THE UNIVERSITY OF SYDNEY

BUSINESS SCHOOL

The External Environment

The ‘Playing to Win’ Strategy Framework

*Lafley and Martin, 2013

3

Purpose – why do we exist?

Values – what do we believe in?

Vision – where are we going? SMART

Strategy – how will we get there?

Setting Winning Aspiration

Levels of the Environment

4

Political / legalMonopolies legislation, Environmental protection laws, Taxation policy, Foreign trade regulations, Employment law, Government stability

Socio-culturalPopulation demographics, Income distribution, Social mobility, Lifestyle changes, Attitudes to work and leisure, Consumerism, Levels of education

EconomicBusiness cycles, GNP trends, Interest rates, Money supply, Inflation, Unemployment, Disposal income, Energy availability and cost

TechnologicalGovernment spending on research, Government and industry focus of technological effort, New discoveries / development, Speed of technology transfer

PEST FRAMEWORK

Which factors will drive change in our industry?What scenarios can we envisage for the future?

PEST Environmental Factors(global/national/local)

FACTORS CURRENTISSUES TRENDS DISRUPTIONS

How might thiseffect my business?

Political

Economic

Socio-Cultural

Technological

Profitability of selected U.S. industries (av. 1990-2010)

0% 5% 10% 15% 20% 25% 30% 35%

Prepackaged Software

Semiconductors

Groceries - Wholesale

Surgical/Medical Instruments

Homebuilding

Petroleum Refining

Trucking

Radio, TV Broadcast & Comm Equipment

Natural Gas Distribution

Cable & Other Pay TV Services

Airlines

Return on Invested Capital (ROIC)

Average ROIC in the U.S. Economy: 11.6%

Long-TermProfit Rate

Attractive-ness ofIndustryStructure

CompetitiveAdvantageor Disad-vantage

=+-

Dynamic

Environment

The winning formula - simplified

INTERNAL RIVALRY•Industry structure•Lifecycle stage•Lack of differentiation or switching costs•Level of cooperation•Strategic groups•Exit barriers

THREAT OF SUBSTITUTES• What are the potential substitutes?• What future impact will they have?• Is the performance or cost position of substitute improving?

THREAT OF NEW ENTRANTS• Economies of scale • High capital requirements•Access to distributionchannels

•Government policy•Product differentiation•Switching costs•Low industry margins

SUPPLIERS•Concentrated suppliers•Product is critical to buyer•No substitutes •Threat of forward •integration

CUSTOMERS•Concentrated customers•Product undifferentiated•Switching costs are low •Buyers have full information•Buyers industry earns lowprofits

•Buyers threaten backward integration

•Product unimportant to buyer•Product presents a significantproportion of buyers costs

•Cost disadvantages•Independent of scale

•Technology•Raw materials•Locations

•Experience•Expected retaliation

5 FORCES INDUSTRY ANALYSIS MODEL

Development

• Early Adopters

• Few Compe- titors

Growth

• Entry of Compe- titors

• Fight for share

• Undiffe- rentiated products

Shakeout

• Selective Purchase

• Strong Competi- tion

• Price- cutting for volume

Maturity

• Satura- tion

• Fight to maintain share

• Efficiency, low cost

Decline

• Drop-Off in usage

• Exit of some compe- titors

How industries change: the life-cycle concept

Market Sector Attractiveness/Competitive Intensity Summary

Factor Low Med High Key Issues, Trends & Strategic Options

Threat of new entrants

Threat of substitutes

Bargaining power of suppliers

Degree of internal rivalry

Bargaining power ofbuyers

Bargaining power ofConsumers

Overall competitive intensity

INTERNAL RIVALRYStrengthen competitive advantageRe-segment

Outsource to reduce fix costs

Acquire competitors with care!

NEW ENTRANTS

Build entry barriersWatch out for mavericks!

SUBSTITUTES

Understand customer preferences before reactingCritically examine indirect substitutesConsider diversification

Strategic options

POWERFUL SUPPLIERSDiversify supply baseReduce supplier costsStandardise requirementsIntegrate backwards

POWERFUL BUYERSSelect customersBuild customer switching costs

- specifications- relationships- service

Integrate forward

ConsumerPower

BuyerPower

New EntrantThreats

SubstituteThreats

SupplierPower

Internal Rivalry

Changing the game…

How can I reduce buyer power?How can I create pull through?How can I gain competitive advantage?How can I raise barriers to entry/substitution?

The new strategic game: Beyond Porter

New types of cooperationand competition: more than arm’slength competition

Old Game

New sources of value: competitiveadvantages no longer based only on structuraladvantages

Increasinguncertainty:today’s industrystructure is probably not agood indicatorof the future

Porter’sFive Forces

Frontline execution

Structural advantage

Basis of competition

Insight/foresight

The new game board

Codepen-dent systems

Privileged relationships

Traditional arm’s lengthIndustry

structure/conduct

Insight/foresight • Creating value by exploiting

superior knowledge or insight due to scientific or technical expertise, pattern recognition, or sheer creativity

Frontline execution • Creating value by consistently outperforming

competitors in the execution of day-to-day tasks through cost, quality, or time

Structural advantage • Traditional

microeconomic assumption that creating value is only possible by exploiting structural advantages over competitors and potential industry entrants due to scale, know how, technology, patents, market access, etc.

Frontline execution

Structural advantage Basis of

competition

Insight/foresight

The new game board

Codepen-dent systems

Privileged relationships

Traditional arm’s lengthIndustry

structure/conduct Uncertainty

Codependent systems• Cross-industry structures such as:

– Networks– Economic webs: Sets of

companies that use a common architecture to deliver independent elements of an overall value proposition that grows stronger as more companies join the web

Privileged relationships• Companies single out other

companies (often in the same market) for a special price or treatment because of financial interest, friendship, trust, or ethnic loyalty

Traditional arm’s length • Microeconomic model based on

“rational” industry structure with competition for control of economic surplus, not only with competitors but also with suppliers and customers

A new approach to industry structure/conduct

Codepen-dent systems

Privileged relationships

Traditional arm’s lengthIndustry

structure/conduct

Porter’s Five Forces as basis of new approach

Key success factors (KSF)

KSF are the major factors that determine competitive success in a particular industry

KSF can be a skill, competitive capability or a condition the company must achieve (technology, manufacturing, distribution, marketing or organisational resources)

KSF vary from industry to industry and change over time

KSF are driven by what the customer wants

Basis of competition Possible KSF

Competitive price

Good product quality

Service

Reassurance

Efficient raw material sourcing Productive plant Low overheads

Product design skills Quality control procedures Understanding what customer

wants

Reliable delivery system Flexible logistics operation Good sales and marketing team Ability to offer technical support

Company reputation or image

The Competitive Analysis Sequence

WHO ARE THE COMPETITORS? WHAT ARE

THEY DOING?

WHY ARE THEY DOING IT?

WHAT ARE THEIR FUTURE STRATEGIESLIKELY TO BE?

MARKET SEGMENTATION

PESTER

INDUSTRYANALYSIS

PERFORMANCE( FINANCIAL, SHARE,

SALES, ETC )

CURRENT STRATEGY

COMMITMENT

HISTORY AND ASSUMPTIONS

IMPLICATIONS FOR US?

HOW SHOULD WE RESPOND?

CULTURE

HOW ARE THEY DOING IT?

CORE COMPETENCES

COMPETITIVE ADVANTAGES