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