3Chapter Outline3.1 The PESTEL Framework 3.2 Industry Structure and Firm Strategy: The Five Forces Model 3.3 Changes over Time: Industry Dynamics 3.4 Explaining Performance Differences within the Same Industry: Strategic Groups 3.5 Implications for the Strategist
4Tesla Motors and the U.S. Automotive Industry ChapterCase 3Courtesy of Tesla MotorsTesla Motors and the U.S. Automotive IndustryWith high entry barriers, the BIG THREE – GM, Ford, and Chrysler – dominated the U.S. car market until the 1980s.There have been no new recent entrants due to the HIGH industry entry barriers.Tesla Motors’ Model S received outstanding market reception, and was awarded the 2013 MotorTrend Car of the Year.
5EXTERNAL ANALYSISPESTEL FrameworkINDUSTRY ANALYSISFive Forces ModelCOMPETITOR ANALYSISStrategic Group MappingMACROMICRO
63.1 The PESTEL FrameworkKEY CONCEPTSManagers mitigate threats and exploit opportunities by analyzing the external environmental forces.Factors are interdependent.Framework to scan, monitor, and evaluate important external factors/trends impacting a firm in its quest for competitive advantage.
7Exhibit 3.1 The Firm Embedded in Its External Environment
8How the Eurozone Crisis Is Hurting Companies Strategy Highlight 3.1How the Eurozone Crisis Is Hurting CompaniesThe EU (European Union) began its formation in the early 1950s.Today – The euro is the common currency used by 17 of the 27 EU member states.2009 – Several European countries took on too much debt and were unable to repay their credit obligations.Strict austerity programs were enacted.Banks tightened credit hampering firms worldwide.
93.2 Industry Structure and Firm Strategy: The Five Forces Model A group of (incumbent) firms that face the same set of suppliers and buyersIndustry AnalysisIdentifies the industry's profit potentialDerive implications for a firm’s strategic position within an industryStrategic PositionA firm’s ability to create value (V) for customers while containing costs (C)Competitive Advantage = a large value gap (V - C)
10The Five Forces in the Airline Services Industry Strategy Highlight 3.2The Five Forces in the Airline Services IndustryLow Entry BarriersPowerful SuppliersPowerful BuyersStrong Substitute ThreatIntense RivalryRESULTS – Low overall industry profit potential, thus an “unattractive” industry for investment.
11INDUSTRY FORCES IMPACT FIRM PROFITABILITY ATTRACTIVE INDUSTRYSustainable Competitive Advantage EasierHigh profit potentialThe weaker the five forcesUNATTRACTIVE INDUSTRYSustainable Competitive Advantage HarderLow profit potentialThe stronger the five forces
12ANALYZING INDUSTRY STRUCTURE USING FIVE – FORCES Threat of New Entrants (and Entry Barriers)Absolute cost advantagesProprietary learning curveAccess to inputsGovernment policyEconomies of scaleCapital requirementsBrand identitySwitching costsAccess to distributionExpected retaliationProprietary productsComplementorsNumber of complementsRelative value addedBarriers to complement entryEngagement of complementsBuyer perception of complementsComplement exclusivityIndustry value chain – from raw materials and other inputs, to channel to end consumerSupplier PowerSupplier concentrationImportance of volume to supplierDifferentiation of inputsImpact of inputs on cost or differentiationSwitching costs of firms in the industryPresence of substitute inputsThreat of forward integrationCost relative to total purchases in industryDegree of RivalryExit barriersIndustry concentrationFixed costs/value addedIndustry growthIntermittent overcapacityProduct differencesSwitching costsBrand identityDiversity of rivalsCorporate stakesBuyer Power (Channel and End consumer)Bargaining leverageBuyer volumeBuyer informationBrand identityPrice sensitivityThreat of backward integrationProduct differentiationBuyer concentration vs. industrySubstitutes availableBuyer’s incentivesThreat of SubstitutesSwitching costsBuyer inclination to substitutePrice-performance tradeoff of substitutesVarity of substitutesNecessity of product or service
13The Threat of EntryIncumbent firms can benefit from several important sources of entry barriers:Economies of scaleNetwork effectsCustomer switching costsCapital requirementsAdvantages independent of sizeGovernment policyCredible threat of retaliation
14Strength & Degree of Competitive Rivalry Exit barriers in the industryQuantity and variability of strength in competitive dynamicsStage if the industry life-cycleIndustry fragmentation vs. consolidationPerceptions of customer switching costs
15The Power of Suppliers Can demand higher prices for their inputs. POWERFUL SUPPLIERSCan demand higher prices for their inputs.Capture part (sometimes a large part) of the economic value created.Signs of Strong SuppliersSuppliers industry is concentrated.They don’t depend heavily on the incumbent’s industry.Incumbent firms face high switching costs.Suppliers’ products are differentiated.Limited substitutesSuppliers have credible forward integration threats.
16The bargaining power of buyers impacts industry profit potential. The Power of BuyersThe bargaining power of buyers impacts industry profit potential.POWERFUL BUYERSCan demand a lower price or higher product qualityReduce industry profit potential:Through price discounts (limited revenue)Through increased quality / better service (higher costs)As they capture part of the economic value createdCredible threat of backwards integration
17The Threat of Substitutes This threat derives from products/services fulfilling the needs of current customers from outside the industry.POWERFUL SUBSTITUTES: THE POWER OF SUBSTITUTES is HIGH when:Price-performance: Has an attractive trade-offThe buyer’s switching cost is lowBreadth/availability of substitute optionsSubstitutes limit the price that industry competitors can charge for their products/services.
18Exhibit 3.3 Industry Competitive Structures Along The Continuum From Fragmented To Consolidated
19Adding a Sixth Force: The Strategic Role of Complements A product, service, or competency that adds value when used in tandem with the original product offeringComplementor – A firm that provides a good/service that leads customers to value your firm’s offering more when the two are combinedCo-opetition – Cooperation by competitors to achieve a strategic objective
203.3 Changes over Time: Industry Dynamics The static five forces model cannot determine the speed of change for an industry.As consolidated industries tend to be more profitable than fragmented ones, firms tend to change their industry structures toward being more consolidated through (horizontal) mergers and acquisitions.Industry Profitability Consolidation
21Exhibit 3. 5 Strategic Groups and the Mobility Barriers in the U. S Exhibit 3.5 Strategic Groups and the Mobility Barriers in the U.S. Domestic Airline Industry
223.4 Explaining Performance Differences Within the Same Industry: Strategic Groups Firms in the same strategic group follow a similar strategy.Strategic group differences identify business-level strategies.Direct competitors – same strategic group firms.Intra-group rivalry exceeds inter-group rivalry:Rivalry among firms within a strategic group is more intense than the rivalry between strategic groups.
233.5 Implications for the Strategist PESTEL analysis guiding consideration: How the external factors identified affect the firm’s industry environmentPorter’s five forces model identifies industry profit potential and firm positioning for gaining and sustaining competitive advantage.Strategic group map helps to find performance differences within the focal industry.
24ChapterCase 3 Consider This… Courtesy of Tesla MotorsConsider This…Recent dynamics in the automotive industry have lowered the profit potential, reducing its attractiveness.Tesla Motors has demonstrated how new technology can be used to circumvent entry barriers.However, incumbent firms are also introducing hybrid or all-electric cars, further increasing rivalry in the industry.