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
“Coca-Cola sells a billion servings – in cans, bottles, and glasses –
every day. You can grab a Coke in almost 200 countries. Its archrival,
Pepsi, isn’t too far behind. Like ford versus Chevy, theirs is a battle
not just for customer dollars, but for their hearts and minds as well.
– The History Channel, “Empires of industry. Cola Wars”
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
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
3
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.
4
COMPARATIVE INDUSTRY – WIDE LEVEL OF PROFITABILITY, 1995 – 2004
Weighted average return on invested capital
Percent
25
20
15
10
5
0
-5
Beverages
Source:
Ciga- Pharma- Eating Steel
rettes ceuticals establishments
Data from Standard and Poor’s CompuStat
Railroads
Trucking
Bottlers
Computers
Agricultural
pro
ducts
Prepack
aged
soft
ware
Airlines
Wireless
providers
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
UNDERSTANDING THE MACRO ENVIRONMENT USING A PESTEL ANALYSIS
Political
• How stable is the political environment?
• Tax policies
• Etc.
Economic
• Projected interest rates?
• Inflation?
• Etc.
Socio-cultural
• Lifestyle trends?
• Demographic changes?
• Etc.
Technological
• Level of government research funding?
• How mature is technology?
• Etc.
Legal
• Is intellectual property protected?
• Relevant consumer laws?
• Etc.
8
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
9
COMPETITION DRIVES PROFITS TO A “NORMAL” LEVEL
Profits
(above
normal)
Competition
Profits
(above
normal)
Revenue Costs
Competition
Revenue Costs
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
CONCENTRATION IN SELECT U.S. INDUSTRIES
Others
Percent of market
Entire
food
industry
Animal
food
Top four competitors
Breakfast
cereal
Dairy
products
Entire
apparel
industry
Men’s
and
boys’
apparel
Women’s
and girls’
apparel
Source: U.S. Census Bureau, “Economic Census: Concentration Rations”, Economic Census 2002 (accessed July
15,2005),www.census.gov/epcd/www/concentration.html
13
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
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:
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)
14
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.
15
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
16
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
17
THREAT OF SUBSTITUTES
Soft drinks
Movie rentals
Block buster
Coke
Pepsi
Cable TV
Bottled water
Hollywood video
18
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
19
MAPPING STRATEGY GROUPS: U.S. BICYCLE INDUSTRY
Cannondale, Gary
Fisher, Klein
Price/quality/image
High
Huffy,
Murray,
Brunswick
Trek
Specialized
Schwinn/GT
Mongoose
Low
Independent
dealers
Independent
dealers and mass
merchandisers
Mass
merchandisers
only
Principal distribution channels
20
HOW WOULD YOU DO THAT? – U.S. AIRLINE INDUSTRY
New
entrants?
How
would you
define the
industry?
Supplier
power?
Rivalry?
Buyer
power?
Substitutes?
21
IMPORTANCE OF DYNAMIC STRATEGIC ANALYSIS
Pineapple industry
pre-1980s
Pineapple industry
post introduction
Fresh Del-Monte
introduces the “Extra
Sweet Gold” brighter
color, sweeter,
resistant to nothing
Fresh
Del-Monte
(70%)
22
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)
23
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)
24
WHEN INDUSTRIES DIVIDE OR COLLIDE
Industries Collide
Industries Divide
Launches
palm pilot/
creates
first PDA
3-Com
Radio
Cable
Modems
Invents
new
interface
Media
conglomerate
Modems
TV
Production
TV
networks
•
•
•
•
Time Warner
Viacom
Disney
Etc.
25
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
26
HOW WOULD YOU DO THAT? – CREDIT – UNION INDUSTRY
Changes in the playing field
Gradual
Radical
Technological Change
Minor
Major
Credit-Union Power 2005:
Wallet Wars 2005:
Both technology and the playing field have
changed at a moderate pace, making this the
most stable scenario. Even with moderate
change in these areas, however, the
changing basis of competition, new business
models, human resource challenges, and
industry dynamics are different enough to
pose significant challenges for many
financial-services companies
Prompted by free-market economics, the playing
field is changing radically, enabling credit unions
and other financial-services institutions to
compete more intensely. At the same time,
technical innovations have not developed as
quickly as many observers and analysts had
predicted
Technocracy 2005:
Chameleon 2005:
The wide-scale adoption of the internet by
U.S. consumers has led to massive
technological innovation for financial-services
companies, increasing their range of
distribution channels, as well as their
products, services, and geographic scope.
Regulations and other changes in the playing
field, however, have been slow to follow
Radical changes occurring in the playing field
and in technology make this a highly tumultuous
scenario for all credit unions. The nature of
competition has evolved so much that banks and
credit unions compete directly – under the same
rules of the game. This situation has caused a
wide-scale convergence of cultures among
various financial-services providers, testing the
boundaries of the traditional credit-union mission
Source: Adapted from Credit Union Society, 2005: Scenarios for Credit Unions, an Executive Report (Madison, WI: Credit Union Executives
27
Society, 1999)
SUMMARY
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
28