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External Analysis: Industry Structure

External Analysis: Industry Structure

Chapter 3

External Analysis: Industry Structure, Competitive Forces, and Strategic Groups


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The AFI Strategy Framework

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The Firm within Its External Environment, Industry, and Strategic Group, Subject to PESTEL Factors

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The PESTEL Framework



Framework to scan, monitor, and evaluate important external factors/trends (opportunities and threats) impacting a firm in its quest for competitive advantage.

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Analyzing the General Environment



Consider the relevance of each of the six factors in the context of the particular business


Identify and categorize the information that applies to the relevant factors (identify opportunities and threats)


Analyze the data and draw conclusions – which O/T need to be acted on and when (short term vs. long term)?

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Five Forces Model















Strategic Group Mapping



PESTEL Framework





A group of (**incumbent**) firms that face the same set of suppliers and buyers

Industry Analysis

Identifies the industry’s profit potential

Derive implications for a firm’s strategic position within an industry

Strategic Position

A firm’s ability to create value (V) for customers while containing costs (C)

Competitive Advantage = a large value gap (V – C)


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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).



Michael Porter’s 5 Forces Model

A framework for identifying the five forces that determine industry profit potential and help shape firm competitive strategy

This model intersects:

Theory: industrial organization economics with

Practice: hundreds of case studies

Managers can predict industry profit potential and position their firms for sustainable competitive advantage.

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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.


Strategy Video

Michael Porter on Five Forces

Interview with Michael Porter, Professor at Harvard University



13:12 Minutes

Topics: Five Forces Model; Competitive Strategy

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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.