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Chapter 3 Outline (2 of 2)
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Learning Objectives
LO 3-1 Generate a PESTEL analysis to evaluate the impact of external factors
on the firm.
LO 3-2 Apply Porter’s five competitive forces to explain the profit potential
of different industries.
LO 3-3 Explain how competitive industry structure shapes rivalry among
competitors.
LO 3-4 Describe the strategic role of complements in creating positive-sum
co-opetition.
LO 3-5 Appraise the role of industry dynamics and industry convergence in
shaping the firm’s external environment.
LO 3-6 Generate a strategic group model to reveal performance differences
between clusters of firms in the same industry.
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The PESTEL Framework
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Importance of Analyzing the External Environment
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The PESTEL Model
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Exhibit 3.1 The Firm within Its External Environment, Industry, and
Strategic Group, Subject to PESTEL Factors
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Political Factors
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Economic Factors
• Largely macro-economic
• Examples include:
– Growth rates
– Levels of employment
– Interest rates
– Price stability
– Currency exchange rates
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In Periods of Economic Expansion…
• Growth rates:
– Businesses expand, are more profitable.
• Levels of employment
– Unemployment is low.
• Interest rates
– Credit is cheap because interest rates are low.
• Price stability
– Rising prices result in inflation.
• Currency exchange rates
– The dollar can appreciate.
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In Periods of Economic Contraction…
• Growth rates:
– Businesses retract, are less profitable.
• Levels of employment
– Unemployment is high.
• Interest rates
– Credit is expensive because interest rates are high.
• Price stability
– Falling prices result in deflation.
• Currency exchange rates
– The dollar can depreciate.
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Sociocultural Factors
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Technological Factors
• Application of knowledge
– To create new processes
– To create new products
• Innovations in process technology:
– Lean manufacturing, Six Sigma quality, and biotechnology
• Innovations in product technology:
– Smartphones, computer tablets, and high-performing
electric cars such as the Tesla Model S
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Ecological Factors
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Legal Factors
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Strategy Highlight 3.1 (1 of 2)
• Blackberry
– Pioneer in smartphones
– Increased productivity
– A status symbol
• Market cap of Blackberry:
– In 2008: $75 Billion
– In 2015: $8 Billion
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Strategy Highlight 3.1 (2 of 2)
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Industry Structure and Firm Strategy:
The Five Forces Model
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Industry & Industry Analysis
• Industry:
– Group of incumbent companies
– Relatively the same set of suppliers and buyers
– Tend to offer similar products and services
• Industry Analysis, a method to:
– Identify an industry’s profit potential
– Derive implications for a firm’s strategic position
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Strategic Positioning
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Exhibit 3.2 The Five Forces Model
The following five forces determine the profit potential of an industry and
shape a firm’s competitive strategy:
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Strategy Highlight 3.2 (1 of 2)
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Strategy Highlight 3.2 (2 of 2)
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Threat of Entry
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Types of Entry Barriers
• Economies of scale
• Network effects
• Customer switching costs
• Capital requirements
• Advantages independent of size
• Government policy
• Credible threat of retaliation
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Power of Suppliers
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Bargaining Power of Suppliers Is High When:
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Bargaining Power of Buyers Is High When:
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Power of Buyers (Customers)
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Threat of Substitutes
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Threat of Substitutes is High When:
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Rivalry Among Competitors
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Competitive Industry Structure
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4 Main Competitive Industry Structures
1. Perfect competition
2. Monopolistic competition
3. Oligopoly
4. Monopoly
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Exhibit 3.3 Industry Competitive Structures
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Perfect Competition
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Monopolistic Competition
• Many firms
• Some pricing power
• Differentiated product
• Medium entry barriers
• Resulting industry: niches are established
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Oligopoly
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Monopoly
• One firm
• Considerable pricing power
• Unique product
• Very high entry barriers
• Resulting industry: profit extracted
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Industry Growth
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Strategic Commitments
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Exit Barriers
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A Sixth Force: Complements
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Changes over Time: Industry Dynamics
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Industry Dynamics
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Industry Consolidation
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Industry Convergence
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Performance Differences within the Same
Industry: Strategic Groups
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Strategic Groups
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Strategic Groups Differ From Other
Strategic Groups In Terms Of…
• R&D expenditures
• Technology
• Product differentiation
• Product and service offerings
• Pricing
• Market segments
• Distribution channels
• Customer service
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How to Create a Strategic Group Map
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Exhibit 3.5 Example of a Strategic Group:
The Airline Industry
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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
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What Is a Mobility Barrier?
• Industry-specific factors
• Separate one strategic group from another
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Implications for the Strategist
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Analysis of the External Environment Is
Key to Strategic Management
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How to Apply the Five Forces Model
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Shortcomings of Models Discussed
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Chapter 3 Summary
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Take Away Concepts (1 of 6)
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Take Away Concepts (2 of 6)
LO 3-2 Apply Porter’s five competitive forces to explain the profit potential
of different industries.
•Competition must be viewed more broadly to encompass not only direct rivals but
also a set of other forces in an industry: buyers, suppliers, the potential new entry of
other firms, and the threat of substitutes.
•The profit potential of an industry is a function of the five forces that shape
competition: (1) threat of entry, (2) power of suppliers, (3) power of buyers, (4) threat
of substitutes, and (5) rivalry among existing competitors.
•The stronger a competitive force, the greater the threat it represents. The weaker the
competitive force, the greater the opportunity it presents.
•A firm can shape an industry’s structure in its favor through its strategy.
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Take Away Concepts (3 of 6)
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Take Away Concepts (4 of 6)
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Take Away Concepts (5 of 6)
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Take Away Concepts (6 of 6)
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Key Terms
• Competitive industry • Industry convergence
structure
• Mobility barriers
• Complement
• Network effects
• Complementor
• PESTEL model
• Co-opetition
• Strategic group
• Entry barriers
• Strategic group model
• Exit barriers
• Strategic position
• Five forces model
• Threat of entry
• Industry
• Industry analysis
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Chapter 3 Cases & Exercises
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Chapter Case 3: Consider This… (1 of 3)
• Tesla Motors:
– Successfully entered U.S. automotive market
– Uses innovative new technology
• Future success will depend on industry forces
– Lowered profit potential
– Reduced attractiveness
• Other non-traditional competitors
– Google and Apple
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Chapter Case 3: Consider This… (2 of 3)
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Chapter Case 3: Consider This… (3 of 3)
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My Strategy Exercise (1 of 2)
Is My Job the Next One Being Outsourced?
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My Strategy Exercise (2 of 2)
Is My Job the Next One Being Outsourced?
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Small Group Exercise #1
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Small Group Exercise #2
• Textbook publishing
• Textbook publishing is challenged by:
– Self-publishing firms
– The need to offer digital resources
• Use the five forces model to think through impacts
– How to respond to change
– How technology shifts impact textbook industry profits
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End of Chapter 3
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Strategy Smart Videos
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Strategy Smart Videos (1 of 5)
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Strategy Smart Videos (2 of 5)
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Strategy Smart Videos (3 of 5)
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Strategy Smart Videos (4 of 5)
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Strategy Smart Videos (5 of 5)
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Chapter Case 3
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Chapter Case 3: Tesla (1 of 2)
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Chapter Case 3: Tesla (2 of 2)
• Elon Musk
– Designed early version of Google maps & PayPal
– Sale of these was $2B
• Enabled him to pursue his passions
• One of his largest ventures: Tesla Motors
– Produces electric cars with small motors
– Sold 2,500 Roadster Sports Coupes ($110,000 each)
– Model S: $71,000 but also eligible for tax credits
• Appeals to larger market
• 2013 Motor Trend Car of the Year
• Highest score of any car: Consumer Reports
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Appendix 1 The AFI Strategy Framework
The important inside circle is titled "Gaining and Sustaining a Competitive Advantage" that is at the very center of the image, with
five different circles on on the outside of it. Arrows go back and forth from the center circle to each of the five outer circles. The
five outer circles are labeled: (1) Getting Started, (2) External and Internal Analysis, (3) Formulation: Business Strategy, (4)
Formulation, Corporate Strategy, and (5) Implementation.
Each of these outer five circles have a brief description beside them to explain what the circle means:
Under the first outer circle titled "Getting Started", it says: Part 1, Strategy Analysis, "What is Strategy (Chapter 1)" and "Strategic
Leadership: Managing the Strategy Process (Chapter 2)".
Under the second outer circle titled "External and Internal Analysis", it says: Part 1, Strategy Analysis, "External Analysis: Industry
Structure, Competitive Forces and Strategic Groups (Chapter 3)", "Internal Analysis: Resources, Capabilities and Core
Competencies (Chapter 4)", and "Competitive Advantage, Firm Performance, and Business Models (Chapter 5)".
Under the third outer circle titled "Formulation: Business Strategy", it says: Part 2, Strategy Formulation, "Business Strategy:
Differentiation, Cost Leadership and Integration (Chapter 6)" and "Business Strategy, Innovation and Entrepreneurship (Chapter
7)".
Under the fourth outer circle titled "Formulation: Corporate Strategy", it says: Part 2, Strategy Formulation, "Corporate Strategy:
Vertical Integration and Diversification (Chapter 8)", "Corporate Strategy: Strategic Alliances, Mergers and Acquisitions (Chapter
9)", and "Global Strategy: Competing Around the World (Chapter 10)".
Under the fifth outer circle titled "Implementation", it says: Part 3, Strategy Implementation, "Organizational Design: Structure,
Culture and Control (Chapter 11)", and "Corporate Governance and Business Ethics (Chapter 12)".
Return to slide
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Appendix 2 Exhibit 3.1 The Firm within Its External Environment,
Industry, and Strategic Group, Subject to PESTEL Factors
Return to slide
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Appendix 3 Exhibit 3.2 The Five Forces Model
Return to slide
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Appendix 4 Exhibit 3.3 Industry Competitive Structures
Return to slide
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Appendix 5 Exhibit 3.5 Example of a Strategic Group:
The Airline Industry
The two strategic dimensions on the axes are prices and routes. As a result of
this mapping, two strategic groups become apparent, as indicated by the
dashed lines: Group A, low-cost, point-to-point airlines (Virgin Atlantic, Alaska
Airlines, JetBlue, and Southwest Airlines) and Group B, differentiated airlines
using a hub-and-spoke system (American, Delta, and United). The low-cost,
point-to-point airlines are clustered in the lower-left corner because they
tend to offer lower ticket prices but generally serve fewer routes due to their
point-to-point operating system.
The differentiated airlines in Group B, offering full services using a hub-and-
spoke route system, are clustered in the upper-right corner because their
frequently higher ticket prices reflect frequently higher cost structures. They
usually offer many more routes than the point-to-point low-cost carriers,
made possible by use of the hub-and-spoke system, and thus offer many
different destinations.
Return to slide
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