Discussion Read and reflect on the assigned readings for the week. Then post what you thought was the most important concept(s), method(s), term(s), and/or

Discussion Read and reflect on the assigned readings for the week. Then post what you thought was the most important concept(s), method(s), term(s), and/or

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Discussion Read and reflect on the assigned readings for the week. Then post what you thought was the most important concept(s), method(s), term(s), and/or any other thing that you felt was worthy of your understanding in each assigned textbook chapter.Your initial post should be based upon the assigned reading for the week, so the textbook should be a source listed in your reference section and cited within the body of the text. Other sources are not required but feel free to use them if they aid in your discussion.Also, provide a graduate-level response to each of the following questions:

In January 2017, a U.S. grand jury indicted six current and former VW executives for their alleged role in the emissions scandal and its subsequent cover-up. The U.S. Justice Department decided to bring charges against these executives after a 16-month criminal investigation by the FBI. In the past, it has been rare for executives to be personally indicted for company misconduct. Do you agree with the decision to go after individual managers in this case? Why or why not? Because learning changes everything. ®

Chapter 3

External Analysis: Industry

Structure, Competitive

Forces, and Strategic


© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.

No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

© McGraw Hill

Learning Objectives

1. Generate a PESTEL analysis to evaluate the impact of external

factors on the firm.

2. Differentiate the roles of firm effects and industry effects in

determining firm performance.

3. Apply Porter’s five competitive forces to explain the profit potential of

different industries.

4. Examine how competitive industry structure shapes rivalry among


5. Describe the strategic role of complements in creating positive-sum


6. Explain the five choices required for market entry.

7. Appraise the role of industry dynamics and industry convergence in

shaping the firm’s external environment.

8. Generate a strategic group model to reveal performance differences

between clusters of firms in the same industry.

© McGraw Hill

How External Factors Impact a Firm

General environment:

• Managers have little control.

• Macroeconomic factors are included.

• Examples: interest, exchange rates, etc.

Task environment:

• Managers can influence.

• Includes the composition of strategic groups.

• Includes the structure of the industry.

© McGraw Hill

The PESTEL Model

Groups environmental factors into six segments:

1. Political.

2. Economic.

3. Sociocultural.

4. Technological.

5. Ecological.

6. Legal.

A straightforward way to

scan, monitor, and evaluate

external factors.

© McGraw Hill

The Firm within Its External Environment,
Industry, and Strategic Group, Subject to
PESTEL Factors
Exhibit 3.1

© McGraw Hill

Political Factors

Processes and actions of government bodies that

influence the firm can be shaped through:

• Lobbying.

• Public Relations.

• Contributions.

• Litigation.

Political and legal forces are closely related.

• Political pressure often results in changes in legislation.

© McGraw Hill

Economic Factors

Largely macroeconomic.

Affect economy-wide


Examples include:

• Growth rates.

• Levels of employment.

• Interest rates.

• Price stability.

• Currency exchange rates.

© McGraw Hill

Sociocultural Factors

Society’s cultures, norms, and values:

• Are constantly in flux.

• Differ across groups.

• Trends should be monitored.

Demographic trends:

• Population characteristics.

• Age, gender, family size, ethnicity, sexual orientation,

religion, and socioeconomic class.

© McGraw Hill

Technological Factors

Application of knowledge:

• New processes and products.

Innovations in process technology:

• Lean manufacturing, Six Sigma quality and biotechnology.

Innovations in product technology:

• Smartphones, wearable devices, high-performing electric


Advances in artificial intelligence and machine


© McGraw Hill

Ecological Factors

Broad environmental


• Natural environment.

• Global warming.

• Sustainable economic


The relationship

between organizations

and the environment

can be:

• Adversarial.

• Can provide business


© McGraw Hill

Legal Factors

Official outcomes of political


• Laws.

• Mandates.

• Regulations.

• Court decisions.

Many industries have been


• Airlines, telecom, energy, and

Legal factors

often coexist

with or result

from political will.

© McGraw Hill

Industry vs. Firm Effects

Industry Effects:

• Describe the economic

structure of the industry.

• Elements in common to


• Entry and exit barriers,

number and size of

companies, and types of

products and services


Firm Effects:

• Attribute firm performance

to the manager’s actions.

• More important than

industry effects.

© McGraw Hill

Industry, Firm, and Other Effects Explaining
Firm Performance

Exhibit 3.2

Source: Data from O.

Bandiera, A. Prat, and R.

Sadun (2012),

“Management capital at

the top: Evidence from

the time use of CEOs,”

London School of

Economics and Harvard

Business School Working


© McGraw Hill

Industry and Industry Analysis


• Group of incumbent


• Relatively similar suppliers

and buyers.

• Similar products and


Industry analysis, a

method to:

• Identify an industry’s profit


• Derive implications for a

firm’s strategic position.

© McGraw Hill

Strategic Positioning

A firm’s ability to:

• Create value for

customers (V).

• While containing costs



To generate a large gap


• The value the firm’s

product or service creates.

• The cost required to

produce it.

• V minus C.

© McGraw Hill

The Five Forces Model

The Five Forces Model helps strategic leaders


• The profit potential of different industries.

• How they can position their firms to gain and sustain

competitive advantage.

Two key insights about this model:

• Competition is viewed more broadly in the five forces


• Profit potential is a function of the five competitive forces.

© McGraw Hill

Porter’s Five Forces Model

Exhibit 3.3

Source: Porter, M. E. (2008, Jan.). “The five

competitive forces that shape strategy,” Harvard

Business Review.

© McGraw Hill

Threat of Entry

The risk that potential

competitors will enter an


• Lowers industry profit


• Increases spending

among incumbent firms.

Entry barriers:

• Economies of scale.

• Network effects.

• Customer switching costs.

• Capital requirements.

• Advantages independent
of size.

• Government policy.

• Credible threat of

© McGraw Hill

Power of Suppliers

Pressures that industry suppliers can exert on an

industry’s profit potential.

Lowers industry profit potential if:

• Suppliers demand higher prices for their inputs.

• Suppliers capture part of the economic value created.

© McGraw Hill

Power of Buyers (Customers)

Lowers industry profit potential if:

• Buyers obtain price discounts, which reduces


• Buyers demand higher quality / service, which

raises production costs.

Situations when buyers are price


• The buyer’s purchase represents a significant

portion of its procurement budget.

• Buyers earn low profits or are strapped for


Buyers are



of an


© McGraw Hill

Threat of Substitutes

Meet the same basic

customer need:

• In a different way.

• Available from outside the

given industry.


• Software vs. professional


• Energy drinks vs. coffee.

• Videoconferencing vs.

business travel.

• Wireless phone services

vs. internet-based

services (Skype).

© McGraw Hill

Rivalry Among Competitors

The intensity with which companies in the same

industry jockey for market share and profitability.

• Can range from genteel to cut-throat.

• The other forces in the model pressure this rivalry.

• The stronger the forces, the stronger the competitive


© McGraw Hill

Competitive Industry Structure is Defined By

Number and size of competitors.

Firm’s degree of pricing power.

Type of product or service

(commodity or differentiated product).

Height of entry barriers.

© McGraw Hill

Industry Competitive Structures along the
Continuum from Fragmented to Consolidated

Exhibit 3.4

Access the text alternative for slide image.

© McGraw Hill

Industry Growth

Affects intensity of rivalry among competitors.

During periods of high growth:

• Consumer demand rises.

• Price competition among firms decreases.

During periods of negative growth:

• Rivalry is fierce.

• Rivals can only gain at the expense of one another.

• Price discounts, promotional campaigns, and retaliation


© McGraw Hill

Strategic Commitments

Firm actions that are:

• Costly, long-term oriented and difficult to reverse.

Can stem from:

• Large, fixed cost requirements.

• Non-economic considerations.

Affects intensity of rivalry among competitors.

© McGraw Hill

Exit Barriers

Obstacles that determine how easily a firm can

leave that industry.

Mainly economic and social factors.

Include fixed costs that must be paid.

Examples: employee health care and retirement


© McGraw Hill

A Sixth Force: Complements

A product, service, or competency that adds value

when used with the original product.

• Complements increase demand for the primary product.

• Enhances the profit potential for the industry and the firm.


• cooperation among competitors to achieve a strategic


© McGraw Hill

Entry Choices

Exhibit 3.6

Source: Based on and

adapted from Zachary,

M.A., P.T. Gianiodis, G.

Tyge Payne, 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, May),

“Strategies to crack

well-guarded markets,”

Harvard Business

Review: 84–92.

Access the text alternative for slide image.

© McGraw Hill

Industry Dynamics

A weakness of other models is that they are static

(point-in-time snapshot).

Industry dynamics provides insight about:

• Changing speed of an industry.

• Rate of innovation.

• Help capture structural changes in the industry.

© McGraw Hill

Industry Convergence

When unrelated

industries begin to satisfy

the same customer need.

Caused by technological



• Media Industries:

• Content going online.

• Newspapers,

magazines, TV,

movies, radio, music.

• Will print media

become obsolete?

© McGraw Hill

Strategic Groups

Strategic groups:

• A set of companies.

• Pursue a similar strategy.

• In the same industry.

The strategic group model (framework):

• Clusters different firms into groups.

• Is based on key strategic dimensions.

© McGraw Hill

How to Create a Strategic Group Model

Identify the important strategic dimensions.

Choose two key dimensions:

• For horizontal and vertical axes.

• Ensure they’re not highly correlated.

Graph the firms in the strategic group.

• Each firm’s market share indicated by the size of the


© McGraw Hill

Strategic Groups and Mobility Barrier in U.S.
Domestic Airline Industry

Exhibit 3.8

Jump to Appendix 3.6 long image


© McGraw Hill

Insights from Strategic Group Mapping

Competitive rivalry is strongest between firms in the

same strategic group.

External environment affects strategic groups

Five competitive forces affect strategic groups

Some strategic groups more profitable than others.

© McGraw Hill

Mobility Barriers

Restrict movement between strategic groups.

Industry-specific factors that separate one group

from another.

Based on hard-to-reverse investments (strategic


Because learning changes everything.®

End of Main Content

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.

No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

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