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

1. 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

2. 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
Pepsi
“Beat Coke”
“Pepsi Generation”
“Pepsi Challenge”
Foster entrepreneurial spirit of Pepsi’s people
Jettison slow-growing businesses
Diversify beyond soft-drinks
1886
1950
1960
1970
1980
1990
2000

3. 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
Internal
Strengths
Weaknesses
Capabilities
Relationships
Etc.

4. 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

5. THE BALANCE OF POWER
Proctor & Gamble
Wal-Mart

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

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

8. PRESSURES FAVORING INDUSTRY GLOBALIZATION
Markets
Costs
Governments
Competition
Homogeneous customer needs
Large scale and scope economies
Favorable trade policies
Interdependent countries
Global competitors
Global customer needs
Common technological standards
Learning and experience
Global channels
Common manufacturing and marketing regulations
Sourcing efficiencies
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

9. 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
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
Buyer’s incentives
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)

10. 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

11. INDUSTRY FRAGMENTATION AND CONCENTRATION
Monopoly
Duopoly
Fragmented

12. CAUSES OF RIVARLY Barriers to Entry 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
Industry Life Cycle
Strong brands
Proprietary technology
Start-up costs
Etc.,

13. 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

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

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

16. IMPACT OF COMPLEMENTOR
Three Examples
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
Hot dogs +
Buns
More sales
Music +
MP3 player
More attractive offering
Delta plane orders +
American Airlines plane orders
Lower costs from Boeing

17. INDUSTRY LIFE CYCLE Market Size Time Embryonic Growing Mature
In Decline
Technological uncertainty
Niche market – selected products for selected markets
Participants emphasize problem solving – product as “solution”
Customers become better informed
Market expands beyond niche
More competitors enter
Aggressive customers
Proliferation of products and markets served
Market volatility and beginnings of industry consolidation
Product/market contraction
Further consolidation and industry regeneration
Source: Adapted from K. Rangan and G. Bowman, “Beating the Commodity Magnet,” Industrial Marketing Management 21 (1992), ; 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)

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

19. 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)

20. 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

21. 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