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Chapter 4Exploring the External Environment:Macro and Industry Dynamics


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OBJECTIVES

Explain the importance of the external context forstrategy and firm performance

1

Use PESTEL to identify the macro characteristics ofthe external context

2

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

3

Understand the dynamic characteristics of theexternal context

4

Show how industry dynamics may redefine industries5

Use scenario planning to predict the future structureof the external context

6


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THE COLA WARS (TIMELINE)

Coca-Cola

Coca-Cola invented

Kick Pepsi's can

Diet CokeNew Coke

Repair Coke and restoreStock priceDiversify product line

1886

1950

1960

1970

1980

1990

2000

Pepsi

Beat Coke

Pepsi Generation

Pepsi Challenge

Foster entrepreneurialspirit of Pepsis people

Jettison slow-growingbusinesses

Diversify beyondsoft-drinks


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EXTERNAL CONTEXT OF STRATEGY

An internal analysis isjust half of what isneeded to build

strategy

The SWOT and morecomplicatedframeworks help usunderstand the fullpicture

Internal

Strengths Weaknesses

Capabilities

Relationships

Etc.


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BLURRING OF INDUSTRY BOUNDARIES

With fewercompanies providingthese services, thepower of buyers willbe impacted.

As services arebundled, the cost toswitch to anotherservice provider willbe greater.

CableCompanies

Long DistanceTelephoneCompanies

InternetProvider

Companies


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THE BALANCE OF POWER

Wal-Mart

Rubbermaid


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THE EXTERNAL ENVIRONMENT OF THE ORGANIZATION

Macro EnvironmentPolitical, Economic, Sociocultural,Technological, Environmental, Legal

Industry Environment

Strategic Group

The Organization


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PESTEL ANALYSIS FRAMES THE EXTERNAL CONTEXT

7

PoliticalEconomic

Sociocultural

TechnologicalEnvironmental

Legal


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KEY QUESTION TO ASK

What macro environmentalconditions will have a materialeffect on our ability to implementour strategy successfully?

How stable are thesecharacteristics?

What is ourfirms industry?

What are thecharacteristics of theindustry?


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PRESSURES FAVORING INDUSTRY GLOBALIZATION

Interdependentcountries Homogeneouscustomer needs Favorable tradepolicies Large scale andscope economies

Globalcompetitors

Global customerneeds

Commontechnologicalstandards

Learning andexperience

Global channels Commonmanufacturingand marketingregulations

Sourcingefficiencies

CompetitionMarkets GovernmentsCosts

Favorablelogistics

Arbitrageopportunities

High R&D costs

Transferablemarketing

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


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KEY SUCCESS FACTORS AS BARRIERS TO ENTRY

Key asset or requisite skillthat all firms in an industrymust possess in order to bea 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 bottlingcapacity

KSFs:

SOFT DRINK EXAMPLE


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INDUSTRY FRAGMENTATION AND CONCENTRATION

Monopoly Duopoly Fragmented


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ENVIRONMENTAL TRENDS

SilentGeneration

Born between 1932 and 1945

Baby Boomers


Generation X


Generation YBorn between 1978 and 1994


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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 Buyers 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 chainfrom raw materials andother inputs, to channel

to end consumer

ComplementorsNumber of complements

Relative value added

Barriers to complemententry

Difficulty of engagingcomplements

Buyer perception ofcomplementsComplement exclusivity


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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 driverivalry

History of price wars

Level of fixed costs

Industryconcentration

Market growth

Etc.


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BARRIERS TO ENTRY VARY BY INDUSTRY

15


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SUPPLIER POWER

When firms in the supplyindustry can dictateterms, they can extractgreater profits

Diamond supply

Percent

DeBeers

Others

50

Diamond

Retailers

50


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BUYER POWER

Suppliers Buyers

Profits

ILLUSTRATIVE

In industries

characterized withmany suppliersand few buyers,buyers oftencapture a greatershare of profits

Industry A

Suppliers Buyers

Industry B

Profits


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THREAT OF SUBSTITUTES

Soft drinks

Coke Pepsi

Movie rentals

Block buster

Hollywood video

Bottle

dwater

Cable

TV


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IMPACT OF COMPLEMENTOR

Any factor that makes it more attractivefor suppliers to supply an industry onfavorable terms or that makes it moreattractive for buyers to purchaseproducts or services from an industryat prices higher than it would payabsent the complementor

Complementor:

Hot dogs

+

Buns

More sales

Three Examples

Music

+

MPS player

More attractive offering

Delta planeorders

+

AmericanAirlinesplane orders

Lower costs from Boeing


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COMPETITIVE INTELLIGENCE

Competitive intelligence is a methodwhereby firms are able to gatherinformation about their competitors.

Steps in predicting competitors behaviors:

1. Understand their objectives2. Determine competitors current strategies3. Identify the competitors assumptions about the industry and

of itself4. Determine the competitors key strengths and weaknesses


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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)

MarketSize

Time

Embryonic

Technologicaluncertainty

Niche marketselected products forselected markets

Participantsemphasize problemsolving product as

solution

Growing

Customers becomebetter informed

Market expandsbeyond niche

More competitorsenter

Mature

Aggressivecustomers

Proliferation ofproducts andmarkets served

Market volatility andbeginnings ofindustry

consolidation

In Decline

Product/marketcontraction

Further consolidationand industryregeneration


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LIFE CYCLES AN EXAMPLE FROM THE SOFTWARE INDUSTRY

Government Policies & Initiatives

Technology Macro Market Environment

Macro-EconomicForces &

Factors

TechnologyTrends

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 andTechnology Absorption

Vertical

IndustryTrends

GlobalCommercial

Environment

Lifecycles:

Firm

Entry &Exit

Software

Trends

Technology MarketEcosystems

Software Market Ecosystems

Software Industry Model

Innovation/Long Wave

Software Market

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


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TECHNOLOGICAL DISCONTINUITIES

Discontinuities

Process-related

Product-related

Southwest airlinesradically changed theairline business model

by adopting newprocesses (e.g., apoint-to-point model)

In disk-drive industry,

virtually every newgeneration of technologyled to demise of marketleader

Example


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HYPERCOMPETITION

Market stability is threatened byshort product life cycles, shortproduct design cycles, newtechnologies, frequent entry byunexpected outsiders,

repositioning by incumbents, andtactical redefinitions of marketboundaries as diverse industriesemerge.

Richard DAveni

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