The Japanese automakers, for example, were successful in the U.S. market because their cars were generally of better quality, their production systems were more efficient, and they were more responsive to changes in customer preferences. Today, Korean carmakers are attempting to duplicate this feat. At the same time, U.S. automakers Ford and GM are experiencing a resurgence. Moreover, technological innovations have allowed startups such as Tesla Motors to enter the electric car segment (or strategic group), effectively circumventing high entry barriers into the broader automotive market. With more firms vying for a share of the U.S. auto market, competitive intensity is sure to increase.
In this chapter, we present a set of frameworks to analyze the firm’s external environment—that is, the industry in which the firm operates, and the competitive forces that surround the firm from the outside. We move from a more macro perspective to a more micro understanding of how the external environment affects a firm’s quest for competitive advantage.
We begin with the PESTEL framework, which allows us to scan, monitor, and evaluate changes and trends in the firm’s macroenvironment. Next, we study Porter’s five forces model of competition, which allows us to determine an industry’s profit potential. Depending on the firm’s strategic position, these forces can affect its performance in a positive or negative fashion. We then move from a static analysis of a firm’s industry environment to a dynamic understanding of how industries and competition change over time. Finally, we will introduce the strategic group model as a final framework to help us understand performance differences between clusters of firms in the same industry before developing practical Implications for the Strategist.