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ChapterCase: Tesla Motors and the U.S. Automotive Industry
3.1 The PESTEL Framework (LO 3-1)
CONNECT INTEGRATION
Case Analysis: The PESTEL Forces
3.2 Industry Structure and Firm Strategy: The Five Forces Model (LO 3-2, LO 3-3, LO 3-4)
CONNECT INTEGRATION
Video Case Analysis: The Five Forces Model Applied to Water
3.3 Changes Over Time: Industry Dynamics (LO 3-5)
3.4 Performance Differences within the Same Industry: Strategic Groups (LO 3-6)
CONNECT INTEGRATION
Case Analysis: Strategic Groups: Pharmaceuticals
3.5 Implications for the Strategist
CONNECT INTEGRATION
HP Running Case: Module 3
Chapter 3
External Analysis: Industry Structure, Competitive Forces,
and Strategic Groups
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POWER POINT SLIDES 1-5
In this chapter, we turn our attention to the firm’s external environment: the industry in which the firm operates and the
competitive forces that surround the firm from the outside.
The chapter starts with a look at macro level influences including political, economic, sociocultural, technological,
ecological, and legal.
Next, the structure of an industry is analyzed. Industry structure captures important economic characteristics such as the
number and size of competitors, whether the offering is an undifferentiated commodity like steel or a highly differentiated
service like management consulting, and the height of entry and exit barriers. We look at the dynamics of industry change
over time.
Finally, we discuss how strategic group mapping can be used to explain performance differences within the same industry.
A chapter opening case on Tesla Motors and two strategy highlights are included in the chapter for tangible applications of
the theoretical frameworks discussed.
Learning Objectives
LO 3-1 Generate a PESTEL analysis to evaluate the impact of external factors on the firm.
LO 3-2 Apply Porter’s five competitive forces to explain the profit potential of different industries.
LO 3-3 Explain how competitive industry structure shapes rivalry among competitors.
LO 3-4 Describe the strategic role of complements in creating positive-sum coopetition.
LO 3-5 Appraise the role of industry dynamics and industry convergence in shaping the firm’s external
environment.
LO 3-6 Generate a strategic group model to reveal performance differences between clusters of firms in
the same industry.
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CHAPTERCASE
STRATEGY SMART VIDEO
POWERPOINT SLIDES 79
You may want to introduce the case discussion with the Wired Magazine video on “How the Tesla Model S is Made.”
CONSIDER THIS DISCUSSION QUESTIONS
POWERPOINT SLIDES 70–72
Which PESTEL factors are the most salient for the electric vehicle segment of the car industry? Do you see a future
for electric vehicles in the United States? Why or why not?
Governments in many parts of the world are subsidizing purchases of electric and other high-mileage cars. This could help
the nascent market get traction to reach economies of scale needed to compete against the internal combustion engines now
dominant. Economics will matter as consumers across the globe compare the purchase prices and cost of operations of these
vehicles. In the medium term, the purchase must make economic sense for the market to grow sustainably. From our
experience in teaching this example, students will have many thoughts on this discussion.
Political – The U.S. government has played a strong role in regulating the automotive industry in recent years, by providing
funding for research (e.g., its 2003 investment of $1.3 billion in hydrogen-powered vehicle research) as well as tax incentives
(e.g., the 2003 commercial truck rebate and the 2009 “Cash for Clunkers” program). It also provided financial bailout funds
to GM and Chrysler to help them emerge from bankruptcy. While there are no current governmental actions mentioned in the
toward driving differ cross-culturally. While American cities are planned with the car in mind, many European governments
are taking actions to make driving less attractive and encourage pedestrian traffic. London charges a congestion fee for
driving in certain areas during peak hours (http://nyti.ms/iusDS3).
Technological – This segment is the main focus of the case, as research and development of alternative energy sources such
as electric batteries, hybrid engines, hydrogen fuel cells, and biofuels will have a significant impact on how they are
implemented in cars. Automakers must monitor multiple competing technologies to see which, if any, emerges as the new
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Legal – Historically, the California ZEV mandate of the 1990s is credited with stimulating the development of early electric
car prototypes, even though they were abandoned when the mandate was defeated in Federal Court in 2002.
Perhaps the strongest driving force affecting automakers is the technological uncertainty regarding which alternative energy
will become the future standard. Companies are trying to hedge their bets, spreading their research investments across
Ask students which 2-3 driving forces are most likely to have a significant impact on the industry in the near future, and what
that impact is likely to be. Oil prices and/or other economic indicators can be defended with solid data, as can demographic
trends like the aging of the baby boomers (though their influence is arguably less direct in nature).
Looking at Porter’s five forces of competition, how would you assess the profit potential of the U.S. car industry?
Force
High
Moderate
Threat of New
Entrants
Individual customer
switching costs are low
Dealers have significant
inventory investments
Supplier Power
• Raw material suppliers service a wide
range of sectors and are not
dependent on automakers
• Some materials are essential and
nonsubstitutable
Inter-firm Rivalry
• Several MNCs with comparable
resources and relatively equal size
(global competition)
• Recent economic downturn led to
increased competition for sales
• Slow growth industry, with faster
rates in some emerging markets
• High exit barriers due to emotional
attachment, capital investments, and
labor agreements
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Force
High
Moderate
Buyer Power
• Individual buyers have low switching
costs (but purchase small quantities
infrequently)
• Dealers buy in large quantities and
establish long-term contracts to reduce
acquisition costs
Threat of Substitutes
• Used cars are readily available and
priced at a discount, but may be less
reliable
• High fuel prices may increase appeal
of car-pooling, walking, mass transit,
etc.
• Availability of mass transit
systems varies by market
• Ease of walking/cycling
varies by market
Using the five forces model, what implications can we derive for how Tesla Motors should compete in the U.S. car
industry? What would be your top three recommendations for Elon Musk? Support your arguments.
As shown in the table in this section, the auto manufacturing industry is not very attractive in terms of profit potential. It is
Draw a strategic group map for the U.S. automotive industry. What are your conclusions?
Ask students to begin by identifying what the dimensions on the map might be. A popular choice might be product range and
geographical scope. Other options might be prices charged and breadth of target customer segment or price and performance.
Why do you think that Tesla’s market capitalization (Share price x Number of outstanding shares) is roughly 50
percent that of GM, while GM’s revenues are more than 50 times larger than that of Tesla Motors?
This question offers a good opportunity to let the finance majors show what they have learned in their investment courses.
Challenge them to provide a detailed answer that is presented in non–mathematical terms. The salient point for all students to
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END OF CHAPTER ETHICAL/SOCIAL ISSUES 2
What is the appropriate role for governments to encourage or discourage certain purchasing behaviors? You may
note many national governments have for decades collected additional taxes on tobacco and alcohol products as a
measure to try to moderate consumption of these items.
Governments have long taken a role in promoting (through tax incentives, surtaxes, or subsidies) actions that they believe to
be in society’s best interest, but not in an individual’s best interest in a free market. There are multiple “carrots” and “sticks”
As a strategist in a major firm, how would you seek to position your company in light of such current and potential
future governmental policies?
3.1 The PESTEL Framework LO 3–1
POWERPOINT SLIDES 6-17
EXAMPLE
NEWER FACULTY: You might want to open this section with an illustration of peeling back layers of an onion to show
students the strategic analysis process of beginning in the broad macroenvironment, closing in to the industry environment,
and then finally reaching the firm environment. Students often need clarification to understand that the PESTEL factors are
traits of the environment that impact multiple industries—some more than others. We find that they often have trouble
distinguishing industry structure issues from macroenvironment issues. If sports analogies are popular in your class, then you
might consider an example of your nearest MLB team. Ask students to identify factors that affect the team’s profit and then
sort those into factors that are related only to the MLB industry from those that are common to all pro sports, all sports, sports
television/radio, sports advertising and sponsorship, disposable income for entertainment, and spectator entertainment in
general (concerts, county fairs, anything else a consumer might buy a ticket to attend, etc.).
How the Eurozone Crisis Is Hurting Companies In the wake of the recent global financial crisis (2008–2012), the
European sovereign-debt crisis has taken center stage. It is negatively affecting companies across the globe. What is the
eurozone crisis, and how does it affect business? The euro is the common currency used by 17 of the 27 member states of the
Research Update
Jacobides, M. G., Macduffie, J. P. and Tae, C. J. (2015), Agency, structure, and the dominance of OEMs: Change and
stability in the automotive sector. Strat. Mgmt. J. doi: 10.1002/smj.2426
This longitudinal study describes and analyzes the driving forces and mental models behind major shifts in the
architecture of the automobile industry driven by the OEMs. In the 1990s, they made efforts to shift the industry structure
based on a vision of “Modularity + Outsourcing” and then in the 2000s shifted the structure again to reduce the
modularity aspect. It can be discussed in the context of the five forces analysis of the industry, especially supplier power.
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countries were to be forced out of the eurozone, they would likely fall into economic isolation and decline. The combined
effect of the unpaid loans and economic decline could lead to a collapse of the banking system, not only in Europe but also
with repercussions in the United States due to the interdependencies of world finance.
Because the euro is a common currency, the affected countries could no longer devalue their own currencies in order to
improve competitiveness. To get a handle on the budget deficit, European countries, with help from the International
that number rose to above 20 percent. Youth unemployment (for those under 25) in Spain soared to over 50 percent. It is not
uncommon to see Spanish medical doctors working in low–level nursing home jobs in Germany.
When banks are not providing credit to companies, their continued operation is threatened and recession deepens. Major
European airlines such as Air France rely on debt financing to purchase new aircraft. However, due to the current credit
crunch, European orders for Airbus, Boeing, and Embraer (a Brazilian aerospace company) have collapsed. Even companies
STRATEGY SMART VIDEO LECTURE
POWERPOINT SLIDES 82
PESTEL Analysis Overview: This video can substitute for your lecture in an online class or be viewed by students as
preparation before your lecture.
INTEGRATION
Case Analysis: PESTEL Forces
This case analysis gives the students an opportunity to further consider the ChapterCase 3 opener on Tesla Motors and
the U.S. car industry using the PESTEL framework. The interactive has a case with further information about Tesla and
then has four questions following it. The student will need to read both the case and the textbook-related materials on
PESTEL before answering the questions in the activity. Difficulty: Medium
Blooms: Analyze AACSB: Analytic

Follow-up Activity: The instructor can expand on the concepts of external analysis in several ways. One suggestion is to
have the whole class choose an industry generally well known (casual dining restaurants, mobile phone providers,
footwear retailing, etc.) and assign one category of the PESTEL framework to each small group. If more time is
available, each small group could take a different commonly known industry and analyze which PESTEL factors would
be the most important for that group of businesses. If the instructor/class is interested in electric cars, there is a very good
full case about Tesla associated with the Rothaermel textbook.
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EXERCISES
NEWER FACULTY: PESTEL is an easy topic for a quick small group activity. We select an industry the students are
familiar with (retailing, fast food, computers, and so on) and then assign each group one of the six PESTEL forces to think
about relative to that particular industry. This way, each group has something a bit different to discuss when the whole class
is pulled back together.
EXPERIENCED FACULTY: An alternative is to use the case opener about Tesla to discuss the PESTEL forces for the
nascent electric vehicle industry split into different groups each with an assigned pair of forces. One of the keys to this
discussion is to bring out conflicts and trade–offs among the forces. For example, regarding electric vehicles, can “go green”
ecological concerns overcome a higher cost burden for electric cars? Will taxes increase on gasoline to reflect non-market
costs of pollution, making the economics shift in favor of electric vehicles? AACSB 2015 Standard 9 Economic, political,
regulatory, legal, technological, and social contexts of organizations in a global society
Ask each group of students to consider themselves a team of Genentech (www.gene.com) sales representatives. They are
death of several months. As part of a sales team for one of the most expensive and widely marketed drugs, their task is to
consider the approach to take with doctors who may be reluctant to prescribe Avastin due to the high cost of the treatment for
the benefits received. (Mayer, R. J. (2004), “Two steps forward in the treatment of colorectal cancer” New England Journal
of Medicine 350: 2406-2408.) AACSB 2015 Standard 9 Ethical understanding and reasoning (able to identify ethical issues
and address the issues in a socially responsible manner)
END OF CHAPTER DISCUSSION QUESTION 1
Why is it important for an organization to study and understand its external environment?
It is important because it can affect the industry and firm’s performance. The PESTEL framework, for instance, is helpful
END OF CHAPTER ETHICAL/SOCIAL ISSUES 1
What is the proper role for a multinational firm in cases where government regulations across countries are in
conflict? For example, UBS executives claimed that releasing
any
names of U.S. customers would violate Swiss
banking laws. A compromise was later reached that only the names of customers suspected of illegal activity were
released.
This is clearly a difficult area as UBS and many other firms have discovered. It is important for firms to adhere to the local
What is the responsibility of individual employees to their employers and to their government when there seems to be
a conflict?
It is the individual’s responsibility to seek guidance from their employers when any conflicts arise in the term of their
employment. Likewise, when employers have an issue with their government, the direction of general counsels and other
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END OF CHAPTER SMALL GROUP EXERCISE 1
This exercise facilitates a discussion that pushes beyond analysis to include the formulation and implementation stages of the
strategic management framework. Instead of accumulating an array of data from a PESTEL analysis as a list of macro–
environment factors that impact the industry environment, this exercise allows you to focus on one PESTEL factor,
sociocultural for the packaged food industry to develop one threat, “societal concern for healthy eating, particularly for
children, is reducing product demand.” Then you move to the next step to discuss what a particular firm in that industry
should do in defending itself against that industry threat, in other words, you formulate a strategy. Then you move to the final
step of developing an implementation plan for that strategy. AACSB 2015 Standard 9 Application of knowledge (able to
translate knowledge of business and management into practice)
Visit the Kraft Foods website (http://www.lunchables.com) and review the Lunchables products, as well as other
packaged food products that Kraft offers. Discuss among your group members the extent to which the product
options are healthy choices.
Students are likely to have very strong opinions about the healthiness of food. While few of your students are probably
What changes would you recommend to the CFBAI pledge in order to ensure that the primary audience watching
advertisements for Kraft packaged foods will not be children? Describe alternative guidelines that Kraft might adopt.
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Many students will want to start this discussion by arguing that the question is phrased incorrectly. If the product is designed
for children’s lunches, but not “healthy,” then maybe a better question than where to advertise it would be “How can we
Identify other actions that Kraft might take in order to demonstrate that it is a food company that genuinely cares
about children’s health and a company that would like to help reverse the trend of increasing childhood obesity.
Solutions proposed here should encompass both new product development and advertising and promotion. You also should
If your group believes that the company is not responsible for personal choices that consumers make to eat unhealthy
food, then describe how the company should respond to activist groups and public health officials that are urging
companies to stop producing and marketing unhealthy foods.
The fact is that a lot of people LIKE carbonated soft drinks, salami, chips, mayonnaise, and other high sodium, high fat, high
Strategy Highlight 3.1
POWERPOINT SLIDES 18–19 BLACKBERRY’S BUST
This strategy highlight sets the stage for two important streams of discussion. First, ask the class to think about Blackberry’s
failure to evolve with the market in terms of strategic direction from its top leadership that they learned about in Chapter 2.
Might a product-centered vision and mission back when the iPhone was launched have constrained the firm from looking at
the big picture from the consumer’s perspective? How might management hubris from a strong market position have shaped
management cognition, such that a critical threat from a disruptive technology (see Chapter 7) was not recognized?
Second, ask students to compare the responses to the iPhone by Google, Nokia, and Blackberry. Google’s formed the open
handset alliance to develop and promote Android. Android-based phones now hold the lead in smartphones. Nokia developed
its own smartphone operating system; then it sought support from Microsoft for development of Windows-based phones.
Both of these strategies were unsuccessful in capturing market share. Both Nokia and Blackberry had far more experience in
mobile phones than Google. What resources and capabilities (see Chapter 4) did Google have (or not have) that enabled them
to succeed where Blackberry and Nokia could not?
3.2 Industry Structure and Firm Strategy LO 3–2
POWERPOINT SLIDES 20–34, 42–44
Strategy Highlight 3.2
POWERPOINT SLIDES 24–25
“Five Forces in the Airline Industry” Five Forces in the Airline Industry serves two useful purposes. It offers an example of
an unattractive industry to analyze and it lays some groundwork for corporate strategy theory by highlighting that some
segments of an industry value chain or industry eco-system are far more profitable than other segments.
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STRATEGY SMART VIDEO LECTURE
POWERPOINT SLIDES 80
“The Five Competitive Forces That Shape Strategy”: This is a 13-minute video interview with Michael Porter. He uses the
airline versus soft drinks industries as examples of applying the five forces model.
NEWER FACULTY: The five forces model is one of the most widely used tools in strategy. It is worth spending some time
on it. Michael Porter wrote his original work on the subject over 30 years ago. However, he updated this work in 2008 and
you may want to review his article in HBR for more details on the model. (Porter, M. E. (2008), “The five competitive forces
STRATEGY SMART VIDEO EXAMPLE
While the primary purpose of the five forces model is to assess the profitability of an industry, you will find that many
students are confused into thinking that its purpose is to determine whether or not to enter an industry. As a result of this
misconception, they can get a bit tangled between the overall assessment to identify how profitable it would be for a new firm
to enter an industry and the barriers to new entry. The soft drink industry offers a good example to clear up this
misunderstanding. The industry is quite attractive, however the barriers to entry in the soft drink industry are such that it
would be quite difficult to compete with Coca-Cola and Pepsi on a national or even regional level. Newer firms are tending to
enter in niche spaces such as the super-caffeinated energy drinks to avoid direct competition with a powerhouse like Pepsi.
This discussion also lays the groundwork for corporate strategy by identifying that in industries with high barriers to entry
acquisition or alliances can be preferred entry modes over greenfield investment.
Soft drinks have been one of the most profitable industries for decades, with an average ROIC of 37.6 percent between 1992
and 2006. Michael Porter calls soft drinks a “five star” industry; by that, he means that each of the five forces is weak,
leading to superior industry performance. The nature of competition between Pepsi and Coke is benign for the most part,
focusing on non-price factors such as lifestyle advertising and product innovation rather than on price. The barriers to entry
STRATEGY SMART VIDEO EXERCISES
If you show the video in class or assign it as homework before class, this quick small group activity, done before your
lecture, can be used to assess the students’ familiarity with the concepts. Each team of 3 – 4 students could be assigned a
force for one of the two industries. Ask them to assess the strength of the force, the theoretical drivers that cause that effect,