Chp 3 - External Analysis

The PESTEL Framework

A framework that categorizes and analyzes an important set of external forces that might impinge upon a firm. These forces are embedded in the global environment and can create both opportunities and threats for the firm. External Forces: Political Economic Sociocultural Technological Ecological Legal

Industry Analysis

A method to... 1. identify an industry's profit potential 2. derive implications for a firm's strategic position within an industry.

Ecological Factors

Broad environmental issues: •Natural environment •Global warming •Sustainable economic growth Can provide business opportunities •Tesla cars have zero emissions

Industry Growth

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 *Affects intensity of rivalry among competitors

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

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

Legal factors

Official outcomes of political processes: •Laws •Mandates •Regulations •Court decisions Many industries have been deregulated: • Airlines, telecom, energy, and trucking

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

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

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

Strategic Group

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

Co-opetition

cooperation by competitors to achieve a strategic objective can create a positive-sum game, resulting in a larger pie for everyone involved

Complements increase...

demand for the primary product enhancing the profit potential for the industry and the firm

Different conditions prevail in different industries

directly affecting the firms competing in these industries and their profitability

Firm Effect

firm performance attributed to the actions managers take - the actions managers take - more important that industry effects

Industry Effect

firm performance attributed to the structure of the industry in which the firm competes elements in common to all - entry/exit barriers - # & size of companies - types of products/services offered

Who

includes questions about the full range of stakeholders not just competitiors

A firms performance is more closely related to

its managers' actions (firm effects) than to the external circumstances surrounding it (industry effects) *Firm & Industry effects are interdependent - both are relevant in determining firm performance

A firm can shape an industry's structure in its favor through...

its strategy

Rivalry among firms of the same strategic group is

more intense in rivalry between strategic groups intra-group rivalry exceeds inter-group rivalry

Network Effects

number of users/customer INCREASE , value of product/serve INCREASE

Exit Barriers

obstacles that determine how easily a firm can leave an industry Mainly economic and social factors Examples: - contractual obligations - emotional attachments

When

question about the industry life cycle

What

questions about options among... - product market - value chain - geography - business model

How

questions about overcoming barriers to entry

Where

questions about... - product positioning - pricing strategy - potential partners

Political Factors

result from the processes and actions of government bodies that can influence the decisions and behavior of firms describes the influence governmental bodies can have on firms Can be shaped through: - lobbying - public relations - contributions - litigation

Strategic groups are affected differently by...

the external environment and the 5 competitive forces some strategic groups are more profitable than the others

The weaker the competitive force...

the greater the opportunity it presents

The stronger the competitive force...

the greater threat it represents

The more profitable an industry...

the more attractive it becomes to competitors 5 Choices required for Market Entry: who,when, how, what, and where to enter

Threat of Entry

the risk that potential competitors will enter an industry - Lower industry profit potential = incumbent lowers price - Incumbents spend more to satisfy existing customers

A monopoly exists when...

there is only one (large) firm supplying the market 1. the firm may offer a unique product 2. the barriers to entry may be high 3. the monopolist usually has considerable pricing power

Complement

•A product, service, or competency •Adds value when used with the original product

Examples of Entry Barriers

•Economies of scale •Network effects •Customer switching costs •Capital requirements •Advantages independent of size •Government policy •Credible threat of retaliation

industry

•Group of incumbent companies •Relatively similar suppliers and buyers •Similar products and services

Entry Barriers

•Obstacles blocking others from entering •A significant predictor of industry profit potential

Technological Factors

1. Application of knowledge •New processes and products 2. Innovations in process technology: •Lean manufacturing and Six Sigma quality 3. Innovations in product technology: •Smartphones and wearable devices

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 are more profitable than others

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

Competitive Industry Structure

1. Number and size of competitors 2. Firm's degree of pricing power 3. Type of product or service •Commodity or differentiated 4. Height of entry barriers

Mobility Barrier

1. Restrict movement between strategic groups 2. Industry-specific factors 3. Based on hard-to-reverse investments

Monopolistic Industry

1. a differentiated product 2. medium entry barrier 3. some pricing power

Oligopolistic Industry

1. few (large) firms 2. a differentiated product 3. high entry barriers 4. some degree of pricing power

Attractive industries for co-opetition are characterized by...

1. high entry barriers 2. low exit barriers 3. low buyer and supplier power 4. a threat of substitutes 5. the availability of complements

Perfectly Competitive Industry

1. many small firms 2. a commodity product 3. low entry barriers 4. no pricing power for individual firms

2 strategic groups in an industry based on 2 different business strategies:

1. pursues a low-cost strategy 2. pursues a differentiation strategy

Economic Factors

5 Macroeconomic Factors: 1. Growth rate 2. Levels of Employment 3. Interest Rates 4. Price Stability (inflation & deflation) 5. Currency Exchange - largely macroeconomic - economy wide phenomena

Strategic Position

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

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

Porter's 5 Competitive Forces

The profit potential of an industry is a function of the 5 forces that shape competition: 1. Threat of new entrants 2. Bargaining power of suppliers 3. Bargaining power of buyers 4. Threat of substitute products or services 5. Rivalry among competitors

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?

Complementor

a company that provides a good or service that leads customers to value your firm's offering more when the two are combined

Sociocultural Factors

capture a 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