Strategic Management

Lecture 2— External Analysis

2024-2025 Semester B— CB4303. © Esther Chau 1

 Overview

Exhibit 3.1

The irm within its

extern l environment,
industry, nd str tegic
group, subject to
PESTEL f ctors
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 3.1
The PESTEL Framework

Societal determinants
of rm performance
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 PESTEL
All Factors

1. Politic l

2. Economic

3. Sociocultur l

4. Technologic l

5. Ecologic l

6. Leg l
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 1. Political Factors
De nition & Elaboration

= Pressure th t government bodies, nongovernment l org niz tions (NGOs) nd soci l movements
c n exert to in luence the irm. They c n in luence the irm through non-m rket str tegies:

• Lobbying.

• Public Rel tions.

• Contributions.

• Litig tion.

• Politic l nd leg l forces re closely rel ted— politic l pressure often results in ch nges in
legisl tion.
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 2. Economic Factors
De nition & Elaboration

= F ctors l rgely m croeconomic th t ect economy-wide phenomen .

• Ex mples include:

• Growth r tes.

• Employment level.

• Interest r tes.

• Price st bility (in l tion nd de l tion)

• Currency exch nge r tes.

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 3. Sociocultural Factors
De nition & Elaboration

= Includes society’s cultures, norms, nd v lues. They re:

• Are const ntly in lux;

• Di er cross groups.

Str tegic le ders should monitor these trends.

•

• Demogr phic trends re lso sociocultur l f ctors.

• These trends c pture popul tion ch r cteristics rel ted to ge, gender, f mily size,
ethnicity, sexu l orient tion, religion, nd socioeconomic cl ss.
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 4. Technological Factors
De nition & Elaboration

= C pture the pplic tion of knowledge to cre te new processes nd products.

• Innov tions in process technology:

• Le n m nuf cturing, Six Sigm qu lity, genetic engineering, rti ici l intelligence, nd
qu ntum computing.

• Innov tions in product technology:

• Drones, we r ble devices, high-performing electric c rs.

• Adv nces in rti ici l intelligence nd m chine le rning.

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 5. Ecological Factors
De nition & Elaboration

= Include bro d environment l issues such s the n tur l environment, glob l w rming, nd
sust in ble economic growth.

• Org niz tions’ rel tionship with the environment c n be dvers ri l, but not necess rily.
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 6. Legal Factors
De nition & Elaboration

= Inlcude the o ici l outcomes of politic l processes s m nifested in l ws, m nd tes,

regul tions, nd court decisions.

• They c n h ve direct be ring on irm’s pro it potenti l;

• They ect the entire industry t once

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 3.2
The Five Forces Model

Industry-level determinants
of rm performance
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 Industry
De nition

= A group of incumbent irms f cing more or less the s me set of suppliers nd buyers.

• Firms competing in the s me industry tend to o er simil r products or services to meet

speci ic customers needs.
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 Industry Analysis
De nition

= An n lysis th t (1) identify n industry’s pro it potenti l* nd (2) derive implic tions for
irm’s str tegic position within n industry.

• *Pro it potenti l refers to the level of pro it bility th t c n be expected for n ver ge irm

• It is more rigorous nd speci ic n lysis comp red to PESTEL fr mework

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 Industry E ects vs. Firm E ects
Two levels of in uence in determining rm performance

• Industry e ects = describe the underlying economic structure of the industry.

• Structure of n industry refers to: entry nd exit b rriers, number nd size of comp nies, nd
types of products nd service o ered.

• Firm e ects = the ttributes of irm, especi lly ctions t ken by the str tegic le ders, th t
ect irm perform nce.
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Industry E ects vs. Firm E ects
Two levels of in uence in determining rm performance

Exhibit 3.2 fl
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The Five Forces Model
Purposes
• The Five Forces Model helps str tegic le ders underst nd:

• The pro it potenti l of di erent industries.

• How they c n position their irms to g in nd sust in competitive dv nt ge.

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 The Five Forces Model
Key Insights

1. Competition is viewed more bro dly in the ive forces model.

2. Pro it potenti l is function of the ive competitive forces.

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 A. Threat of Entrants
De nition

= Describe the risk of potenti l competitors entering the industry, which could imp ct pro it
potenti l in two w ys:

i. Lowers industry pro it potenti l.

ii. Incre ses spending mong incumbent irms.

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 A. Threat of Entrants
Elaboration

= Describe the risk of potenti l competitors entering the industry, which could imp ct pro it
potenti l in two w ys:

i. Lowers industry pro it potenti l.

• Especi lly in industries with slow m rket growth r te, ddition l entry to the m rket would le d to
excess supply; Supply > dem nd lowers price.

ii. Incre ses spending mong incumbent irms.

• Existing irms m y need to spend more to ttr ct or s tisfy customers when competition
incre ses, reducing n industry’s pro it potenti l.
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 A. Threat of Entrants— Entry Barriers
List

Entry B rriers

• Economies of sc le. • Adv nt ges independent of size.

• Network e ects. • Government policy.

• Customer switching costs. • Credible thre t of ret li tion

• C pit l requirements.
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 A. Threat of Entrants— Entry Barriers
Elaboration

Entry B rriers

• Economies of sc le:

• Cost per unit is lower for l rge incumbent irms nd new entr nts c nnot m ster such
sc le.

• The cost dv nt ges th t ccrue to irms with l rger output bec use they c n spre d
costs over more units, employ technology more e iciently, bene it from more speci lized
division of l bor, nd dem nd better terms from their suppliers.
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 A. Threat of Entrants— Entry Barriers
Elaboration (2)
Entry B rriers

• Network e ects:

• “Refers to the positive imp ct th t one user of product or service h s on other users of the
product or service.”

• When network e ects re presence, the v lue of the product or service incre ses with the number
of users.

• Customer switching costs:

• The cost th t customer incur when ch nging to the products, services, nd/or br nds o ered
by di erent vendor.
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 A. Threat of Entrants— Entry Barriers
Elaboration (3)

Entry B rriers

• C pit l requirements.

• Refers to the mount of c pit l required to st rt business in p rticul r industry.

• Government policy.

• Government m y regul te or restrict entry to cert in m rkets

• Credible thre t of ret li tion— by incumbent irms

• When there is new entr nt, incumbent irms m y re ct by initi ting price w r, for ex mple.
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 A. Threat of Entrants— Entry Barriers
Elaboration (4)
Entry B rriers

• Adv nt ges independent of size.

• Br nd Loy lty

• Propriety Technology

• Preferenti l Access

• F vor ble Loc tion

• Cumul tive Le rning nd Experience

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 A. Threat of Entrants— Entry Barriers
Elaboration (4b)
Entry B rriers

• Adv nt ges independent of size.

• Br nd Loy lty

• Propriety Technology: process, method, device, or system used in the production

• Preferenti l Access: ccess to r w m teri ls, critic l components, & distribution ch nnels

• F vor ble Loc tion

• Cumul tive Le rning nd Experience: vs. the time compression diseconomies th t new
irms f ce
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 B. Threat of Substitutes
De nition

= the thre t th t products or services from outside of the given industry c n meet the needs of
current customers.

• e.g., softw re products m y be ble to repl ce copyediting services

• G soline —> biofuel

• Energy drinks —> co ee

• Videoconferening —> business tr vels

• Wireless phone services vs. internet-b sed services (Zoom, Skpe)

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B. Threat of Substitutes
Elaboration

• A high thre t of substitutes reduces industry pro it potenti l by limiting the price th t the
industry’s competitors c n ch rge for their products nd services.

• The thre t of substitute is high when:

i. The substitute o ers high price/perform nce tr de-o

ii. The buyers’ cost of switching to the substitute is low

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 C. Bargaining Power of Suppliers
De nition

= the pressure th t industry suppliers c n exert on n industry’s pro it potenti l

• Powerful suppliers reduces irms’ bility to obt in superior perform nce:

i. They c n r ise the cost of production by dem nding higher prices for their inputs or by
reducing the qu lity of input f ctors or service level delivered.

ii. They c n reduce the industry’s pro it potenti l by c pturing p rt of the economic v lue
cre ted.
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C. Bargaining Power of Suppliers
Elaboration

• The b rg ining power of suppliers is high when:

• The suppliers’ industry is more concentr ted th n the industry it sells to.

• Suppliers do not depend he vily on the industry for much of their revenues.

• Incumbent irms f ct high switching costs when ch nging suppliers.

• Suppliers o er products th t re di erenti ted.

• There is no re dily v il ble substitute for the suppliers’ product or services.

• Suppliers c n credibly thre ten to fow rd-integr te into the industry

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 D. Bargaining Power of Buyers
De nition

= the pressure th t buyers c n exert on n industry’s pro it potenti l.

• Buyers c n lower industry pro it potenti l when they

i. get price discounts, reducing revenue nd

ii. dem nd higher qu lity products/services, r ising production costs.

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 D. Bargaining Power of Buyers
Elaboration

• The b rg ining power of consumers is high when:

• There re only few buyers, nd e ch buyer purch ses l rge qu ntities rel tive to the size
of single seller.

• The foc l industry's products (th t the buyer purch ses) re st nd rdized or
undi erenti ted commodities.

• Buyers f ce no or low switching costs.

• Buyers c n credibly thre ten to integr te into the industry b ckw rdly
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 E. Rivalry Among Incumbents

• The intensity of riv lry mong existings irms in n industry depends on

. Competitive industry structure

b. Industry growth

c. Str tegic commitments

d. Exit b rriers
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 a. Competitive Industry Structure
De nition

The elements nd fe tures common to ll industries

• The number nd size of irm’s competitors

• The irm’s degree of pricing power

• The type of product or services (commodity or di erenti ted products)

• The height of entry b rriers

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a. Competitive Industry Structure
Types

1. Perfect Competition

2. Monopolistic Competition

3. Oligopoly

4. Monopoly
a. Competitive Industry Structure
Types- Illustration

Exhibit 3.4
 b. Industry Growth
Elaboration

• Industry growth directly ects the intensity of riv lry mong competitors.

• During periods of high growth: • During periods of neg tive growth:

• Consumer dem nd rises. • Riv lry is ierce.

• Price competition mong irms • Riv ls c n only g in t the expense of

frequently decre ses. one nother.

• Price discounts, frequent new product

rele ses with minor modi ic tions,
promotion l c mp igns, nd ret li tion
bound.
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 c. Strategic Commitments
De nition & Elaboration

= re decisions th t re costly, h ve long-term imp ct, nd re di icult to reverse.

• e.g. spending billions of doll rs to build high-tech f ctory

• If irms m ke str tegic commitments to compete in n industry, riv lry mong competitors is
likely to become more intense.
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 d. Exit Barriers
De nition & Elaboration

= obst cles th t determine how e sily irm c n le ve n industry

• Exit b rriers re cre ted by both soci l nd economic f ctors;

• They included ixed cost th t must be p id reg rdless of whether the comp ny is oper ting.
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Porter’s Five Forces Model
Summary

Exhibit 3.3
 A Sixth Force: Complements
De nition & Elaboration

• A complement = product, service, or competency th t dds v lue when used with the
origin l product.

• Complements incre se dem nd for the prim ry product.

• Enh nces the pro it potenti l for the industry nd the irm. Firms m y provide the
complement themselves or work with nother comp ny to ccomplish this.

• Co-opetitions = cooper tions by competitors to chieve str tegic objectives.

• e.g., Alph bet’s Google complement S msung with its Android system; but Google
cquired Motorol Mobility to l unch sm rtphones, m king it competitor with S msung.
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3.3
Entry Choice &
Industry Dynamics

Capturing changes over time

Entry Choices

Exhibit 3.6
Industry Dynamics
Explanation

• Industry structures re not st ble over time; they re dyn mic.

• Why?

• Firms h ve the tendency to ch nge industry structure in their f vor: m king it more
consolid ted through horizont l mergers nd cquisitions (M&A).

• With fewer but l rger pl yers in the industry = e sier to mitig te the thre ts of strong
competitve forces.
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 Industry Convergence
De nition & Elaboration

= the process whereby formerly unrel ted industries begin to s tisfy the s me constomer
need.

• It could be c used by technologic l dv ncement

• e.g., Medi Industry— with content nd news reports v il ble online, print medi m y
become obsolete

• newsp pers, m g zines, TV, movies, r dio, nd music re coverging

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3.4
Strategic Groups

Performance di erences
within the same industry
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 Strategic Groups & Model

= set of comp nies th t pursue simil r str tegy within speci ic industry, in the quest for
competitive dv nt ge

• The str tegic group model clusters di erent irms into groups b sed on sever l key str tegic
dimensions.

• Within the s me industry, irm perform nce di ers depending on str tegic group
membership.

• The distinct di erences cross str tegic groups re lect the business str tegies th t irms
pursue.
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 Strategic Group Model
How to create

• Identify the import nt str tegic dimensions (e.g., technology).

• Choose two key dimensions— for horizont l nd vertic l xes.

• Ensure the dimensions re not highly correl ted.

• Gr ph the irms in the str tegic group:

• E ch irm’s m rket sh re indic ted by the size of the bubble.

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Strategic Group Model
Illustration

Exhibit 3.8
Strategic Group Model
So what? Insights from Strategic Group Mapping

• Competitive riv lry is strongest between irms in the s me str tegic group.

• Extern l environment ects str tegic groups di erently.

• Five competitive forces ect str tegic groups di erently.

• Some str tegic groups re more pro it ble th n others.

•
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 Mobility Barriers
De nition & Elaboration

= re industry-speci ic f ctors th t sep r te one str tegic group from nother.

• Although some str tegic groups tend to be more pro it ble, mobility b rriers prevent
movement between groups.

• Mobility b rriers re results of prior str tegic commitments, which re costly nd not e sily
reversible.
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 Strategic Group Dynamics
Concluding remarks

• Str tegic groups c n ch nge over time due to ch nges in irms positioning nd str tegy.

• Str tegic groups c n be ch nged, split into subgroups, or even combine into l rger groups.
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