Session 1 External analysis

Strategic Management

Session 1 – External analysis:

Macro-environment, industrial structure, competitive

forces, and strategic groups

Prof. Yue ZHAO

The AFI Framework – Dynamics!

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LO 3-1 Apply the PESTEL model to organize and assess the impact

of external forces on the firm.

LO 3-2 Apply the structure-conduct-performance (SCP) model to explain

the effect of industry structure on firm profitability.

LO 3-3 Apply the five forces model to understand the profit potential of the

firm’s industry.

LO 3-4 Describe the strategic role of complements in creating positive-

sum co-opetition.

LO 3-5 Understand the role of industry dynamics and industry

convergence in shaping the firm’s external environment.

LO 3-6 Apply the strategic group model to reveal performance differences

between clusters of firms in the same industry.

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EXHIBIT 3.1 The Firm Embedded in Its External Environment

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External: firm boundaries?

Different Layers (outer inner)

SCP

5 forces

EXHIBIT 3.1 The Firm Embedded in Its External Environment

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PESTEL Framework

Political

•Gov’t pressures

•Subsidies & incentives

•Differences in countries, states,

Countries & regions

Economic

•Growth rates

•Interest rates

•Employment levels

•Currency exchange

Sociocultural

•Norms, culture, values

•Demographics

•Lifestyle changes

Technological

•Innovation

•Diffusion

•Research & development

Ecological

•Global warming

•Sustainability

•Pollution

Legal

•Court system

•Legislation

•Hiring laws

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THE PESTEL FRAMEWORK

Key forces in the external environment

• Macro-level factors, Forces embedded in global environment

• Simple way to categorize external forces

Go beyond, not a simple list:

• Identify relevant factors Does the factor represents an opportunity or a

threat? (It depends on your company’s strategy!)

• Group related factors (inter-dependent)

• Comparative, Today≠ Tomorrow, predictive or proactive

• Opportunities or threats? SWOT

PESTEL is a good starting point, but not the whole picture!

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Porter’s Diamond Model: national competitive advantage

In-class exercise: Why France has competitive

advantage in wine?

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How to leverage on national competitive advantage (from the country of origin)

when competing abroad?

EXHIBIT 3.2 Industry Structures along the Continuum

Structure-conduct-performance model

Industrial structure continuum

LO 3-1 Apply the PESTEL model to organize and assess the impact of

external forces on the firm.



LO 3-3 Apply the five forces model to understand the profit potential

of the firm’s industry.


sum co-opetition.





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EXHIBIT 3.3 Porter’s Five Forces Model

Source: Porter, M. E. (2008), “The five competitive forces that shape strategy,” Harvard Business Review 5 forces video- M. Porter

•One of the most widely used tools

•Rule of thumb: strong forces low profit potential

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Threat of Entry :

High if:

• Customer Switching Costs are Low

• Capital Needs are Low

• Retaliation is Not Expected

• Incumbents don’t have:

Proprietary technology

Established brands

Closed distribution channels

Power of Suppliers :

Power of suppliers High, if:

•Forward Integration is a credible threat

•No substitutes for supplier products

•Suppliers products are differentiated

•Incumbents face high switching costs

•Product is important input to buyer

Suppliers exert power in

the industry by:

•threatening to raise prices or

to reduce quality.

•Powerful suppliers can

squeeze industry profitability.

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Forward

integration

Supplier you Buyer

Power of Buyers :

Power of buyers High, if

•A few large buyers

•Large buyers relative to a seller

•Products are standardized

•Buyers face few switching costs

•Backward Integration is credible

•Buyer has full information

Buyers compete with the

supplying industry by:

•Bargaining down prices

•Forcing higher quality

•Playing firms off of each other

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integration

Supplier you Buyer

Threat of Substitutes – HIGH IF:

Threat of substitutes high, if

• Substitute provides good price-

performance

• Buyers switching costs is low

Products with similar

functions limit the prices

firms can charge

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Incumbent Rivalry:

Rivalry of incumbent high, if

• Many competitors in the industry

• Firms are equal size

• Industry growth is slow or shrinking

• Exit barriers are high (both economic and social)

• Product/service undifferentiated

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EXERCISE: 5-FORCE FOR SOFTDRINK/AIRLINE INDUSTRY

Michael Porter (2008)The Five Competitive Forces That Shape Strategy,

Harvard Business Publishing.

https://www.youtube.com/watch?v=mYF2_FBCvXw

https://www.youtube.com/watch?v=mYF2_FBCvXw






firm’s industry.

LO 3-4 Describe the strategic role of complements in creating

positive-sum co-opetition.





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Complements

Complement: A product or service or competency that adds

value to original product.

Ex. iTunes for iPod music players

Complementor: If customers value your product more when

combined with another firm’s product or service.

Ex. Michelin tires for Ford

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EXHIBIT 3.5 Determining Industry Attractiveness

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firm’s industry.


sum co-opetition.



LO 3-6 Apply the strategic group model to reveal performance

differences between clusters of firms in the same industry.

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STRATEGIC GROUPS

“Organizations within an industry that with similar

strategic characteristics, following similar strategies or

competing on similar basis”

Identify most direct competitors

Inter-groups moves

Intra-group competitive dynamics

EXHIBIT 3.7 Strategic Groups and Mobility Barrier – U.S. Airlines

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Barriers:

International routes,

Regulations: airport slots

Heavy investment

Plane types

hub-and-spoke

Strategic Groups

Mapping Groups

• Identify best dimensions (compare top

performers with others)

• Choose two for map, not highly

correlated!

• Locate firms on map

• Size of the bubble represents market

chare

• Rivalry is strongest in SAME group

• Some groups more profitable

Mobility Barriers

Firms would try to move to the

profit spots BUT…

Specific factors separate groups

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Potential dimensions

Expenditure of R&D

Technology

Product features/range

Pricing

Market segments

Distribution channels

Service

Location

….

Example: mapping ecoles de commerces?

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Can you identify

other potential

dimensions for the

strategic mapping?

What are other

factors that matter?

MyStrategy

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1. What industries do you think may offer the best domestic job

opportunities in the future? Which industries do you think

may offer the greatest job opportunities in the

global/European market in the future? Use the PESTEL

framework and the five forces model to think through a

logical set of reasons that some fields will have higher job

growth trends than others.

2. Do these types of macro environmental and industry trends

affect your thought process about selecting a career field

after graduation? Why or why not? Explain.

Apply theories to your company- exercise 2

EXTERNAL ANALYSIS

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1. Apply the PESTEL framework to evaluate how pandemic and other macro

level external factors influence your industry/company?

2. Apply the five forces model to your industry. What does this model tell you

about the nature of competition in the industry? Note: (Define your industry

first!)

3. Identify any strategic groups that might exist in the industry. How does the

intensity of competition differ across the strategic groups you have identified?

Capsule: how covid-19 influences French wine industry

https://app.klaxoon.com/join/USR4TJ7

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https://app.klaxoon.com/join/USR4TJ7

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Case study:

European Brewing Industry

The European Brewing Industry

PESTEL

•Political: government campaigns against drink driving

•Economic: the rise of the Asian economies, recession

•Social cultural : hostility towards “binge drinking in UK; decline of beer

consumption in traditional high beer consumption countries (Germany, UK),

slow rise of beer consumption in southern Europe; wine consumption rising in

North Europe; on-trade consumption decreases, comparing to off-trade

consumption

•Technological: innovations around products such as ice-cold lager

•Environmental: packaging issues, energy consumption

•Legal: changes in licensing laws and permitted alcohol limits for driving

Note: PESTELs can often seem somewhat inconclusive, so it is important to

pull out key issues and conclusions. The increasing hostility to drinking (under

P and L) and the rise of Asian economies and southern Europe (under E & S)

seem particularly important trends and are likely to be threats for European

brewing industry.

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The European Brewing IndustryFive forces

•Buyers: High. With more than one fifth of beer sold through supermarkets, and increasing

resort to ‘own-label’, these buyers are increasingly powerful (notice that buyers are not the

ultimate consumers). ( buyers’ backward integration). Supermarkets cut beer pricing to attract

consumers to the shops.

•Suppliers: High. The high concentration of the packagers suggests that these are becoming

increasingly powerful.

•Substitutes: high. Wine is clearly a dangerous substitute. (to mitigate this force, some “cave a

bieres” emerged.

•New entrants: high. Internationalisation through M&A and increased trade is introducing new

entrants into previously protected markets: most countries see increasing imports (Table 2).

Anheuser-Busch, SABMiller, TsingTao are new entrants into Europe. there is the potential of

small new brewers entering using microbreweries or contract brewers (e.g. Cobra). Home

brewing kits (buyers’ backward integration)

•Rivalry: high. falling demand, international entrants and over-capacity obviously increase the

scope for rivalry. However, note that sales values are rising, that innovation and branding can

mitigate price-competition, that there has been a history of price-fixing cartels, and that leading

players are attempting consolidation through M&A (compare industry concentration ratios in

2000 and 2009 in Table 3).

On balance, the European brewing industry does not seem attractive, and unlikely to become

more so until the current round of consolidation is completed and brewers achieve greater

leverage against their buyers and suppliers.32

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The European Brewing Industry

Impact on Particular Brewing Companies

The three companies are chosen to represent different types of ‘player’.

•A–B InBev is the largest player, after a succession of spectacular mergers. It

is remarkable how the company is withdrawing from fast-growing China and

Eastern Europe, however.

•Greene King is tiny in comparison to A–B InBev, with just one key domestic

market, the United Kingdom. However, domestic focus and its own pubs may

be giving it a strongly defended local position

•Tsing Tao is the wild-card here. It is strong in its booming home market, but

it is also interested in moving overseas. But would it make Europe a priority

region for expansion, or choose another market?

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LO 3-1 Apply the PESTEL model for external forces.

Macro environment has a wide range of domestic & global forces.

The political environment describes the influence government bodies

can have on firms.

The economic environment is mainly affected by five factors: growth

rates, interest rates, levels of employment, price stability (inflation and

deflation), and currency exchange rates.

Sociocultural factors capture a society’s cultures, norms, and values.

Technological factors capture the application of knowledge to create

new processes and products.

Ecological factors concern a firm’s regard for environmental issues such

as the natural environment, global warming, and sustainable economic

growth.

Legal environment factors capture the official outcomes of the political

processes that manifest themselves in laws, mandates, regulations, and

court decisions.

Take-Away Concepts

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Take-Away Concepts (cont’d)

LO 3-2 Apply the SCP model for industry structure.

Helps explain differences in industry performance.

A perfectly competitive industry is characterized by many small firms, a

commodity product, low entry barriers, and no pricing power for

individual firms.

A monopolistic industry is characterized by many firms, a differentiated

product, medium entry barriers, and some pricing power.

An oligopolistic industry is characterized by few (large) firms, a

differentiated product, high entry barriers, and some degree of pricing

power.

A monopoly exists when there is only one (large) firm supplying the

market. The firm may offer a unique product, the barriers to entry are

high, and the monopolist has considerable pricing power.

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LO 3-3 Apply the five forces model for profit potential of industry.

Five competitive forces shape an industry’s profit potential: (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.

Firm can shape industry structure through its strategy.

Industry attractiveness determined by 3 pairs of forces.

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sum co-opetition.

Co-opetition (co-operation among competitors) 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.

Industry attractiveness can be determined by three pairs of two forces:

(1) supplier and buyer power, (2) entry and exit barriers, and (3)

available complements and the threat of substitutes.

Attractive industries for co-opetition are characterized by high entry

barriers, low exit barriers, low buyer and supplier power, a low threat of

substitutes, and the availability of complements.

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LO 3-5 Understand the role of industry dynamics and industry convergence

in shaping the firm’s external environment.

Industries are dynamic—they change over time.

Different conditions prevail in different industries, directly affecting the

firms competing in these industries and their profitability.

In industry convergence, formerly unrelated industries begin to satisfy

the same customer need. It is often brought on by technological

advances.

LO 3-6 Apply the strategic group model for differences between clusters of

firms in the same industry.

A strategic group is a set of firms within a specific industry that pursue

a similar strategy in their quest for competitive advantage.

Rivalry within the same group is more intense than between groups.

Mobility barriers restrict movement between groups.

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Complement

Complementor

Entry barriers

Exit barriers

Five forces model

Industry

Industry convergence

Mobility barriers

PESTEL model

SCP (structure-conduct-

performance) model

Strategic group

Strategic group model

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Soft drink VS airline industry: 5-star or 0-star?

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Documents

Session 1 External analysis