PERFORMANCE (SCP) • Perfect Competition • Many small firms – commodity products • Ex. Pet supply stores • Monopolistic Competition • Many firms – differentiated products • Ex. Computer hardware, organic foods • Oligopoly • Few large firms – interdependent • Ex. Express mail, soft drinks • Monopoly • One supplier – often government approved • Ex. Utilities for electricity, gas, and water

8. COMPETITIVE FORCES AND FIRM STRATEGY • The Five Forces Model • The classic industry analysis model • Threat of Entry • Power of Suppliers • Power of Buyers • Threat of Substitutes • Rivalry Among Existing Competitors

9. EXHIBIT 3.3 Porter’s Five Forces Model 5 forces video- M. Porter Source: Porter, M. E. (2008), “The five competitive forces that shape strategy,” Harvard Business Review

10. Five Forces in Airlines vs. Soft Drinks • Airlines low profits for decades • Entry threats – small airlines popping up • Suppliers – few & large: aircraft, engines, unions • Buyers – no switching costs, perfect info now • Subs – drive for shorter flights • Rivalry – intense and low profit • “ZERO star” industry, each force is strong • Yielding……inferior profits

11. Five Forces in Airlines vs. Soft Drinks strong profits • Soft Drinks high profits for decades • Entry threats – strong brands (Coke & Pepsi) • Suppliers – mostly commodities • Buyers – bottlers lock into long-term contracts • Subs – other drinks (water, coffee, etc.) • Rivalry – advertizing-based • “FIVE star” industry, each force is weak • Yielding……

12. Substitutes and Complements • Complement: A product or service or competency that adds value to original product. When its performance increases or its price falls, industry demand increases. • Paper for Xerox copiers • iTunes for iPod music players • Complementor: If customers value your product more when combined with another firm’s product or service. • Michelin tires for Ford & GM

13. CHANGES OVER TIME: INDUSTRY DYNAMICS • Industry Growth Rates Highly Variable (Exh. 3.6) • Metals & Internet at the top • Retailers and food at the bottom • Structures Change too • U.S. banking industry – major consolidations • Big 8 accountants are now Big FOUR • Stock brokerage firms have grown – Internet catalyst • Industry Convergence • Formerly unrelated industries collide • Media – newspapers, TV, movies • Online business model?

14. Strategic Groups • Mapping Groups • Auto industry example • GM, Ford, Toyota – gas • BYD, Tesla – electric • ID best dimensions • Choose two for map • Locate firms on map • Bubble size = market share • Rivalry is strongest in SAME group • Some groups more profitable than others • Mobility Barriers • Firms would try to move to the profit spots BUT… • Specific factors that separate groups • Airlines • International routes • Regulations: airport slots

15. CHAPTERCASE 3 /Consider This… • BYD was China's fastest-growing carmaker! • Sold more the 500,000 in 2010 • Shanghai gov’t subsidy of $9k for EVs • Which PESTEL factors are most salient for the electric vehicle industry? • How is your home country auto industry structured? • Use Exhibit 3.5 for traditional auto industry. • What changes for electric auto industry? 2–15