1

PGBM 156
Week 2
Strategic Management
in International Context
Industry & Competitive Analysis

Delivered by:
Alessandro Ferrazza
2
LEARNING
OUTCOMES
1. How to analyse an organisation’s position in the external environment –
both macro-environment and industry or sector environment.
2. How to analyse the determinants of strategic capability – resources,
competences and the linkages between them
3. Use Porter’s competitive five forces framework to analyse industries or
sectors: rivalry, threat of entrants, substitute threats, customer’s power and
supplier power.
4. On the basis of the five competitive forces and complementors and
network effects-define industry attractiveness and identify ways of
managing these.
5. Understand different industry types and how industries develop and
change in industry life cycles and how to make five force analyses
dynamic through comparative industry structure analysis.
6. Analyse strategic and competitor positions in terms of strategic groups
and market segments.
The business world is facing unprecedented
challenges due to COVID-19 pandemic. Can
you describe how COVID-19 pandemic has
impacted industries/markets?

OPENING
CHALLENGE
STUDENT FEEDBACK
LAYERS OF THE
MARKETING
ENVIRONMENT
Slide 2.3

LAYERS OF THE MARKETING

ENVIRONMENT
THE NATURE OF
MARKETING ENVIRONMENT

 Internal
 External

 Micro
 Macro

 Market based environment

 The non-market environment
MARKET AND NON-MARKET ENVIRONMENT
The market environment includes interactions between firms,
suppliers, and customers, where the interactions are voluntary
economic transactions, governed by markets and contracts.

The nonmarket environment, on the other hand, refers to the

domain of concerns that cannot be controlled or managed
through an individual's or organization's market-based
interactions. These are social, political, regulatory, and legal
considerations that affect an organisation’s and/or individual's
fortunes but occur outside of the market environment.
PESTEL analysis highlights six environmental factors in
particular: political, economic, social, technological, ecological
and legal.

PESTEL helps to provide a list of potentially important external

environmental issues influencing strategy.

THE PESTEL FRAMEWORK

 STEP = PEST in more positive
approach.
PESTEL = PEST + Environmental +
Legal
PESTELI = PESTEL + Industry
PESTEL analysis
STEEP = PEST + Ethical
ANALYSIS SLEPT = PEST + Legal
STEEPLE = PEST + Environmental +
WITH SOME Legal + Ethical
STEEPLED = STEEPLE +
VARIATIONS Demographic
PESTLIED = PEST + Legal +
International + Environmental +
Demographic
LONGPEST = Local + National +
Global factors + PEST
Analysing Business Environment

P Political
R Regulatory
E Economic
S Social
T Technological
C Competition
O Organisation
M Market
 Political factors include:
POLITICAL  The role of the state e.g. as an owner, customer or
FACTORS supplier of businesses.
 Government policies.
 Taxation changes.
 Foreign trade regulations.
 Political risk in foreign markets.
 Changes in trade blocks (e.g. BREXIT).
 Exposure to civil society organisations
 (e.g. lobbyists, campaign groups, social media).
 Political risk analysis is the analysis of threats and
POLITICAL opportunities arising from potential political change.
FACTORS There are two key dimensions to political risk analysis:
 The macro–micro dimension – assessment of the
macro risk is that which attaches to whole countries
(e.g. middle east countries assessed as high risk.)
Micro risk is that which attaches to the specific
organisation.
 The internal–external dimension – internal
factors relate to issues within a country (e.g.
government change); external factors arise
outside a country but have an impact within it
(e.g. OPEC oil prices).
 Economic factors include:

• Business cycles.
• Interest rates.
• Personal disposable income.
• Exchange rates.
• Unemployment rates.
• Differential growth rates around the world.

ECONOMIC FACTORS
 Social factors include:
• Changing cultures and demographics (e.g. ageing
population in Western societies).
• Income distribution.
• Lifestyle changes.
• Consumerism.
• Changes in culture and fashion.
• Social networks within an organisational field
• (e.g. with regulators, campaign groups, trade unions).

SOCIAL FACTORS
(1 OF 2)
 Sociograms are maps of potentially important social (or economic)
connections within an organisational field.
Maps can help assess the effectiveness of networks and identify
who is the most powerful and innovative within them.
Power and innovation increase with:
Network density – the number of interconnections between
members.
Central hub positions – when a particular organisation interacts
with many other members.
Broker positions – an organisation that connects otherwise separate
groups/organisations.

SOCIAL FACTORS
(2 OF 2)
SOCIOGRAM OF SOCIAL NETWORKS WITHIN
AN ORGANISATIONAL FIELD
Technological factors include:
 New discoveries and technology developments.
 Examples include developments on the
internet, nano-technology or the rise of
new composite materials.

TECHNOLOGICAL
FACTORS
(1 OF 2)
 There are five primary indicators of innovative
activity:
 Research and development budgets.
 Patenting activity.
 Citation analysis.
 New product announcements.
 Media coverage.

TECHNOLOGICAL
FACTORS
(2 OF 2)
 Legal factors include:
LEGAL  Labour, environmental and consumer regulations.
FACTORS  Taxation and reporting requirements.
(1 OF 2)  Rules on ownership.
 Competition regulations.
 Regulation of corporate governance.
 PESTEL analysis should consider not only formal
LEGAL laws and regulations but also more informal norms:
FACTORS Informal rules are patterns of expected (‘normal’)
behaviour that are hard to ignore (e.g. proper respect
(2 OF 2) for the ecological environment).
  Ecological factors: This refers to
‘green’ or environmental issues, such
ECOLOGICAL as pollution, waste and climate
change.
FACTORS
 Examples are environmental protection
regulations, energy problems, global
warming, waste disposal and
recycling.
CONTEXTS AND MOTIVES FOR
ECOLOGICAL ISSUES

Source: Substantially adapted from P. Bansal and K. Roth, ‘Why companies go green: a model of ecological responsiveness’,
Academy of Management Journal, vol. 43, no. 4 (2000), pp. 717–36 (Figure 2, p. 729).
 Apply selectively – identify specific factors which
Apply impact on the industry, market and organisation in
question.

Identify factors which are important currently but

Identify also consider which will become more important in

USING THE
the next few years.

PESTEL
FRAMEWORK
Use data to support the points and analyse trends
Use using up-to-date information.

Identify opportunities and threats – the main point of

Identify the exercise.
Key Key drivers for change are environmental
drivers factors that are likely to have a high impact
for on industries and sectors, and impact on the
change: success or failure of strategies within them.

KEY
Typically key drivers vary by industry or
market. DRIVERS
FOR
For example, retailers are concerned with
CHANGE
social changes and customer behaviour
which have driven a move to ‘out-of-town’
shopping. Personal disposable income also
drives demand for retailers.
INDUSTRY AND
SECTOR ANALYSIS
An industry is a group of firms producing products and services
that are essentially the same. For example, the automobile industry
and the airline industry.
A market is a group of customers for specific products or services
that are essentially the same (e.g. the market for luxury cars in
Germany).
A sector is a broad industry group (or a group of markets)
especially in the public sector (e.g. the health sector).

INDUSTRIES, MARKETS AND

SECTORS
INDUSTRY AND SECTOR
ENVIRONMENTS:
THE KEY TOPICS
 Porter’s Five Forces Framework helps identify the attractiveness
of an industry in terms of five competitive forces:
 The threat of entry.
 The threat of substitutes.
 The bargaining power of buyers.
 The bargaining power of suppliers and.
 The extent of rivalry between competitors.
The five forces constitute an industry’s ‘structure’.

COMPETITIVE FORCES: THE FIVE

FORCES FRAMEWORK
Source: Adapted from Competitive
Strategy: Techniques for Analyzing
Industries and Competitors by Michael E.
Porter, copyright © 1980, 1998 by The
Free Press. All rights reserved.

THE FIVE FORCES

FRAMEWORK
(1 OF 6)
 Rivalry between existing competitors
THE FIVE  Competitive rivals are organisations with similar
FORCES products and services aimed at the same customer
group and are direct competitors in the same
FRAMEWORK industry/market (distinct from substitutes).
(2 OF 6)  The degree of rivalry depends on:
 Competitor concentration and balance.
 Industry growth rate.
 High fixed costs.
 High exit barriers.
 Low differentiation.
 The threat of entry
THE FIVE  Barriers to entry are the factors that need to be
FORCES overcome by new entrants if they are to compete. The
threat of entry is low when the barriers to entry are
FRAMEWORK high and vice versa.
The main barriers to entry are:
(3 OF 6)  Economies of scale/Experience/Network effects.
 Access to supply and distribution channels.
 Differentiation and market penetration costs.
 Legislation or government restrictions (e.g.
licensing).
 Expected retaliation.
 Incumbency advantages.
 The threat of substitutes
THE FIVE  Substitutes are products or services that offer a similar benefit to an
industry’s products or services, but have a different nature i.e. they
FORCES are from outside the industry.
 Customers will switch to alternatives (and thus the threat increases)
FRAMEWORK if:
The price/performance ratio of the substitute is superior (e.g.
(4 OF 6)

aluminium is more expensive than steel but it is more cost efficient
for car parts)
 The substitute benefits from an innovation that improves customer
satisfaction (e.g. high speed trains can be quicker than airlines from
city centre to city centre on short haul routes).
 Extra-industry effects. Substitutes come from outside the
 incumbents’ industry which forces managers to look outside their
 own industry to consider more distant threats and constraints.
 The bargaining power of buyers
THE FIVE  Buyers are the organisation’s immediate customers, not
necessarily the ultimate consumers.
FORCES  If buyers are powerful, then they can demand cheap prices or
product/service improvements to reduce profits.
FRAMEWORK  Buyer power is likely to be high when:

(5 OF 6)  Buyers are concentrated.

 Buyers have low switching costs.
 Buyers can supply their own inputs (backward vertical
integration).
 Low buyer profits (under pressure to improve profits) and the
purchased
 inputs have a low impact on quality (can cut costs without loss of
quality).
 The bargaining power of suppliers
THE FIVE  Suppliers are those who supply what organisations
FORCES need to produce the product or service. Powerful
suppliers can reduce an organisation’s profits.
FRAMEWORK  Supplier power is likely to be high when:
(6 OF 6)  The suppliers are concentrated (few of them).
 Suppliers provide a specialist or rare input.
 Switching costs are high (it is disruptive or
expensive to change suppliers).
 Suppliers can integrate forwards (e.g. low-cost
airlines have cut out the use of travel agents).
COMPLEMENTORS

Demand complementors:
 An organisation is your complementor if it enhances your
business attractiveness to customers. (E.g. app suppliers are
complementors to smartphone producers).
Supply complementors:
An organisation is a complementor with respect to suppliers if it is
more attractive for a supplier to deliver when it also supplies the
other organisation. (E.g. a competing airline can be a complementor
with respect to a supplier like Boeing – as Boeing may invest more
in improvements if they are supplying both airlines).
 A value net is
a map of organisations in a business
environment demonstrating opportunities for value-creating
cooperation as well as competition.

 Sony is a complementor, supplier and competitor to Apple’s

iPod. Sony and Apple have an interest in cooperating as well
as competing. ‘Coopetition’

THE VALUE NET

  There are network effects in an
industry when one customer of
a product or service has a
NETWORK positive effect on the value of
that product for other

EFFECTS 
customers.
Network effects are very
important for eBay and
Facebook.
Strategiclock-in is where users become dependent on a supplier and
are unable to use another supplier without substantial switching costs.
E.g. customers that bought music on Apple’s
iTunes store could initially only play it on Apple’s own iPod players.
Sometimes companies are so successful that they create an industry standard
under their own control (e.g. Microsoft’s Windows).

STRATEGIC LOCK-IN
 Which industries/markets to enter or leave? – it helps identify the
attractiveness of industries.
 What influence can be exerted? Identifies strategies that can influence
the impact of the five forces. E.g. building barriers to entry by becoming
more vertically integrated.
 The forces may have a different impact on different organisations. E.g.
large firms can deal with barriers to entry more easily than small firms.

IMPLICATIONS OF FIVE
FORCES ANALYSIS
 Defining the ‘right’ industry. Applying the model at the most
appropriate level – not necessarily the whole industry. E.g. the
European low-cost airline industry rather than airlines globally.
 Converging industries – particularly in the high tech arenas –
where industries overlap (e.g. digital industries
 – mobile phones/cameras/mp3 players).
 Complementary organisations – which enhance the
attractiveness of a business to customers or suppliers. Microsoft
Windows and McAfee computer security systems are
complementors. This can almost be considered as a sixth force.

ISSUES IN FIVE FORCES

ANALYSIS
STEPS IN AN INDUSTRY
ANALYSIS
There are several important steps in an industry analysis before
and after analysing the five forces:
 Define the industry clearly.
 Identify the actors of each of the five forces and any different
 groups within them and the basis for this.
 Determine the underlying factors of, and the total strength of, each force.
 Assess the overall industry structure and attractiveness.
 Assess recent and expected future changes for each force.
 Determine how to position your business in relation to each of
 the five forces.
Strategic groups are organisations
within an industry or sector with
similar strategic characteristics,
following similar strategies or
competing on similar bases.
 These characteristics are different
from those in other strategic
groups in the same industry or
sector. STRATEGIC
 There are many
different
GROUPS
characteristics that
distinguish
between strategic
groups.
 Strategic groups can be mapped on to
two-dimensional charts (maps).
These can be useful tools of analysis.
SOME
CHARACTERISTICS
FOR IDENTIFYING
STRATEGIC GROUPS
 Understanding competition – enables focus on direct
competitors within a strategic group, rather than the whole
industry. (E.g. Tesco will focus on Sainsburys and Asda.)
 Analysis of strategic opportunities – helps identify
attractive ‘strategic spaces’ within an industry.
 Analysis of ‘mobility barriers’ – i.e. obstacles to movement
from one strategic group to another. These barriers can be
overcome to enter more attractive groups. Barriers can be
built to defend an attractive position in a strategic group.

USES OF STRATEGIC GROUP

ANALYSIS
A market Where these customer groups are relatively small,
segment is such market segments are called ‘niches’.
a group of
customers
who have
similar
Customer needs vary. Focusing on customer needs
needs that
that are highly distinctive is one means of building
are different
a secure segment strategy.
from
customer
needs in
other parts Customer needs vary for a variety of reasons – these

MARKET
of the factors can be used to identify distinct market
market. segments.

Not all segments are attractive or viable market

opportunities SEGMENTS
– evaluation is essential.
SOME BASES OF MARKET
SEGMENTATION
Two issues are particularly
important in market segment
analysis:
• Variation in customer needs: Focusing on
customer needs that are highly distinctive
from those typical in the market is one
means of building a long-term segment
strategy.
MARKET
• Specialisation within a market segment
can also be an important basis for a
SEGMENTS
successful segmentation strategy. This is
sometimes called a ‘niche strategy’.
A strategiccustomer is the person(s) at whom the strategy is
primarily addressed because they have the most influence over
which goods or services are purchased.
Examples:

 For a food manufacturer it is the multiple retailers (e.g. Tesco)

that are the strategic customers, not the ultimate consumer.
 For a pharmaceutical manufacturer it is the health authorities
and hospitals, not the final patient.

WHO ARE THE STRATEGIC

CUSTOMERS?
 Critical success factors are those factors that are either
particularly valued by customers or which provide a
significant advantage in terms of cost.

Different industries and markets will have

Critical success factors are likely to be an
different critical success factors (e.g. in low-
important source of competitive advantage if
cost airlines the CSFs will be punctuality and
an organisation has them (or a disadvantage if
value for money whereas in full- service
an organisation lacks them).
airlines it is all about quality of service).

CRITICAL SUCCESS
FACTORS (CSFS)
 All strategic decisions involve forecasts about future
conditions and outcomes.
 PESTEL factors will feed into these forecasts.
 Accurate forecasting is notoriously difficult as
organisations are frequently trying to surprise their
competitors.
 Forecasting takes three fundamental approaches based on
varying degrees of certainty:
 Single-point.
 Range.
 Multiple-futures forecasting.

FORECASTING
FORECASTING UNDER CONDITIONS
OF UNCERTAINTY
  Single-point forecasting is where organisations have
FORECAST such confidence about the future that they will
provide just one forecast number.
APPROACHES  Range forecasting is where organisations have
less certainty, suggesting a range of possible
outcomes with different degrees of probability
and a central projection identified as the most
probable.
 Alternative futures forecasting typically involves
even less certainty, focusing on a set of possible yet
distinct
 futures with radically different outcomes.
Alternative futures can be fed into scenario
analyses though not as simple forecasts.
Scenarios are plausible views of how the environment of
an organisation might develop in the future based on key
drivers of change about which there is a high level of
uncertainty.
 Build on PESTEL analysis and drivers for change.

 Offer more than a single view. An organisation will

typically develop a few alternative scenarios (2–4)
to explore and evaluate future strategic options.

 Scenario analysis is used in industries with long

planning horizons, for example, the oil industry
or airlines industry.

SCENARIOS
 SUMMAR
Y
Environmental influences can be thought of as layers around an organisation,
with the outer layer making up the macro- environment, the middle layer making
up the industry or sector and the inner layer strategic groups and market
segments.

The macro-environment can be analysed in terms of the PESTEL factors –

political, economic, social, technological, ecological and legal.

Macro-environmental trends can be forecast according to different levels of

uncertainty, from single-point, through ranges to multiple-futures.

A PESTEL analysis helps identify key drivers of change, which need to

addressed in strategy. Alternative scenarios can be constructed around key
drivers.
 SUMMAR
Y

The environment influence closest to an organisation includes the industry or

sector Industries and sectors can be analysed in terms of Porter’s five forces –
barriers to entry, substitutes, buyer power, supplier power and rivalry. Together
with complementors and network effects, these determine industry or sector
attractiveness and possible ways of managing strategy.

Industries and sectors are dynamic, and their changes can be analysed in

terms of the industry life cycle and comparative five forces radar plots.

Within industries strategic group analysis and market segment analysis can help
identify strategic gaps or opportunities
Competitive strategy
Chapter 2 of Porter (2004)
Porter, M. E. (1996). What is strategy. Harvard Business Review. 74 (6): 61-​78.
Case study: Southwest Airlines

Industry Dynamics
Chapter 3 of Porter (2004)
Porter,
M. E. (2008). The five competitive forces that shape strategy. Harvard Business Revi
ew. 86(1): 78-​93.
Case study: Southwest Airlines

Strategic groups & firm membership

Short,J. C., David J. K., Timothy B. P., & Tomas M. H. (2007). Firm, strategic group, and in
dustry influences on performance. Strategic Management Journal, 28: 147-​167.
Harrigan,
K. R. (1985). An application of clustering for strategic group analysis. Strategic M
anagement Journal, 6(1), 55-​73.

RECOMMENDING
READING
57
ICA in the Digital Age
Adner, R., Puranam
, P., & Zhu, F. (2019). What Is Different About Digital Strategy? From Quantitative to Qualitative Cha
nge. Strategy Science, 4(4), 253-​261.
Porter, Michael E., and James E. Heppelmann
. (2015) "How Smart, Connected Products Are Transforming Companies." Harvard Business Review
93 (10): 97–114. .
Kim, E., Nam, D. I., & Stimpert
, J. L. (2004). The applicability of Porter’s generic strategies in the digital age: assumptions, conjectur
es, and suggestions. Journal of management, 30(5), 569-​589.
Davenport, T. H. (2006). Competing on analytics. Harvard business review, 84(1), 98.

Opportunities & Resources

Alvarez, S. A., Barney, J. B., Anderson, P. (2013). Forming and Exploiting Opportunities: The Implica
tions of Discovery and Creation Processes for Entrepreneurial and Organizational Research. Organizat
ion Science, 24(1), 301-​317
Competitive Analysis 
Chen, H., Chiang, R. H., & Storey, V. C. (2012). Business Intelligence and Analytics: From Big Data t
o Big Impact. MIS quarterly, 36(4), 1165-​1188

RECOMMENDING
READING
58