Chapter 4 Exploring the External Environment: Macro and Industry Dynamics

1. Chapter 4Exploring the External Environment: Macro and Industry Dynamics

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

3. Coca-Cola Pepsi Coca-Cola invented 1886 1950 “Beat Coke” 1960 “Pepsi Generation” 1970 “Pepsi Challenge” “Kick Pepsi's can” Diet CokeNew Coke 1980 Foster entrepreneurial spirit of Pepsi’s people 1990 Jettison slow-growing businesses Repair Coke and restore Stock price Diversify product line 2000 Diversify beyond soft-drinks THE COLA WARS (TIMELINE)

4. Internal • Strengths • Weaknesses • Capabilities • Relationships • Etc. 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 • 4 Elements of Opportunities & Threats: Direction, Magnitude, Scope, and Timing External environment

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. Long Distance/Cell Phone Companies Cable Companies  Internet Provider Companies

6. THE BALANCE OF POWER • Proctor & Gamble • Wal-Mart

7. THE EXTERNAL ENVIRONMENT OF THE ORGANIZATION Macro Environment Political/Legal, Economic, Sociocultural, Technological Industry Environment Strategic Group The Organization

8. What is our firm’s industry? What are the characteristics of the industry? How stable are these characteristics? KEY QUESTION TO ASK What macro environmental conditions will have a material effect on our ability to implement our strategy successfully?

9. 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 PRESSURES FAVORING INDUSTRY GLOBALIZATION Markets Costs Governments Competition • Homogeneous customer needs • Large scale and scope economies • Favorable trade policies • Interdependent countries 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

10. 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 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 • Engagement of complements • Buyer perception of complements • Complement exclusivity • Industry value chain – from raw materials and other inputs, to channel to end consumer • 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 Substitutes • Switching costs • Buyer inclination to substitute • Price-performance tradeoff of substitutes • Varity of substitutes • Necessity of product or service Source: Adapted from M.E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980)

11. KEY SUCCESS FACTORS AS BARRIERS TO ENTRY SOFT DRINK EXAMPLE Key success factor (KSF) KSFs: Key asset or requisite skill that all firms in an industry must possess in order to be a viable competitor • Ability to meet competitive pricing • Extensive distribution • Ability to raise consumer awareness • Broad product mix • Global presence • Well positioned bottlers and bottling capacity

12. INDUSTRY FRAGMENTATION AND CONCENTRATION Monopoly Duopoly Fragmented

13. 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 • Industry Life Cycle • Few other opportunities • Sunk investments • Etc., CAUSES OF RIVARLY Barriers to Entry • Strong brands • Proprietary technology • Start-up costs • Etc.,

14. Diamond Retailers SUPPLIER POWER Diamond supply Percent Others 50 When firms in the supply industry can dictate terms, they can extract greater profits DeBeers 50

15. Industry B Suppliers Buyers In industries characterized with many suppliers and few buyers, buyers often capture a greater share of profits Profits BUYER POWER ILLUSTRATIVE Industry A Suppliers Buyers Profits

16. Bottled water Cable/Satellite TV THREAT OF SUBSTITUTES Soft drinks Movie rentals Redbox Coke Pepsi Netflix

17. Three Examples Hot dogs + More sales Buns Music + More attractive offering MP3 player Delta plane orders + Lower costs from Boeing American Airlinesplane orders 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

18. Niche market – selected products for selected markets Market expands beyond niche Proliferation of products and markets served Product/market contraction Participants emphasize problem solving – product as “solution” More competitors enter Market volatility and beginnings of industry consolidation Further consolidation and industry regeneration Technological uncertainty Customers become better informed Aggressive customers INDUSTRY LIFE CYCLE Market Size Time Embryonic Growing Mature In Decline 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)

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

20. Product-related Discontinuities Process-related TECHNOLOGICAL DISCONTINUITIES Example In disk-drive industry, virtually every new generation of technology led to demise of market leader Southwest airlines radically changed the airline business model by adopting new processes (e.g., a point-to-point model)

21. SCENARIO PLANNING An understanding of the big picture and a plan to manage uncertainty 6 Assess the strategic implications of each scenario 5 Specify indicators that can signal which scenario is unfolding 4 Flesh out the picture 3 Develop the framework by defining two specific axes 2 Brainstorm key drivers, decision factors, and possible scenario departure or divergence points 1 Define target issue, time frame, and scope for scenarios

22. 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