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External Analysis:
Industry Structure,
Competitive Forces,
& Strategic Groups
McGraw-Hill/Irwin
32
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
firms industry.
LO 3-4 Describe the strategic role of complements in creating positivesum co-opetition.
LO 3-5 Understand the role of industry dynamics and industry
convergence in shaping the firms external environment.
LO 3-6 Apply the strategic group model to reveal performance differences
between clusters of firms in the same industry.
33
Chapter Case 3
34
35
PESTEL Framework
Political
Technological
Government pressures
Subsidies and incentives
Innovation
Diffusion
Differences in countries,
Economic
Environmental
Growth rates
Interest rates
Global warming
Sustainability
Employment levels
Currency exchange
Pollution
Sociocultural
Legal
Court system
Legislation
Lifestyle changes
Hiring laws
36
EXHIBIT 3.1
37
STRATEGY
STRATEGY HIGHLIGHT
HIGHLIGHT 3.1
3.1
18
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
firms industry.
LO 3-4 Describe the strategic role of complements in creating positivesum co-opetition.
LO 3-5 Understand the role of industry dynamics and industry
convergence in shaping the firms external environment.
LO 3-6 Apply the strategic group model to reveal performance differences
between clusters of firms in the same industry.
39
EXHIBIT 3.2
Efficient Markets
The efficient market hypothesis, in financial markets, is one
in which prices reflect information instantaneously and one
in which extra-ordinary profit opportunities are thus rapidly
dissipated by the action of profit-seeking individuals in the
market.
How well does the efficient market hypothesis for capital
markets apply to product markets?
If the efficient market hypothesis applied fully to product
markets then we should see over time equalization in riskadjusted rates of return across industries.
What do the data support?
311
90
13.8%
11.7%
100
80
First Quartile
Average
22.2%
Fourth Quartile
Average
9.3%
70
60
Number
50
of
Industries
40
Average = 14.7%
Median = 13.8%
30
20
10
0
32%
30%
28%
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
Return on Equity = Net Income / Year End Shareholders Equity; Analysis based on sample of 593 industries
Silverman 2000
12
Dental equipment
30%
25%
Drug stores
Engineering services
ROE
ROA
15%
-5
10
15
20
25
Home Appliances
13
Semiconductor Industry
IntelROE - Pharmaceutical Industry 1989
60%Texas
50%
Instruments
Motorola
AMD
40%
Analog Devices
30%
National Semiconductor
20%
-5
10
15
20
25
10%
0%
Amgen
AMP
Eli Lilly
Merck
Mylan
Pfizer
14
15
5-22
Industry
18%
Corporate
parent
4%
Transient
46%
Business
segment
30%
Source: Anita M. McGahan and Michael E. Porter, How Much Does Industry Matter Really? Strategic Management Journal, 1997
16
National Context
e.g., worlds most successful consumer electronics firms
are in Japan
17
Structure-Conduct-Performance
Industry Structure
Number of buyers
and sellers
Degree of product
differentiation
Barriers to entry
Cost structures
Vertical integration
Alliances
Firm Conduct
Pricing
Advertising
R&D
Investment in
plant and
equipment
Performance
Econ profits
Accounting
profits (ratios)
NPV/DCF
MVA/EVA
Tobins Q
18
Conduct
Performance
19
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 firms industry.
LO 3-4 Describe the strategic role of complements in creating positivesum co-opetition.
LO 3-5 Understand the role of industry dynamics and industry
convergence in shaping the firms external environment.
LO 3-6 Apply the strategic group model to reveal performance differences
between clusters of firms in the same industry.
320
Power of Suppliers
Power of Buyers
Threat of Substitutes
Rivalry Among Existing Competitors
321
EXHIBIT 3.3
322
Barriers To Entry
The free entry and free exit assumption that works
reasonably well for describing financial markets seems
to be a premise that strays so far from our world of
experience that the assumption impedes our
understanding of real-world product competition.
Thus, empirical evidence suggests
that (risk-adjusted) ROE does
NOT equalize in the long run.
323
324
(economies of scope)
Example: Cost (Iron, Steel) < Cost (Iron) +
Cost (Steel)
Key idea: Shareable input (In this case, thermal
economies in the production of iron and steel)
Modern examples: Aircraft, Automobiles, Consumer
electronics, Household Appliances; Personal
Computers, Software, Power Tools
325
26
excess capacity:
Demand is cyclical; Demand falls short of
expectations; Demand is expected to grow.
328
329
employee retraining
(e.g., IV solutions, and
computer software).
330
331
332
Degree of Rivalry
Headed In
339
demand
time
340
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
firms 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 firms external environment.
LO 3-6 Apply the strategic group model to reveal performance differences
between clusters of firms in the same industry.
341
Five
FiveForces
Forcesor
orSix?
Six? Introducing
Introducing Complements
Complements
The suppliers of
complements create
value for the industry
and can exercise
bargaining power
SUPPLIERS
Bargaining power of suppliers
INDUSTRY
COMPETITORS
POTENTIAL
ENTRANTS
COMPLEMENTS
Threat of
new entrants
Threat of
Rivalry among
existing firms
SUBSTITUTES
substitutes
BUYERS
42
343
344
EXHIBIT 3.5
Determining Industry
Attractiveness
345
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
firms industry.
LO 3-4 Describe the strategic role of complements in creating positivesum co-opetition.
LO 3-5 Understand the role of industry dynamics and industry
convergence in shaping the firms external environment.
LO 3-6 Apply the strategic group model to reveal performance
differences between clusters of firms in the same industry.
346
Strategic Groups
Mobility Barrier Dimensions To Consider:
Specialization
Width
of product line
Target customer segments
Geographic markets served
Brand Identification
Advertising
Sales
Force
Technological Leadership
First
Strategic Groups
Mobility Barrier Dimensions To Consider:
Product Quality
Raw materials
Specifications
Features
Durability
Cost Position
Economies
Vertical Integration
Backward
and/or forward
Exclusive contracts and in-house service networks
348
Strategic Groups
Mapping Groups
Auto industry example
GM,
ID best dimensions
Choose two for map
Locate firms on map
Bubble
Mobility Barriers
Firms would try to
separate groups
Rivalry is strongest in
Airlines
International routes
Regulations: airport
slots
349
EXHIBIT 3.7
350
351
Model Specification
In practice, researchers estimate a statistical model of
352
Model Specification
Multiple regression analysis seeks to evaluate the
353
Model Specification
The nature of this association is captured by regression
354
Structure-Conduct-Performance
Model Specification
Industry Structure
Number of buyers
and sellers
Degree of product
differentiation
Barriers to entry
Cost structures
Vertical integration
Alliances
Reason
CR4 +
prices
Higher concentration
CAP/S
Firm Conduct
Pricing
Advertising
R&D
Investment in
plant and
equipment
Performance
Econ profits
Accounting
profits (ratios)
NPV/DCF
MVA/EVA
Tobins Q
enables higher
A/S +
Advertising intensity as a product
differentiation
barrier to entry
R&D/S
Technological know-how
GROW
+
price wars
less likely
355
Model Specification
Note that the multiple regression results are consistent
357
3-61
(3)
(3 Identification Problems
However, you might argue instead that high profit