Read
Chapter 3
(Attached) and view the required videos on PESTEL Analysis and the Five Forces Framework. From Attached case – AirBnB in 2018, analyze the six components of the Macro-Environment and the Five Forces Model. (500 words with references)
For this assignment:
· Prepare a brief PESTEL Analysis for the case. Address all six elements.
· Prepare a brief Five Force Analysis for the case. Address all five forces.
Required Videos:
PESTEL Analysis EXPLAINED | B2U | Business To You –
Porter’s 5 Forces EXPLAINED | B2U | Business To You
Textbook: Thompson Jr. A. A, Peteraf, M. A., Gamble, J. E., and Strickland III, A. J. (2020). Crafting & Executing Strategy: The Quest for Competitive Advantage: Concepts and Cases. 22nd Edition. McGraw-Hill. ISBN: 978-1-260-07510-6
Chapter 3
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Airbnb In 2018
John D. Varlaro
Johnson & Wales University
John E. Gamble
Texas A&M University–Corpus Christi
Airbnb was founded in 2008 when Brian Chesky and a friend decided to rent their apartment to guests for a local convention. To accommo-
date the guests, they used air mattresses and referred
to it as the “Air Bed & Breakfast.” It was that week-
end when the idea—and the potential viability—of a
peer-to-peer room-sharing business model was born.
By 2018, Airbnb had seen immense growth and suc-
cess in its 10-year existence. The room-sharing com-
pany had expanded to over 190 countries with more
than 4 million listed properties, and had an estimated
valuation of $31 billion. Airbnb seemed poised to
revolutionize the hotel and tourism industry through
its business model that allowed hosts to offer spare
rooms or entire homes to potential guests, in a peer-
reviewed digital marketplace.
This business model’s success was leveraging
what had become known as the sharing economy.
Yet, with its growth and usage of a new business
model, Airbnb was now faced with resistance, as city
officials, owners and operators of hotels, motels, and
bed and breakfasts were all crying foul. While these
traditional brick-and-mortar establishments were sub-
ject to regulations and taxation, Airbnb hosts were
able to circumvent and avoid such liabilities due to
participation in Airbnb’s digital marketplace. In other
instances, Airbnb hosts had encountered legal issues
due to city and state ordinances governing hotels
and apartment leases. Stories of guests who would
not leave and hosts needing to evict them because
city regulations deemed the guests apartment leasees
were beginning to make headlines.
As local city and government officials across the
United States, and in countries like Japan, debated
regulations concerning Airbnb, Brian Chesky needed
to manage this new business model, which had led to
phenomenal success within a new, sharing economy.
OVERVIEW OF
ACCOMODATION MARKET
Hotels, motels, and bed and breakfasts competed
within the larger, tourist accommodation market. All
businesses operating within this sector offered lodg-
ing, but were differentiated by their amenities. Hotels
and motels were defined as larger facilities accom-
modating guests in single or multiple rooms. Motels
specifically offered smaller rooms with direct parking
lot access from the unit and amenities such as laun-
dry facilities to travelers who were using their own
transportation. Motels might also be located closer
to roadways, providing guests quicker and more con-
venient access to highways. It was also not uncom-
mon for motel guests to segment a longer road trip
as they commuted to a vacation destination, thereby
potentially staying at several motels during their
travel. Hotels, however, invested heavily in additional
amenities as they competed for all segments of trav-
elers. Amenities, including on-premise spa facilities
and fine dining, were often offered by the hotel.
Further, properties offering spectacular views, bol-
stering a hotel as the vacation destination, may con-
tribute to significant operating costs. In total, wages,
property, and utilities, as well as purchases such as
food, accounted for 59 percent of the industry’s total
costs—see Exhibit 1.
CASE 2
Copyright ©2018 by John D. Varlaro and John E. Gamble. All rights
reserved.
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CAsE 2 Airbnb In 2018 C-7
Bed and breakfasts, however, were much smaller,
usually where owner-operators offered a couple of
rooms within their own home to accommodate guests.
The environment of the bed and breakfast—one of a
cozy, home-like ambience—was what the guest desired
when booking a room. Contrasted with the hotel or
motel, a bed and breakfast offered a more personal-
ized, yet quieter atmosphere. Further, many bed and
breakfast establishments were in rural areas where
the investment to establish a larger hotel may have
been cost prohibitive, yet the location itself could be
an attraction to tourists. In these areas individuals
invested in a home and property, possibly with a his-
torical background, to offer a bed and breakfast with
great allure and ambience for the guests’ experiences.
Thus, the bed and breakfast competed through offer-
ing an ambience associated with a more rural, slower
pace through which travelers connected with their
hosts and the surrounding community. A comparison
of the primary market segments of bed and breakfasts
and hotels in 2017 is presented in Exhibit 2.
While differing in size and target consumer, all
hotels, motels, and bed and breakfasts were subject to
city, state, and federal regulations. These regulations
covered areas such as the physical property and food
safety, access for persons with disabilities, and even
alcohol distribution. Owners and operators were sub-
ject to paying fees for different licenses to operate.
Due to operating as a business, these properties and
the associated revenues were also subject to state and
federal taxation.
In addition to regulations, the need to construct
physical locations prevented hotels and motels from
expanding quickly, especially in new international
markets. Larger chains tended to expand by purchas-
ing preexisting physical locations, or through merg-
ers and acquisitions, such as Marriott International
Inc.’s acquisition of Starwood Hotels and Resorts
Worldwide in 2016.
A BUsINEss MODEL FOR THE
sHARING ECONOMY
Startup companies have been functioning in a space
commonly referred to as the “sharing economy” for
several years. According to Chesky, the previous
model for the economy was based on ownership.1
Thus, operating a business first necessitated owner-
ship of the assets required to do business. Any spare
capacity the business faced—either within production
or service—was a direct result of the purchase of hard
assets in the daily activity of conducting business.
Airbnb and other similar companies, however,
operated through offering a technological platform,
where individuals with spare capacity could offer their
services. By leveraging the ubiquitous usage of smart-
phones and the continual decrease in technology
Costs Hotels/Motels
Bed &
Breakfasts
Wages 24% 19%
Purchases 27% 21%
Depreciation 10% 9%
Marketing 2% 2%
Rent and Utilities 8% 11%
Other 13% 22%
EXHIBIT 1 Hotel, Motel, and Bed &
Breakfast Industry Costs
as Percentage of Revenue,
2017
Source: www.ibisworld.com.
EXHIBIT 2 Major Market segments
for Hotels/Motels & Bed &
Breakfast/Hostels sectors,
2017
Market Segment B&Bs* Hotels**
Recreation 80% 70%
Business 12% 18%
Other, including
meetings
8% 12%
Total 100% 100%
*The bed & breakfast market was primarily domestic.
**Includes both domestic and international travelers.
Approximately 20% was associated with international travelers.
Source: www.ibisworld.com.
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C-8 PART 2 Cases in Crafting and Executing Strategy
this change seemed to be how the consumer had deem-
phasized ownership. Instead of focusing on ownership,
consumers seemed to prefer sharing or renting. Other
startup companies have been targeting these segments
through subscription-based services and on-demand
help. From luxury watches to clothing, experiencing—
and not owning—assets seemed to be on the rise. Citing
a more experiential-based economy, Chesky believed
Airbnb guests desired a community and a closer rela-
tionship with the host—and there seemed to be support
for this assertion.4 A recent Goldman Sachs study
showed that once someone used Airbnb, their pref-
erence for a traditional accommodation was greatly
reduced.5 The appeal of the company’s value proposi-
tion with customers had allowed it to readily raise capi-
tal to support its growth, including an $850 million
cash infusion in 2016 that raised its estimated valu-
ation to $30 billion. A comparison of Airbnb’s 2018
estimated market capitalization of $31 billion to the
world’s largest hoteliers is presented in Exhibit 4.
costs, these companies provided a platform for indi-
viduals to instantly share a number of resources.
Thus, a homeowner with a spare room could offer it
for rent. Or, the car owner with spare time could offer
[his or her] services a couple of nights a week as a taxi
service. The individual simply signed up through the
platform and began to offer the service or resource.
The company then charged a small transaction fee as
the service between both users was facilitated.
Within its business model, Airbnb received a
percentage of what the host received for the room.
For Airbnb, its revenues were decoupled from the
considerable operating expenses of traditional lodg-
ing establishments and provided it with significantly
smaller operating costs than hotels, motels, and bed
and breakfasts. Rather than expenses related to own-
ing and operating real estate properties, Airbnb’s
expenses were that of a technology company. Airbnb’s
business model, therefore, was based on the revenue-
cost-margin structure of an online marketplace,
rather than a lodging establishment. With an esti-
mated 11 percent fee per room stay, it was reported
that Airbnb achieved profitability for a first time in
2016.2 Airbnb’s revenues were estimated to increase
from approximately $6 million in 2010 to a projected
$1.2 billion in 2017—see Exhibit 3. However, it was
announced in an annual investors’ meeting that the
company had recorded nearly $3 billion in revenue
and earned over $90 million in profit in 2017.3
A CHANGE IN THE
CONsUMER EXPERIENCE
AND RATE
Airbnb, however, was not just leveraging technology. It
was also leveraging the change in how the current con-
sumer interacted with businesses. In conjunction with
EXHIBIT 3 Airbnb Estimated Revenue and Bookings Growth, 2010–2017 (in millions)
2010 2011 2012 2013 2014 2015 2016 2017
Estimated Revenue $6 $44 $132 $264 $436 $675 $945 $1,229
Estimated Bookings Growth 273% 666% 200% 100% 65% 55% 40% 30%
Source: Ali Rafat, “Airbnb’s Revenues Will Cross Half Billion Mark in 2015,” Analysts Estimate, March 25, 2015, skift.com/2015/03/25/
airbnbs-revenues-will-cross-half-billion-mark-in-2015-analysts-estimate/.
EXHIBIT 4 Market Capitalization
Comparison, 2018
(in billions)
Competitor Market Capitalization
Marriot International Inc. $49
Airbnb $31
Hilton Worldwide Holdings. $25
Intercontinental Hotels Group $11
Source: Yahoo Finance (accessed April 2018); “Airbnb Announces
It Won’t Go Public in 2018,” Business Insider, http://www.busines-
sinsider.com/airbnb-announces-it-wont-go-public-in-2018-2018-2
(accessed April 20, 2018).
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CAsE 2 Airbnb In 2018 C-9
Finally, there were accusations of businesses
using Airbnb’s marketplace to own and operate
accommodations without obtaining the proper
licenses. These locations appeared to be individu-
als on the surface, but were actually businesses.
And, because of Airbnb’s platform, these pseudo-
businesses could operate and generate revenue with-
out meeting regulations or claiming revenues for
taxation.
Airbnb continued to respond to some of
these issues. A report was written and released by
Airbnb in 2015 detailing both discrimination on its
platform and how it would be mitigated. Airbnb
also settled its lawsuit with San Francisco in early
2017. The city was demanding Airbnb enforce
a city regulation requiring host registration, or
incur significant fines. As part of the settlement,
Airbnb agreed to offer more information on its
hosts within the city.9 And in 2018, Airbnb began
partnering with local municipalities to help collect
taxes automatically for rentals within their jurisdic-
tions, helping to potentially recoup millions in lost
tax revenue.10 11
“WE WIsH TO BE REGULATED,
THIs WOULD LEGITIMIZE Us”
Recognizing that countries and local municipalities
were responding to the local business owner and
their constituents’ concerns, Chesky and Airbnb
have focused on mobilizing and advocating for con-
sumers and business owners who utilize the app.
Airbnb’s website provided support for guests and
hosts who wished to advocate for the site. A focal
point of the advocacy emphasized how those particu-
larly hit hard at the height of the recession relied on
Airbnb to establish a revenue stream, and prevent the
inevitable foreclosure and bankruptcy.
Yet, traditional brick-and-mortar establishments
subject to taxation and regulations have continued
to put pressure on government officials to level the
playing field. “We wish to be regulated; this would
legitimize us,” Chesky remarked to Noah in the same
interview on The Daily Show.12 Proceeding forward
and possibly preparing for a future public offering,
Chesky would need to manage how the progressive
business model—while fit for the new, global sharing
economy—may not fit older, local regulations.
Recognizing this shift in consumer preference,
traditional brick-and-mortar operators were respond-
ing. Hilton was considering offering a hostel-like
option to travelers.6 Other entrepreneurs were con-
structing urban properties to specifically leverage
Airbnb’s platform and offer rooms only to Airbnb
users, such as in Japan7 where rent and hotel costs
were extremely high.
To govern the community of hosts and guests,
Airbnb had instituted a rating system. Popularized by
companies such as Amazon, eBay, and Yelp, peer-to-
peer ratings helped police quality. Both guests and
hosts rated each other in Airbnb. This approach
incentivized hosts to provide quality service, while
encouraging guests to leave a property as they found
it. Further, the peer-to-peer rating system greatly min-
imized the otherwise significant task and expense of
Airbnb employees assessing and rating each individ-
ual participant within Airbnb’s platform.
NOT PLAYING BY
THE sAME RULEs
Local and global businesses criticized Airbnb for
what they claimed were unfair business practices and
lobbied lawmakers to force the company to comply
with lodging regulations. These concerns illuminated
how due to its business model, Airbnb and its users
seemed to not need to abide by these same regula-
tions. This could have been concerning on many
levels. For the guest, regulations exist for protection
from unsafe accommodations. Fire codes and occu-
pation limits all exist to prevent injury and death.
Laws also exist to prevent discrimination, as tradi-
tional brick-and-mortar accommodations are barred
from not providing lodging to guests based on race
and other protected classes. But, there seemed to be
evidence that Airbnb guests had faced such discrimi-
nation from hosts.8
Hosts might also expose themselves to legal and
financial problems from accommodating guests.
There had been stories of hosts needing to evict guests
who would not leave, and due to local ordinances the
guests were actually protected as apartment leasees.
Other stories highlighted rooms and homes being
damaged by huge parties given by Airbnb guests.
Hosts might also be exposed to liability issues in the
instance of an injury or even a death of a guest.
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C-10 PART 2 Cases in Crafting and Executing Strategy
ENDNOTEs
2016, www.bloomberg.com/news/
articles/2016-02-16/goldman-sachs-more-
and-more-people-who-use-airbnb-don-t-
want-to-go-back-to-hotels.
6 D. Fahmy, “Millennials Spending Power
Has Hilton Weighing a ‘Hostel-Like’ Brand,”
March 8, 2016, Bloomberg Businessweek,
www.bloomberg.com/businessweek.
7 Y. Nakamura and M. Takahashi, “Airbnb Faces
Major Threat in Japan, Its Fastest-Growing
Market,” Bloomberg, February 18, 2016, www
.bloomberg.com/news/articles/2016-02-18/
fastest-growing-airbnb-market-under-threat-
as-japan-cracks-down.
8 R. Greenfield, “Study Finds Racial
Discrimination by Airbnb Hosts,”
Bloomberg, December 10, 2015, www
.bloomberg.com/news/articles/2015-12-10/
study-finds-racial-discrimination-by-airbnb-
hosts.
1 Interview with Airbnb founder and CEO Brian
Chesky, The Daily Show with Trevor Noah,
Comedy Central, February 24, 2016.
2 B. Stone and O. Zaleski, “Airbnb Enters the
Land of Profitability,” Bloomberg, January 26,
2017, https://www.bloomberg.com/news/
articles/2017-01-26/airbnb-enters-the-
land-of-profitability (accessed June 20,
2017).
3 O. Zaleski, “Inside Airbnb’s Battle to Stay
Private,” Bloomberg.Com, February 6, 2018,
https://www.bloomberg.com/news/arti-
cles/2018-02-06/inside-airbnb-s-battle-to-
stay-private (accessed April 20, 2018).
4 Interview with Airbnb founder and CEO Brian
Chesky, The Daily Show with Trevor Noah,
Comedy Central, February 24, 2016.
5 J. Verhage, “Goldman Sachs: More and
More People Who Use Airbnb Don’t Want to
Go Back to Hotels,” Bloomberg, February 26,
9 K. Benner, “Airbnb Adopts Rules to Fight
Discrimination by Its Hosts,” New York Times,
(September 8, 2016) http://www.nytimes
.com/2016/09/09/technology/airbnb-anti-
discrimination-rules.html (accessed June 20,
2017).
10 S. Cameron, “New TN Agreement Ensures
$13M in Airbnb Rental Taxes Collected,” wjhl.
com, April 20, 2018, http://www.wjhl.com/
local/new-tn-agreement-ensures-13m-in-
airbnb-rental-taxes-collected/1131192392
(accessed April 20, 2018).
11 “Duluth, Airbnb Make Deal on Lodging Tax
Collection,” TwinCitiesPioneerPress, April 19,
2018, https://www.twincities.com/2018/04/19/
duluth-airbnb-make-deal-on-lodging-tax-collec-
tion/ (accessed April 20, 2018).
12 Interview with Airbnb founder and CEO
Brian Chesky, The Daily Show with Trevor
Noah, Comedy Central, February 24, 2016.
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chapter 3
Evaluating a Company’s
External Environment
©Imagezoo/Getty Images
Learning Objectives
This chapter will help you
LO 3-1 Recognize the factors in a company’s broad macro-
environment that may have strategic significance.
LO 3-2 Use analytic tools to diagnose the competitive
conditions in a company’s industry.
LO 3-3 Map the market positions of key groups of industry
rivals.
LO 3-4 Determine whether an industry’s outlook presents a
company with sufficiently attractive opportunities for
growth and profitability.
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a basis for deciding on a long-term direction and
developing a strategic vision). It then moves toward
an evaluation of the most promising alternative
strategies and business models, and finally culmi-
nates in choosing a specific strategy.
This chapter presents the concepts and analytic
tools for zeroing in on those aspects of a compa-
ny’s external environment that should be consid-
ered in making strategic choices. Attention centers
on the broad environmental context, the specific
market arena in which a company operates, the
drivers of change, the positions and likely actions
of rival companies, and key success factors. In
Chapter 4, we explore the methods of evaluating a
company’s internal circumstances and competitive
capabilities.
In order to chart a company’s strategic course
wisely, managers must first develop a deep under-
standing of the company’s present situation. Two
facets of a company’s situation are especially per-
tinent: (1) its external environment—most nota-
bly, the competitive conditions of the industry in
which the company operates; and (2) its internal
environment— particularly the company’s resources
and organizational capabilities.
Insightful diagnosis of a company’s external and
internal environments is a prerequisite for man-
agers to succeed in crafting a strategy that is an
excellent fit with the company’s situation—the first
test of a winning strategy. As depicted in Figure 3.1,
strategic thinking begins with an appraisal of the
company’s external and internal environments (as
tho75109_ch03_048-085.indd 49 11/19/18 12:44 PM
Continued innovation is the best way to beat the
competition.
Thomas A Edison—Inventor and Businessman
No matter what it takes, the goal of strategy is to beat the
competition.
Kenichi Ohmae—Consultant and author
Sometimes by losing a battle you find a new way to win
the war.
Donald Trump—President of the United States and founder of
Trump Entertainment Resorts
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50
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ANALYZING THE COMPANY’S
MACRO-ENVIRONMENT
• LO 3-1
Recognize the factors
in a company’s broad
macro- environment
that may have strate-
gic significance.
FIGURE 3.1 From Analyzing the Company’s Situation to Choosing a Strategy
Identify
promising
strategic
options
for the
company
Select the
best
strategy
and
business
model
for the
company
Form a
strategic
vision of
where the
company
needs to
head
Analyzing the
company’s
external
environment
Analyzing the
company’s
internal
environment
CORE CONCEPT
The macro-environment
encompasses the broad
environmental context in
which a company’s industry
is situated.
Every company operates in a broad “macro-environment” that comprises six princi-
pal components: political factors; economic conditions in the firm’s general environ-
ment (local, country, regional, worldwide); sociocultural forces; technological factors;
environmental factors (concerning the natural environment); and legal/regulatory con-
ditions. Each of these components has the potential to affect the firm’s more immedi-
ate industry and competitive environment, although some are likely to have a more
important effect than others (see Figure 3.2). An analysis of the impact of these fac-
tors is often referred to as PESTEL analysis, an acronym that serves as a reminder
of the six components involved (Political, Economic, Sociocultural, Technological,
Environmental, Legal/regulatory).
Since macro-economic factors affect different industries in different ways and to
different degrees, it is important for managers to determine which of these represent the
most strategically relevant factors outside the firm’s industry boundaries. By strategically
relevant, we mean important enough to have a bearing on the decisions the company
ultimately makes about its long-term direction, objectives, strategy, and business model.
The impact of the outer-ring factors depicted in Figure 3.2 on a company’s choice of
strategy can range from big to small. Those factors that are likely to a bigger impact
deserve the closest attention. But even factors that have a low impact on the company’s
business situation merit a watchful eye since their level of impact may change.
For example, when stringent new federal banking regulations are announced, banks
must rapidly adapt their strategies and lending practices to be in compliance. Cigarette
producers must adapt to new antismoking ordinances, the decisions of governments
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CHAPTER 3 Evaluating a Company’s External Environment 51
tho75109_ch03_048-085.indd 51 11/19/18 12:44 PM
CORE CONCEPT
PESTEL analysis can be
used to assess the stra-
tegic relevance of the six
principal components of
the macro-environment:
Political, Economic,
Social, Technological,
Environmental, and Legal/
Regulatory forces.
FIGURE 3.2 The Components of a Company’s Macro-Environment
Political
Factors
MACRO-EN
VIRONMENT
Economic Conditions
Legal/
Regulatory
Factors
Environmental
Forces
Technological
Factors
Sociocultural
Forces
COMPANY
Producers of
Substitute Products
Suppliers
Rival
Firms
New
Entrants
Buyers
Imm
edia
te In
dustry an
d Competitive Environment
to impose higher cigarette taxes, the growing cultural stigma attached to smoking
and newlyemerging e-cigarette technology. The homebuilding industry is affected
by such macro-influences as trends in household incomes and buying power, rules
and regulations that make it easier or harder for homebuyers to obtain mortgages,
changes in mortgage interest rates, shifting preferences of families for renting versus
owning a home, and shifts in buyer preferences for homes of various sizes, styles, and
price ranges. Companies in the food processing, restaurant, sports, and fitness indus-
tries have to pay special attention to changes in lifestyles, eating habits, leisure-time
preferences, and attitudes toward nutrition and fitness in fashioning their strategies.
Table 3.1 provides a brief description of the components of the macro-environment
and some examples of the industries or business situations that they might affect.
As company managers scan the external environment, they must be alert for
potentially important outer-ring developments, assess their impact and influence,
and adapt the company’s direction and strategy as needed. However, the factors in a
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tho75109_ch03_048-085.indd 52 11/19/18 12:44 PM
Component Description
Political factors Pertinent political factors include matters such as tax policy, fiscal policy, tariffs, the political
climate, and the strength of institutions such as the federal banking system. Some political
policies affect certain types of industries more than others. An example is energy policy, which
clearly affects energy producers and heavy users of energy more than other types of businesses.
Economic conditions Economic conditions include the general economic climate and specific factors such as interest
rates, exchange rates, the inflation rate, the unemployment rate, the rate of economic growth,
trade deficits or surpluses, savings rates, and per-capita domestic product. Some industries,
such as construction, are particularly vulnerable to economic downturns but are positively
affected by factors such as low interest rates. Others, such as discount retailing, benefit when
general economic conditions weaken, as consumers become more price-conscious.
Sociocultural forces Sociocultural forces include the societal values, attitudes, cultural influences, and lifestyles
that impact demand for particular goods and services, as well as demographic factors such
as the population size, growth rate, and age distribution. Sociocultural forces vary by locale
and change over time. An example is the trend toward healthier lifestyles, which can shift
spending toward exercise equipment and health clubs and away from alcohol and snack
foods. The demographic effect of people living longer is having a huge impact on the health
care, nursing homes, travel, hospitality, and entertainment industries.
Technological factors Technological factors include the pace of technological change and technical developments
that have the potential for wide-ranging effects on society, such as genetic engineering,
nanotechnology, and solar energy technology. They include institutions involved in creating
new knowledge and controlling the use of technology, such as R&D consortia, university-
sponsored technology incubators, patent and copyright laws, and government control
over the Internet. Technological change can encourage the birth of new industries, such as
drones, virtual reality technology, and connected wearable devices. They can disrupt others,
as cloud computing, 3-D printing, and big data solution have done, and they can render
other industries obsolete (film cameras, music CDs).
Environmental forces These include ecological and environmental forces such as weather, climate, climate change,
and associated factors like flooding, fire, and water shortages. These factors can directly
impact industries such as insurance, farming, energy production, and tourism. They may
have an indirect but substantial effect on other industries such as transportation and utilities.
The relevance of environmental considerations stems from the fact that some industries
contribute more significantly than others to air and water pollution or to the depletion of
irreplaceable natural resources, or to inefficient energy/resource usage, or are closely
associated with other types of environmentally damaging activities (unsustainable agricultural
practices, the creation of waste products that are not recyclable or biodegradable). Growing
numbers of companies worldwide, in response to stricter environmental regulations and also
to mounting public concerns about the environment, are implementing actions to operate in
a more environmentally and ecologically responsible manner.
Legal and regulatory
factors
These factors include the regulations and laws with which companies must comply, such as
consumer laws, labor laws, antitrust laws, and occupational health and safety regulation. Some
factors, such as financial services regulation, are industry-specific. Others affect certain types of
industries more than others. For example, minimum wage legislation largely impacts low-wage
industries (such as nursing homes and fast food restaurants) that employ substantial numbers of
relatively unskilled workers. Companies in coal-mining, meat-packing, and steel-making, where
many jobs are hazardous or carry high risk of injury, are much more impacted by occupational
safety regulations than are companies in industries such as retailing or software programming.
TABLE 3.1 The Six Components of the Macro-Environment
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company’s environment having the greatest strategy-shaping impact typically pertain
to the company’s immediate industry and competitive environment. Consequently, it
is on a company’s industry and competitive environment (depicted in the center of
Figure 3.2) that we concentrate the bulk of our attention in this chapter.
ASSESSING THE COMPANY’S INDUSTRY
AND COMPETITIVE ENVIRONMENT
Thinking strategically about a company’s industry and competitive environment
entails using some well-validated concepts and analytic tools. These include the five
forces framework, the value net, driving forces, strategic groups, competitor analy-
sis, and key success factors. Proper use of these analytic tools can provide managers
with the understanding needed to craft a strategy that fits the company’s situa-
tion within their industry environment. The remainder of this chapter is devoted to
describing how managers can use these tools to inform and improve their strategic
choices.
•
LO 3-2
Use analytic tools
to diagnose the
competitive conditions
in a company’s
industry.
The character and strength of the competitive forces operating in an industry are never
the same from one industry to another. The most powerful and widely used tool for
diagnosing the principal competitive pressures in a market is the five forces framework.1
This framework, depicted in Figure 3.3, holds that competitive pressures on compa-
nies within an industry come from five sources. These include (1) competition from
rival sellers, (2) competition from potential new entrants to the industry, (3) competition
from producers of substitute products, (4) supplier bargaining power, and (5) customer
bargaining power.
Using the five forces model to determine the nature and strength of competitive
pressures in a given industry involves three steps:
• Step 1: For each of the five forces, identify the different parties involved, along with
the specific factors that bring about competitive pressures.
• Step 2: Evaluate how strong the pressures stemming from each of the five forces are
(strong, moderate, or weak).
• Step 3: Determine whether the five forces, overall, are supportive of high industry
profitability.
Competitive Pressures Created by the Rivalry among
Competing
Sellers
The strongest of the five competitive forces is often the rivalry for buyer patronage
among competing sellers of a product or service. The intensity of rivalry among com-
peting sellers within an industry depends on a number of identifiable factors. Figure 3.4
summarizes these factors, identifying those that intensify or weaken rivalry among
direct competitors in an industry. A brief explanation of why these factors affect the
degree of rivalry is in order:
THE FIVE FORCES FRAMEWORK
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FIGURE 3.3 The Five Forces Model of Competition: A Key Analytic Tool
Buyers
Competitive
pressures
stemming
from supplier
bargaining
power
Competitive pressures
coming from other firms in
the industry
Competitive pressures coming from
the threat of entry of new rivals
Competitive
pressures
stemming
from buyer
bargaining
power
Potential
New Entrants
Firms in Other
Industries O�ering
Substitute Products
Rivalry among
Competing
Sellers
Competitive pressures coming
from the producers of substitute
products
Suppliers
Sources: Adapted from M. E. Porter, “How Competitive Forces Shape Strategy,” Harvard Business Review 57, no. 2 (1979), pp. 137–145;
M. E. Porter, “The Five Competitive Forces That Shape Strategy,” Harvard Business Review 86, no. 1 (2008), pp. 80–86.
• Rivalry increases when buyer demand is growing slowly or declining. Rapidly expand-
ing buyer demand produces enough new business for all industry members to grow
without having to draw customers away from rival enterprises. But in markets
where buyer demand is slow-growing or shrinking, companies eager to gain more
business are likely to engage in aggressive price discounting, sales promotions, and
other tactics to increase their sales volumes at the expense of rivals, sometimes to
the point of igniting a fierce battle for market share.
• Rivalry increases as it becomes less costly for buyers to switch brands. The less costly
(or easier) it is for buyers to switch their purchases from one seller to another,
the easier it is for sellers to steal customers away from rivals. When the cost of
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FIGURE 3.4 Factors Affecting the Strength of Rivalry
Suppliers
Rivalry among Competing Sellers
Rivalry increases and becomes a stronger force when:
Rivalry decreases and becomes a weaker force under the opposite
conditions.
Substitutes
New Entrants
Buyers
• Buyer demand is growing slowly or declining.
• Buyer costs to switch brands are low.
• The products of industry members are commodities or else
weakly di�erentiated.
• The firms in the industry have excess production capacity
and/or inventory.
• The firms in the industry have high fixed costs or high storage costs.
• Competitors are numerous or are of roughly equal size and
competitive strength.
• Rivals have diverse objectives, strategies, and/or countries of origin.
• Rivals have emotional stakes in the business or face high exit barriers.
switching brands is higher, buyers are less prone to brand switching and sellers
have protection from rivalrous moves. Switching costs include not only monetary
costs but also the time, inconvenience, and psychological costs involved in switch-
ing brands. For example, retailers may not switch to the brands of rival manufactur-
ers because they are hesitant to sever long-standing supplier relationships or incur
the additional expense of retraining employees, accessing technical support, or test-
ing the quality and reliability of the new brand. Consumers may not switch brands
because they become emotionally attached to a particular brand (e.g. if you identify
with the Harley motorcycle brand and lifestyle).
• Rivalry increases as the products of rival sellers become less strongly differentiated. When
the offerings of rivals are identical or weakly differentiated, buyers have less reason
to be brand-loyal—a condition that makes it easier for rivals to convince buyers to
switch to their offerings. Moreover, when the products of different sellers are virtu-
ally identical, shoppers will choose on the basis of price, which can result in fierce
price competition among sellers. On the other hand, strongly differentiated product
offerings among rivals breed high brand loyalty on the part of buyers who view the
attributes of certain brands as more appealing or better suited to their needs.
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• Rivalry is more intense when industry members have too much inventory or sig-
nificant amounts of idle production capacity, especially if the industry’s product
entails high fixed costs or high storage costs. Whenever a market has excess sup-
ply (overproduction relative to demand), rivalry intensifies as sellers cut prices
in a desperate effort to cope with the unsold inventory. A similar effect occurs
when a product is perishable or seasonal, since firms often engage in aggressive
price cutting to ensure that everything is sold. Likewise, whenever fixed costs
account for a large fraction of total cost so that unit costs are significantly lower
at full capacity, firms come under significant pressure to cut prices whenever
they are operating below full capacity. Unused capacity imposes a significant
cost-increasing penalty because there are fewer units over which to spread fixed
costs. The pressure of high fixed or high storage costs can push rival firms into
offering price concessions, special discounts, and rebates and employing other
volume-boosting competitive tactics.
• Rivalry intensifies as the number of competitors increases and they become more equal
in size and capability. When there are many competitors in a market, companies
eager to increase their meager market share often engage in price-cutting activities
to drive sales, leading to intense rivalry. When there are only a few competitors,
companies are more wary of how their rivals may react to their attempts to take
market share away from them. Fear of retaliation and a descent into a damaging
price war leads to restrained competitive moves. Moreover, when rivals are of com-
parable size and competitive strength, they can usually compete on a fairly equal
footing—an evenly matched contest tends to be fiercer than a contest in which
one or more industry members have commanding market shares and substantially
greater resources than their much smaller rivals.
• Rivalry becomes more intense as the diversity of competitors increases in terms of
long-term directions, objectives, strategies, and countries of origin. A diverse group of
sellers often contains one or more mavericks willing to try novel or rule-breaking
market approaches, thus generating a more volatile and less predictable competi-
tive environment. Globally competitive markets are often more rivalrous, especially
when aggressors have lower costs and are intent on gaining a strong foothold in
new country markets.
• Rivalry is stronger when high exit barriers keep unprofitable firms from leaving the
industry. In industries where the assets cannot easily be sold or transferred to other
uses, where workers are entitled to job protection, or where owners are commit-
ted to remaining in business for personal reasons, failing firms tend to hold on
longer than they might otherwise—even when they are bleeding red ink. Deep price
discounting typically ensues, in a desperate effort to cover costs and remain in busi-
ness. This sort of rivalry can destabilize an otherwise attractive industry.
The previous factors, taken as whole, determine whether the rivalry in an industry is
relatively strong, moderate, or weak. When rivalry is strong, the battle for market share
is generally so vigorous that the profit margins of most industry members are squeezed
to bare-bones levels. When rivalry is moderate, a more normal state, the maneuvering
among industry members, while lively and healthy, still allows most industry members
to earn acceptable profits. When rivalry is weak, most companies in the industry are
relatively well satisfied with their sales growth and market shares and rarely undertake
offensives to steal customers away from one another. Weak rivalry means that there
is no downward pressure on industry profitability due to this particular competitive
force.
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The Choice of Competitive Weapons
Competitive battles among rival sellers can assume many forms that extend well beyond
lively price competition. For example, competitors may resort to such marketing tactics
as special sales promotions, heavy advertising, rebates, or low-interest-rate financing to
drum up additional sales. Rivals may race one another to differentiate their products
by offering better performance features or higher quality or improved customer service
or a wider product selection. They may also compete through the rapid introduction
of next-generation products, the frequent introduction of new or improved products,
and efforts to build stronger dealer networks, establish positions in foreign markets,
or otherwise expand distribution capabilities and market presence. Table 3.2 displays
the competitive weapons that firms often employ in battling rivals, along with their
primary effects with respect to price (P), cost (C), and value (V)—the elements of an
effective business model and the value-price-cost framework, discussed in Chapter 1.
Competitive Pressures Associated with the Threat of
New Entrants
New entrants into an industry threaten the position of rival firms since they will com-
pete fiercely for market share, add to the number of industry rivals, and add to the
industry’s production capacity in the process. But even the threat of new entry puts
added competitive pressure on current industry members and thus functions as an
important competitive force. This is because credible threat of entry often prompts
industry members to lower their prices and initiate defensive actions in an attempt
Types of Competitive Weapons Primary Effects
Discounting prices, holding clearance
sales
Lowers price (P), increases total sales volume and market share, lowers profits
if price cuts are not offset by large increases in sales volume
Offering coupons, advertising items
on sale
Increases sales volume and total revenues, lowers price (P), increases unit
costs (C), may lower profit margins per unit sold (P – C)
Advertising product or service
characteristics, using ads to enhance
a company’s image
Boosts buyer demand, increases product differentiation and perceived value
(V), increases total sales volume and market share, but may increase unit costs
(C) and lower profit margins per unit sold
Innovating to improve product
performance and quality
Increases product differentiation and value (V), boosts buyer demand, boosts
total sales volume, likely to increase unit costs (C)
Introducing new or improved features,
increasing the number of styles to
provide greater product selection
Increases product differentiation and value (V), strengthens buyer demand,
boosts total sales volume and market share, likely to increase unit costs (C)
Increasing customization of product
or servi
ce
Increases product differentiation and value (V), increases buyer switching
costs, boosts total sales volume, often increases unit costs (C)
Building a bigger, better dealer
network
Broadens access to buyers, boosts total sales volume and market share, may
increase unit costs (C)
Improving warranties, offering low-
interest financing
Increases product differentiation and value (V), increases unit costs (C),
increases buyer switching costs, boosts total sales volume and market share
TABLE 3.2 Common “Weapons” for Competing with Rivals
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to deter new entrants. Just how serious the threat of entry is in a particular market
depends on (1) whether entry barriers are high or low, and (2) the expected reaction of
existing industry members to the entry of newcomers.
Whether Entry Barriers Are High or Low The strength of the threat of entry is
governed to a large degree by the height of the industry’s entry barriers. High barriers
reduce the threat of potential entry, whereas low barriers enable easier entry. Entry bar-
riers are high under the following conditions:2
• There are sizable economies of scale in production, distribution, advertising, or other
activities. When incumbent companies enjoy cost advantages associated with large-
scale operations, outsiders must either enter on a large scale (a costly and perhaps
risky move) or accept a cost disadvantage and consequently lower profitability.
• Incumbents have other hard to replicate cost advantages over new entrants. Aside from
enjoying economies of scale, industry incumbents can have cost advantages that
stem from the possession of patents or proprietary technology, exclusive partner-
ships with the best and cheapest suppliers, favorable locations, and low fixed costs
(because they have older facilities that have been mostly depreciated). Learning-
based cost savings can also accrue from experience in performing certain activi-
ties such as manufacturing or new product development or inventory management.
The extent of such savings can be measured with learning/experience curves. The
steeper the learning/experience curve, the bigger the cost advantage of the com-
pany with the largest cumulative production volume. The microprocessor industry
provides an excellent example of this:
Manufacturing unit costs for microprocessors tend to decline about 20 percent each time cumu-
lative production volume doubles. With a 20 percent experience curve effect, if the first 1 million
chips cost $100 each, once production volume reaches 2 million, the unit cost would fall to
$80 (80 percent of $100), and by a production volume of 4 million, the unit cost would be $64
(80 percent of $80).3
• Customers have strong brand preferences and high degrees of loyalty to seller. The
stronger the attachment of buyers to established brands, the harder it is for a new-
comer to break into the marketplace. In such cases, a new entrant must have the
financial resources to spend enough on advertising and sales promotion to over-
come customer loyalties and build its own clientele. Establishing brand recognition
and building customer loyalty can be a slow and costly process. In addition, if it is
difficult or costly for a customer to switch to a new brand, a new entrant may have
to offer a discounted price or otherwise persuade buyers that its brand is worth
the switching costs. Such barriers discourage new entry because they act to boost
financial requirements and lower expected profit margins for new entrants.
• Patents and other forms of intellectual property protection are in place. In a number of
industries, entry is prevented due to the existence of intellectual property protec-
tion laws that remain in place for a given number of years. Often, companies have
a “wall of patents” in place to prevent other companies from entering with a “me
too” strategy that replicates a key piece of technology.
• There are strong “network effects” in customer demand. In industries where buyers
are more attracted to a product when there are many other users of the product,
there are said to be “network effects,” since demand is higher the larger the net-
work of users. Video game systems are an example because users prefer to have
the same systems as their friends so that they can play together on systems they all
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know and can share games. When incumbents have a large existing base of users,
new entrants with otherwise comparable products face a serious disadvantage in
attracting buyers.
• Capital requirements are high. The larger the total dollar investment needed to enter
the market successfully, the more limited the pool of potential entrants. The most
obvious capital requirements for new entrants relate to manufacturing facilities and
equipment, introductory advertising and sales promotion campaigns, working capital
to finance inventories and customer credit, and sufficient cash to cover startup costs.
• There are difficulties in building a network of distributors/dealers or in securing adequate
space on retailers’ shelves. A potential entrant can face numerous distribution-channel
challenges. Wholesale distributors may be reluctant to take on a product that lacks
buyer recognition. Retailers must be recruited and convinced to give a new brand
ample display space and an adequate trial period. When existing sellers have strong,
well-functioning distributor–dealer networks, a newcomer has an uphill struggle in
squeezing its way into existing distribution channels. Potential entrants sometimes
have to “buy” their way into wholesale or retail channels by cutting their prices to
provide dealers and distributors with higher markups and profit margins or by giv-
ing them big advertising and promotional allowances. As a consequence, a potential
entrant’s own profits may be squeezed unless and until its product gains enough con-
sumer acceptance that distributors and retailers are willing to carry it.
• There are restrictive regulatory policies. Regulated industries like cable TV, tele-
communications, electric and gas utilities, radio and television broadcasting,
liquor retailing, nuclear power, and railroads entail government-controlled entry.
Government agencies can also limit or even bar entry by requiring licenses and
permits, such as the medallion required to drive a taxicab in New York City.
Government-mandated safety regulations and environmental pollution standards
also create entry barriers because they raise entry costs. Recently enacted banking
regulations in many countries have made entry particularly difficult for small new
bank startups—complying with all the new regulations along with the rigors of com-
peting against existing banks requires very deep pockets.
• There are restrictive trade policies. In international markets, host governments com-
monly limit foreign entry and must approve all foreign investment applications.
National governments commonly use tariffs and trade restrictions (antidumping
rules, local content requirements, quotas, etc.) to raise entry barriers for foreign
firms and protect domestic producers from outside competition.
The Expected Reaction of Industry Members in Defending against New Entry
A second factor affecting the threat of entry relates to the ability and willingness of indus-
try incumbents to launch strong defensive maneuvers to maintain their positions and
make it harder for a newcomer to compete successfully and profitably. Entry candidates
may have second thoughts about attempting entry if they conclude that existing firms
will mount well-funded campaigns to hamper (or even defeat) a newcomer’s attempt to
gain a market foothold big enough to compete successfully. Such campaigns can include
any of the “competitive weapons” listed in Table 3.2, such as ramping up advertising
expenditures, offering special price discounts to the very customers a newcomer is seek-
ing to attract, or adding attractive new product features (to match or beat the newcomer’s
product offering). Such actions can raise a newcomer’s cost of entry along with the risk of
failing, making the prospect of entry less appealing. The result is that even the expectation
on the part of new entrants that industry incumbents will contest a newcomer’s entry may
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be enough to dissuade entry candidates from going forward. Microsoft can be counted on
to fiercely defend the position that Windows enjoys in computer operating systems and
that Microsoft Office has in office productivity software. This may well have contributed
to Microsoft’s ability to continuously dominate this market space.
However, there are occasions when industry incumbents have nothing in their com-
petitive arsenal that is formidable enough to either discourage entry or put obstacles in
a newcomer’s path that will defeat its strategic efforts to become a viable competitor. In
the restaurant industry, for example, existing restaurants in a given geographic market
have few actions they can take to discourage a new restaurant from opening or to block
it from attracting enough patrons to be profitable. A fierce competitor like Nike was
unable to prevent newcomer Under Armour from rapidly growing its sales and market
share in sports apparel. Furthermore, there are occasions when industry incumbents
can be expected to refrain from taking or initiating any actions specifically aimed at
contesting a newcomer’s entry. In large industries, entry by small startup enterprises
normally poses no immediate or direct competitive threat to industry incumbents and
their entry is not likely to provoke defensive actions. For instance, a new online retailer
with sales prospects of maybe $5 to $10 million annually can reasonably expect to
escape competitive retaliation from much larger online retailers selling similar goods.
The less that a newcomer’s entry will adversely impact the sales and profitability of
industry incumbents, the more reasonable it is for potential entrants to expect industry
incumbents to refrain from reacting defensively.
Figure 3.5 summarizes the factors that cause the overall competitive pressure
from potential entrants to be strong or weak. An analysis of these factors can help
managers determine whether the threat of entry into their industry is high or low,
in general. But certain kinds of companies—those with sizable financial resources,
proven competitive capabilities, and a respected brand name—may be able to hurdle
an industry’s entry barriers even when they are high.4 For example, when Honda
opted to enter the U.S. lawn-mower market in competition against Toro, Snapper,
Craftsman, John Deere, and others, it was easily able to hurdle entry barriers that
would have been formidable to other newcomers because it had long-standing
expertise in gasoline engines and a reputation for quality and durability in automobiles
that gave it instant credibility with homeowners. As a result, Honda had to spend rela-
tively little on inducing dealers to handle the Honda lawn-mower line or attracting cus-
tomers. Similarly, Samsung’s brand reputation in televisions, DVD players, and other
electronics products gave it strong credibility in entering the market for smartphones—
Samsung’s Galaxy smartphones are now a formidable rival of Apple’s iPhone.
It is also important to recognize that the barriers to entering an industry can
become stronger or weaker over time. For example, once key patents preventing
new entry in the market for functional 3-D printers expired, the way was open for
new competition to enter this industry. On the other hand, new strategic actions
by incumbent firms to increase advertising, strengthen distributor–dealer relations,
step up R&D, or improve product quality can erect higher roadblocks to entry.
Competitive Pressures from the Sellers
of Substitute Products
Companies in one industry are vulnerable to competitive pressure from the actions of
companies in a closely adjoining industry whenever buyers view the products of the
two industries as good substitutes. Substitutes do not include other brands within your
Even high entry barriers
may not suffice to keep out
certain kinds of entrants:
those with resources and
capabilities that enable
them to leap over or bypass
the barriers.
High entry barriers and
weak entry threats today
do not always translate into
high entry barriers and weak
entry threats tomorrow.
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FIGURE 3.5 Factors Affecting the Threat of Entry
Rivalry
among
Competing
Sellers
Buyers
Substitutes
Suppliers
Competitive Pressures from Potential Entrants
Threat of entry is a stronger force when (1) incumbents are unlikely to make retaliatory moves against new
entrants and (2) entry barriers are low. Entry barriers are high (and threat of entry is low) when
• Incumbents have large cost advantages over potential entrants due to
− High economies of scale
− Significant experience-based cost advantages or learning curve e�ects
− Other cost advantages (e.g., favorable access to inputs, technology, location, or low fixed costs)
• Customers with strong brand preferences and/or loyalty to incumbent sellers
• Patents and other forms of intellectual property protection
• Strong network e�ects
• High capital requirements
• Limited new access to distribution channels and shelf space
• Restrictive government policies
• Restrictive trade policies
industry; this type of pressure comes from outside the industry. Substitute products
from outside the industry are those that can perform the same or similar functions
for the consumer as products within your industry. For instance, the producers of eye-
glasses and contact lenses face competitive pressures from the doctors who do correc-
tive laser surgery. Similarly, the producers of sugar experience competitive pressures
from the producers of sugar substitutes (high-fructose corn syrup, agave syrup, and
artificial sweeteners). Internet providers of news-related information have put brutal
competitive pressure on the publishers of newspapers. The makers of smartphones, by
building ever better cameras into their cell phones, have cut deeply into the sales of
producers of handheld digital cameras—most smartphone owners now use their phone
to take pictures rather than carrying a digital camera for picture-taking purposes.
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As depicted in Figure 3.6, three factors determine whether the competitive pressures
from substitute products are strong or weak. Competitive pressures are stronger when
1. Good substitutes are readily available and attractively priced. The presence of readily
available and attractively priced substitutes creates competitive pressure by placing
a ceiling on the prices industry members can charge without risking sales erosion.
This price ceiling, at the same time, puts a lid on the profits that industry members
can earn unless they find ways to cut costs.
2. Buyers view the substitutes as comparable or better in terms of quality, performance,
and other relevant attributes. The availability of substitutes inevitably invites custom-
ers to compare performance, features, ease of use, and other attributes besides
price. The users of paper cartons constantly weigh the price-performance trade-offs
FIGURE 3.6 Factors Affecting Competition from Substitute Products
Firms in Other Industries O�ering Substitute Products
Competitive pressures from substitutes are stronger when
• Good substitutes are readily available and attractively priced.
• Substitutes have comparable or better performance features.
• Buyers have low costs in switching to substitutes.
Competitive pressures from substitutes are weaker under
the opposite conditions.
Suppliers Buyers
Rivalry
among
Competing
Sellers
New Entrants
Indicators of increasing competitive
strength among substitutes
• Sales of substitutes are
growing faster than sales of
the industry being analyzed.
• Producers of substitutes are
moving to add new capacity.
• Profits of the producers of
substitutes are on the rise.
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with plastic containers and metal cans, for example. Movie enthusiasts are increas-
ingly weighing whether to go to movie theaters to watch newly released movies or
wait until they can watch the same movies streamed to their home TV by Netflix,
Amazon Prime, cable providers, and other on-demand sources.
3. The costs that buyers incur in switching to the substitutes are low. Low switching costs
make it easier for the sellers of attractive substitutes to lure buyers to their offer-
ings; high switching costs deter buyers from purchasing substitute products.
Some signs that the competitive strength of substitute products is increasing include
(1) whether the sales of substitutes are growing faster than the sales of the industry being
analyzed, (2) whether the producers of substitutes are investing in added capacity, and
(3) whether the producers of substitutes are earning progressively higher profits.
But before assessing the competitive pressures coming from substitutes, com-
pany managers must identify the substitutes, which is less easy than it sounds since it
involves (1) determining where the industry boundaries lie and (2) figuring out which
other products or services can address the same basic customer needs as those pro-
duced by industry members. Deciding on the industry boundaries is necessary for
determining which firms are direct rivals and which produce substitutes. This is a mat-
ter of perspective—there are no hard-and-fast rules, other than to say that other brands
of the same basic product constitute rival products and not substitutes. Ultimately, it’s
simply the buyer who decides what can serve as a good substitute.
Competitive Pressures Stemming from Supplier
Bargaining Power
Whether the suppliers of industry members represent a weak or strong competitive force
depends on the degree to which suppliers have sufficient bargaining power to influence
the terms and conditions of supply in their favor. Suppliers with strong bargaining power
are a source of competitive pressure because of their ability to charge industry members
higher prices, pass costs on to them, and limit their opportunities to find better deals.
For instance, Microsoft and Intel, both of which supply PC makers with essential com-
ponents, have been known to use their dominant market status not only to charge PC
makers premium prices but also to leverage their power over PC makers in other ways.
The bargaining power of these two companies over their customers is so great that both
companies have faced antitrust charges on numerous occasions. Prior to a legal agree-
ment ending the practice, Microsoft pressured PC makers to load only Microsoft prod-
ucts on the PCs they shipped. Intel has defended itself against similar antitrust charges,
but in filling orders for newly introduced Intel chips, it continues to give top priority
to PC makers that use the biggest percentages of Intel chips in their PC models. Being
on Intel’s list of preferred customers helps a PC maker get an early allocation of Intel’s
latest chips and thus allows the PC maker to get new models to market ahead of rivals.
Small-scale retailers often must contend with the power of manufacturers whose
products enjoy well-known brand names, since consumers expect to find these prod-
ucts on the shelves of the retail stores where they shop. This provides the manufacturer
with a degree of pricing power and often the ability to push hard for favorable shelf dis-
plays. Supplier bargaining power is also a competitive factor in industries where unions
have been able to organize the workforce (which supplies labor). Air pilot unions, for
example, have employed their bargaining power to increase pilots’ wages and benefits
in the air transport industry. The growing clout of the largest healthcare union in the
United States has led to better wages and working conditions in nursing homes.
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As shown in Figure 3.7, a variety of factors determine the strength of suppliers’
bargaining power. Supplier power is stronger when
• Demand for suppliers’ products is high and the products are in short supply. A surge
in the demand for particular items shifts the bargaining power to the suppliers of
those products; suppliers of items in short supply have pricing power.
• Suppliers provide differentiated inputs that enhance the performance of the industry’s
product. The more valuable a particular input is in terms of enhancing the per-
formance or quality of the products of industry members, the more bargaining
leverage suppliers have. In contrast, the suppliers of commodities are in a weak
bargaining position, since industry members have no reason other than price to
prefer one supplier over another.
• It is difficult or costly for industry members to switch their purchases from one supplier
to another. Low switching costs limit supplier bargaining power by enabling indus-
try members to change suppliers if any one supplier attempts to raise prices by
more than the costs of switching. Thus, the higher the switching costs of industry
members, the stronger the bargaining power of their suppliers.
• The supplier industry is dominated by a few large companies and it is more concen-
trated than the industry it sells to. Suppliers with sizable market shares and strong
demand for the items they supply generally have sufficient bargaining power to
charge high prices and deny requests from industry members for lower prices or
other concessions.
FIGURE 3.7 Factors Affecting the Bargaining Power of Suppliers
Suppliers
Supplier bargaining power is stronger when
• Suppliers’ products and/or services are in short supply.
• Suppliers’ products and/or services are di�erentiated.
• Industry members incur high costs in switching their
purchases to alternative suppliers.
• The supplier industry is more concentrated than the
industry it sells to and is dominated by a few large
companies.
• Industry members do not have the potential to
integrate backward in order to self-manufacture
their own inputs.
• Suppliers’ products do not account for more than
a small fraction of the total costs of the industry‘s
products.
• There are no good substitutes for what the suppliers
provide.
• Industry members do not account for a big fraction
of suppliers’ sales.
Supplier bargaining power is weaker under the
opposite conditions.
Buyers
Rivalry
among
Competing
Sellers
New Entrants
Substitutes
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• Industry members are incapable of integrating backward to self-manufacture items
they have been buying from suppliers. As a rule, suppliers are safe from the threat
of self-manufacture by their customers until the volume of parts a customer needs
becomes large enough for the customer to justify backward integration into self-
manufacture of the component. When industry members can threaten credibly to
self-manufacture suppliers’ goods, their bargaining power over suppliers increases
proportionately.
• Suppliers provide an item that accounts for no more than a small fraction of the costs
of the industry’s product. The more that the cost of a particular part or component
affects the final product’s cost, the more that industry members will be sensitive to
the actions of suppliers to raise or lower their prices. When an input accounts for
only a small proportion of total input costs, buyers will be less sensitive to price
increases. Thus, suppliers’ power increases when the inputs they provide do not
make up a large proportion of the cost of the final product.
• Good substitutes are not available for the suppliers’ products. The lack of readily avail-
able substitute inputs increases the bargaining power of suppliers by increasing the
dependence of industry members on the suppliers.
• Industry members are not major customers of suppliers. As a rule, suppliers have less
bargaining leverage when their sales to members of the industry constitute a big
percentage of their total sales. In such cases, the well-being of suppliers is closely
tied to the well-being of their major customers, and their dependence upon them
increases. The bargaining power of suppliers is stronger, then, when they are not
bargaining with major customers.
In identifying the degree of supplier power in an industry, it is important to recog-
nize that different types of suppliers are likely to have different amounts of bargaining
power. Thus, the first step is for managers to identify the different types of suppliers,
paying particular attention to those that provide the industry with important inputs.
The next step is to assess the bargaining power of each type of supplier separately.
Competitive Pressures Stemming from Buyer
Bargaining Power and Price Sensitivity
Whether buyers are able to exert strong competitive pressures on industry members
depends on (1) the degree to which buyers have bargaining power and (2) the extent to
which buyers are price-sensitive. Buyers with strong bargaining power can limit indus-
try profitability by demanding price concessions, better payment terms, or additional
features and services that increase industry members’ costs. Buyer price sensitivity
limits the profit potential of industry members by restricting the ability of sellers to
raise prices without losing revenue due to lost sales.
As with suppliers, the leverage that buyers have in negotiating favorable terms of
sale can range from weak to strong. Individual consumers seldom have much bar-
gaining power in negotiating price concessions or other favorable terms with sell-
ers. However, their price sensitivity varies by individual and by the type of product
they are buying (whether it’s a necessity or a discretionary purchase, for example).
Similarly, small businesses usually have weak bargaining power because of the small-
size orders they place with sellers. Many relatively small wholesalers and retailers
join buying groups to pool their purchasing power and approach manufacturers
for better terms than could be gotten individually. Large business buyers, in con-
trast, can have considerable bargaining power. For example, large retail chains like
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Walmart, Best Buy, Staples, and Home Depot typically have considerable bargaining
power in purchasing products from manufacturers, not only because they buy in large
quantities, but also because of manufacturers’ need for access to their broad base of
customers. Major supermarket chains like Kroger, Albertsons, Hannaford, and Aldi
have sufficient bargaining power to demand promotional allowances and lump-sum
payments (called slotting fees) from food products manufacturers in return for stock-
ing certain brands or putting them in the best shelf locations. Motor vehicle manu-
facturers have strong bargaining power in negotiating to buy original-equipment tires
from tire makers such as Bridgestone, Goodyear, Michelin, Continental, and Pirelli,
partly because they buy in large quantities and partly because consumers are more
likely to buy replacement tires that match the tire brand on their vehicle at the time
of its purchase. The starting point for the analysis of buyers as a competitive force
is to identify the different types of buyers along the value chain—then proceed to
analyzing the bargaining power and price sensitivity of each type separately. It is
important to recognize that not all buyers of an industry’s product have equal degrees of
bargaining power with sellers, and some may be less sensitive than others to price, quality,
or service differences.
Figure 3.8 summarizes the factors determining the strength of buyer power in an
industry. The top of this chart lists the factors that increase buyers’ bargaining power,
FIGURE 3.8 Factors Affecting the Power of Buyers
Buyers
Competitive pressures from buyers increase when
they have strong bargaining power and are price-
sensitive.
Buyer bargaining power is stronger when
• Buyer demand is weak in relation to industry supply.
• The industry’s products are standardized or
undi�erentiated.
• Buyer costs of switching to competing products
are low.
• Buyers are large and few in number relative to
the number of industry sellers.
• Buyers pose a credible threat of integrating backward
into the business of sellers.
• Buyers are well informed about the quality, prices,
and costs of sellers.
• Buyers have the ability to postpone purchases.
Buyers are price-sensitive when
• Buyers earn low profits or low income.
• The product represents a significant fraction of
their purchases.
• The product is undi�erentiated or quality is not
an important factor.
Competitive pressures from buyers decrease under
the opposite conditions.
Rivalry
among
Competing
Sellers
Suppliers
Substitutes
New Entrants
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which we discuss next. Note that the first five factors are the mirror image of those
determining the bargaining power of suppliers.
Buyer bargaining power is stronger when
• Buyer demand is weak in relation to the available supply. Weak or declining demand
and the resulting excess supply create a “buyers’ market,” in which bargain-hunting
buyers have leverage in pressing industry members for better deals and special
treatment. Conversely, strong or rapidly growing market demand creates a “sellers’
market” characterized by tight supplies or shortages—conditions that put buyers in
a weak position to wring concessions from industry members.
• Industry goods are standardized or differentiation is weak. In such circumstances,
buyers make their selections on the basis of price, which increases price competi-
tion among vendors.
• Buyers’ costs of switching to competing brands or substitutes are relatively low.
Switching costs put a cap on how much industry producers can raise prices or
reduce quality before they will lose the buyer’s business.
• Buyers are large and few in number relative to the number of sellers. The larger the
buyers, the more important their business is to the seller and the more sellers will
be willing to grant concessions.
• Buyers pose a credible threat of integrating backward into the business of sellers. Beer
producers like Anheuser Busch InBev SA/NV (whose brands include Budweiser,
Molson Coors, and Heineken) have partially integrated backward into metal-can
manufacturing to gain bargaining power in obtaining the balance of their can
requirements from otherwise powerful metal-can manufacturers.
• Buyers are well informed about the product offerings of sellers (product features and
quality, prices, buyer reviews) and the cost of production (an indicator of markup).
The more information buyers have, the better bargaining position they are in. The
mushrooming availability of product information on the Internet (and its ready
access on smartphones) is giving added bargaining power to consumers, since they
can use this to find or negotiate better deals. Apps such as ShopSavvy and BuyVia
are now making comparison shopping even easier.
• Buyers have discretion to delay their purchases or perhaps even not make a purchase
at all. Consumers often have the option to delay purchases of durable goods (cars,
major appliances), or decline to buy discretionary goods (massages, concert tick-
ets) if they are not happy with the prices offered. Business customers may also be
able to defer their purchases of certain items, such as plant equipment or mainte-
nance services. This puts pressure on sellers to provide concessions to buyers so
that the sellers can keep their sales numbers from dropping off.
Whether Buyers Are More or Less Price Sensitive Low-income and budget-
constrained consumers are almost always price sensitive; bargain-hunting consumers
are highly price sensitive by nature. Most consumers grow more price sensitive as the
price tag of an item becomes a bigger fraction of their spending budget. Similarly, busi-
ness buyers besieged by weak sales, intense competition, and other factors squeezing
their profit margins are price sensitive. Price sensitivity also grows among businesses
as the cost of an item becomes a bigger fraction of their cost structure. Rising prices
of frequently purchased items heightens the price sensitivity of all types of buyers. On
the other hand, the price sensitivity of all types of buyers decreases the more that the
quality of the product matters.
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The following factors increase buyer price sensitivity and result in greater competi-
tive pressures on the industry as a result:
• Buyer price sensitivity increases when buyers are earning low profits or have low
income. Price is a critical factor in the purchase decisions of low-income consumers
and companies that are barely scraping by. In such cases, their high price sensitiv-
ity limits the ability of sellers to charge high prices.
• Buyers are more price-sensitive if the product represents a large fraction of their total
purchases. When a purchase eats up a large portion of a buyer’s budget or repre-
sents a significant part of his or her cost structure, the buyer cares more about
price than might otherwise be the case.
• Buyers are more price-sensitive when the quality of the product is not uppermost in their
considerations. Quality matters little when products are relatively undifferentiated,
leading buyers to focus more on price. But when quality affects performance, or
can reduce a business buyer’s other costs (by saving on labor, materials, etc.), price
will matter less.
Is the Collective Strength of the Five Competitive
Forces Conducive to Good Profitability?
Assessing whether each of the five competitive forces gives rise to strong, moderate, or
weak competitive pressures sets the stage for evaluating whether, overall, the strength
of the five forces is conducive to good profitability. Is any of the competitive forces suf-
ficiently powerful to undermine industry profitability? Can companies in this industry
reasonably expect to earn decent profits in light of the prevailing competitive forces?
The most extreme case of a “competitively unattractive” industry occurs when all
five forces are producing strong competitive pressures: Rivalry among sellers is vigor-
ous, low entry barriers allow new rivals to gain a market foothold, competition from
substitutes is intense, and both suppliers and buyers are able to exercise considerable
leverage. Strong competitive pressures coming from all five directions drive industry
profitability to unacceptably low levels, frequently producing losses for many industry
members and forcing some out of business. But an industry can be competitively unat-
tractive without all five competitive forces being strong. In fact, intense competitive
pressures from just one of the five forces may suffice to destroy the conditions for good
profitability and prompt some companies to exit the business.
As a rule, the strongest competitive forces determine the extent of the competitive
pressure on industry profitability. Thus, in evaluating the strength of the five forces
overall and their effect on industry profitability, managers should look to the stron-
gest forces. Having more than one strong force will not worsen the effect on industry
profitability, but it does mean that the industry has multiple competitive challenges
with which to cope. In that sense, an industry with three to five strong forces is even
more “unattractive” as a place to compete. Especially intense competitive conditions
due to multiple strong forces seem to be the norm in tire manufacturing, apparel, and
commercial airlines, three industries where profit margins have historically been thin.
In contrast, when the overall impact of the five competitive forces is moderate to
weak, an industry is “attractive” in the sense that the average industry member can
reasonably expect to earn good profits and a nice return on investment. The ideal
competitive environment for earning superior profits is one in which both suppliers
and customers have limited power, there are no good substitutes, high barriers block
further entry, and rivalry among present sellers is muted. Weak competition is the best
CORE CONCEPT
The strongest of the five
forces determines the extent
of the downward pressure
on an industry’s profitability.
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of all possible worlds for also-ran companies because even they can usually eke out a
decent profit—if a company can’t make a decent profit when competition is weak, then
its business outlook is indeed grim.
Matching Company Strategy
to Competitive Conditions
Working through the five forces model step by step not only aids strategy makers
in assessing whether the intensity of competition allows good profitability but also
promotes sound strategic thinking about how to better match company strategy
to the specific competitive character of the marketplace. Effectively matching a
company’s business strategy to prevailing competitive conditions has two aspects:
1. Pursuing avenues that shield the firm from as many of the different competitive
pressures as possible.
2. Initiating actions calculated to shift the competitive forces in the company’s
favor by altering the underlying factors driving the five forces.
But making headway on these two fronts first requires identifying competitive
pressures, gauging the relative strength of each of the five competitive forces, and gain-
ing a deep enough understanding of the state of competition in the industry to know
which strategy buttons to push.
A company’s strategy is
strengthened the more it
provides insulation from
competitive pressures, shifts
the competitive battle in the
company’s favor, and posi-
tions the firm to take advan-
tage of attractive growth
opportunities.
COMPLEMENTORS AND THE VALUE NET
Not all interactions among industry participants are necessarily competitive in nature.
Some have the potential to be cooperative, as the value net framework demonstrates.
Like the five forces framework, the value net includes an analysis of buyers, suppliers,
and substitutors (see Figure 3.9). But it differs from the five forces framework in sev-
eral important ways.
First, the analysis focuses on the interactions of industry participants with a
particular company. Thus it places that firm in the center of the framework, as
Figure 3.9 shows. Second, the category of “competitors” is defined to include not
only the focal firm’s direct competitors or industry rivals but also the sellers of sub-
stitute products and potential entrants. Third, the value net framework introduces a
new category of industry participant that is not found in the five forces framework—
that of “complementors.” Complementors are the producers of complementary prod-
ucts, which are products that enhance the value of the focal firm’s products when
they are used together. Some examples include snorkels and swim fins or shoes and
shoelaces.
The inclusion of complementors draws particular attention to the fact that suc-
cess in the marketplace need not come at the expense of other industry participants.
Interactions among industry participants may be cooperative in nature rather than
competitive. In the case of complementors, an increase in sales for them is likely to
increase the sales of the focal firm as well. But the value net framework also encour-
ages managers to consider other forms of cooperative interactions and realize that
value is created jointly by all industry participants. For example, a company’s suc-
cess in the marketplace depends on establishing a reliable supply chain for its inputs,
which implies the need for cooperative relations with its suppliers. Often a firm works
CORE CONCEPT
Complementors are the
producers of complemen-
tary products, which are
products that enhance the
value of the focal firm’s
products when they are
used together.
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hand in hand with its suppliers to ensure a smoother, more efficient operation for both
parties. Newell-Rubbermaid, and Procter & Gamble for example, work cooperatively
as suppliers to companies such as Walmart, Target, and Kohl’s. Even direct rivals
may work cooperatively if they participate in industry trade associations or engage in
joint lobbying efforts. Value net analysis can help managers discover the potential to
improve their position through cooperative as well as competitive interactions.
FIGURE 3.9 The Value Net
Customers
Suppliers
The FirmCompetitors Complementors
(Includes
substitutors and
potential entrants)
INDUSTRY DYNAMICS AND THE
FORCES DRIVING CHANGE
While it is critical to understand the nature and intensity of competitive and coopera-
tive forces in an industry, it is equally critical to understand that the intensity of these
forces is fluid and subject to change. All industries are affected by new developments
and ongoing trends that alter industry conditions, some more speedily than others.
The popular hypothesis that industries go through a life cycle of takeoff, rapid growth,
maturity, market saturation and slowing growth, followed by stagnation or decline is
but one aspect of industry change—many other new developments and emerging trends
cause industry change.5 Any strategies devised by management will therefore play
out in a dynamic industry environment, so it’s imperative that managers consider the
factors driving industry change and how they might affect the industry environment.
Moreover, with early notice, managers may be able to influence the direction or scope
of environmental change and improve the outlook.
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CORE CONCEPT
Driving forces are the major
underlying causes of change
in industry and competitive
conditions.
Industry and competitive conditions change because forces are enticing or pres-
suring certain industry participants (competitors, customers, suppliers, complemen-
tors) to alter their actions in important ways. The most powerful of the change
agents are called driving forces because they have the biggest influences in reshap-
ing the industry landscape and altering competitive conditions. Some driving forces
originate in the outer ring of the company’s macro-environment (see Figure 3.2),
but most originate in the company’s more immediate industry and competitive
environment.
Driving-forces analysis has three steps: (1) identifying what the driving forces are;
(2) assessing whether the drivers of change are, on the whole, acting to make the indus-
try more or less attractive; and (3) determining what strategy changes are needed to
prepare for the impact of the driving forces. All three steps merit further discussion.
Identifying the Forces Driving Industry Change
Many developments can affect an industry powerfully enough to qualify as driving
forces. Some drivers of change are unique and specific to a particular industry situa-
tion, but most drivers of industry and competitive change fall into one of the following
categories:
• Changes in an industry’s long-term growth rate. Shifts in industry growth up or down
have the potential to affect the balance between industry supply and buyer demand,
entry and exit, and the character and strength of competition. Whether demand is
growing or declining is one of the key factors influencing the intensity of rivalry in
an industry, as explained earlier. But the strength of this effect will depend on how
changes in the industry growth rate affect entry and exit in the industry. If entry
barriers are low, then growth in demand will attract new entrants, increasing the
number of industry rivals and changing the competitive landscape.
• Increasing globalization. Globalization can be precipitated by such factors as
the blossoming of consumer demand in developing countries, the availability of
lower-cost foreign inputs, and the reduction of trade barriers, as has occurred
recently in many parts of Latin America and Asia. Significant differences in labor
costs among countries give manufacturers a strong incentive to locate plants for
labor-intensive products in low-wage countries and use these plants to supply
market demand across the world. Wages in China, India, Vietnam, Mexico, and
Brazil, for example, are much lower than those in the United States, Germany,
and Japan. The forces of globalization are sometimes such a strong driver that
companies find it highly advantageous, if not necessary, to spread their oper-
ating reach into more and more country markets. Globalization is very much
a driver of industry change in such industries as energy, mobile phones, steel,
social media, public accounting, commercial aircraft, electric power generation
equipment, and pharmaceuticals.
• Emerging new Internet capabilities and applications. Mushrooming use of high-speed
Internet service and Voice-over-Internet-Protocol (VoIP) technology, growing
acceptance of online shopping, and the exploding popularity of Internet applica-
tions (“apps”) have been major drivers of change in industry after industry. The
Internet has allowed online discount stock brokers, such as E*TRADE, and TD
Ameritrade to mount a strong challenge against full-service firms such as Edward
Jones and Merrill Lynch. The newspaper industry has yet to figure out a strategy
for surviving the advent of online news.
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Massive open online courses (MOOCs) facilitated by organizations such as
Coursera, edX, and Udacity are profoundly affecting higher education. The “Internet
of things” will feature faster speeds, dazzling applications, and billions of connected
gadgets performing an array of functions, thus driving further industry and competitive
changes. But Internet-related impacts vary from industry to industry. The challenges
are to assess precisely how emerging Internet developments are altering a particular
industry’s landscape and to factor these impacts into the strategy-making equation.
• Shifts in who buys the products and how the products are used. Shifts in buyer demo-
graphics and the ways products are used can greatly alter competitive conditions.
Longer life expectancies and growing percentages of relatively well-to-do retirees, for
example, are driving demand growth in such industries as cosmetic surgery, assisted
living residences, and vacation travel. The burgeoning popularity of streaming video
has affected broadband providers, wireless phone carriers, and television broadcasters,
and created opportunities for such new entertainment businesses as Hulu and Netflix.
• Technological change and manufacturing process innovation. Advances in technology
can cause disruptive change in an industry by introducing substitutes or can alter
the industry landscape by opening up whole new industry frontiers. For instance,
revolutionary change in autonomous system technology has put Google, Tesla,
Apple, and every major automobile manufacturer into a race to develop viable self-
driving vehicles.
• Product innovation. An ongoing stream of product innovations tends to alter the
pattern of competition in an industry by attracting more first-time buyers, rejuve-
nating industry growth, and/or increasing product differentiation, with concomi-
tant effects on rivalry, entry threat, and buyer power. Product innovation has been
a key driving force in the smartphone industry, which in an ever more connected
world is driving change in other industries. Philips Lighting Hue bulbs now allow
homeowners to use a smartphone app to remotely turn lights on and off, blink
if an intruder is detected, and create a wide range of white and color ambiances.
Wearable action-capture cameras and unmanned aerial view drones are rapidly
becoming a disruptive force in the digital camera industry by enabling photography
shots and videos not feasible with handheld digital cameras.
• Marketing innovation. When firms are successful in introducing new ways to market
their products, they can spark a burst of buyer interest, widen industry demand,
increase product differentiation, and lower unit costs—any or all of which can alter
the competitive positions of rival firms and force strategy revisions. Consider, for
example, the growing propensity of advertisers to place a bigger percentage of their
ads on social media sites like Facebook and Twitter.
• Entry or exit of major firms. Entry by a major firm thus often produces a new
ball game, not only with new key players but also with new rules for competing.
Similarly, exit of a major firm changes the competitive structure by reducing the
number of market leaders and increasing the dominance of the leaders who remain.
• Diffusion of technical know-how across companies and countries. As knowledge about
how to perform a particular activity or execute a particular manufacturing technol-
ogy spreads, products tend to become more commodity-like. Knowledge diffusion
can occur through scientific journals, trade publications, onsite plant tours, word of
mouth among suppliers and customers, employee migration, and Internet sources.
• Changes in cost and efficiency. Widening or shrinking differences in the costs among
key competitors tend to dramatically alter the state of competition. Declining costs
of producing tablets have enabled price cuts and spurred tablet sales (especially
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lower-priced models) by making them more affordable to lower-income households
worldwide. Lower cost e-books are cutting into sales of costlier hardcover books as
increasing numbers of consumers have laptops, iPads, Kindles, and other brands of
tablets.
• Reductions in uncertainty and business risk. Many companies are hesitant to enter
industries with uncertain futures or high levels of business risk because it is unclear
how much time and money it will take to overcome various technological hurdles
and achieve acceptable production costs (as is the case in the solar power indus-
try). Over time, however, diminishing risk levels and uncertainty tend to stimulate
new entry and capital investments on the part of growth-minded companies seeking
new opportunities, thus dramatically altering industry and competitive conditions.
• Regulatory influences and government policy changes. Government regulatory
actions can often mandate significant changes in industry practices and strategic
approaches—as has recently occurred in the world’s banking industry. New rules
and regulations pertaining to government-sponsored health insurance programs
are driving changes in the health care industry. In international markets, host gov-
ernments can drive competitive changes by opening their domestic markets to for-
eign participation or closing them to protect domestic companies.
• Changing societal concerns, attitudes, and lifestyles. Emerging social issues as well
as changing attitudes and lifestyles can be powerful instigators of industry change.
Growing concern about the effects of climate change has emerged as a major
driver of change in the energy industry. Concerns about the use of chemi-
cal additives and the nutritional content of food products have been driving
changes in the restaurant and food industries. Shifting societal concerns, atti-
tudes, and lifestyles alter the pattern of competition, favoring those players that
respond with products targeted to the new trends and conditions.
While many forces of change may be at work in a given industry, no more than
three or four are likely to be true driving forces powerful enough to qualify as the
major determinants of why and how the industry is changing. Thus, company strate-
gists must resist the temptation to label every change they see as a driving force.
Table 3.3 lists the most common driving forces.
The most important part of
driving-forces analysis is
to determine whether the
collective impact of the driv-
ing forces will increase or
decrease market demand,
make competition more
or less intense, and lead
to higher or lower industry
profitability.
• Changes in the long-term industry growth rate
• Increasing globalization
• Emerging new Internet capabilities and applications
• Shifts in buyer demographics
• Technological change and manufacturing process innovation
• Product and marketing innovation
• Entry or exit of major firms
• Diffusion of technical know-how across companies and countries
• Changes in cost and efficiency
• Reductions in uncertainty and business risk
• Regulatory influences and government policy changes
• Changing societal concerns, attitudes, and lifestyles
TABLE 3.3 The Most Common Drivers of Industry Change
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Assessing the Impact of the Forces Driving
Industry Change
The second step in driving-forces analysis is to determine whether the prevailing
change drivers, on the whole, are acting to make the industry environment more or less
attractive. Three questions need to be answered:
The real payoff of driving-
forces analysis is to help
managers understand
what strategy changes
are needed to prepare for
the impacts of the driving
forces.
•
LO 3-3
Map the market
positions of key groups
of industry rivals.
STRATEGIC GROUP ANALYSIS
Within an industry, companies commonly sell in different price/quality ranges, appeal
to different types of buyers, have different geographic coverage, and so on. Some are
more attractively positioned than others. Understanding which companies are strongly
positioned and which are weakly positioned is an integral part of analyzing an indus-
try’s competitive structure. The best technique for revealing the market positions of
industry competitors is strategic group mapping.
Using Strategic Group Maps to Assess the Market
Positions of Key Competitors
A strategic group consists of those industry members with similar competitive
approaches and positions in the market. Companies in the same strategic group can
1. Are the driving forces, on balance, acting to cause demand for the industry’s
product to increase or decrease?
2. Is the collective impact of the driving forces making competition more or less
intense?
3. Will the combined impacts of the driving forces lead to higher or lower industry
profitability?
Getting a handle on the collective impact of the driving forces requires looking
at the likely effects of each factor separately, since the driving forces may not all be
pushing change in the same direction. For example, one driving force may be acting
to spur demand for the industry’s product while another is working to curtail demand.
Whether the net effect on industry demand is up or down hinges on which change
driver is the most powerful.
Adjusting the Strategy to Prepare for the Impacts of
Driving Forces
The third step in the strategic analysis of industry dynamics—where the real payoff for
strategy making comes—is for managers to draw some conclusions about what strat-
egy adjustments will be needed to deal with the impacts of the driving forces. But taking
the “right” kinds of actions to prepare for the industry and competitive changes being
wrought by the driving forces first requires accurate diagnosis of the forces driving
industry change and the impacts these forces will have on both the industry environ-
ment and the company’s business. To the extent that managers are unclear about the
drivers of industry change and their impacts, or if their views are off-base, the chances of
making astute and timely strategy adjustments are slim. So driving-forces analysis is not
something to take lightly; it has practical value and is basic to the task of thinking stra-
tegically about where the industry is headed and how to prepare for the changes ahead.
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resemble one another in a variety of ways. They may have comparable product-line
breadth, sell in the same price/quality range, employ the same distribution channels,
depend on identical technological approaches, compete in much the same geographic
areas, or offer buyers essentially the same product attributes or similar services and
technical assistance.6 Evaluating strategy options entails examining what strategic
groups exist, identifying the companies within each group, and determining if a com-
petitive “white space” exists where industry competitors are able to create and cap-
ture altogether new demand. As part of this process, the number of strategic groups
in an industry and their respective market positions can be displayed on a strategic
group map.
The procedure for constructing a strategic group map is straightforward:
• Identify the competitive characteristics that delineate strategic approaches
used in the industry. Typical variables used in creating strategic group maps are
price/quality range (high, medium, low), geographic coverage (local, regional,
national, global), product-line breadth (wide, narrow), degree of service offered
(no frills, limited, full), use of distribution channels (retail, wholesale, Internet,
multiple), degree of vertical integration (none, partial, full), and degree of diver-
sification into other industries (none, some, considerable).
• Plot the firms on a two-variable map using pairs of these variables.
• Assign firms occupying about the same map location to the same strategic group.
• Draw circles around each strategic group, making the circles proportional to the
size of the group’s share of total industry sales revenues.
This produces a two-dimensional diagram like the one for the U.S. casual dining
industry in Illustration Capsule 3.1.
Several guidelines need to be observed in creating strategic group maps. First, the
two variables selected as axes for the map should not be highly correlated; if they are,
the circles on the map will fall along a diagonal and reveal nothing more about the
relative positions of competitors than would be revealed by comparing the rivals on
just one of the variables. For instance, if companies with broad product lines use mul-
tiple distribution channels while companies with narrow lines use a single distribution
channel, then looking at the differences in distribution-channel approaches adds no
new information about positioning.
Second, the variables chosen as axes for the map should reflect important
differences among rival approaches—when rivals differ on both variables, the
locations of the rivals will be scattered, thus showing how they are positioned
differently. Third, the variables used as axes don’t have to be either quantitative
or continuous; rather, they can be discrete variables, defined in terms of distinct
classes and combinations. Fourth, drawing the sizes of the circles on the map
proportional to the combined sales of the firms in each strategic group allows the
map to reflect the relative sizes of each strategic group. Fifth, if more than two
good variables can be used as axes for the map, then it is wise to draw several maps
to give different exposures to the competitive positioning relationships present in
the industry’s structure—there is not necessarily one best map for portraying how
competing firms are positioned.
The Value of Strategic Group Maps
Strategic group maps are revealing in several respects. The most important has to
do with identifying which industry members are close rivals and which are distant
rivals. Firms in the same strategic group are the closest rivals; the next closest rivals
CORE CONCEPT
Strategic group mapping is
a technique for displaying
the different market or com-
petitive positions that rival
firms occupy in the industry.
CORE CONCEPT
A strategic group is a clus-
ter of industry rivals that
have similar competitive
approaches and market
positions.
Strategic group maps reveal
which companies are close
competitors and which are
distant competitors.
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ILLUSTRATION
CAPSULE 3.1
Note: Circles are drawn roughly proportional to the sizes of the chains, based on revenues.
Comparative Market Positions of Selected
Companies in the Casual Dining Industry:
A Strategic Group Map Example
Few U.S. Locations
Low
Moderate
High
Many U.S. Locations
Geographic Coverage
P
ri
ce
/S
er
vi
ce
/R
es
ta
ur
an
t A
m
bi
an
ce
International
Maggiano’s
Little Italy, P.F.
Chang’s
Olive Garden,
Longhorn
Steakhouse
Hard Rock
Café, Outback
Steakhouse
Applebee’s, Chili’s,
On the Border,
TGI Friday’s
Cracker Barrel, Red
Lobster, Golden
Corral
Five Guys, Bu�alo
Wild Wings, Firehouse
Subs, Moe’s
Southwest Grill
Jason’s Deli,
McAlister’s
Deli, Fazoli’s
BJ’s Restaurant &
Brewery, The
Cheesecake Factory,
Carrabba’s Italian
Grille
Corner Bakery Café,
Atlanta Bread
Company
Panera
Bread
Company
California
Pizza
Kitchen
are in the immediately adjacent groups. Often, firms in strategic groups that are far
apart on the map hardly compete at all. For instance, Walmart’s clientele, merchandise
selection, and pricing points are much too different to justify calling Walmart a close
competitor of Neiman Marcus or Saks Fifth Avenue. For the same reason, the beers
produced by Yuengling are really not in competition with the beers produced by Pabst.
The second thing to be gleaned from strategic group mapping is that not all posi-
tions on the map are equally attractive.7 Two reasons account for why some positions can
be more attractive than others:
1. Prevailing competitive pressures from the industry’s five forces may cause the profit
potential of different strategic groups to vary. The profit prospects of firms in dif-
ferent strategic groups can vary from good to poor because of differing degrees
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of competitive rivalry within strategic groups, differing pressures from potential
entrants to each group, differing degrees of exposure to competition from substi-
tute products outside the industry, and differing degrees of supplier or customer
bargaining power from group to group. For instance, in the ready-to-eat cereal
industry, there are significantly higher entry barriers (capital requirements, brand
loyalty, etc.) for the strategic group comprising the large branded-cereal makers
than for the group of generic-cereal makers or the group of small natural-cereal
producers. Differences among the branded rivals versus the generic cereal mak-
ers make rivalry stronger within the generic-cereal strategic group. Among apparel
retailers, the competitive battle between Marshall’s and TJ MAXX is more intense
(with consequently smaller profit margins) than the rivalry among Prada, Burberry,
Gucci, Armani, and other high-end fashion retailers.
2. Industry driving forces may favor some strategic groups and hurt others. Likewise,
industry driving forces can boost the business outlook for some strategic groups and
adversely impact the business prospects of others. In the energy industry, produc-
ers of renewable energy, such as solar and wind power, are gaining ground over
fossil fuel based producers due to improvements in technology and increased
concern over climate change. Firms in strategic groups that are being adversely
impacted by driving forces may try to shift to a more favorably situated position.
If certain firms are known to be trying to change their competitive positions
on the map, then attaching arrows to the circles showing the targeted direction
helps clarify the picture of competitive maneuvering among rivals.
Thus, part of strategic group map analysis always entails drawing conclusions
about where on the map is the “best” place to be and why. Which companies/strategic
groups are destined to prosper because of their positions? Which companies/strategic
groups seem destined to struggle? What accounts for why some parts of the map are
better than others? Since some strategic groups are more attractive than others, one
might ask why less well-positioned firms do not simply migrate to the more attractive
position. The answer is that mobility barriers restrict movement between groups in the
same way that entry barriers prevent easy entry into attractive industries. The most
profitable strategic groups may be protected from entry by high mobility barriers.
Some strategic groups are
more favorably positioned
than others because they
confront weaker competi-
tive forces and/or because
they are more favorably
impacted by industry driving
forces.
CORE CONCEPT
Mobility barriers restrict
firms in one strategic group
from entering another more
attractive strategic group in
the same industry.
COMPETITOR ANALYSIS AND
THE SOAR FRAMEWORK
Unless a company pays attention to the strategies and situations of competitors and
has some inkling of what moves they will be making, it ends up flying blind into
competitive battle. As in sports, scouting the opposition is an essential part of game
plan development. Gathering competitive intelligence about the strategic direction
and likely moves of key competitors allows a company to prepare defensive coun-
termoves, to craft its own strategic moves with some confidence about what mar-
ket maneuvers to expect from rivals in response, and to exploit any openings that
arise from competitors’ missteps. The question is where to look for such informa-
tion, since rivals rarely reveal their strategic intentions openly. If information is not
directly available, what are the best indicators?
Michael Porter’s SOAR Framework for Competitor Analysis points to four indica-
tors of a rival’s likely strategic moves and countermoves. These include a rival’s Strategy,
Studying competitors’ past
behavior and preferences
provides a valuable assist
in anticipating what moves
rivals are likely to make next
and outmaneuvering them
in the marketplace.
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Objectives, Assumptions about itself and the industry, and Resources and capabilities, as
shown in Figure 3.10. A strategic profile of a competitor that provides good clues to its
behavioral proclivities can be constructed by characterizing the rival along these four
dimensions. By “behavioral proclivities,” we mean what competitive moves a rival is likely
to make and how they are likely to react to the competitive moves of your company—its
probable actions and reactions. By listing all that you know about a competitor (or a set of
competitors) with respect to each of the four elements of the SOAR framework, you are
likely to gain some insight about how the rival will behave in the near term. And knowl-
edge of this sort can help you to predict how this will affect you, and how you should posi-
tion yourself to respond. That is, what should you do to protect yourself or gain advantage
now (in advance); and what should you do in response to your rivals next moves?
Current Strategy To succeed in predicting a competitor’s next moves, company strate-
gists need to have a good understanding of each rival’s current strategy, as an indicator of
its pattern of behavior and best strategic options. Questions to consider include: How is
the competitor positioned in the market? What is the basis for its competitive advantage
(if any)? What kinds of investments is it making (as an indicator of its growth trajectory)?
Objectives An appraisal of a rival’s objectives should include not only its financial
performance objectives but strategic ones as well (such as those concerning market
share). What is even more important is to consider the extent to which the rival is
meeting these objectives and whether it is under pressure to improve. Rivals with good
financial performance are likely to continue their present strategy with only minor fine-
tuning. Poorly performing rivals are virtually certain to make fresh strategic moves.
FIGURE 3.10 The SOAR Framework for Competitor Analysis
The Rival’s Likely
Moves and
Countermoves
ASSUMPTIONS
What the rival believes
about itself and
the industry
OBJECTIVES
The rival’s strategic and
performance objectives
STRATEGY
How the rival company is
competing currently
The rival’s key strengths
and weaknesses
RESOURCES AND
CAPABILITIES
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Resources and Capabilities A rival’s strategic moves and countermoves are both
enabled and constrained by the set of resources and capabilities the rival has at hand.
Thus a rival’s resources and capabilities (and efforts to acquire new resources and capa-
bilities) serve as a strong signal of future strategic actions (and reactions to your com-
pany’s moves). Assessing a rival’s resources and capabilities involves sizing up not only
its strengths in this respect but its weaknesses as well.
Assumptions How a rival’s top managers think about their strategic situation can
have a big impact on how the rival behaves. Banks that believe they are “too big to
fail,” for example, may take on more risk than is financially prudent. Assessing a rival’s
assumptions entails considering its assumptions about itself as well as about the indus-
try it participates in.
Information regarding these four analytic components can often be gleaned from
company press releases, information posted on the company’s website (especially the
presentations management has recently made to securities analysts), and such public
documents as annual reports and 10-K filings. Many companies also have a competi-
tive intelligence unit that sifts through the available information to construct up-to-
date strategic profiles of rivals.8
Doing the necessary detective work can be time-consuming, but scouting competi-
tors well enough to anticipate their next moves allows managers to prepare effective
countermoves (perhaps even beat a rival to the punch) and to take rivals’ probable
actions into account in crafting their own best course of action.
KEY SUCCESS FACTORS
An industry’s key success factors (KSFs) are those competitive factors that most affect
industry members’ ability to survive and prosper in the marketplace: the particular
strategy elements, product attributes, operational approaches, resources, and competi-
tive capabilities that spell the difference between being a strong competitor and a weak
competitor—and between profit and loss. KSFs by their very nature are so important
to competitive success that all firms in the industry must pay close attention to them
or risk becoming an industry laggard or failure. To indicate the significance of KSFs
another way, how well the elements of a company’s strategy measure up against an
industry’s KSFs determines whether the company can meet the basic criteria for sur-
viving and thriving in the industry. Identifying KSFs, in light of the prevailing and
anticipated industry and competitive conditions, is therefore always a top priority in
analytic and strategy-making considerations. Company strategists need to understand the
industry landscape well enough to separate the factors most important to competitive suc-
cess from those that are less important.
Key success factors vary from industry to industry, and even from time to time
within the same industry, as change drivers and competitive conditions change. But
regardless of the circumstances, an industry’s key success factors can always be
deduced by asking the same three questions:
1. On what basis do buyers of the industry’s product choose between the competing brands
of sellers? That is, what product attributes and service characteristics are crucial?
2. Given the nature of competitive rivalry prevailing in the marketplace, what resources
and competitive capabilities must a company have to be competitively successful?
3. What shortcomings are almost certain to put a company at a significant competi-
tive disadvantage?
CORE CONCEPT
Key success factors are the
strategy elements, prod-
uct and service attributes,
operational approaches,
resources, and competitive
capabilities that are essen-
tial to surviving and thriving
in the industry.
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ILLUSTRATION
CAPSULE 3.2
Those who gather competitive intelligence on rivals can
sometimes cross the fine line between honest inquiry
and unethical or even illegal behavior. For example, call-
ing rivals to get information about prices, the dates of
new product introductions, or wage and salary levels is
legal, but misrepresenting one’s company affiliation dur-
ing such calls is unethical. Pumping rivals’ representa-
tives at trade shows is ethical only if one wears a name
tag with accurate company affiliation indicated.
Avon Products at one point secured information
about its biggest rival, Mary Kay Cosmetics (MKC),
by having its personnel search through the garbage
bins outside MKC’s headquarters. When MKC officials
learned of the action and sued, Avon claimed it did noth-
ing illegal since a 1988 Supreme Court case had ruled
that trash left on public property (in this case, a side-
walk) was anyone’s for the taking. Avon even produced
a videotape of its removal of the trash at the MKC site.
Avon won the lawsuit—but Avon’s action, while legal,
scarcely qualifies as ethical.
Business Ethics and Competitive Intelligence
Only rarely are there more than five key factors for competitive success. And even
among these, two or three usually outrank the others in importance. Managers should
therefore bear in mind the purpose of identifying key success factors—to determine
which factors are most important to competitive success—and resist the temptation to
label a factor that has only minor importance as a KSF.
In the beer industry, for example, although there are many types of buyers (whole-
sale, retail, end consumer), it is most important to understand the preferences and
buying behavior of the beer drinkers. Their purchase decisions are driven by price,
taste, convenient access, and marketing. Thus the KSFs include a strong network of
wholesale distributors (to get the company’s brand stocked and favorably displayed in
retail outlets, bars, restaurants, and stadiums, where beer is sold) and clever advertis-
ing (to induce beer drinkers to buy the company’s brand and thereby pull beer sales
through the established wholesale and retail channels). Because there is a potential for
strong buyer power on the part of large distributors and retail chains, competitive suc-
cess depends on some mechanism to offset that power, of which advertising (to create
demand pull) is one. Thus the KSFs also include superior product differentiation (as in
microbrews) or superior firm size and branding capabilities (as in national brands). The
KSFs also include full utilization of brewing capacity (to keep manufacturing costs low
and offset the high costs of advertising, branding, and product differentiation).
Correctly diagnosing an industry’s KSFs also raises a company’s chances of craft-
ing a sound strategy. The key success factors of an industry point to those things that
every firm in the industry needs to attend to in order to retain customers and weather
the competition. If the company’s strategy cannot deliver on the key success factors of
its industry, it is unlikely to earn enough profits to remain a viable business.
THE INDUSTRY OUTLOOK FOR PROFITABILITY
Each of the frameworks presented in this chapter—PESTEL, five forces analysis, driv-
ing forces, strategy groups, competitor analysis, and key success factors—provides a
useful perspective on an industry’s outlook for future profitability. Putting them all
together provides an even richer and more nuanced picture. Thus, the final step in
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evaluating the industry and competitive environment is to use the results of each of
the analyses performed to determine whether the industry presents the company with
strong prospects for competitive success and attractive profits. The important factors
on which to base a conclusion include
• How the company is being impacted by the state of the macro-environment.
• Whether strong competitive forces are squeezing industry profitability to subpar
levels.
• Whether the presence of complementors and the possibility of cooperative actions
improve the company’s prospects.
• Whether industry profitability will be favorably or unfavorably affected by the pre-
vailing driving forces.
• Whether the company occupies a stronger market position than rivals.
• Whether this is likely to change in the course of competitive interactions.
• How well the company’s strategy delivers on the industry key success factors.
As a general proposition, the anticipated industry environment is fundamentally attrac-
tive if it presents a company with good opportunity for above-average profitability; the industry
outlook is fundamentally unattractive if a company’s profit prospects are unappealingly low.
However, it is a mistake to think of a particular industry as being equally
attractive or unattractive to all industry participants and all potential entrants.9
Attractiveness is relative, not absolute, and conclusions one way or the other have
to be drawn from the perspective of a particular company. For instance, a favor-
ably positioned competitor may see ample opportunity to capitalize on the vulner-
abilities of weaker rivals even though industry conditions are otherwise somewhat
dismal. At the same time, industries attractive to insiders may be unattractive to
outsiders because of the difficulty of challenging current market leaders or because
they have more attractive opportunities elsewhere.
When a company decides an industry is fundamentally attractive and presents
good opportunities, a strong case can be made that it should invest aggressively to cap-
ture the opportunities it sees and to improve its long-term competitive position in the
business. When a strong competitor concludes an industry is becoming less attractive, it
may elect to simply protect its present position, investing cautiously—if at all—and looking
for opportunities in other industries. A competitively weak company in an unattractive
industry may see its best option as finding a buyer, perhaps a rival, to acquire its business.
• LO 3-4
Determine whether
an industry’s
outlook presents
a company with
sufficiently attractive
opportunities
for growth and
profitability.
The degree to which an
industry is attractive or
unattractive is not the
same for all industry par-
ticipants and all potential
entrants.
KEY POINTS
Thinking strategically about a company’s external situation involves probing for
answers to the following questions:
1. What are the strategically relevant factors in the macro-environment, and how do they
impact an industry and its members? Industries differ significantly as to how they are
affected by conditions and developments in the broad macro-environment. Using
PESTEL analysis to identify which of these factors is strategically relevant is the
first step to understanding how a company is situated in its external environment.
2. What kinds of competitive forces are industry members facing, and how strong is each
force? The strength of competition is a composite of five forces: (1) rivalry within
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the industry, (2) the threat of new entry into the market, (3) inroads being made by
the sellers of substitutes, (4) supplier bargaining power, and (5) buyer power. All
five must be examined force by force, and their collective strength evaluated. One
strong force, however, can be sufficient to keep average industry profitability low.
Working through the five forces model aids strategy makers in assessing how to
insulate the company from the strongest forces, identify attractive arenas for expan-
sion, or alter the competitive conditions so that they offer more favorable prospects
for profitability.
3. What cooperative forces are present in the industry, and how can a company harness
them to its advantage? Interactions among industry participants are not only com-
petitive in nature but cooperative as well. This is particularly the case when comple-
ments to the products or services of an industry are important. The Value Net
framework assists managers in sizing up the impact of cooperative as well as com-
petitive interactions on their firm.
4. What factors are driving changes in the industry, and what impact will they have on
competitive intensity and industry profitability? Industry and competitive condi-
tions change because certain forces are acting to create incentives or pressures
for change. The first step is to identify the three or four most important drivers of
change affecting the industry being analyzed (out of a much longer list of potential
drivers). Once an industry’s change drivers have been identified, the analytic task
becomes one of determining whether they are acting, individually and collectively,
to make the industry environment more or less attractive.
5. What market positions do industry rivals occupy—who is strongly positioned and who
is not? Strategic group mapping is a valuable tool for understanding the similari-
ties, differences, strengths, and weaknesses inherent in the market positions of rival
companies. Rivals in the same or nearby strategic groups are close competitors,
whereas companies in distant strategic groups usually pose little or no immediate
threat. The lesson of strategic group mapping is that some positions on the map are
more favorable than others. The profit potential of different strategic groups may
not be the same because industry driving forces and competitive forces likely have
varying effects on the industry’s distinct strategic groups. Moreover, mobility barri-
ers restrict movement between groups in the same way that entry barriers prevent
easy entry into attractive industries.
6. What strategic moves are rivals likely to make next? Anticipating the actions of rivals
can help a company prepare effective countermoves. Using the SOAR Framework
for Competitor Analysis is helpful in this regard.
7. What are the key factors for competitive success? An industry’s key success fac-
tors (KSFs) are the particular strategy elements, product attributes, operational
approaches, resources, and competitive capabilities that all industry members must
have in order to survive and prosper in the industry. For any industry, they can
be deduced by answering three basic questions: (1) On what basis do buyers of
the industry’s product choose between the competing brands of sellers, (2) what
resources and competitive capabilities must a company have to be competitively
successful, and (3) what shortcomings are almost certain to put a company at a
significant competitive disadvantage?
8. Is the industry outlook conducive to good profitability? The last step in industry anal-
ysis is summing up the results from applying each of the frameworks employed
in answering questions 1 to 7: PESTEL, five forces analysis, Value Net, driving
forces, strategic group mapping, competitor analysis, and key success factors.
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Applying multiple lenses to the question of what the industry outlook looks like
offers a more robust and nuanced answer. If the answers from each framework,
seen as a whole, reveal that a company’s profit prospects in that industry are above-
average, then the industry environment is basically attractive for that company.
What may look like an attractive environment for one company may appear to be
unattractive from the perspective of a different company.
Clear, insightful diagnosis of a company’s external situation is an essential first
step in crafting strategies that are well matched to industry and competitive condi-
tions. To do cutting-edge strategic thinking about the external environment, managers
must know what questions to pose and what analytic tools to use in answering these
questions. This is why this chapter has concentrated on suggesting the right questions
to ask, explaining concepts and analytic approaches, and indicating the kinds of things
to look for.
ASSURANCE OF LEARNING EXERCISES
1. Prepare a brief analysis of the organic food industry using the information pro-
vided by the Organic Trade Association at www.ota.com and the Organic Report
magazine at theorganicreport.com. That is, based on the information provided on
these websites, draw a five forces diagram for the organic food industry and briefly
discuss the nature and strength of each of the five competitive forces.
2. Based on the strategic group map in Illustration Capsule 3.1, which casual dining
chains are Cracker Barrel’s closest competitors? With which strategic group does
Panera Bread Company compete the least, according to this map? Why do you think
no casual dining chains are positioned in the area above the Olive Garden’s group?
3. The National Restaurant Association publishes an annual industry fact book that
can be found at www.restaurant.org. Based on information in the latest report,
does it appear that macro-environmental factors and the economic characteristics
of the industry will present industry participants with attractive opportunities for
growth and profitability? Explain.
LO 3-2
LO 3-3
LO 3-1, LO 3-4
EXERCISE FOR SIMULATION PARTICIPANTS
1. Which of the factors listed in Table 3.1 might have the most strategic relevance for
your industry?
2. Which of the five competitive forces is creating the strongest competitive pressures
for your company?
3. What are the “weapons of competition” that rival companies in your industry can
use to gain sales and market share? See Table 3.2 to help you identify the various
competitive factors.
4. What are the factors affecting the intensity of rivalry in the industry in which your
company is competing? Use Figure 3.4 and the accompanying discussion to help
you in pinpointing the specific factors most affecting competitive intensity. Would
you characterize the rivalry and jockeying for better market position, increased
sales, and market share among the companies in your industry as fierce, very
strong, strong, moderate, or relatively weak? Why?
LO 3-1, LO 3-2,
LO 3-3, LO 3-4
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5. Are there any driving forces in the industry in which your company is competing?
If so, what impact will these driving forces have? Will they cause competition to be
more or less intense? Will they act to boost or squeeze profit margins? List at least
two actions your company should consider taking in order to combat any negative
impacts of the driving forces.
6. Draw a strategic group map showing the market positions of the companies in your
industry. Which companies do you believe are in the most attractive position on the
map? Which companies are the most weakly positioned? Which companies do you
believe are likely to try to move to a different position on the strategic group map?
7. What do you see as the key factors for being a successful competitor in your indus-
try? List at least three.
8. Does your overall assessment of the industry suggest that industry rivals have suf-
ficiently attractive opportunities for growth and profitability? Explain.
ENDNOTES
Firms,” Journal of Economic Behavior &
Organization 15, no. 1 (January 1991).
5 For a more extended discussion of the prob-
lems with the life-cycle hypothesis, see Porter,
Competitive Strategy, pp. 157–162.
6 Mary Ellen Gordon and George R. Milne,
“Selecting the Dimensions That Define
Strategic Groups: A Novel Market-Driven
Approach,” Journal of Managerial Issues 11,
no. 2 (Summer 1999), pp. 213–233.
7 Avi Fiegenbaum and Howard Thomas,
“Strategic Groups as Reference Groups:
Theory, Modeling and Empirical Examination of
1 Michael E. Porter, Competitive Strategy (New
York: Free Press, 1980); Michael E. Porter, “The
Five Competitive Forces That Shape Strategy,”
Harvard Business Review 86, no. 1 (January
2008), pp. 78–93.
2 J. S. Bain, Barriers to New Competition
(Cambridge, MA: Harvard University Press,
1956); F. M. Scherer, Industrial Market
Structure and Economic Performance
(Chicago: Rand McNally, 1971).
3 Ibid.
4 C. A. Montgomery and S. Hariharan,
“Diversified Expansion by Large Established
Industry and Competitive Strategy,” Strategic
Management Journal 16 (1995), pp. 461–476;
S. Ade Olusoga, Michael P. Mokwa, and
Charles H. Noble, “Strategic Groups, Mobility
Barriers, and Competitive Advantage,” Journal
of Business Research 33 (1995), pp. 153–164.
8 Larry Kahaner, Competitive Intelligence (New
York: Simon & Schuster, 1996).
9 B. Wernerfelt and C. Montgomery, “What Is an
Attractive Industry?” Management Science 32,
no. 10 (October 1986), pp. 1223–1230.
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