Chapter 4 Exploring the External Environment: Macro and Industry Dynamics

1. Chapter 4Exploring the External Environment: Macro and Industry Dynamics

2. 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 5 forces that affect industry profitability 4 Understand the dynamic characteristics of the external context 5 Show how industry dynamics may redefine industries

3. 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

4. Coca-Cola Pepsi Coca-Cola invented 1886 1950 Beat Coke 1960 Pepsi Generation 1970 Pepsi Challenge Kick Pepsi's can Diet CokeNew Coke 1980 Foster entrepreneurial spirit of Pepsi’s people 1990 Jettison slow-growing businesses Repair Coke Restore stock price Diversify product line 2000 Diversify beyond soft-drinks THE COLA WARS TIMELINE

5. Internal • Strengths • Weaknesses • Capabilities • Resources EXTERNAL CONTEXT OF STRATEGY External environment • An internal analysis is just half of what is needed to build strategy • The SWOT and more complicated frameworks help us understand the full picture

6. COMPARATIVE INDUSTRY–WIDE LEVEL PROFITABILITY, 1995 – 2004 Weighted average return on invested capital Percent Agri-cul-turalpro-ducts Steel Air-lines Wire-lesspro-viders Ciga-rettes Pharma-ceuticals Eatingestablish-ments Truck-ing Pre-packagedsoftware Bever-ages Rail-roads Bott-lers Computers Source: Data from Standard and Poors CompuStat

7. THE EXTERNAL ENVIRONMENT OF THE ORGANIZATION Macro Environment Political, Economic, Sociocultural, Technological, Environmental, Legal Industry Environment Strategic Group The Organization

8. What is our firm’s industry? What are the characteristics of the industry? How stable are these characteristics? KEY QUESTIONS TO ASK What macro environmental conditions will have a material effect on our ability to implement our strategy successfully?

9. UNDERSTANDING THE MACRO ENVIRONMENT USING A PESTEL ANALYSIS • Stability of the political environment • Tax policies • Etc. Political • Projected interest rates • Inflation rate • Etc. Economic • Lifestyle norms and trends • Demographic changes • Etc. Sociocultural • Level of government research funding • Maturity of technology • Etc. Technological • Intellectual property protection • Relevant consumer laws • Etc. Legal

10. Global customer needs • Learning and experience • Common technological standards • Global competitors • Global channels • Sourcing efficiencies • Common manufacturing and marketing regulations • Transferable marketing approaches • Favorable logistics • Arbitrage opportunities • High R&D costs PRESSURES FAVORING INDUSTRY GLOBALIZATION Markets Costs Governments Competition • Homogeneous customer needs • Economies of scale and scope • Favorable trade policies • Interdependent countries 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

11. Profits (abovenormal) Competition Profits (abovenormal) Revenue Costs Revenue Costs Competition COMPETITION DRIVES PROFITS TO A “NORMAL” LEVEL

12. 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 viable competitors • Ability to meet competitive pricing • Extensive distribution • Ability to raise consumer awareness • Broad product mix • Global presence • Well positioned bottlers and bottling capacity

13. CONCENTRATION IN SELECT U.S. INDUSTRIES Others Percent of market Top four competitors Entirefoodindustry Animal food Break-fastcereal Dairy pro-ducts Entireapparel industry Men’s and boys’ apparel Women’s and girls’ apparel Source: U.S. Census Bureau, “Economic Census: Concentration Ratios,” Economic Census 2002, www.census.gov/epcd/www/concentration.html

14. Degree of • Rivalry • FOCAL INDUSTRY ANALYZING INDUSTRY STRUCTURE USING FIVE – FORCES • Threat of New Entrants (and Exit Barriers) • Complementors • Industry value chain – from raw materials and other inputs, to channel to end consumer • Buyer Power (Channel and End consumers) • Supplier Power Threat of Substitutes Source: Adapted from M.E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980)

15. Barriers to Exit Many other factors also drive rivalry • History of price wars • Level of fixed costs • Industry concentration • Market growth • Few other opportunities • Sunk investments • Existing relationships CAUSES OF RIVALRY Barriers to Entry • Strong brands • Proprietary technology • Start-up costs • Distribution channels

16. Diamond Retailers SUPPLIER POWER Diamond supply Others 50% When firms in the supply industry can dictate terms, they can extract greater profits DeBeers 50%

17. Industry B Suppliers Buyers In industries characterized with many suppliers and few buyers, buyers often capture a greater share of profits Profits BUYER POWER Industry A Suppliers Buyers Profits

18. Bottled water Cable TV THREAT OF SUBSTITUTES Movie rentals Soft drinks Blockbuster Coke Pepsi Hollywood Video

19. Examples Hot dogs + More sales Buns Music + More attractive offering MP3 player Delta plane orders + Lower costs from Boeing American Airlinesplane orders IMPACT OF COMPLEMENTORS Complementor • Any factor that makes it… • More attractive for suppliers to supply an industry on favorable terms, or • More attractive for buyers to purchase products or services from an industry at prices higher than they would pay without the complementor

20. MAPPING STRATEGY GROUPS: U.S. BICYCLE INDUSTRY High Cannondale, GaryFisher, Klein Huffy,Murray,Brunswick Price/quality/image Schwinn/GTMongoose TrekSpecialized Low Independentdealers Independentdealers and massmerchandisers Massmerchandisersonly Principal distribution channels

21. 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 INDUSTRY LIFE CYCLE Market Size Time Embryonic Growth Mature Decline 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)

22. Product-related Discontinuities Process-related TECHNOLOGICAL DISCONTINUITIES Example In disk-drive industry, virtually every new generation of technology led to demise of market leader In steel industry, mini-mills such as Nucor were originally ignored by Big Steel, yet radically changed the business model with new production technology

23. Radio Launches Palm Pilot: first commercially successful PDA Cable Invents new interface Media conglomerate TV Production Modems • Time Warner • Viacom • Disney • Etc. TV networks WHEN INDUSTRIES DIVIDE OR COLLIDE Industries Collide Industries Divide 3-Com Modems

24. 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