Chapter 3

External analysis:
Industry Structure,
Competitive Forces, and
Strategic Groups
Lecture: Doan Van Ha
Email: ha.doanvan@gmail.com
Mobile: 098 868 8371
 Learning objectives
• Generate a PESTEL analysis to evaluate the impact of external factors on the firm.
• Differentiate the roles of firm effects and industry effects in determining firm
performance.
• Apply Porter’s five competitive forces to explain the profit potential of different
industries.
• Examine how competitive industry structure shapes rivalry among competitors.
• Describe the strategic role of complements in creating positive-sum co-opetition.
• Explain the five choices required for market entry.
• Appraise the role of industry dynamics and industry convergence in shaping the firm’s
external environment.
• Generate a strategic group model to reveal performance differences between clusters of
firms in the same industry.
The PESTLE framework
• A firm’s external environment consists of all factors outside the firm that
can affect its potential to gain and sustain a competitive advantage
• strategic leaders can mitigate threats and leverage opportunities
• General environment
– Managers have little control.
– Macroeconomic factors are included.
– Examples: interest, exchange rates, etc.
• Task environment:
– Managers can influence.
– Includes the composition of strategic groups.
– Includes the structure of the industry.
The PESTLE framework
• PESLTE Model
• Groups the factors in the firm’s
general environment into six
segments
1. Political.
2. Economic.
3. Sociocultural.
4. Technological.
5. Ecological.
6. Legal
The PESTLE framework
• Political factors: Processes and actions of government bodies that
influence the firm can be shaped through:
– Lobbying.
– Public Relations.
– Contributions.
– Litigation.
• Political and legal forces are closely related.
– Political pressure often results in changes in legislation.
The PESTLE framework
• Economic factors
– largely macroeconomic, affecting economy-wide phenomena.
– Common economic factors:
1. Growth rates:
2. Levels of employment.
3. Interest rates
4. Price stability (inflation and deflation):
5. Currency exchange rates.
The PESTLE framework
• Sociocultural factors
• Sociocultural factors capture a society’s cultures, norms, and values
– Are constantly in flux.
– Differ across groups.
– Trends should be monitored.
• Demographic trend
– Population characteristics.
– Age, gender, family size, ethnicity, sexual orientation, religion, and
socioeconomic class.
The PESTLE framework
• Technological factors
• capture the application of knowledge to create new processes and
products
• Innovations in process technology:
– Lean manufacturing, Six Sigma quality and biotechnology.
• Innovations in product technology:
– Smartphones, wearable devices, high-performing electric cars.
• Advances in artificial intelligence and machine learning.
The PESTLE framework
• Ecological factor
• Broad environmental issues: natural environment, global warming,
sustainable economic growth
• Organizations and the natural environment coexist in an interdependent
relationship
– Adversarial.
– Can provide business opportunities.
The PESTLE framework
• Legal factors
• include the official outcomes of political processes as manifested in laws,
mandates, regulations, and court decisions
• Many industries have been deregulated: airlines, telecom, energy, and
trucking,
• Legal factors often coexist with or result from political will.
Industry Structure and Firm
Strategy: The Five Forces Model
• Industry vs. Firm Effects
• Industry: group of incumbent companies that face more or less the same
set of suppliers and buyers, offering similar products or services
• Firm performance is determined primarily by two factors: industry and
firm effects.
• Industry effect: Describe the economic structure of the industry
– is determined by elements common to all industry
– Types of products and services offered.
• Firm effects attribute firm performance directly to the actions strategic
leaders take.
Industry Structure and Firm
Strategy: The Five Forces Model
Industry Structure and Firm
Strategy: The Five Forces Model
• Industry group analysis is a method to
– identify an industry’s profit potential
– derive implications for a firm’s strategic position within an industry.
• A strategic position: A firm’s ability to
– Create value for customers (V)
– While containing the cost (C)
– the bigger gap (V-C), the better
Industry Structure and Firm
Strategy: The Five Forces Model
• Competition in Five force model
• The Five forces Model: A framework that identifies five forces that
determine the profit potential of an industry and shape a firm’s
competitive strategy.
• The Five Forces Model helps strategic leaders understand:
– The profit potential of different industries.
– How they can position their firms to gain and sustain competitive
advantage.
Industry Structure and Firm
Strategy: The Five Forces Model
• Competition in 5 forces model
• Two key insights about this
model:
– Competition is viewed more
broadly in the five forces model.
– Profit potential is a function of
the five competitive forces.
Industry Structure and Firm
Strategy: The Five Forces Model
• Competition in 5 forces model
• Threat of entry: The risk that potential competitors will enter an industry
– Lowers industry profit potential.
– Increases spending among incumbent firms
• Entry barriers: obstacles that determine how easily a firm can enter an
industry and often significantly predict industry profit potential.
– Economies of scale.
– Network effects.
– Customer switching costs.
– Capital requirements.
– Advantages independent of size.
– Government policy.
– Credible threat of retaliation.
Industry Structure and Firm
Strategy: The Five Forces Model
• Competition in 5 forces model
• 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 capture part of the economic value created

• When is the Power of supplier high???

Industry Structure and Firm
Strategy: The Five Forces Model
• Competition in 5 forces model
• The power of buyers: relates to the pressure an industry’s customers can put on
the producers’ margins
• Lowers industry profit potential if
– Buyers obtain price discounts, which reduces revenue.
– Buyers demand higher quality / service, which raises production costs.

• Situations when buyers are price sensitive

– The buyer’s purchase represents a significant portion of its procurement budget.
– Buyers earn low profits or are strapped for

• (?) WHEN IS THE POWER OF BUYER HIGH?

Industry Structure and Firm
Strategy: The Five Forces Model
• Competition in 5 forces model
• Threat of substitute: Meet the same basic customer need
– In a different way.
– Available from outside the given industry.
• The threat of substitutes is high when:
– The substitute offers an attractive price-performance trade-off.
– The buyer’s cost of switching to the substitute is low.
• A high threat of substitutes reduces industry profit potential
Industry Structure and Firm
Strategy: The Five Forces Model
• Competition in 5 forces model
• Rivalry among existing competitors
• Describes the intensity with which companies within the same industry
jockey for market share and profitability
– Can range from genteel to cut-throat.
– The other forces in the model pressure this rivalry.
– The stronger the forces, the stronger the competitive intensity.
• The intensity of rivalry among existing competitors is determined by:
• Competitive industry structure.
• Industry growth
• Strategic commitments
• Exit barriers
Industry Structure and Firm
Strategy: The Five Forces Model
• Competition in 5 forces model
• Competitive industry structure: Elements and features common to all industries,
including
– the number and size of competitors,
– the firms’ degree of pricing power,
– the type of product or service offered,
– the height of entry barriers.
Industry Structure and Firm
Strategy: The Five Forces Model
• Competition in 5 forces model
Industry Structure and Firm
Strategy: The Five Forces Model
• Competition in 5 forces model
– Perfection competition
– has many small firms,
– market of a commodity product,
– Low entry and exit barrier
– Firm are price takers (and little or no ability for each individual firm
to raise its prices)
– E.g.: wheat market, rice market, natural gas, copper, and iron tend to
approach this structure

–.
Industry Structure and Firm
Strategy: The Five Forces Model
• Competition in 5 forces model
– Monopolistic competition
– industry has many firms
– a differentiated product
– some obstacles to entry (medium barrier)
– communicate the degree of product differentiation through
advertising.

– E.g.: Computer hardware

Industry Structure and Firm
Strategy: The Five Forces Model
• Competition in 5 forces model
– Oligopoly competition
– has few large firms,
– Differentiated products
– Some pricing power
– High entry barriers
– Competing firms are interdependent
– Competition is not based on price
– E.g.: Express delivery industry, soft drink industry, airframe
manufacturing business
Industry Structure and Firm
Strategy: The Five Forces Model
• Competition in 5 forces model
– monopoly industry
– One firm in the industry
– a unique products
– high barrier to entry
– Considerable pricing power
– Natural monopoly vs. near monopoly

– E.g.: Computer hardware

Industry Structure and Firm
Strategy: The Five Forces Model
• Industry growth
– Affects intensity of rivalry among competitors
– During periods of high growth:
– Consumer demand rises.
– Price competition among firms decreases.

Market
Industry Structure and Firm
Strategy: The Five Forces Model
• Industry growth
– Affects intensity of rivalry among competitors
– During periods of negative growth:
– Rivalry is fierce.
– Rivals can only gain at the expense of one another.
– Price discounts, promotional campaigns, and retaliation abound.
Industry Structure and Firm
Strategy: The Five Forces Model
• Strategic commitments
• are firm actions that are costly, long-term oriented, and difficult to
reverse.
• can stem from
– from large, fixed cost requirements,
– noneconomic considerations
• Affects intensity of rivalry among competitors.
Industry Structure and Firm
Strategy: The Five Forces Model
• Exit barriers
• are obstacles that determine how easily a firm can leave that industry.
• Mainly both economic and social factors
• Include fixed costs that must be paid.
– E.g.: employee health care and retirement benefits.
• Social factors include elements such as emotional attachments to certain
geographic locations
• Industry with low exit barriers is more attractive and vice versa.
Industry Structure and Firm
Strategy: The Five Forces Model
• A 6th force: the strategic roles of complements
• A product, service, or competency that adds value when used with the
original product.
– Complements increase demand for the primary product.
– Enhances the profit potential for the industry and the firm.
• A company is a complementor to your company if customers value your
product or service offering more when they are able to combine it with
the other company’s product or service

– Co-opetion: cooperation among competitors to achieve a strategic

objective.
Changes over Time: Entry
Choices and Industry Dynamics
• Entry choice
Changes over Time: Entry
Choices and Industry Dynamics
• Industry dynamic
• A weakness of other models is that they are static (point-in-time
snapshot).
• Industry dynamic provides insight about
– Changing speed of an industry.
– Rate of innovation.
– Help capture structural changes in the industry
• Industry coverage:
– a process whereby formerly unrelated industries begin to satisfy the
same customer need.
– caused by technology advances
Performance Differences within the
Same Industry: Strategic Groups
• Strategic Groups:
– set of companies
– that pursue a similar strategy
– within a specific industry
– Different Strategic groups differ from one another along important
dimensions.
– strategic group framework that explains differences in firm performance
within the same industry.
– Clusters different firms into groups.
– Is based on key strategic dimensions
Performance Differences within the
Same Industry: Strategic Groups
• Create a strategic group model
• Identify the important strategic dimensions
• Choose two key dimensions:
– For horizontal and vertical axes.
– Ensure they’re not highly correlated
• Graph the firms in the strategic group.
– Each firm’s market share indicated by the size of the bubble.
Changes over Time: Entry
Choices and Industry Dynamics
• Strategic group model
• Intra- group rivalry exceeds
inter-group rivalry.
• The external environment
affects strategic groups
differently
• The five competitive forces
affect strategic groups
differently
• Some strategic groups are
more profitable than others
Changes over Time: Entry
Choices and Industry Dynamics
• Mobility barriers
• Industry-specific factors that separate one strategic group from another.
• Restrict movement between strategic groups
• Based on hard-to-reverse investments (strategic commitments).
• END OF CHAPTER 3