Chapter 4 Exploring 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 industries 5 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 Coke New Coke Repair Coke and restore Stock price Diversify product line 188 6 195 0 196 0 197 0 198 0 199 0 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. Cable Companies Long Distance Telephone Companies Internet Provider 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 8 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? 9 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 10 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 [...].. .INDUSTRY FRAGMENTATION AND CONCENTRATION Monopoly Duopoly Fragmented 11 ENVIRONMENTAL TRENDS – Born between 1932 and 1 945 – Born between 1 946 and 19 64 – Silent Generation Born between 1965 and 1977 Baby Boomers Generation X Born between 1978 and 19 94 Generation Y 12 ANALYZING INDUSTRY STRUCTURE USING FIVE – FORCES Complementors Number of... 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) 21 SCENARIO PLANNING An understanding of the big picture and a plan to manage uncertainty 6 Assess the strategic implications... addition to entry and exit barriers, many factors drive rivalry • History of price wars • Level of fixed costs • Industry concentration • • • • Strong brands Proprietary technology Start-up costs Etc., • Market growth • Few other opportunities • Sunk investments • Etc., • Etc 14 SUPPLIER POWER Diamond supply Percent Others Diamond Retailers 50 When firms in the supply industry can dictate terms, they can extract... Rangan and G Bowman, “Beating the Commodity Magnet,” Industrial Marketing Management 21 (1992), 21 5-2 24; 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) 19 COMPETITIVE INTELLIGENCE Competitive intelligence is a method whereby firms are able to gather information about their... barriers • Industry concentration • Fixed costs/value added • Industry growth • Intermittent overcapacity • Product differences • Switching costs • Brand identity • Diversity of rivals • Corporate stakes 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... Decline 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 Source: Growing Customers... differentiation • Switching costs of firms in the industry • Presence of substitute inputs • Threat of forward integration • Cost relative to total purchases in industry Source: 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... 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... 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 Hot dogs + More sales Buns Music + More attractive offering MPS player Delta plane orders + Lower costs from Boeing American Airlines plane orders 18 Market Size INDUSTRY LIFE CYCLE Time Embryonic... Diamond Retailers 50 When firms in the supply industry can dictate terms, they can extract greater profits DeBeers 50 15 BUYER POWER ILLUSTRATIVE Industry A Suppliers Profits Buyers Industry B Suppliers Profits Buyers In industries characterized with many suppliers and few buyers, buyers often capture a greater share of profits 16 THREAT OF SUBSTITUTES Soft drinks Movie rentals Block buster Coke Pepsi Cable . Chapter 4 Exploring the External Environment: Macro and Industry Dynamics 2 OBJECTIVES Explain the importance of the external context for strategy and firm performance. 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. the external context 4 Show how industry dynamics may redefine industries 5 Use scenario planning to predict the future structure of the external context 6 3 THE COLA WARS (TIMELINE) Coca-Cola Coca-Cola