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How External Factors Impact a Firm
Key Ideas Chapter 3
External Analysis:
General Environment
Industry Structure,
• Managers have little control
Competitive Forces, and
• Macroeconomic factors
• Interest / currency exchange rates
Strategic Groups
Task Environment
• Managers can influence
• Composition of strategic groups
• Industry structure
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The PESTEL Model
The Firm Within Its External Environment
Groups environmental factors into six segments:
1.
2.
3.
4.
5.
6.
Political
Economic
Sociocultural
Technological
Ecological
Legal
A straightforward way to scan, monitor, and evaluate
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Exhibit 3.1
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Political Factors
Economic Factors
Processes & actions of government bodies
Can be shaped through:
Largely macro-economic
Economy-wide phenomena
• Lobbying
• Public Relations
• Contributions
• Litigation
Examples include:
• Growth rates
• Levels of employment
Political and legal forces are closely related.
• Interest rates
• Price stability
• Currency exchange rates
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Sociocultural Factors
Technological Factors
Society’s cultures, norms, and values
Application of knowledge
• Are constantly in flux
• New processes and products
• Differ across groups
Innovations in process technology:
• Lean manufacturing and Six Sigma quality
Demographic trends
• Population characteristics
Innovations in product technology:
• Age, gender, family size, ethnicity, sexual orientation,
religion, and socioeconomic class
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• Smartphones and wearable devices
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Ecological Factors
Legal Factors
Broad environmental issues:
Official outcomes of political processes:
• Laws
• Mandates
• Regulations
• Court decisions
• Natural environment
• Global warming
• Sustainable economic growth
Can provide business opportunities
Many industries have been deregulated:
• Airlines, telecom, energy, and trucking
• Tesla cars have zero emissions
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Exhibit 3.2 Effects Determining
Superior Firm Performance
Industry vs. Firm Effects
Industry Effects
• Elements in common to all
• Entry and exit barriers, number and size of companies,
and types of products and services offered
Firm Effects
• The actions managers take
• More important than firm effects
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Industry & Industry Analysis
Strategic Positioning
Industry:
A firm’s ability to:
• Group of incumbent companies
• Create value for customers (V)
• Relatively similar suppliers and buyers
• Contain costs (C)
• Similar products and services
Goal: Generate a large gap between:
• The value the firm’s product or service creates
Industry analysis, a method to:
• Identify an industry’s profit potential
• The cost required to produce it
• Derive implications for a firm’s strategic position
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Porter’s Five Forces Model
Threat of Entry (1 of 2)
The risk that potential competitors will enter an
industry
Lowers industry profit potential:
• Incumbents lower prices
Incumbents spend more to satisfy existing customers.
Entry barriers:
• Obstacles blocking others from entering
• A significant predictor of industry profit potential
Exhibit 3.3
SOURCE: Michael E. Porter, “The five competitive forces that shape strategy,” Harvard Business Review, January 2008.
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Threat of Entry (2 of 2)
Power of Suppliers
The risk that potential competitors will enter the industry
Pressures that industry suppliers can exert on an
industry’s profit potential
Entry barriers:
• Economies of scale
Lowers industry profit potential if:
• Network effects
• Suppliers demand higher prices for their inputs
• Customer switching costs
• Suppliers reduce quality
• Capital requirements
• Advantages independent of size
• Government policy
• Credible threat of retaliation
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Power of Buyers (Customers)
Threat of Substitutes
Pressure customers put on an industry
Meet the same basic customer need
• But in a different way
Lowers industry profit potential if:
• Available from outside the given industry
• Buyers obtain price discounts
• Reduces revenue
Examples:
• Buyers demand higher quality / service
• Energy drinks vs. coffee
• Raises production costs
• Videoconferencing vs. business travel
• E-mail vs. express mail
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Rivalry Among Competitors
A Sixth Force: Complements and Co-Opetition
The intensity with which companies in the same
industry jockey for market share and profitability
Complements:
• A product, service, or competency
Other forces pressure this rivalry
• Adds value when used with the original product
Examples of tactics:
Co-opetition:
• Price discounting
• Cooperation by competitors to achieve a strategic
objective
• After sales service
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Competitive Industry Structure
4 Main Competitive Industry Structures
Number and size of competitors
Firm’s degree of pricing power
Type of product or service
• Commodity or differentiated
Height of entry barriers
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Exhibit 3.4
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Industry Growth
Strategic Commitments
Affects intensity of rivalry among competitors
Firm actions that are:
• Costly
During periods of high growth:
• Consumer demand rises
• Long-term oriented
• Price competition among firms decreases
• Difficult to reverse
Affects intensity of rivalry among competitors
During periods of negative growth:
• Rivalry is fierce
Example: airline industry
• Rivals can only gain at the expense of one another
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• Hub and spoke model requires significant investment
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Exit Barriers
Entry Choices
Obstacles that determine how easily a firm can leave
that industry
Mainly economic and social factors
Examples:
• Contractual obligations
• Emotional attachments
Exhibit 3.6
Source: Based on and adapted from Zachary M.A., Gianiodis P.T., Tyge Payne G., and G.D. Markman (2014), Entry timing: enduring lessons and future directions,
Journal of Management, 41: 1409; and Bryce D.J. and J.H. Dyer (2007), Strategies to crack well-guarded markets, Harvard Business Review, May: 84-92.
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Industry Dynamics
Industry Convergence
Provides insight about:
When unrelated industries satisfy the same need
Caused by technological advances
Example: Media Industries
• Changing speed of an industry
• Rate of innovation
• Content going online
Analysis must repeat over time
• Newspapers, magazines, TV, movies, radio, music
• Industry structures aren’t stable
• Will print media become obsolete?
• They are dynamic
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Strategic Groups
How to Create a Strategic Group Map
Strategic groups:
1. Identify the important strategic dimensions
• A set of companies
2. Choose two key dimensions
• Pursue a similar strategy
• For horizontal and vertical axes
• In the same industry
• Ensure they’re not highly correlated
The strategic group model (framework):
3. Graph the firms in the strategic group
• Clusters different firms into groups
• Each firm’s market share indicated by the size of the
bubble
• Is based on key strategic dimensions
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Strategic Group Map: Domestic Airline Industry
Insights from Strategic Group Mapping
1. Competitive rivalry:
Exhibit 3.8
•
Strongest between firms in the same strategic group
2. External environment:
•
Affects strategic groups differently
3. Five competitive forces:
•
Affect strategic groups differently
4. Profitability:
•
Some strategic groups more profitable than others
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Mobility Barrier
Strategic Group Dynamics
Restrict movement between strategic groups
Firm positioning, strategy, and strategic groups can
change over time.
Industry-specific factors
One strategic group can split into two subgroups.
Based on hard-to-reverse investments
Ultra low-cost airlines (Frontier, Allegiant, and Spirit)
split from low-cost airlines (JetBlue, Southwest, Alaska
Airlines).
In 2022 Frontier bid to acquire Spirit Airlines.
In sum, strategic groups are dynamic.
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