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discussion is to identify for you which aspects of the model that your students find most difficult to understand. A secondary
purpose is to bring students as close as possible to a common basis at the beginning of class through peer–to-peer coaching.
To illustrate the supplier and buyer impacts on industry attractiveness you can use a tug-of-war exercise. One rope connects
the suppliers to the industry rivals. Another rope connects the buyers to the industry rivals. A knot in the center of the buyer
rope illustrates the industry sales price and a knot in the supplier rope illustrates the industry COGS paid to suppliers. The
supplier rope will be manned by supplier sales reps on one side and industry rival purchasing agents on the other. Similarly,
the buyer rope will be manned by the buyer purchasing agents and the industry sales reps. Have the industry sales reps and
EXAMPLES
electric vehicles. BYD’s claim to fame is a lithium ferrous phosphate battery on which cars can run 250 miles on a single
three-hour charge. Already one of the fastest growing independent automakers, BYD is selling plug-in hybrids and all–
electric vehicles in China, Africa, the Middle East, and South America. It plans to sell cars in the U.S. and other Western
countries in the near future. Globalization led to extensive entry by foreign car manufacturers, increasing the number of
competitors in the U.S. auto industry, and with it, competitive rivalry. The Japanese automakers, for example, were
competitors. There is not a significant threat of entry because entering the airframe manufacturing industry requires huge
capital investments. In fact, Airbus was only able to overcome these tremendous barriers to entry with the help of direct
subsidies from several European governments including France, Germany, Spain, and the UK.
New Entrants: Apple’s Mac-brand customers are among the most loyal product fans. New entrants will have great difficulty
attracting Mac users to their computer products, because Mac fans seem to have a personal identification and bond with the
companies. For many decades, De Beers, a global diamond mining and trading company, held a virtual monopoly in both
access to diamond mines and the distribution channels in the diamond trade, which in turn reduced the threat of entry.
New Entrants: Incumbent firms often benefit from cumulative learning and experience effects accrued over long periods of
time. Leading industrial engineering companies such as Siemens and GE have many decades of experience in solving the
toughest engineering problems. Attempting to obtain such deep knowledge within a shorter time frame is often costly, if not
percent of Google’s Android operating system use in smartphones and roughly 30 percent in tablets (in 2012). Google
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benefits from Samsung’s strong performance, allowing the Android operating system to capture more than 70 percent market
share in smartphones. This large installed base of mobile operating systems enables Google to capture revenues from use of
backward-integrate in order to produce their components in-house if their demands for lower prices and higher product
quality are not met by their suppliers. Taken together, powerful buyers have the ability to extract a significant amount of the
value created in the industry, leaving little or nothing for producers.
END OF CHAPTER DISCUSSION QUESTION 2
How do the five competitive forces in Porter’s five forces model affect the profitability of the industry? For example,
in what way might strong forces increase industry profits, and in what way do strong forces reduce industry profits?
Identify an industry in which many of the competitors seem to be having financial performance problems. Which of
the five forces seem to be strongest?
INTEGRATION
Video Case Analysis: The Five Forces Model Applied to Water
This video case analysis gives the students an opportunity to consider the importance, costs and price of water. For many
students, this may be the first time they have given thought to the value of water and its relatively low price to consumers.
The video also compares the U.S. water system to that in Singapore, thus adding a global context. The video lasts about
seven minutes and has four embedded questions contained in it. Difficulty: Medium
Blooms: Analyze
AACSB:
Analytic
Video Case Tips: We suggest setting the “attempts” policy to “revise the previous attempt” for video cases.
This enables students to watch parts of the video and edit their answers without having to watch the entire video again.
Follow-Up Activity: The instructor can expand on the concepts from this interactive by discussing the five forces more
explicitly for critical utilities such as water and electricity. The textbook discusses airlines (Strategy Highlight 3.2),
automobiles, and technology industries. A comparison of these more traditional industries with more highly regulated
utilities can help students see the usefulness of the five forces analysis model.
Research Update
Chang, S.-J. and Wu, B. (2013), Institutional barriers and industry dynamics. Strat. Mgmt. J. doi: 10.1002/smj.2152
EXPERIENCED FACULTY: Discussion of this new research offers an opportunity to link the PESTEL analysis to the five
forces analysis. The study focuses on the competitive interaction between incumbents and new entrants as a driver of
industry evolution. It investigates the impact of institutional characteristics (political, legal, and sociocultural norms in
PESTEL analysis) unique to China on the productivity and exit hazards of incumbents versus new entrants. China’s
environment created a divergence between productivity and survival that shaped industry evolution. It also offers an
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EXERCISE
You can illustrate the impacts of new entrants, substitutes, and complements with a pizza example. Form four groups of
students: new entrants, substitutes, complements, and focal industry rivals. Bring three pizzas (one smaller than the other two
and one of the larger ones a different type than the other) to class. Caution students not to eat pizza until teaching is done!
Hand the smaller pizza to the industry rivals. Explain the drivers of rivalry intensity and what consequences that has for how
evenly and civilly the pie is shared among all of the hungry incumbents. Hand one of the larger pizzas to the complements
industry; explain how as the complements industry grows the size of pie available to the focal industry rivals grows. Ask
someone in the complements industry to swap out the focal industry’s small pie for the bigger one. Hand one pizza to the
substitutes industry and explain how they are a separate industry that has its own profits, but in this case they are close
substitutes for the focal industry. The substitute industry begins to take customers/profit from the focal industry. Ask
someone from the substitutes industry to take a piece of pizza from the focal industry. Explain that new entrants are firms
who are not in the focal industry, but decide to enter it. Send a student from the new entrants team over to the focal industry
team and tell them to take a piece of pizza. Discuss the impact of the lost pieces of the focal industry pie on the original
incumbents. Then let the students eat your teaching materials!
A way to assess critical reasoning skills is to assign students a five forces model of an industry, then ask students to explicitly
assess each of the driving forces listed in Exhibit 3.4. For one force that has some drivers that are strong and some that are
weak, ask students to justify how they weighed those competing factors to reach a conclusion. If you choose the
pharmaceutical industry, you can assign this article “For prescription drug makers, price increases drive revenue” (J Walker
10/6/15 The Wall Street Journal). It provides a good alternative to the soft drink industry as a profitable industry due to weak
forces. Two factors that should come out of the discussion are strong patent protection (see Chapter 7), a regulatory system
3.2 Industry Structure and Firm Strategy LO 3–3
POWERPOINT SLIDES 35–41
EXAMPLES
The structure-conduct-performance model has the benefit of simplicity compared with the five forces model, BUT it is also a
bit harder for students to grasp as it is a continuum and may not always yield “black & white” answers. One such example:
Although undifferentiated agricultural products are commodities leading to a perfect competitive market structure, farmers
have noted the demographic trend toward organic food. The demand for organic milk far outstrips supply, and allows dairy
companies to command a 50–100 percent price premium over non-organic milk. The dairy producers now enjoy some pricing
power as a result of their differentiated product.
NEWER FACULTY: An example of a U.S. oligopoly might be the accounting firm industry. In contrast, the U.S. personal
injury attorney industry is much more fragmented and rivalry is more intense. You can expand this contrasting example by
asking students how competition within each industry to hire the best accounting graduates or the best law school graduates
differs due to industry structure.
While natural monopolies appear to be disappearing from the competitive landscape, so-called near monopolies are of much
greater interest to strategists. These near monopolies are firms that have accomplished product differentiation to such a
degree that they are in a class by themselves, just like a monopolist. Intel, with its 80 percent market share in semiconductors,
is a near monopoly. Discuss the impacts on both the semiconductor industry and the industry of its largest buyers, such as PC
manufacturers.
The European Union, for example, views Intel (with its 80 percent market share in semiconductors) as a near monopoly. This
is an enviable position in terms of the ability to extract profits, so long as Intel can steer clear of monopolistic behavior,
which may attract antitrust regulators and lead to legal repercussions.
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Likewise, the French government owns and supports Areva, an industrial conglomerate in the nuclear power industry,
Category-killers like PetSmart and PetCo expanded rapidly. Most e-tailers of pet supplies went out of business. Applying the
SCP model could have predicted that online pet supply stores are unlikely to be profitable: Many small firms offering a
commodity product in an industry that is easy to enter would be unable to increase prices and generate profits. The ensuing
price competition led to online retailers exiting and large brick-and-mortar retailers surviving.
The potash industry is an example of a commodity market cartel. “Russian potash producer signals end to global cartel” (The
Wall Street Journal, 7/31/13) gives you an example that illustrates the principles of the SCP model of competition while at
familiar with Uber and Lyft competing in the U.S., but possibly not with Uber’s position in China, so this example offers an
opportunity to put their experience into a global context.
3.2 Industry Structure and Firm Strategy LO 3–4
POWERPOINT SLIDES 45
EXAMPLES
A good example of what a complement is would be the Halo game franchise and the effect it has had on driving increased
Illegal music downloads created a powerful substitute for CD record sales, which plummeted with the availability of file–
sharing software such as Napster. Seeing a strategic opportunity, Apple established the iTunes music store to complement its
Extended Discussion
The equipping of industrial and everyday products with sensors, processors, Internet connections, and user interfaces is
radically changing the competitive landscape in the microprocessor and software industries, but also in many
manufacturing industries, mobile devices, and in consumer marketing. McKinsey Quarterly has published a series of
articles about the Internet of Things. Some of the articles specifically discuss the Internet of Things in the auto industry,
which allows you to build on the chapter opening case during the discussion.
One way to use this topic for discussion in your classroom would be to assign each team of students a different article.
Begin the discussion with a small group discussion of the implications to be drawn from their particular assigned article.
Then, invite a broad group discussion on: (1) industries that are impacted, (2) what the PESTEL analysis tells you about
how and why the profitability in these industries is changing, and (3) what the five force model tells you about how and
why the profitability in these industries is changing.
Some possible articles are: An executive’s guide to the Internet of Things Aug 2015, Unlocking the potential of the
Internet of Things Jun 2015, How the Internet of Things could transform the value chain Dec 2014, The Internet of
Things: Sizing up the opportunity Dec 2014, GE’s Jeff Immelt on digitizing in the industrial space Oct 2015, Consumer
view on connected homes Oct 2015.
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iPod music player. Apple makes money by selling the hardware (iPod or iPhone) and taking a cut from transactions on the
3.3 Changes over Time: Industry Dynamics
LO 3–5
POWERPOINT SLIDES 46–49
END OF CHAPTER SMALL GROUP EXERCISE 2
Use the five forces plus complements model to think through the various impacts such technology shifts may have on the
textbook industry. Include in your response answers to the following questions. AACSB 2015 Standard 9 Application of
knowledge (able to translate knowledge of business and management into practice)
How should the managers of a textbook publishing company respond to such changes?
Smart business leaders in the textbook industry will not ignore this technological threat to their business. The user interface
experiences of Kindle and iPad are far superior to that of prior notebooks and netbooks. This key complement seems likely to
Will the shifts in technology and business models be likely to raise or lower the textbook industry-level profits?
Explain.
The shifts in technology will be likely to raise textbook industry-level profits if new technology is readily implemented into
the current mix. The textbook industry is currently struggling due to rivalry amongst existing competitors. A focus to create
tailored products to customers’ needs should be initiated to be able to increase industry profitability as producers are able to
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DISCUSSION TOPICS
The U.S. banking industry has experienced major consolidation, and banking giants like Citigroup, Bank of America, and
Wells Fargo have emerged. In a similar fashion, there used to be the Big Eight in the accounting and professional services
industry, handling the audits of publicly traded and well–to-do private companies. Today, only the Big Four remain:
PricewaterhouseCoopers, Deloitte, Ernst & Young, and KPMG. You could invite the finance and accounting majors in your
class to lead the discussion of what changes in the industry caused this consolidation to occur.
Industry consolidation can lead to anti-competitive behavior and increased government scrutiny for proposed mergers. For
example, the U.S. DOJ recently began investigating the airline industry for collusion (see “Justice department probes airlines
for collusion” J Nicas, B Kendall, S Carey 7/2/15 The Wall Street Journal). InBev faces difficulties in gaining approval to
acquire SAB Miller (see “AB InBev will take over SAB Miller and much of the beer world” M Esterl and T Fairless 10/14/15
The Wall Street Journal). Ask students to use these examples to identify ways in which society benefits from or suffers from
industry consolidation.
NEWER FACULTY: Use this funny video to discuss the reasons behind evolution in video rentals.
EXPERIENCED FACULTY: Use this funny video to discuss how rapid evolution in one industry can create change in other
industries. Ask students first to identify the macroenvironment forces that are contributing to the decline of the newspaper
industry. Then ask them to identify (a) other industries that will be affected either positively or negatively by the decline of
the print newspaper industry and (b) other industries affected either positively or negatively by the same macroenvironment
forces that are hurting the newspaper industry.
The changing face of the tech industry offers a good example of industry evolution. “Tech’s rust belt takes shape” The Wall
Street Journal, 4/19/13 helps students recognize that industries do not always take decades to move from early adopters to
obsolescence. Challenge students to draw analogies between the old rust belt and the new tech rust belt. Are we seeing the
rise and fall of industries or differences among strategic groups? In what ways are the firms previously considered disruptors
now being disrupted by others? The article is accompanied by a video. Ask students to choose one of the rust belt firms: how
might that firm have predicted the industry evolution and what actions could it take now? AACSB 2015 Standard 9 Making
sound decisions and exercising good judgment under uncertainty
EXPERIENCED FACULTY: The opening case sets up a discussion of how the auto industry has changed in recent years
with the growth in hybrid engines and the advent of fully electric plug-ins. The next evolution in this industry may be self–
driving cars. (See “What to expect when you’re expecting an Apple car” C Mims 8/31/15 The Wall Street Journal, “Tesla
releasing autopilot software for its Model S Cars” M Ramsey 10/14/15 The Wall Street Journal, and “Ten ways autonomous
driving could redefine the automotive world” June 2015 McKinsey Quarterly.) Use this trend to identify changes in key
competencies for industry success over time, from combustion chambers and transmissions, to batteries and computer
processors, to computer software and artificial intelligence. What are the implications of these changes for industry structure
and profitability? In light of these trends, ask students to explain the advantages of moving your R&D labs from Detroit to
Silicon Valley (see “Ford, Mercedes Benz set up shop in Silicon Valley” M Ramsey 3/28/15 The Wall Street Journal).
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3.4 Performance Differences within the Same
Industry: Strategic Groups LO 3–6
POWERPOINT SLIDES 50–56
STRATEGY SMART VIDEO LECTURE
POWERPOINT SLIDES 81
Professor Jim Hazy’s lecture on “Overview of Strategic Group Mapping” can be used either as a substitute for your lecture or
as a homework assignment before class.
STRATEGY SMART VIDEO LECTURE
POWERPOINT SLIDES 83
“How to Create a Strategic Group Map in Excel” can be shown in class, but is perhaps better used as a homework assignment
to view before an assignment to create a strategic map of an industry.
EXERCISES
NEWER FACULTY: We have found that the mapping of strategic groups is useful in helping students understand the
competitive dynamics within industries. This can also be used as a small group activity in the classroom. Display the airline
example in Exhibit 3.5 and ask each group of students to select a different industry and plot out some of the firms they may
know in that industry (retailing of various types, restaurants, and consumer brands are often selected by our students).
EXPERIENCED FACULTY: You might want to go deeper into one industry and explore the importance of the dimensions
for the strategic map. If so, choose the industry and then hold a large group discussion on the appropriate dimensions for
mapping the industry. Then assign small groups to map the industry on the board or flip charts using different dimensions.
Invite them to share their maps and draw strategic implications. Then hold a discussion about how the dimensions you choose
might affect management cognition of competitive threats.
INTEGRATION
Case Analysis: Strategic Groups: Pharmaceuticals
This activity builds student comprehension using a case about the pharmaceutical industry. The student must read the case
provided, as well as the relevant textbook section, and answer the five questions in this exercise. This case analysis gives
the students an opportunity to consider the strategic group mapping framework in a less well known industry than the
airline example in the textbook. Difficulty: Medium
Blooms: Analyze
AACSB: Analytic
Follow-Up Activity: The instructor can expand on the concepts from this case analysis by having students compare the
differences in this case with the one on airlines in the textbook. In particular, the differences in X axis values and the
mobility barriers may yield good student discussions.
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END OF CHAPTER DISCUSSION QUESTION 3
What is a strategic group? How can studying such groups be useful in industry analysis? A strategic group is a set of
END OF CHAPTER DISCUSSION QUESTION 4
How do mobility barriers affect the structure of an industry? How do they help us explain firm differences in
performance? Mobility barriers affect the structure of an industry because they separate one strategic group from another on
3.5 Implications for the Strategist
POWERPOINT SLIDES 57–60
EXAMPLES
It is useful to explain to students that they will be using these tools, especially the five forces model throughout their careers,
not just as senior executives. Some examples include: preparing for an appointment with a key supplier or customer,
estimating the duration of a first mover advantage, evaluating whether and how to compete on RFPs, predicting the reaction
of competitors for estimating financial return on a new facility investment, or positioning the value your firm can contribute
EXERCISE
To develop critical reasoning and decision making skills, you might try an exercise that takes the data from an external
analysis, assesses implications for industry profitability, translates the results into the opportunities and threats for the
industry, and then develops alternative offensive and defensive strategies to take advantage of opportunities and mitigate
threats. Here is one such example: AACSB 2015 Standard 9 Thinking creatively and Application of knowledge (able to
translate knowledge of business and management into practice)
Suppliers of rare earth metals have strong negotiating power versus the firms in the electric car industry. The reasoning to
support this conclusion is that there are few suppliers, the focal industry has high switching costs, supplier products are
critical to the focal industry’s products, the focal industry purchases low volumes, and there is low rivalry in the supplier
industry. The implications are that focal industry profitability will be reduced by a higher COGS.
Threat: High supplier power by rare earth industry, due to few suppliers, low profitability among them, [etc.], will depress
profitability of the focal industry.
An offensive alternative strategy would be to backward integrate into the lithium mining industry as Toyota has done. A
defensive alternative strategy would be to develop alternative battery technologies that use different metals and design
manufacturing plants to be flexible enough to produce multiple versions, thereby reducing switching costs.
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Strategy Term Project: Mission, Goals, and the
Strategic Management Process
Term Project Module 3
In this section, students will study the external environment of the firm they previously selected for this project.
Study the external environment of the firm you have previously selected for this project. Are any changes taking place
in the macroenvironment that might have a positive or negative impact on the industry in which your company is
based? Apply the PESTEL framework to identify which factors may be the most important in your industry. What
will be the effect on your industry?
Here, students will look over annual reports and press clippings (or websites) for insights on the INDUSTRY for the firm
they have selected. It is important at this stage for the student to clearly define what industry they are going to use for the
Apply the five forces model to your industry. What does this model tell you about the nature of competition in the
industry?
Identify any strategic groups that might exist in the industry. How does the intensity of competition differ across the
strategic groups you have identified?
How dynamic is the industry in which your company is based? Is there evidence that industry structure is reshaping
competition, or has done so in the recent past?
INTEGRATION
HP Running Case: Module 3
While offering each student the opportunity to explore and analyze the company of his/her choice can add interest to the
exercise, there are many advantages for an instructor when the entire class works on the same firm. Connect allows you to
do this with a running case for a single firm that encompasses every chapter in the textbook and tracks the Strategy Term
Project. Hewlett-Packard is provided as an example firm your students can use to see what information and analysis is
appropriate for this portion of the term project.
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my
Strategy
POWERPOINT SLIDES 73–74
Is My Job the Next One Being Outsourced?
Which aspects of accounting do you think are more likely to resist the outsourcing trends discussed earlier? Think
about what aspects of accounting are the high–value activities versus the routine, standardized ones. (If it’s been a
while since you took your accounting courses, reach out for information to someone in your strategy class who is an
accounting major.)
The types of accounting that are more likely to resist outsourcing are the non-routine and high-value activities since they
What industries do you think may offer the best U.S. (or domestic) job opportunities in the future? Which industries
do you think may offer the greatest job opportunities in the global market in the future? Use the PESTEL framework
and the five forces model to think through a logical set of reasons that some fields will have higher job growth trends
than others.
In the U.S., and globally, among the top industries for job opportunities are health care, Internet services, and perhaps the
Do these types of macroenvironmental trends affect your thought process about selecting a career field after college?
Why or why not? Explain.
These types of macroenvironmental trends affect the choices of career field after college due to the fact that many students