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Chapter 4

Exploring the External Environment: Macro and Industry Dynamics

OBJECTIVES

1 Explain the importance of the external context for strategy and firm performance
2 3 4 5 6 Use PESTEL to identify the macro characteristics of the external context Identify the major features of an industry and the forces that affect industry profitability Understand the dynamic characteristics of the external context Show how industry dynamics may redefine industries Use scenario planning to predict the future structure of the external context

THE COLA WARS (TIMELINE)


Coca-Cola Coca-Cola invented 1886 1950 1960 Beat Coke Pepsi Generation Pepsi

1970
Kick Pepsi's can Diet Coke New Coke 1980

Pepsi Challenge
Foster entrepreneurial spirit of Pepsis people Jettison slow-growing businesses Diversify beyond soft-drinks

1990

Repair Coke and restore Stock price Diversify product line

2000

EXTERNAL CONTEXT OF STRATEGY

An internal analysis is
Internal

Strengths Weaknesses Capabilities Relationships Etc.

just half of what is needed to build strategy

The SWOT and more


complicated frameworks help us understand the full picture

BLURRING OF INDUSTRY BOUNDARIES

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

Cable Companies

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

Internet Provider Companies

THE BALANCE OF POWER

Rubbermaid

Wal-Mart

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

Political Economic Sociocultural Technological Environmental Legal

KEY QUESTION TO ASK

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

What is our firms industry?

How stable are these characteristics?

What are the characteristics of the industry?

PRESSURES FAVORING INDUSTRY GLOBALIZATION


Markets Costs Governments Competition

Homogeneous
customer needs

Large scale and


scope economies

Favorable trade
policies

Interdependent
countries

Global customer
needs

Learning and
experience

Common
technological standards

Global
competitors

Global channels

Sourcing
efficiencies

Common
manufacturing and marketing regulations

Transferable
marketing approaches

Favorable
logistics

Arbitrage
opportunities

High R&D costs


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 9

KEY SUCCESS FACTORS AS BARRIERS TO ENTRY

SOFT DRINK EXAMPLE Key success factor (KSF) Key asset or requisite skill that all firms in an industry must possess in order to be a viable competitor KSFs:

Ability to meet competitive pricing Extensive distribution Ability to raise consumer awareness

Broad product mix


Global presence Well positioned bottlers and bottling
capacity

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INDUSTRY FRAGMENTATION AND CONCENTRATION

Monopoly

Duopoly

Fragmented

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ENVIRONMENTAL TRENDS

Silent Generation

Born between 1932 and 1945

Born between 1946 and 1964

Baby Boomers

Born between 1965 and 1977

Generation X

Born between 1978 and 1994 Generation Y

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ANALYZING INDUSTRY STRUCTURE USING FIVE FORCES


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

Complementors Number of complements Relative value added Barriers to complement entry Difficulty of engaging complements Buyer perception of complements Complement exclusivity

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

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

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

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

Source:

Threat of Substitutes Switching costs Buyer inclination to substitute Price-performance tradeoff of substitutes Varity of substitutes Necessity of product or service Adapted from M.E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980)

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CAUSES OF RIVALRY
Barriers to Entry Barriers to Exit In addition to entry and exit barriers, many factors drive rivalry

History of price wars


Level of fixed costs Industry
concentration

Market growth
Strong brands Proprietary technology Start-up costs Etc.,

Few other opportunities Sunk investments Etc.,

Etc.

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BARRIERS TO ENTRY VARY BY INDUSTRY

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SUPPLIER POWER

Diamond supply Percent

Diamond Retailers

Others

50
When firms in the supply industry can dictate terms, they can extract greater profits

DeBeers

50

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BUYER POWER
Industry A Suppliers Buyers Industry B Suppliers Buyers

ILLUSTRATIVE

Profits

Profits

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

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THREAT OF SUBSTITUTES
Soft drinks Movie rentals
Block buster Coke Pepsi

Hollywood video

Bottled water

Cable TV

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IMPACT OF COMPLEMENTOR
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 Three Examples Hot dogs + Buns Music + MPS player Delta plane orders + American Airlines plane orders
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More sales

More attractive offering

Lower costs from Boeing

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 strategies 3. Identify the competitors assumptions about the industry and of itself 4. Determine the competitors key strengths and weaknesses

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INDUSTRY LIFE CYCLE

Market Size

Time Embryonic Niche market selected products for selected markets Growing Market expands beyond niche Mature Proliferation of products and markets served In Decline Product/market contraction

Participants emphasize problem solving product as solution


Technological uncertainty
Source:

More competitors enter

Market volatility and beginnings of industry consolidation


Aggressive customers

Further consolidation and industry regeneration

Customers become better informed

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, 7 th ed (Upper Saddle River, NJ: Prentice Hall, 1991)

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LIFE CYCLES AN EXAMPLE FROM THE SOFTWARE INDUSTRY


Software Industry Model
Technology Macro Market Environment SW Industry Structure Supply
Innovation: Vendor Business, Technology, and Market Entry Strategy

Social Trends

Demand

Technology Trends Software Trends

Competitive Pressures Global Commercial Environment

Technology Adoption: Buyer Demand and Technology Absorption


MacroEconomic Forces & Factors

Vertical Industry Trends

Firm Entry & Exit

Lifecycles:

Software Market Ecosystems SW Business Models

R&D Trends

Innovation/Long Wave

Technology Market Ecosystems Government Policies & Initiatives

Software Market Product/technology


Source: S. A. Mertz, dissertation proposal

TECHNOLOGICAL DISCONTINUITIES
Example Product-related In disk-drive industry, virtually every new generation of technology led to demise of market leader

Discontinuities

Process-related

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

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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 DAveni

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