Exploring the
External
Environment
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
1
External Environmental Factors Shaping A
Company’s Choice of Strategy
A thorough environmental analysis uses the tools to come to specific conclusions regarding the
nature of the competitive arena, what it takes to succeed in the industry, and what strategies are
2
possible.
The Firm’s External Environment
REMOTE ENVIRONMENT
Economic Factors
1. Prime interest rates
2. Inflation rates
3. Trends in the growth of the
4.
5.
6.
gross national product
Unemployment rates
Globalization of the
economy
Outsourcing
Social Factors
Present in the external environment:
 Beliefs & Values
 Attitudes & Opinions
 Lifestyles
Developed from:
 Cultural conditioning
 Ecological conditioning
 Demographic makeup
 Religion
 Education
 Ethnic conditioning
Political Factors
Political constraints on firms:
•
•
•
•
•
•
Fair-trade Decisions
Antitrust Laws
Tax Programs
Minimum Wage Legislation
Pollution and Pricing Policies
Administrative jawboning
Technological Factors
Technological forecasting helps protect and improve the
profitability of firms in growing industries.
It alerts strategic managers to impending challenges and
promising opportunities.
The key to beneficial forecasting of technological
advancement lies in accurately predicting future
technological capabilities and their probable impacts.
Ecological Factors
•
Ecology refers to the relationships among human beings
and other living things and the air, soil, and water that
supports them.
•
Threats to our life-supporting ecology caused principally
by human activities in an industrial society are commonly
referred to as pollution
•
Loss of habitat and biodiversity
•
Environmental legislation
•
Eco-efficiency
International Environment
Monitoring the international environment involves assessing
each non-domestic market on the same factors that are used
in a domestic assessment.
While the importance of factors will differ, the same set of
considerations can be used for each country.
Economic, political, legal, and social factors are used to
assess international environments.
One complication to this process is that the
interplay among international markets must be
considered.
INDUSTRY ENVIRONMENT
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
12
Industry Environment
Harvard professor Michael E. Porter propelled the
concept of industry environment into the foreground of
strategic thought and business planning.
The cornerstone of Porter’s work first appeared in the
Harvard Business Review, in which he explains the five
forces that shape competition in an industry.
Porter’s well-defined analytic framework helps strategic
managers to link remote factors to their effects on a firm’s
operating environment.
4-13
Competitive Forces Shape Strategy
The essence of strategy formulation is coping with competition.
Intense competition in an industry is neither coincidence nor bad luck.
Competition in an industry is rooted in its underlying economics, and
competitive forces exist that go well beyond the established
combatants in a particular industry.
The corporate strategists’ goal is to find a position in the industry
where his or her company can best defend itself against these forces
or can influence them in its favor.
4-14
Forces Driving Industry Competition
What Causes Rivalry To Be Stronger?
• Competing sellers regularly launch fresh actions to boost
market standing
• Declining demand or slow market growth
• The products or services offered by rivals are
standardized or weakly differentiated
• Number of rivals increases
• Buyer costs to switch brands are low
• Industry conditions tempt rivals use price cuts or other
competitive weapons to boost volume
• Outsiders have recently acquired weak firms in the
industry and are trying to turn them into major market
contenders
What Causes Rivalry To Be Weaker?
• Industry rivals move only infrequently or in a
non-aggressive manner to draw sales from rivals
• Rapid market growth
• Products of rivals are strongly differentiated
and customer loyalty is high
• Buyer costs to switch brands are high
• There are fewer than 5 rivals or there are
numerous rivals so any one firm’s actions has
minimal impact on rivals’ business
What Are the Typical Weapons for
Competing?
•Vigorous price competition
• Bigger/better dealer network
•More or different performance
• Low interest rate financing
features
•Better product performance
•Higher quality
•Stronger brand image and
appeal
•Wider selection of models and
styles
• Higher levels of advertising
• Stronger product innovation
capabilities
• Better customer service
• Stronger capabilities to provide
buyers with custom-made
products
When is the Bargaining Power of Buyers
Stronger?
• They are large & purchase a sizable percentage
of industry’s product
• They buy in volume quantities
• They incur low costs in switching to substitutes
• They have flexibility to purchase from several
sellers
• Selling industry’s product is standardized
• They can integrate backward
19
When is the Competition From Substitutes
Stronger?
• There are many good substitutes that are
readily available
• Substitutes are attractively priced
• Substitutes have comparable or better
quality and performance
• End-users have low switching costs
Substitutes are alternative product types (not brands)
that perform essentially the same function.
THREAT OF SUBSTITUTES
Soft drinks
Movie rentals
Block buster
Coke
Pepsi
Cable TV
Bottled water
Hollywood video
IMPACT OF COMPLEMENTOR
Complementor:
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
+
MP3 player
More attractive offering
When is the Bargaining Power of Supplier
Stronger?
• Item makes up large portion of costs of product, is crucial to
production process, and/or significantly affects product quality
• They have good reputations & growing demand for their product
• They can supply a component cheaper than industry members can
make it themselves
• They do not have to contend with substitutes
Common Barriers to Entry
•
•
•
•
•
•
•
•
Economies of scale
Inability to gain access to specialized technology
Brand preferences and customer loyalty
Capital requirements
Cost disadvantages independent of size
Access to distribution channels
Regulatory policies
Tariffs & international trade restrictions
Strategic Implications of the
Five Competitive Forces
• Competitive environment is
unattractive from a profit-making
standpoint when
– Rivalry is vigorous
– Entry barriers are low
and entry is likely
– Competition from
substitutes is strong
– Suppliers and customers have
considerable bargaining power
• Competitive environment is ideal
from a profit-making standpoint
when
– Rivalry is moderate
– Entry barriers are high and no
firms is likely to enter
– Good substitutes do not exist
– Suppliers and customers are in a
weak bargaining position
Analyzing Driving Forces
1.
•
2.
•
•
•
Identify forces likely to exert greatest
influence over next 1 - 3 years
Usually no more than 3 - 4 factors
qualify as real drivers of change
Assess impact
Are the driving forces causing demand for product to increase or
decrease?
Are the driving forces acting to make competition more or less intense?
Will the driving forces lead to higher or lower industry profitability?
3. Determine what strategy changes are needed to prepare for impact of
driving forces
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
• Arbitrage
opportunities
• High R&D costs
policies
• Common
technological
standards
• Common
manufacturing
and marketing
regulations
countries
• Global
competitors
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)
“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