Chapter 3:

External Analysis: Industry Structure,

Competitive Forces, and Strategic Groups
Group 2:
Datita Charinta G (1806249094)
Dewi Noviyanti Sari (1806160996)
Diadre Dachiviant S (1806249106)
Meirna Larasati (1806161443)
 3.1 The PESTEL Framework
📖 3.2 Industry Structure and Firm
Strategy: The Five Forces Model
3.3 Changes Over Time: Entry Choices
and Industry Dynamics
3.4 Performance Differences within
the Same Industry: Strategic Groups
3.5 Implication for Strategic Leader

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3.1 The PESTEL Framework
 The firm’s external environments: the industry in which the firm operates, and the
competitive force that surround the firm from the outside. It consists alll the
factors that can affect its potential to gain and sustain a competitive advantage.
(Rothaermel, 2019).

The PESTEL model

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 Political Factors
result from the processes and actions of government bodies that can
influence the decisions and behavior of firms.
Firms applying nonmarket strategies:
✘ Lobbying
✘ Public Relations
✘ Contributions
✘ Litigation
✘ Etc

Political pressure often result in change in legislation and

regulation.
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 Economic Factors
are largely macroeconomic, affecting economy wide
phenomena.
Five macroeconomic factors can affect firm strategy:
✘ Growth Rates
✘ Levels of Employment
✘ Interest Rates
✘ Price Stability
✘ Currency Exchange Rates

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 Sociocultural Factors
capture a society’s cultures, norms, and values, attitudes, and
lifestyles.

Demographic trends are also

important sociocultural factors. These
trends capture population
characteristics related to age, gender,
familiy size, ethnicity, sexual
orientation, religion, and
socioeconomic class.
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 Technological Factors
capture the application of knowledge to create new processes
and products.
They include the pace of
technological change and technical
developments that have the potential
for wide-ranging effects on society,
They include institutions involved in
creating new knowledge and
controlling the use of technology,.
Technological change can encourage www.wired.co.uk

the birth of new industries and disrupt

others.
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 Ecological Factors
involve broad environmental issues such as the natural environment,
global warming, and sustainable economic growth.
These factors can directly impact
industries such as insurance, farming,
energy production, and tourism.
They may have an indirect but substantial
effect on other industries such as
transportation and utilities.
Ecological factors can also provide
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business opportunities.

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 Legal Factors
include the official outcomes of political processes as manifested in
laws, mandates, regulations, and court decisions

These factors include the regulations and

laws with which companies must comply,
Some factors, such as financial services
regulation, are industry-specific.
Others, such as minimum wage
legislation, affect certain types of
industries more
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than others.

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3.2 Industry Structure and
Firm Strategy:
The Five Forces Model
 Industry Vs Firm Effects
Industry Effects Firm Effects
Describe the underlying Attribute firm performance to
economic structure of the the action strategic leaders take.
industry. They attribute firm
performance
to the industry in
which the firms
competes.

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 Industry Analysis
A method to 1) identify an industry’s profit potential 2) derive
implications for one firm’s strategic position within an industry.
Strategic Position
A firm strategic profile based on the difference between value
creation and cost (V - C).

Competitive Advantage
Flow to the firm that is able to create as large a gap as possible
between the value the firm’s product or service generates and the
cost required to produce it (V - C).

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 Michael Porter
Derived two key insight that form the basis of his seminal five
forces model.
Rather than defining competition narrowly as the firm’s closest
competitors to explain and predict a firm’s performance, competition
must be viewed more broadly, to also encompass the other forces in
an industry: buyers, suppliers, potential new entry of other firms,
and the threat of substitutes.
The profit potential of an industry is neither random nor entirely
determined by industry-specific factors. Rather, it is a function of
the five forces that shape competition: threat of entry, power of
suppliers, power of buyers, threat of substitutes, and rivalry among
existing firms.

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 The Five Forces Model

“The stronger the five forces, the lower the industry’s profit
potential.”
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 Threat of Entry
A risk that potential competitors will enter the
industry.

Potential new entry depresses industry profit potential in two

major way

Thread of additional capacity Threat of entry by additional

coming into an industry
- Lowering their price
- Will reduce industry’s
profit potential
competitors
- Spend more to satisfy
their existing customers
- But will reduce
industry’s profit
potential

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 Barrier to Entry
Obstacles that determine how easily a firm can
enter an industry

Economics of Scale

Advantages
Network effects
independent of size

Customer switching
Government policy
cost

Credible threat of
Capital requirements
retaliation
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 The Power of Supplier
- Bargaining power of
supplier
- Powerful supplier are
a threat to firms

- Bargaining power is high when:

- Incumbent firms face significant switching cost
- Supplier offer products that are differentiated
- There are no readily available substitutes
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 The Power of Buyer
- Strong buyer can
reduce industry profit
potential.
- Will refer to
switching cost

- Buyer power is high when:

- The industry’s product are standardized
- Buyers face low or no switching costs

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 Threat of Substitutes
A threat that comes from
outside the given
industry that meeting the
needs of current
customer

A threat of substitutes is high when:

- The substitute offers an attractive price-performance trade off
- The buyers cost of switching to the substitute is low

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 Threat of Substitutes
Alta Velocidad Española
Vs
Short haul flights over
Madrid and Barcelona

There are two fundamental insight from above case

- Competition must be defined more broadly to go beyond direct
industry competitors
- Any of the five forces on its own can extract industry profitability

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 Rivalry Among Existing Competitors

● The intensity with Intensity determined by:

which companies in the 1. Competitive industry
same industry jockey structure
for market share and 2. Industry growth
profitability 3. Strategic
● The other 4 forces: commitments
Threat of entry, the 4. Exit barriers
power of buyers and
suppliers. -- The
stronger the forces, the
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higher the intensity
 Competitive Industry Structure

The structure of an industry is largely captured by:

1. The number and size of its competitors
2. The firm’s degree of pricing power
3. The type of product or service (commodity of
differentiated product
4. The height of entry barriers

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 4 Main Competitive Industry Structure

1. Perfect Competition
2. Monopolistic Competition
3. Oligopoly
4. Monopoly

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 Industry Competitive Structures

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 Perfect Competition
✘ A perfectly competitive industry is fragmented
and has many small firms, a commodity product,
ease of entry, and little or no ability for each
individual firm to raise its price.
✘ The firms competing in this type of industry are
approximately similar in size and resources.
✘ Consumers make purchasing decisions solely on
price.
✘ Resulting industry: profitability is typically low

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 Monopolistic Competition
✘ A monopolistically competitive industry has many firms, a
differentiated product, some obstacles to entry, and the
ability to raise prices for a relatively unique product while
retaining customers.
✘ The key to understanding this industry structure is that the
firms now offer products or services with unique features.
✘ Resulting industry: niches are established

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 Oligopoly
✘ An oligopolistic industry is consolidated with a few large
firms, differentiated products, high barriers to entry, and
some degree of pricing power.
✘ A key feature of an oligopoly is that the competing firms
are interdependent.
✘ This type of industry structure is often analyzed using game
theory
✘ Resulting industry: firm actions often coordinated

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 Monopoly

✘ An industry is a monopoly when there is only

one, often large firm supplying the market.
✘ The firm may offer a unique product, and the
challenges to moving into the industry tend to be
high.
✘ The monopolist has considerable pricing power
✘ Resulting industry: profit extracted

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 Industry Growth

● Industry growth directly affects the intensity of

rivalry among competitors.
● During periods of high growth:
❖ Consumer demand rises
❖ Price competition among firms decreases
➔ Rivals focus on capturing new customers
➔ Rivals aren’t focused on taking profitability away from each other
● During periods of negative growth:
❖ Rivalry is fierce
❖ Rivals can only gain at the expense of one
another
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 Strategic Commitments
● If firms make strategic commitments to compete in
an industry, rivalry among competitors is likely to
be more intense.
● Strategic commitments are firm actions that are
costly, long-term oriented, and difficult to reserve
● Strategic commitments to a specific industry can
stem from large, fixed cost requirements, but also
from non economic considerations.
● Example: airlines industry

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 Exit Barriers

● The rivalry among existing competitors is also a

function of an industry’s exit barriers, the obstacles
that determine how easily a firm can leave that
industry.
● Exit barriers comprise both economic and social
factors.
● Examples:
❖ Contractual Obligations
❖ Emotional Attachments

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 A Sixth Force: The Strategic Role Of
Complements
● A complements is product, service, or competency
that adds value to the original product offering when
two are used in tandem.
● Complements increase demand for the primary
product, thereby enhancing the profit potential for
the industry and the firm.
● Complementor:
A company that provides a good or service that leads
customers to value your firm’s offering more when
the two are combined.
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 The Five Forces Competitive
Analysis Checklist

Describe the strategic

role of complements in
creating positive-sum
coopetition.

Coopetition: which is
cooperation by competitors
to achieve a strategic
34 objective.
3.3 Changes over Time:
Entry Choices and
Industry Dynamics
 When?
ENTRY CHOICES ● Entry timing
● Stage of industry cycle life
● Order of entry

Who? How?
Identify the player;
● Leverage existing assets
incumbents, entrants, ENTRY ● Reconfigure value chain
customers, supplier,
other stakeholder
CHOICES ● Establish niches

Where? What?
● Product Positioning Type of entry: scale,
● Pricing strategy commitment, product /
● Potential Partner service, business model
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 INDUSTRY DYNAMICS

✘ Industry structure are not stable over time →

dynamic
✘ Manager need to consider industry dynamics
✘ Profitable industry: consolidated > fragmented

Industry Convergence
A process whereby formerly unrelated industries begin to
satisfy the same customer need
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.
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3.4 Performance Differences
within the same Industry:
Strategic Groups
 Strategic Group : The set of the companies that pursue a similar strategy
within a specific industry

Strategic Group Model : A framework that explains differences in firm

performance within the same industry.
✘ Identifying the most important strategic dimensions
✘ Choosing two keys dimensions for the horizontal and vertical axes,
which expose important differences among competitors
✘ Graphing the firms in the strategic group, indicating each firm’s
market share by the bubble size

Mobility Barrier : Industry-specific factors that separate one strategic

group from another
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Strategic Groups
and Mobility
Barrier in U.S
Domestic Airline
Industry
3.5 Implications for Strategic
Leaders
 Implications for Strategic Leaders

1. Analysis firm’s external environment to identify opportunities

and threat
2. Apply a PESTEL analysis to monitor firm’s macroenvironment
3. Apply Porter’s five forces model by:
a. Define the relevant industry
b. Identify the key players in each of the five forces and
attempt to group them into different categories
c. Determine the underlying drivers drivers of each force
d. Assess the overall industry structure
43 4. Draw a strategic group map
THANK
S!
Any questions?

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