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
Use PESTEL 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
1
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
1886
1950
“Beat Coke”
1960
“Pepsi Generation”
1970
“Pepsi Challenge”
1980
Foster entrepreneurial
spirit of Pepsi’s people
1990
Jettison slow-growing
businesses
2000
Diversify beyond
soft-drinks
2
EXTERNAL CONTEXT OF STRATEGY
• An internal analysis is
Internal
•
•
•
•
•
Strengths
just half of what is
needed to build
strategy
Weaknesses
• The SWOT and more
Capabilities
complicated
frameworks help us
understand the full
picture
Relationships
Etc.
3
BLURRING OF INDUSTRY BOUNDARIES
With fewer
companies providing
these services, the
power of buyers will
be impacted.


Long Distance
Telephone
Companies
Cable
Companies
As services are
bundled, the cost to
switch to another
service provider will
be greater.

Internet
Provider
Companies
4
THE BALANCE OF POWER
Rubbermaid
Wal-Mart
5
THE EXTERNAL ENVIRONMENT OF THE ORGANIZATION
Macro Environment
Political, Economic, Sociocultural,
Technological, Environmental, Legal
Industry Environment
Strategic Group
The Organization
6
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?
7
PRESSURES FAVORING INDUSTRY GLOBALIZATION
Markets
Costs
Governments
Competition
• Homogeneous
• Large scale and
• Favorable trade
• Interdependent
customer needs
• Global customer
needs
• Global channels
scope economies
• Learning and
experience
• Sourcing
efficiencies
• Transferable
• Favorable
marketing
approaches
logistics
policies
• Common
technological
standards
countries
• Global
competitors
• Common
manufacturing
and marketing
regulations
• 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
8
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
9
INDUSTRY FRAGMENTATION AND CONCENTRATION
Monopoly
Duopoly
Fragmented
10
ENVIRONMENTAL TRENDS
Silent
Generation
–
Born between 1932 and 1945
–
Born between 1946 and 1964
–
Born between 1965 and 1977
Baby Boomers
Generation X
Born between 1978 and 1994
Generation Y
11
ANALYZING INDUSTRY STRUCTURE USING FIVE – FORCES
Complementors
Number of complements
Relative value added
Barriers to complement
entry
Difficulty of engaging
complements
Buyer perception of
complements
Complement exclusivity
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
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 distribution
• Expected retaliation
• Proprietary products
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
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
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)
12
CAUSES OF RIVARLY
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.
13
SUPPLIER POWER
Diamond supply
Percent
Others
Diamond
Retailers
50
When firms in the supply
industry can dictate
terms, they can extract
greater profits
DeBeers
50
14
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
15
THREAT OF SUBSTITUTES
Soft drinks
Movie rentals
Block buster
Coke
Pepsi
Cable TV
Bottled water
Hollywood video
16
IMPACT OF COMPLEMENTOR
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
+
More sales
Buns
Music
+
More attractive offering
MPS player
Delta plane
orders
+
Lower costs from Boeing
American
Airlines
plane orders
17
Market Size
INDUSTRY LIFE CYCLE
Time
Source:
Embryonic
Growing
Mature
In 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
Customers become
better informed
Aggressive
customers
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)
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
22