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Chapter 4Exploring the External Environment:Macro and Industry Dynamics
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OBJECTIVES
Explain the importance of the external context forstrategy and firm performance
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Use PESTEL to identify the macro characteristics ofthe external context
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Identify the major features of an industry and theforces that affect industry profitability
3
Understand the dynamic characteristics of theexternal context
4
Show how industry dynamics may redefine industries5
Use scenario planning to predict the future structureof the external context
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THE COLA WARS (TIMELINE)
Coca-Cola
Coca-Cola invented
Kick Pepsi's can
Diet CokeNew Coke
Repair Coke and restoreStock priceDiversify product line
1886
1950
1960
1970
1980
1990
2000
Pepsi
Beat Coke
Pepsi Generation
Pepsi Challenge
Foster entrepreneurialspirit of Pepsis people
Jettison slow-growingbusinesses
Diversify beyondsoft-drinks
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EXTERNAL CONTEXT OF STRATEGY
An internal analysis isjust half of what isneeded to build
strategy
The SWOT and morecomplicatedframeworks help usunderstand the fullpicture
Internal
Strengths Weaknesses
Capabilities
Relationships
Etc.
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BLURRING OF INDUSTRY BOUNDARIES
With fewercompanies providingthese services, thepower of buyers willbe impacted.
As services arebundled, the cost toswitch to anotherservice provider willbe greater.
CableCompanies
Long DistanceTelephoneCompanies
InternetProvider
Companies
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THE BALANCE OF POWER
Wal-Mart
Rubbermaid
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THE EXTERNAL ENVIRONMENT OF THE ORGANIZATION
Macro EnvironmentPolitical, Economic, Sociocultural,Technological, Environmental, Legal
Industry Environment
Strategic Group
The Organization
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PESTEL ANALYSIS FRAMES THE EXTERNAL CONTEXT
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PoliticalEconomic
Sociocultural
TechnologicalEnvironmental
Legal
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KEY QUESTION TO ASK
What macro environmentalconditions will have a materialeffect on our ability to implementour strategy successfully?
How stable are thesecharacteristics?
What is ourfirms industry?
What are thecharacteristics of theindustry?
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PRESSURES FAVORING INDUSTRY GLOBALIZATION
Interdependentcountries Homogeneouscustomer needs Favorable tradepolicies Large scale andscope economies
Globalcompetitors
Global customerneeds
Commontechnologicalstandards
Learning andexperience
Global channels Commonmanufacturingand marketingregulations
Sourcingefficiencies
CompetitionMarkets GovernmentsCosts
Favorablelogistics
Arbitrageopportunities
High R&D costs
Transferablemarketing
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
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KEY SUCCESS FACTORS AS BARRIERS TO ENTRY
Key asset or requisite skillthat all firms in an industrymust possess in order to bea viable competitor
Key success factor (KSF)
Ability to meet competitive pricing
Extensive distribution
Ability to raise consumer awareness
Broad product mix
Global presence
Well positioned bottlers and bottlingcapacity
KSFs:
SOFT DRINK EXAMPLE
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INDUSTRY FRAGMENTATION AND CONCENTRATION
Monopoly Duopoly Fragmented
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ENVIRONMENTAL TRENDS
SilentGeneration
Born between 1932 and 1945
Baby Boomers
Born between 1946 and 1964
Generation X
Born between 1965 and 1977
Generation YBorn between 1978 and 1994
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ANALYZING INDUSTRY STRUCTURE USING FIVE FORCES
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 Buyers incentives
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
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
Threat of Substitutes Switching costs Buyer inclination to substitute Price-performance tradeoff of
substitutes
Varity of substitutes Necessity of product or service
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
Source: Adapted from M.E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980)
Industry value chainfrom raw materials andother inputs, to channel
to end consumer
ComplementorsNumber of complements
Relative value added
Barriers to complemententry
Difficulty of engagingcomplements
Buyer perception ofcomplementsComplement exclusivity
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CAUSES OF RIVALRY
Barriers to Entry
Strong brands
Proprietary technology Start-up costs Etc.,
Barriers to Exit
Few other opportunities Sunk investments Etc.,
In addition to entry
and exit barriers,many factors driverivalry
History of price wars
Level of fixed costs
Industryconcentration
Market growth
Etc.
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BARRIERS TO ENTRY VARY BY INDUSTRY
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SUPPLIER POWER
When firms in the supplyindustry can dictateterms, they can extractgreater profits
Diamond supply
Percent
DeBeers
Others
50
Diamond
Retailers
50
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BUYER POWER
Suppliers Buyers
Profits
ILLUSTRATIVE
In industries
characterized withmany suppliersand few buyers,buyers oftencapture a greatershare of profits
Industry A
Suppliers Buyers
Industry B
Profits
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THREAT OF SUBSTITUTES
Soft drinks
Coke Pepsi
Movie rentals
Block buster
Hollywood video
Bottle
dwater
Cable
TV
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IMPACT OF COMPLEMENTOR
Any factor that makes it more attractivefor suppliers to supply an industry onfavorable terms or that makes it moreattractive for buyers to purchaseproducts or services from an industryat prices higher than it would payabsent the complementor
Complementor:
Hot dogs
+
Buns
More sales
Three Examples
Music
+
MPS player
More attractive offering
Delta planeorders
+
AmericanAirlinesplane orders
Lower costs from Boeing
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COMPETITIVE INTELLIGENCE
Competitive intelligence is a methodwhereby firms are able to gatherinformation about their competitors.
Steps in predicting competitors behaviors:
1. Understand their objectives2. Determine competitors current strategies3. Identify the competitors assumptions about the industry and
of itself4. Determine the competitors key strengths and weaknesses
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INDUSTRY LIFE CYCLE
Source: 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, 7th ed (Upper Saddle River, NJ: Prentice Hall,1991)
MarketSize
Time
Embryonic
Technologicaluncertainty
Niche marketselected products forselected markets
Participantsemphasize problemsolving product as
solution
Growing
Customers becomebetter informed
Market expandsbeyond niche
More competitorsenter
Mature
Aggressivecustomers
Proliferation ofproducts andmarkets served
Market volatility andbeginnings ofindustry
consolidation
In Decline
Product/marketcontraction
Further consolidationand industryregeneration
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LIFE CYCLES AN EXAMPLE FROM THE SOFTWARE INDUSTRY
Government Policies & Initiatives
Technology Macro Market Environment
Macro-EconomicForces &
Factors
TechnologyTrends
Social Trends
Supply
Competitive
Pressures
SW Industry Structure
SW Business Models
R&D
Trends
Demand
Innovation: Vendor
Business, Technology,and Market Entry
Strategy
Technology Adoption:
Buyer Demand andTechnology Absorption
Vertical
IndustryTrends
GlobalCommercial
Environment
Lifecycles:
Firm
Entry &Exit
Software
Trends
Technology MarketEcosystems
Software Market Ecosystems
Software Industry Model
Innovation/Long Wave
Software Market
Product/technology Source: S. A. Mertz, dissertation proposa
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TECHNOLOGICAL DISCONTINUITIES
Discontinuities
Process-related
Product-related
Southwest airlinesradically changed theairline business model
by adopting newprocesses (e.g., apoint-to-point model)
In disk-drive industry,
virtually every newgeneration of technologyled to demise of marketleader
Example
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HYPERCOMPETITION
Market stability is threatened byshort product life cycles, shortproduct design cycles, newtechnologies, frequent entry byunexpected outsiders,
repositioning by incumbents, andtactical redefinitions of marketboundaries as diverse industriesemerge.
Richard DAveni