Chapter 4 Exploring the External Environment: Macro and Industry Dynamics

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

2. Internal • Strengths • Weaknesses • Capabilities • Relationships • Etc. The External Environment 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

3. The External Environment of Strategy Macro Environment Political, Economic, Sociocultural, Technological, Environmental, Legal Industry Environment Strategic Group The Organization

4. Macro Environment • PESTEL analysis is used widely to structure analysis of a company’s external environment. • PESTEL is an acronym for the political, economic, sociocultural, technological, environmental, • and legal context(s) in which a company operates.

5. Global customer needs • Learning and experience • Common technological standards • Global competitors • Global channels • Sourcing efficiencies • Common manufacturing and marketing regulations • Transferable marketing approaches • Favourable logistics • Arbitrage opportunities • High R&D costs Macro Environment - PRESSURES FAVOURING INDUSTRY GLOBALIZATION Markets Costs Governments Competition • Homogeneous customer needs • Large scale and scope economies • Favourable 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

6. Value System Analysis • The company’s value chain is embedded in a larger system that Michael Porter calls the “value system.” The system is a chain of companies, each with its own value chain. • That part of the system that creates and delivers the inputs used by the company is “upstream,” while that part of the system that takes the company’s output to the final consumer is “downstream.”

7. 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 Analysis – THE FIVES FORCES MODEL • 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 • Complementors • Number of complements • Relative value added • Barriers to complement entry • Difficulty of engaging complements • Buyer perception of complements • Complement exclusivity • Industry value chain – from raw materials and other inputs, to channel, to end consumer • Buyer Power (Channel and End Consumer) • Buyer concentration • Importance of volume to customers • Differentiation of inputs • Impact of outputs on cost of differentiation • Switching costs of customers • Presence of substitute products • Threat of backward integration • Costs relative to total purchases in industry • 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 Substitutes • Switching costs • Buyer inclination to substitute • Price-performance tradeoff of substitutes • Varity of substitutes • Necessity of product or service Source: Adapted from M.E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980)

8. Competitor Analysis Mapping Competitors • The Value Curve • Predicting Competitors’ Behaviours

9. 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 Dynamic Characteristics of the External Environment - INDUSTRY LIFE CYCLE Market Size Time Embryonic Growing Mature In Decline

10. Product-related Discontinuities Process-related Dynamic Characteristics of the External Environment - TECHNOLOGICAL DISCONTINUITIES Example In disk-drive industry, virtually every new generation of technology led to demise of market leader Southwest Airlines radically changed the airline business model by adopting new processes (e.g., a point-to-point model)