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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 for strategy and firm performance
1
Use PESTEL to identify the macro characteristics of the external context
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Identify the major features of an industry and the forces that affect industry profitability
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Understand the dynamic characteristics of the external context
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Show how industry dynamics may redefine industries5
Use scenario planning to predict the future structure of the external context
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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
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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.
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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
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THE BALANCE OF POWER
Wal-Mart
Rubbermaid
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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
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PoliticalEconomicSocioculturalTechnologicalEnvironmentalLegal
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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?
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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
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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
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INDUSTRY FRAGMENTATION AND CONCENTRATION
Monopoly Duopoly Fragmented
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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
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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• 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
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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 drive rivalry • History of price wars
• Level of fixed costs
• Industry concentration
• Market growth
• Etc.
BARRIERS TO ENTRY VARY BY INDUSTRY
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SUPPLIER POWER
When firms in the supply industry can dictate terms, they can extract greater profits
Diamond supplyPercent
DeBeers
Others
50
Diamond Retailers
50
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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
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THREAT OF SUBSTITUTES
Soft drinks
Coke Pepsi
Movie rentals
Block buster
Hollywood videoB
ottle
d w
ater
Cab
le T
V
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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
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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
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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)
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
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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
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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 D’Aveni