MGT499- W2 Post and Response
INeal
Roth4_SM_Lecture_PPT_C03_Final.pptxCHAPTER 3
External Analysis: Industry Structure, Competitive Forces, and Strategic Groups
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Be sure to see the NEW Teacher’s Resource Manual located in the Connect Library under Instructor’s Resources.
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The AFI Strategy Framework
Exhibit 1.3
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Learning Objectives
LO 3-1 Generate a PESTEL analysis to evaluate the impact of external factors on the firm.
LO 3-2 Differentiate the roles of firm effects and industry effects in determining firm performance.
LO 3-3 Apply Porter’s five competitive forces to explain the profit potential of different industries.
LO 3-4 Explain how competitive industry structure shapes rivalry among competitors.
LO 3-5 Describe the strategic role of complements in creating positive-sum co-opetition.
LO 3-6 Explain the five choices required for market entry.
LO 3-7 Appraise the role of industry dynamics and industry convergence in shaping the firm’s external environment.
LO 3-8 Generate a strategic group model to reveal performance differences between clusters of firms in the same industry.
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How External Factors Impact a Firm
General Environment
Managers have little control
Macroeconomic factors
Interest / currency exchange rates
Task Environment
Managers can influence
Composition of strategic groups
Industry structure
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The PESTEL Model
Groups environmental factors into six segments:
Political
Economic
Sociocultural
Technological
Ecological
Legal
A straightforward way to scan, monitor, and evaluate
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Instructors:
The digital companion to this book McGraw-Hill Connect has an brief case exercise on this section of the textbook. It builds student confidence on the PESTEL tool (LO 3-1).
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The Firm Within Its External Environment
Exhibit 3.1
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This image represents each of these environmental layers in detail, moving from a firm’s general environment to its task environment.
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Political Factors
Processes & actions of government bodies
Can be shaped through:
Lobbying
Public Relations
Contributions
Litigation
Political and legal forces are closely related.
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For example, hotel chains and resort owners have challenged Airbnb in courts and lobbied local governments, some of which passed regulations to limit or prohibit short-term rentals. Local residents in New York, San Francisco, Berlin, Paris, and many other cities are also pressuring local governments to enact more aggressive rules banning short-term rentals because they argue that companies such as Airbnb contribute to a shortage of affordable housing by turning entire apartment complexes into hotels or transforming quiet family neighborhoods into all-night, every-night party hot spots.
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Economic Factors
Largely macro-economic
Economy-wide phenomena
Examples include:
Growth rates
Levels of employment
Interest rates
Price stability
Currency exchange rates
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Occasionally, boom periods can overheat and lead to speculative asset bubbles. In the early 2000s, the United States experienced an asset bubble in real estate.4 Easy credit, made possible by the availability of subprime mortgages and other financial innovations, fueled an unprecedented demand in housing. Real estate, rather than stocks, became the investment vehicle of choice for many Americans, propelled by the common belief that house prices could only go up. When the housing bubble burst, the deep economic recession of 2008–2009 began, impacting in some way nearly all businesses in the United States and worldwide.
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Sociocultural Factors
Society’s cultures, norms, and values
Are constantly in flux
Differ across groups
Demographic trends
Population characteristics
Age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class
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In recent years, for example, a growing number of U.S. consumers have become more health-conscious about what they eat. This trend led to a boom for businesses such as Chipotle, Subway, and Whole Foods. At the same time, traditional fast-food companies McDonald’s and Burger King, along with grocery chains such as Albertsons and Kroger, have all had to scramble to provide healthier choices in their product offerings.
The most recent U.S. census revealed that 55 million Americans (16.4 percent of the total population) are Hispanic. It is now the largest ethnic group in the United States and growing fast. On average, Hispanics are also younger and their incomes are climbing quickly. This trend is not lost on companies trying to benefit from this opportunity. For example, MundoFox and ESPN Deportes (specializing in soccer) have joined Univision and NBC’s Telemundo in the Spanish-language television market. In the United States, Univision is now the fifth most popular network overall, just behind the four major English-language networks (ABC, NBC, CBS, and Fox). Likewise, advertisers are pouring dollars into the Spanish-language networks to promote their products and services.
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Technological Factors
Application of knowledge
New processes and products
Innovations in process technology:
Lean manufacturing and Six Sigma quality
Innovations in product technology:
Smartphones and wearable devices
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As discussed in the Chapter Case, Airbnb launched a radical process innovation of offering and renting rooms based on a business model leveraging the sharing economy. If one thing seems certain, technological progress is relentless and seems to be picking up speed.
Strategy Highlight 3.1 details how BlackBerry fell victim by not paying sufficient attention to the PESTEL factors.
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Ecological Factors
Broad environmental issues:
Natural environment
Global warming
Sustainable economic growth
Can provide business opportunities
Tesla cars have zero emissions
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Negative examples come readily to mind, as many business organizations have contributed to the pollution of air, water, and land, as well as depletion of the world’s natural resources. BP’s infamous oil spill in the Gulf of Mexico destroyed fauna and flora along the U.S. shoreline from Texas to Florida. This disaster led to a decrease in fish and wildlife populations, triggered a decline in the fishery and tourism industries, and threatened the livelihood of thousands of people. It also cost BP more than $40 billion and one-half of its market value (see Strategy Highlight 2.2).
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Legal Factors
Official outcomes of political processes:
Laws
Mandates
Regulations
Court decisions
Many industries have been deregulated:
Airlines, telecom, energy, and trucking
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Consider how several European countries and the European Union (EU) apply political and legal pressure on U.S. tech companies. European targets include Apple, Amazon, Facebook, Google, and Microsoft—the five largest U.S. tech companies—but also startups such as Uber, the taxi-hailing mobile app. Europe’s policy makers seek to retain control over important industries ranging from transportation to the internet to ensure that profits earned in Europe by Silicon Valley firms are taxed locally. The EU parliament even proposed legislation to break up “digital monopolies” such as Google. This proposal would require Google to offer search services independently as a standalone company from its other online services.
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Industry vs. Firm Effects
Industry Effects
Elements in common to all
Entry and exit barriers, number and size of companies, and types of products and services offered
Firm Effects
The actions managers take
More important than firm effects
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Superior Firm Performance
Exhibit 3.2
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Although a firm’s industry is not quite as important as the firm’s strategy within its industry, they jointly determine roughly 75 percent of overall firm performance. The remaining 25 percent relates partly to business cycles and other effects.
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Industry & Industry Analysis
Industry:
Group of incumbent companies
Relatively similar suppliers and buyers
Similar products and services
Industry analysis, a method to:
Identify an industry’s profit potential
Derive implications for a firm’s strategic position
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Threat of Entry (1 of 2)
The risk that potential competitors will enter an industry
Lowers industry profit potential:
Incumbents lower prices
Incumbents spend more to satisfy existing customers.
Entry barriers:
Obstacles blocking others from entering
A significant predictor of industry profit potential
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Strategic Positioning
A firm’s ability to:
Create value for customers (V)
Contain costs (C)
Goal: Generate a large gap between:
The value the firm’s product or service creates
The cost required to produce it
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Porter’s Five Forces Model
Exhibit 3.3
SOURCE: Michael E. Porter, “The five competitive forces that shape strategy,” Harvard Business Review, January 2008.
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Porter derived two key insights that form the basis of his seminal five forces model:
1. Rather than defining competition narrowly as the firm’s closest competitors to explain and predict a firm’s performance, competition must be viewed more broadly, to also encompass the other forces in an industry: buyers, suppliers, potential new entry of other firms, and the threat of substitutes.
2. The profit potential of an industry is neither random nor entirely determined by industry-specific factors. Rather, it is a function of the five forces that shape competition: threat of entry, power of suppliers, power of buyers, threat of substitutes, and rivalry among existing firms.
As a rule of thumb, the stronger the five forces, the lower the industry’s profit potential—making the industry less attractive for competitors. The reverse is also true: the weaker the five forces, the greater the industry’s profit potential—making the industry more attractive.
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Threat of Entry (2 of 2)
The risk that potential competitors will enter the industry
Entry barriers:
Economies of scale
Network effects
Customer switching costs
Capital requirements
Advantages independent of size
Government policy
Credible threat of retaliation
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The threat of entry is high when:
✓The minimum efficient scale to compete in an industry is low.
✓Network effects are not present.
✓Customer switching costs are low.
✓Capital requirements are low.
✓Incumbents do not possess:
Brand loyalty.
Proprietary technology.
Preferential access to raw materials.
Preferential access to distribution channels.
Favorable geographic locations.
Cumulative learning and experience effects.
✓Restrictive government regulations do not exist.
✓New entrants expect that incumbents will not or cannot retaliate.
To benefit from economies of scale, Tesla is introducing new models, helping it move away from small-scale and costly production of niche vehicles to larger production runs of cars with a stronger mass-market appeal.
Network effects: For example, Facebook, with over 1.2 billion active users worldwide, enjoys tremendous network effects, making it difficult for more recent entrants such as Google Plus to compete effectively.
Switching costs - For example, a firm that has used enterprise resource planning (ERP) software from SAP for many years will incur significant switching costs when implementing a new ERP system from Oracle
Capital requirements: Tesla Motors made a sizable capital investment of roughly $150 million when it purchased the Fremont, California, manufacturing plant from Toyota and upgraded it with a highly automated production process, using robots to produce cars of the highest quality at large scale.
Advantages independent of size – Tesla’s lithium-ion batteries are not only the most expensive and critical parts of an all-electric vehicle, but they are also in short supply. Tesla’s new battery “gigafactory” will afford it independence from the few worldwide suppliers, such as Panasonic of Japan, and also likely bestow an absolute cost advantage.
Government policy - India did not allow foreign retailers such as Walmart or IKEA to own stores and compete with domestic companies in order to protect the country’s millions of small vendors and wholesalers. China frequently requires foreign companies to enter joint ventures with domestic ones and to share technology.
Threat of retaliation - For example, in the southeastern United States, TV cable company Comcast has entered the market for residential and commercial telephone services and internet connectivity (as an ISP, internet service provider), emerging as a direct competitor for AT&T. Comcast also acquired NBC Universal, combining delivery and content. AT&T responded to Comcast’s threat by introducing U-verse, a product combining high-speed internet access with cable TV and telephone service, all provided over its fast fiber-optic network.
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Power of Suppliers
Pressures that industry suppliers can exert on an industry’s profit potential
Lowers industry profit potential if:
Suppliers demand higher prices for their inputs
Suppliers reduce quality
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The power of suppliers is high when:
✓Supplier’s industry is more concentrated than the industry it sells to.
✓Suppliers do not depend heavily on the industry for their revenues.
✓Incumbent firms face significant switching costs when changing suppliers.
✓Suppliers offer products that are differentiated.
✓There are no readily available substitutes for the products or services that the suppliers offer.
✓Suppliers can credibly threaten to forward-integrate into the industry.
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Power of Buyers (Customers)
Pressure customers put on an industry
Lowers industry profit potential if:
Buyers obtain price discounts
Reduces revenue
Buyers demand higher quality / service
Raises production costs
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The power of buyers is high when:
✓There are a few buyers and each buyer purchases large quantities relative to the size of a single seller.
✓The industry’s products are standardized or undifferentiated commodities.
✓Buyers face low or no switching costs.
✓Buyers can credibly threaten to backwardly integrate into the industry.
The retail giant Walmart provides perhaps the most potent example of tremendous buyer power. Walmart is not only the largest retailer worldwide (with over 11,000 stores and 2.2 million employees), but it is also one of the largest companies in the world (with $485 billion in revenues in 2014). Walmart is one of the few large big-box global retail chains and frequently purchases large quantities from its suppliers. Walmart leverages its buyer power by exerting tremendous pressure on its suppliers to lower prices and to increase quality or risk losing access to shelf space at the largest retailer in the world. Walmart’s buyer power is so strong that many suppliers co-locate offices directly next to Walmart’s headquarters in Bentonville, Arkansas, because such proximity enables Walmart’s managers to test the supplier’s latest products and negotiate prices.
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Threat of Substitutes
Meet the same basic customer need
But in a different way
Available from outside the given industry
Examples:
Energy drinks vs. coffee
Videoconferencing vs. business travel
E-mail vs. express mail
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The threat of substitutes is high when:
✓The substitute offers an attractive price-performance trade-off.
✓The buyer’s cost of switching to the substitute is low.
Examples: many software products are substitutes to professional services, at least at the lower end. Tax preparation software such as Intuit’s TurboTax is a substitute for professional services offered by H&R Block and others. LegalZoom, an online legal documentation service, is a threat to professional law firms. Other examples of substitutes are energy drinks versus coffee, videoconferencing versus business travel, e-mail versus express mail, gasoline versus biofuel, and wireless telephone services versus Voice over Internet Protocol (VoIP), offered by Skype or Vonage.
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Rivalry Among Competitors
The intensity with which companies in the same industry jockey for market share and profitability
Other forces pressure this rivalry
Examples of tactics:
Price discounting
After sales service
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The rivalry among existing competitors is high when:
✓There are many competitors in the industry.
✓The competitors are roughly of equal size.
✓Industry growth is slow, zero, or even negative.
✓Exit barriers are high.
✓Incumbent firms are highly committed to the business.
✓Incumbent firms cannot read or understand each other’s strategies well.
✓Products and services are direct substitutes.
✓Fixed costs are high and marginal costs are low.
✓Excess capacity exists in the industry.
✓The product or service is perishable.
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Competitive Industry Structure
Number and size of competitors
Firm’s degree of pricing power
Type of product or service
Commodity or differentiated
Height of entry barriers
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4 Main Competitive Industry Structures
Exhibit 3.4
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Perfect competition: Many Internet entrepreneurs learned the hard way that it is difficult to beat the forces of perfect competition. Fueled by eager venture capitalists, about 100 online pet supply stores such as pets.com, petopia.com, and pet-store.com had sprung up by 1999, at the height of the Internet bubble. Cut-throat competition ensued, with online retailers selling products below cost. When there are many small firms offering a commodity product in an industry that is easy to enter, no one is able to increase prices and generate profits. Besanko, D., E. Dranove, M. Hanley, and S. Schaefer (2010), The Economics of Strategy, 5th ed. (Hoboken, NJ: John Wiley).
Monopolistic competition: Example: The computer hardware industry provides one example of monopolistic competition. Many firms compete in this industry, and even the largest of them (Apple, ASUS, Dell, HP, or Lenovo) have less than 20 percent market share. Moreover, while products between competitors tend to be similar, they are by no means identical.
Oligopoly: Examples: The express-delivery industry is an example of an oligopoly. The main competitors in this space are FedEx and UPS. Any strategic decision made by FedEx (e.g., to expand delivery services to ground delivery of larger-size packages) directly affects UPS; likewise, any decision made by UPS (e.g., to guarantee next-day delivery before 8:00 a.m.) directly affects FedEx. Other examples of oligopolies include the soft drink industry (Coca-Cola vs, Pepsi), airframe manufacturing business (Boeing vs. Airbus), home-improvement retailing (The Home Depot vs. Lowe’s), toys and games (Hasbro vs. Mattel), and detergents (P&G vs. Unilever). When there are only two main competitors, it’s called a duopoly and is a special case of oligopoly.
Monopoly: Examples: Georgia Power is the only supplier of electricity for some 2.5 million customers in the southeastern United States. Philadelphia Gas Works is the only supplier of natural gas in the city of Philadelphia, Pennsylvania, serving some 500,000 customers.
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Industry Growth
Affects intensity of rivalry among competitors
During periods of high growth:
Consumer demand rises
Price competition among firms decreases
During periods of negative growth:
Rivalry is fierce
Rivals can only gain at the expense of one another
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Example: Demand for traditional fast food providers such as McDonald’s, Burger King, and Wendy’s has been declining in recent years. Consumers have become more health-conscious and demand has shifted to alternative restaurants such as Subway, Chick-fil-A, and Chipotle. Attempts by McDonald’s, Burger King, and Wendy’s to steal customers from one another include frequent discounting tactics like dollar menus. Such competitive tactics are indicative of cut-throat competition and a low profit potential in the traditional hamburger fast food industry.
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Strategic Commitments
Firm actions that are:
Costly
Long-term oriented
Difficult to reverse
Affects intensity of rivalry among competitors
Example: airline industry
Hub and spoke model requires significant investment
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Significant strategic commitments are required to compete in the airline industry when using a hub-and-spoke system to provide not only domestic but also international coverage. U.S. airlines Delta, United, and American have large fixed costs to maintain their network of routes that affords global coverage, frequently in conjunction with foreign partner airlines. These fixed costs in terms of aircraft, gate leases, hangars, maintenance facilities, baggage facilities, and ground transportation all accrue before the airlines sell any tickets.
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Exit Barriers
Obstacles that determine how easily a firm can leave that industry
Mainly economic and social factors
Examples:
Contractual obligations
Emotional attachments
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In Michigan, entire communities still depend on GM, Ford, and Chrysler. If any of those carmakers were to exit the industry, communities would suffer. Other social and economic factors include ripple effects through the supply chain. When one major player in an industry shuts down, its suppliers are adversely impacted as well.
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A Sixth Force: Complements and Co-Opetition
Complements:
A product, service, or competency
Adds value when used with the original product
Co-opetition:
Cooperation by competitors to achieve a strategic objective
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For example, in the smartphone industry, Google complements Samsung. The Korean high-tech company’s smartphones are more valuable when they come with Google’s Android system installed. At the same time, Google and Samsung are increasingly becoming competitors. With Google’s acquisition of Motorola Mobility, the online search company launched its own line of smartphones and Chromebooks.
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Entry Choices
Exhibit 3.6
Source: Based on and adapted from Zachary M.A., Gianiodis P.T., Tyge Payne G., and G.D. Markman (2014), Entry timing: enduring lessons and future directions, Journal of Management, 41: 1409; and Bryce D.J. and J.H. Dyer (2007), Strategies to crack well-guarded markets, Harvard Business Review, May: 84-92.
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This represents an integrative model that can guide the entry choices firms make. Rather than considering firm entry as a discrete event (i.e., simple yes or no decision), or a discrete event composed of five parts, this model suggests that the entry choices firms make constitute a strategic process unfolding over time.
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Industry Dynamics
Provides insight about:
Changing speed of an industry
Rate of innovation
Analysis must repeat over time
Industry structures aren’t stable
They are dynamic
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The U.S. domestic airline industry has witnessed several large, horizontal mergers between competitors, including Delta and Northwest, United and Continental, Southwest and AirTran, as well as American and U.S. Airways. These moves allow the remaining carriers to enjoy a more benign industry structure. It also allows them to retire some of the excess capacity in the industry as the merged airlines consolidate their networks of routes. The merger activity in the airline industry provides one example of how firms can proactively reshape industry structure in their favor. A more consolidated airline industry is likely to lead to higher ticket prices and fewer choices for customers, but also more profitable airlines.
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Industry Convergence
When unrelated industries satisfy the same need
Caused by technological advances
Example: Media Industries
Content going online
Newspapers, magazines, TV, movies, radio, music
Will print media become obsolete?
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Internet companies such as Google, Facebook, Instagram (acquired by Facebook), LinkedIn (acquired by Microsoft), Snap, Pinterest, and Twitter are changing the industry structure by constantly morphing their capabilities and forcing old-line media companies such as News Corp., Time Warner, and Disney to adapt. A wide variety of mobile devices, including smartphones, tablets, and e-readers, provide a new form of content delivery that has the potential to make print media obsolete.
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Strategic Groups
Strategic groups:
A set of companies
Pursue a similar strategy
In the same industry
The strategic group model (framework):
Clusters different firms into groups
Is based on key strategic dimensions
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Strategic groups differ from one another along important dimensions such as expenditures on research and development, technology, product differentiation, product and service offerings, market segments, distribution channels, and customer service.
Instructors:
The digital companion to this book McGraw-Hill Connect has a case exercise on this section of the textbook. It builds student confidence on strategic groups using the pharmaceutical industry as an example (LO 3-6).
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How to Create a Strategic Group Map
Identify the important strategic dimensions
Choose two key dimensions
For horizontal and vertical axes
Ensure they’re not highly correlated
Graph the firms in the strategic group
Each firm’s market share indicated by the size of the bubble
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Examples of strategic dimensions: expenditures on research and development, technology, product differentiation, product and service offerings, pricing, market segments, distribution channels, and customer service.
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Strategic Group Map: Domestic Airline Industry
Exhibit 3.7
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This graph maps companies active in the U.S. domestic airline industry. The two strategic dimensions on the axes are cost structure and routes. As a result of this mapping, two strategic groups become apparent, as indicated by the dashed circles: Group A, low-cost, point-to-point airlines (Alaska Airlines, Frontier Airlines, JetBlue, Southwest Airlines, and Spirit Airlines) and Group B, differentiated airlines using a hub-and-spoke system (American, Delta, and United). The low-cost, point-to-point airlines are clustered in the lower-left corner because they tend to have a lower cost structure but generally serve fewer routes due to their point-to-point operating system.
The differentiated airlines in Group B, offering full services using a hub-and-spoke route system, comprise the so-called legacy carriers. They are clustered in the upper-right corner because their generally higher ticket prices reflect higher cost structures. The legacy carriers usually offer many more routes than the point-to-point low-cost carriers, made possible by use of the hub-and-spoke system, and thus offer many different destinations. For example, Delta’s main hub is in Atlanta, Georgia. If you were to fly from Seattle, Washington, to Miami, Florida, you would stop to change planes in Delta’s Atlanta hub on your way.
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Insights from Strategic Group Mapping
Competitive rivalry:
Strongest between firms in the same strategic group
External environment:
Affects strategic groups differently
Five competitive forces:
Affect strategic groups differently
Profitability:
Some strategic groups more profitable than others
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Mobility Barrier
Restrict movement between strategic groups
Industry-specific factors
Based on hard-to-reverse investments
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The two groups identified in Exhibit 3.7 are separated by the fact that offering international routes necessitates the hub-and-spoke model. Frequently, the international routes tend to be the remaining profitable routes left for the legacy carriers; albeit the up-and-coming Persian Gulf region carriers, in particular Emirates, Etihad Airways, and Qatar Airways, are beginning to threaten this profit sanctuary.
If carriers in the lower-left cluster, such as SWA or JetBlue, would like to compete globally, they would likely need to change their point-to-point operating model to a hub-and-spoke model. Or they could select a few profitable international routes and service them with long-range aircrafts such as Boeing 787s or Airbus A-380s. Adding international service to the low-cost model, however, would require managerial commitments resulting in significant capital investments and a likely departure from a well-functioning business model. Additional regulatory hurdles reinforce these mobility barriers, such as the difficulty of securing landing slots at international airports around the world.
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Appendices Descriptions of Visual Graphics to Support Student Accessibility Needs
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Appendix 1 The AFI Strategy Framework
The important inside circle is titled "Gaining and Sustaining a Competitive Advantage" that is at the very center of the image, with five different circles on the outside of it. Arrows go back and forth from the center circle to each of the five outer circles. The five outer circles are labeled: (1) Getting Started, (2) External and Internal Analysis, (3) Formulation: Business Strategy, (4) Formulation, Corporate Strategy, and (5) Implementation.
Each of these outer five circles have a brief description beside them to explain what the circle means:
Under the first outer circle titled "Getting Started," it says: Part 1, Strategy Analysis, "What is Strategy (Chapter 1)" and "Strategic Leadership: Managing the Strategy Process (Chapter 2)."
Under the second outer circle titled "External and Internal Analysis," it says: Part 1, Strategy Analysis, "External Analysis: Industry Structure, Competitive Forces and Strategic Groups (Chapter 3)," "Internal Analysis: Resources, Capabilities and Core Competencies (Chapter 4)," and "Competitive Advantage, Firm Performance, and Business Models (Chapter 5)."
Under the third outer circle titled "Formulation: Business Strategy," it says: Part 2, Strategy Formulation, "Business Strategy: Differentiation, Cost Leadership and Integration (Chapter 6)" and "Business Strategy, Innovation and Entrepreneurship (Chapter 7)."
Under the fourth outer circle titled "Formulation: Corporate Strategy," it says: Part 2, Strategy Formulation, "Corporate Strategy: Vertical Integration and Diversification (Chapter 8)," "Corporate Strategy: Strategic Alliances, Mergers and Acquisitions (Chapter 9)," and "Global Strategy: Competing Around the World (Chapter 10)."
Under the fifth outer circle titled "Implementation," it says: Part 3, Strategy Implementation, "Organizational Design: Structure, Culture and Control (Chapter 11)," and "Corporate Governance and Business Ethics (Chapter 12)."
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Appendix 2 The Firm Within Its External Environment
This image shows circles within several circles. The center-most circle is titled "Firm." That circle is contained within another circle titled, "Strategic Group." That circle is contained within another circle titled, "Industry." That circle is contained within another circle titled, "External Environment." The External Environment circle contains six arrows pointing inward, and they are titled: Economic, Sociocultural, Technological, Ecological, Legal and Political.
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Appendix 3 Superior Firm Performance
This image is of a pie chart, and outlines three distinct "slices" which explain superior firm performance. The biggest slice of the pie, about 55 percent, represents firm effects. The smallest slice of the pie, about 20 percent, represents industry effects. The last slice of the pie, about 25 percent, represents other effects, such as business cycles and unexplained variance.
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Appendix 4 Porter’s Five Forces Model
This image shows an inner circle titled "Rivalry among Existing Competitors." There are four boxes on the outside of the inner circle, with arrows coming out from the box and pointing towards the circle. These boxes say: Threat of New Entrants, Bargaining Power of Buyers, Threat of Substitute Products or Services, Bargaining Power of Suppliers.
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Appendix 5 4 Main Competitive Industry Structures
The most fragmented industry form is perfect competition, and it is made up of many small firms. Firms are price takers, they offer commodity products, and there are low entry barriers. The next somewhat fragmented industry form is monopolistic competition, which consists of many firms with some pricing power; they offer a differentiated product and there are medium entry barriers. The next somewhat consolidated industry form is an oligopoly, which features few (large) firms, some pricing power, a differentiated product, and high entry barriers. The next consolidated industry form is a monopoly, which consists of one firm with considerable pricing power, a unique product, and very high entry barriers.
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Appendix 6 Entry Choices
This image is of a pentagon separated into five sides with a center block that reads "entry choices." The following words are inscribed in the blocks:
1. Who: identify the players incumbents, entrants, suppliers, customers, other stakeholders.
2. When: entry timing, stage of industry life cycle, order of entry.
3. How: leverage existing assets, reconfigure value chains, establish niches.
4. What: type of entry scale, commitment, product and / or service, business model, etc.
5. Where: leverage existing assets, reconfigure value chains, establish niches.
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Appendix 7 Strategic Group Map: Domestic Airline Industry
The two strategic dimensions on the axes are prices and routes. As a result of this mapping, two strategic groups become apparent, as indicated by the dashed lines: Group A, low-cost, point-to-point airlines (Virgin Atlantic, Alaska Airlines, JetBlue, and Southwest Airlines) and Group B, differentiated airlines using a hub-and-spoke system (American, Delta, and United). The low-cost, point-to-point airlines are clustered in the lower-left corner because they tend to offer lower ticket prices but generally serve fewer routes due to their point-to-point operating system.
The differentiated airlines in Group B, offering full services using a hub-and-spoke route system, are clustered in the upper-right corner because their frequently higher ticket prices reflect frequently higher cost structures. They usually offer many more routes than the point-to-point low-cost carriers, made possible by use of the hub-and-spoke system, and thus offer many different destinations.
©McGraw-Hill Education.
