Chapter 4Exploring the External Environment: Macro and Industry Dynamics

2

OBJECTIVES

Explain the importance of the external context for strategy and firm performance

1

Use PESTEL to identify the macro characteristics of the external context

2

Identify the major features of an industry and the forces that affect industry profitability

3

Understand the dynamic characteristics of the external context

4

Show how industry dynamics may redefine industries5

Use scenario planning to predict the future structure of the external context

6

3

THE COLA WARS (TIMELINE)

Coca-Cola

Coca-Cola invented

“Kick Pepsi's can” Diet CokeNew Coke

Repair Coke and restore Stock price Diversify product line

1886

1950

1960

1970

1980

1990

2000

Pepsi

“Beat Coke”

“Pepsi Generation”

“Pepsi Challenge”

Foster entrepreneurial spirit of Pepsi’s people

Jettison slow-growing businesses

Diversify beyond soft-drinks

4

EXTERNAL CONTEXT OF STRATEGY

• An internal analysis is just half of what is needed to build strategy

• The SWOT and more complicated frameworks help us understand the full picture

Internal • Strengths

• Weaknesses

• Capabilities

• Relationships

• Etc.

5

BLURRING OF INDUSTRY BOUNDARIES

With fewer companies providing these services, the power of buyers will be impacted.

As services are bundled, the cost to switch to another service provider will be greater.

CableCompanies

Long DistanceTelephone

Companies

InternetProvider

Companies

6

THE BALANCE OF POWER

Wal-Mart

Rubbermaid

7

THE EXTERNAL ENVIRONMENT OF THE ORGANIZATION

Macro Environment Political, Economic, Sociocultural,

Technological, Environmental, Legal

Industry Environment

Strategic Group

The Organization

PESTEL ANALYSIS FRAMES THE EXTERNAL CONTEXT

8

PoliticalEconomicSocioculturalTechnologicalEnvironmentalLegal

9

KEY QUESTION TO ASK

What macro environmental conditions will have a material effect on our ability to implement our strategy successfully?

How stable are these characteristics?

What is our firm’s industry?

What are the characteristics of the industry?

10

PRESSURES FAVORING INDUSTRY GLOBALIZATION

• Interdependent countries

• Homogeneous customer needs

• Favorable trade policies

• Large scale and scope economies

• Global competitors

• Global customer needs

• Common technological standards

• Learning and experience

• Global channels • Common manufacturing and marketing regulations

• Sourcing efficiencies

CompetitionMarkets GovernmentsCosts

• Favorable logistics

• Arbitrage opportunities

• High R&D costs

• Transferable marketing approaches

Source: Adapted from M.E. Porter, Competition in Global industries (Boston: Harvard Business School Press, 1986); G. Yip, “Global Strategy in a World of Nations, “ Sloan Management review 31:1 (1989), 29-40

11

KEY SUCCESS FACTORS AS BARRIERS TO ENTRY

Key asset or requisite skill that all firms in an industry must possess in order to be a viable competitor

Key success factor (KSF)

Ability to meet competitive pricing

Extensive distribution

Ability to raise consumer awareness

Broad product mix

Global presence

Well positioned bottlers and bottling capacity

KSFs:

SOFT DRINK EXAMPLE

12

INDUSTRY FRAGMENTATION AND CONCENTRATION

Monopoly Duopoly Fragmented

13

ENVIRONMENTAL TRENDS

Silent Generation

– Born between 1932 and 1945

Baby Boomers– Born between 1946 and 1964

Generation X– Born between 1965 and 1977

Generation Y Born between 1978 and 1994

14

ANALYZING INDUSTRY STRUCTURE USING FIVE – FORCES

Buyer Power (Channel and End consumer)• Bargaining leverage• Buyer volume• Buyer information• Brand identity• Price sensitivity• Threat of backward integration• Product differentiation• Buyer concentration vs. industry• Substitutes available• Buyer’s incentives

Supplier Power• Supplier concentration• Importance of volume to supplier• Differentiation of inputs • Impact of inputs on cost or differentiation• Switching costs of firms in the industry• Presence of substitute inputs• Threat of forward integration• Cost relative to total purchases in industry

Threat of New Entrants (and Entry Barriers)• Absolute cost advantages • Proprietary learning curve• Access to inputs• Government policy• Economies of scale• Capital requirements• Brand identity• Switching costs• Access to distribution• Expected retaliation• Proprietary products

Threat of Substitutes• Switching costs• Buyer inclination to substitute • Price-performance tradeoff of

substitutes• Varity of substitutes• Necessity of product or service

Degree of Rivalry• Exit barriers • Industry concentration• Fixed costs/value added• Industry growth• Intermittent overcapacity• Product differences • Switching costs• Brand identity• Diversity of rivals• Corporate stakes

Source: Adapted from M.E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980)

Industry value chain – from raw materials and other inputs, to channel to end consumer

Complementors Number of complementsRelative value added Barriers to complement entryDifficulty of engaging complementsBuyer perception of complementsComplement exclusivity

15

CAUSES OF RIVALRY

Barriers to Entry

• Strong brands • Proprietary technology• Start-up costs • Etc.,

Barriers to Exit

• Few other opportunities • Sunk investments• Etc.,

In addition to entry and exit barriers,many factors drive rivalry • History of price wars

• Level of fixed costs

• Industry concentration

• Market growth

• Etc.

BARRIERS TO ENTRY VARY BY INDUSTRY

16

17

SUPPLIER POWER

When firms in the supply industry can dictate terms, they can extract greater profits

Diamond supplyPercent

DeBeers

Others

50

Diamond Retailers

50

18

BUYER POWER

Suppliers Buyers

Profits

ILLUSTRATIVE

In industries characterized with many suppliers and few buyers, buyers often capture a greater share of profits

Industry A

Suppliers Buyers

Industry B

Profits

19

THREAT OF SUBSTITUTES

Soft drinks

Coke Pepsi

Movie rentals

Block buster

Hollywood videoB

ottle

d w

ater

Cab

le T

V

20

IMPACT OF COMPLEMENTOR

Any factor that makes it more attractive for suppliers to supply an industry on favorable terms or that makes it more attractive for buyers to purchase products or services from an industry at prices higher than it would pay absent the complementor

Complementor:

Hot dogs

+

Buns

More sales

Three Examples

Music

+

MPS player

More attractive offering

Delta plane

orders+

American Airlinesplane orders

Lower costs from Boeing

21

COMPETITIVE INTELLIGENCE

Competitive intelligence is a method whereby firms are able to gather information about their competitors.

Steps in predicting competitors’ behaviors:

1. Understand their objectives 2. Determine competitors current strategies3. Identify the competitors assumptions about the industry and

of itself4. Determine the competitor’s key strengths and weaknesses

22

INDUSTRY LIFE CYCLE

Source: Adapted from K. Rangan and G. Bowman, “Beating the Commodity Magnet,” Industrial Marketing Management 21 (1992), 215-224; P. Kotler, “Managing Products through their Product Life Cycle,” in Marketing Management: Planning, Implementation, and Control, 7th ed (Upper Saddle River, NJ: Prentice Hall, 1991)

Mar

ket S

ize

Time

Embryonic

Technological uncertainty

Niche market – selected products for selected markets

Participants emphasize problem solving – product as “solution”

Growing

Customers become better informed

Market expands beyond niche

More competitors enter

Mature

Aggressive customers

Proliferation of products and markets served

Market volatility and beginnings of industry consolidation

In Decline

Product/market contraction

Further consolidation and industry regeneration

LIFE CYCLES – AN EXAMPLE FROM THE SOFTWARE INDUSTRY

Government Policies & Initiatives

Technology Macro Market Environment

Macro-Economic Forces & Factors

Technology Trends

Social Trends

Supply

Competitive Pressures

SW Industry Structure

SW Business Models

R&D Trends

Demand

Innovation: Vendor Business, Technology,

and Market Entry Strategy

Technology Adoption: Buyer Demand and

Technology Absorption

Vertical Industry Trends

Global Commercial Environment

Lifecycles:

Firm Entry &

Exit

Software Trends

Technology Market Ecosystems

Software Market Ecosystems

Software Industry Model

Innovation/Long Wave

Software Market

Product/technology Source: S. A. Mertz, dissertation proposal

24

TECHNOLOGICAL DISCONTINUITIES

Discontinuities

Process-related

Product-related

Southwest airlines radically changed the airline business model by adopting new processes (e.g., a point-to-point model)

In disk-drive industry, virtually every new generation of technology led to demise of market leader

Example

25

HYPERCOMPETITION

“Market stability is threatened by short product life cycles, short product design cycles, new technologies, frequent entry by unexpected outsiders, repositioning by incumbents, and tactical redefinitions of market boundaries as diverse industries emerge.”

– Richard D’Aveni