Strategic Management Session 1 – External analysis: Macro-environment, industrial structure, competitive forces, and strategic groups Prof. Yue ZHAO
Strategic Management
Session 1 – External analysis:
Macro-environment, industrial structure, competitive
forces, and strategic groups
Prof. Yue ZHAO
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
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 3-2 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 3.3 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
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
3-15Backward
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.
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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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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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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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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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
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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Take-Away Concepts (cont’d)
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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Take-Away Concepts (cont’d)
LO 3-4 Describe the strategic role of complements in creating positive-
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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Take-Away Concepts (cont’d)
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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