Exploring the External Environment

1. Exploring the External Environment

2. 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 and restore Stock price Diversify product line 2000 Diversify beyond soft-drinks THE COLA WARS (TIMELINE)

3. 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 possible.

4. The Firm’s External Environment

5. REMOTE ENVIRONMENT

6. Economic Factors • Prime interest rates • Inflation rates • Trends in the growth of the gross national product • Unemployment rates • Globalization of the economy • Outsourcing

7. Social Factors Present in the external environment: • Beliefs & Values • Attitudes & Opinions • Lifestyles Developed from: • Cultural conditioning • Ecological conditioning • Demographic makeup • Religion • Education • Ethnic conditioning

8. Political constraints on firms: • Fair-trade Decisions • Antitrust Laws • Tax Programs • Minimum Wage Legislation • Pollution and Pricing Policies • Administrative jawboning Political Factors

9. 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. Technological Factors

10. 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 Ecological Factors

11. 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. International Environment

12. INDUSTRY ENVIRONMENT

13. BLURRING OF INDUSTRY BOUNDARIES   With fewer companies providing these services, the power of buyers will be impacted. As services are bundled, the cost to switch to another service provider will be greater. Long Distance Telephone Companies Cable Companies  Internet Provider Companies

14. 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. Industry Environment 4-13

15. 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. Competitive Forces Shape Strategy 4-14

16. Forces Driving Industry Competition

17. 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

18. 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 differentiatedand 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

19. Vigorous price competition More or different performance features Better product performance Higher quality Stronger brand image and appeal Wider selection of models and styles What Are the Typical Weapons for Competing? • Bigger/better dealer network • Low interest rate financing • Higher levels of advertising • Stronger product innovation capabilities • Better customer service • Stronger capabilities to provide buyers with custom-made products

20. 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

21. 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.

22. Bottled water Cable TV THREAT OF SUBSTITUTES Soft drinks Movie rentals Block buster Coke Pepsi Hollywood video

23. Examples Hot dogs + More sales Buns Music + More attractive offering MP3 player IMPACT OF COMPLEMENTOR Complementor: 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

24. 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

25. 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

26. Strategic Implications of theFive Competitive Forces • Competitive environment is unattractive from a profit-making standpoint when • Rivalry is vigorous • Entry barriers are lowand entry is likely • Competition from substitutes is strong • Suppliers and customers haveconsiderable 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

27. Analyzing Driving Forces • 1. Identify forces likely to exert greatest • influence over next 1 - 3 years • Usually no more than 3 - 4 factorsqualify as real drivers of change • 2. 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

28. 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 • Large scale and scope economies • Favorable trade policies • Interdependent countries

29. 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 Growing Mature In 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)

30. “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