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Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

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Page 1: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics
Page 2: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

THE COLA WARSTHE COLA WARS

2

“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”

Page 3: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

THE COLA WARS (TIMELINE)THE COLA WARS (TIMELINE)

3

Coca-Cola

Coca-Cola invented

“Kick Pepsi's can” Diet CokeNew Coke

Repair Coke and restore Stock price Diversify product line

1886

1950

1960

1970

1980

1990

2000

Pepsi

“Beat Coke”

“Pepsi Generation”

“Pepsi Challenge”

Foster entrepreneurial spirit of Pepsi’s people

Jettison slow-growing businesses

Diversify beyond soft-drinks

Page 4: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

EXTERNAL CONTEXT OF STRATEGYEXTERNAL CONTEXT OF STRATEGY

4

• 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

Internal

• Strengths

• Weaknesses

• Capabilities

• Relationships

• Etc.

Page 5: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

COMPARATIVE INDUSTRY – WIDE LEVEL OF COMPARATIVE INDUSTRY – WIDE LEVEL OF PROFITABILITY, 1995 – 2004PROFITABILITY, 1995 – 2004

5Source: Data from Standard and Poor’s CompuStat

Weighted average return on invested capitalPercent

-5

0

5

10

15

20

25

Bever-ages

Ciga-rettes

Pharma-ceuticals

Eatingesta-blish-ments

Steel Rail-roads

Truck-ing

Bott-lers

Comp-uters

Agri-cul-turalproducts

Pre-packagedsoftware

Air-lines

Wire-lesspro-viders

Page 6: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

THE EXTERNAL ENVIRONMENT OF THE ORGANIZATIONTHE EXTERNAL ENVIRONMENT OF THE ORGANIZATION

6

Macro Environment Political, Economic, Sociocultural,

Technological, Environmental, Legal

Industry Environment

Strategic Group

The Organization

Page 7: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

KEY QUESTION TO ASKKEY QUESTION TO ASK

7

What macro environmental conditions will have a material effect on our ability to implement our strategy successfully?

How stable are these characteristics?

What is our firm’s industry?

What are the characteristics of the industry?

Page 8: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

UNDERSTANDING THE MACRO ENVIRONMENT USING A UNDERSTANDING THE MACRO ENVIRONMENT USING A PESTEL ANALYSISPESTEL ANALYSIS

8

• How stable is the political environment?• Tax policies• Etc.

• Projected interest rates?• Inflation?• Etc.

• Lifestyle trends?• Demographic changes?• Etc.

• Level of government research funding?• How mature is technology?• Etc.

Political

Economic

Socio-cultural

Technological

• Is intellectual property protected?• Relevant consumer laws? • Etc.

Legal

Page 9: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

PRESSURES FAVORING INDUSTRY GLOBALIZATIONPRESSURES FAVORING INDUSTRY GLOBALIZATION

9

• Interdependent countries

• Homogeneous customer needs

• Favorable trade policies

• Large scale and scope economies

• Global competitors

• Global customer needs

• Common technological standards

• Learning and experience

• Global channels • Common manufacturing and marketing regulations

• Sourcing efficiencies

CompetitionMarkets GovernmentsCosts

• Favorable logistics

• Arbitrage opportunities

• High R&D costs

• Transferable marketing 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

Page 10: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

COMPETITION DRIVES PROFITS TO A “NORMAL” LEVELCOMPETITION DRIVES PROFITS TO A “NORMAL” LEVEL

10

CompetitionProfits (abovenormal)

CostsRevenue

Profits (abovenormal)

CostsRevenue

Co

mp

etit

ion

Page 11: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

ANALYZING INDUSTRY STRUCTURE USING FIVE – FORCESANALYZING INDUSTRY STRUCTURE USING FIVE – FORCES

11

Complementors

•Number of complements

•Relative value added

•Barriers to complement entry

•Difficulty of engaging complements

•Buyer perception of complements

•Complement exclusivity

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• Buyer’s 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

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• Product differences • Switching costs• Brand identity• Diversity of rivals

Source: Adapted from M.E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980)

Industry value chain – from raw materials and other inputs, to channel to end consumer

Page 12: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

KEY SUCCESS FACTORS AS BARRIERS TO ENTRYKEY SUCCESS FACTORS AS BARRIERS TO ENTRY

12

Key asset or requisite skill that all firms in an industry must possess in order to be a 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 bottling capacity

KSFs:

SOFT DRINK EXAMPLE

Page 13: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

INDUSTRY FRAGMENTATION AND CONCENTRATIONINDUSTRY FRAGMENTATION AND CONCENTRATION

13

Monopoly Duopoly Fragmented

Page 14: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

CONCENTRATION IN SELECT U.S. INDUSTRIESCONCENTRATION IN SELECT U.S. INDUSTRIES

14

Source: U.S. Census Bureau, “Economic Census: Concentration Rations”, Economic Census 2002 (accessed July 15,2005),www.census.gov/epcd/www/concentration.html

Percent of market

Entirefoodindustry

Animal

food

Break-fastcereal

Dairy pro-ducts

Entireapparel industry

Men’s and boys’ apparel

Women’s and girls’ apparel

Others

Top four competitors

Page 15: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

Low, risky ReturnsLow, stable Returns

High, stable Returns High, risky Returns

Low High

Exit Barriers

Entry Barriers

Low

High

Page 16: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

CAUSES OF RIVARLYCAUSES OF RIVARLY

16

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 drive rivalry

• History of price wars

• Level of fixed costs

• Industry concentration

• Market growth

• Etc.

Page 17: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

Bargaining Power of SuppliersBargaining Power of Suppliers

Supplier power increases when:

◦ Suppliers are large and few in number

◦ Suitable substitute products are

not available

◦ Individual buyers are not large customers of suppliers and there are many of them

◦ Suppliers’ goods are critical to buyers’ marketplace success

◦ Suppliers’ products create high switching costs.

◦ Suppliers pose a threat to integrate forward into buyers’ industry

17

Page 18: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

18

Supplier

Plan

Customer Customer’sCustomer

Suppliers’Supplier

Make DeliverSource Make DeliverMakeSourceDeliver SourceDeliver

Your Company

Source

Return Return ReturnReturn Return Return Return Return

Supply Chain

Page 19: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

Supply ChainSupply Chain

19

The Firm

Wholesaler Wholesaler

Retailer Retailer Retailer Retailer

1st Tier Supplier 1st Tier Supplier

3rd Tier Supplier

2nd Tier Supplier

3rd Tier Supplier

2nd Tier Supplier

Customer Base

Resources Base

Sell Side

Buy Side

Page 20: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

20

Firm Competitors

buyers

Suppliers

Competitors

Page 21: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

Threat of Substitute ProductsThreat of Substitute Products

The threat of substitute products

increases when:

◦ Buyers face few switching costs

◦ The substitute product’s price is lower

◦ Substitute product’s quality and performance are equal to or greater than the existing product

Differentiated industry products that are valued by customers reduce this threat

21

Page 22: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

Intensity of Rivalry Among CompetitorsIntensity of Rivalry Among Competitors

Industry rivalry increases when:

◦ There are numerous or equally

balanced competitors

◦ Industry growth slows or declines

◦ There are high fixed costs or high

storage costs

◦ There is a lack of differentiation opportunities or low switching costs

◦ When high exit barriers prevent competitors from leaving the industry

22

Page 23: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

Interpreting Industry Interpreting Industry AnalysesAnalyses

23

Low entry barriers

UnattractiveIndustry

Suppliers and buyers have

strong positions

Strong threats from substitute

productsIntense rivalry

among competitors

Low profit potential

Page 24: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

Interpreting Industry Interpreting Industry AnalysesAnalyses

24

AttractiveIndustry

High entry barriers

Suppliers and buyers have weak

positions

Few threats from substitute

productsModerate rivalry

among competitors

High profit potential

Page 25: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

Competitor AnalysisCompetitor Analysis

Competitor Intelligence

◦ The ethical gathering of needed information and data that provides insight into:

A competitor’s direction (future objectives)

A competitor’s capabilities and intentions (current strategy)

A competitor’s beliefs about the industry (its assumptions)

A competitor’s capabilities

25

Page 26: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

Competitor Analysis Competitor Analysis ComponentsComponents

26

Page 27: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

SUPPLIER POWERSUPPLIER POWER

27

When firms in the supply industry can dictate terms, they can extract greater profits

Diamond supplyPercent

DeBeers

Others

50

Diamond Retailers

50

Page 28: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

BUYER POWERBUYER POWER

28

Suppliers Buyers

Profits

ILLUSTRATIVE

In industries characterized with many suppliers and few buyers, buyers often capture a greater share of profits

Industry A

Suppliers Buyers

Industry B

Profits

Page 29: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

THREAT OF SUBSTITUTESTHREAT OF SUBSTITUTES

29

Soft drinks

Coke Pepsi

Movie rentals

Block buster

Hollywood videoB

ott

led

wat

er

Cab

le T

V

Page 30: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

IMPACT OF COMPLEMENTORIMPACT OF COMPLEMENTOR

30

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

Complementor:

Hot dogs

+

Buns

More sales

Three Examples

Music

+

MPS player

More attractive offering

Delta plane

orders+

American Airlinesplane orders

Lower costs from Boeing

Page 31: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

MAPPING STRATEGY GROUPS: U.S. BICYCLE MAPPING STRATEGY GROUPS: U.S. BICYCLE INDUSTRYINDUSTRY

31

Cannondale, GaryFisher, Klein

Huffy,Murray,Brunswick

Schwinn/GTMongoose

TrekSpecialized

Independentdealers

Independentdealers and massmerchandisers

Massmerchandisersonly

Principal distribution channels

Pri

ce/q

ual

ity/

imag

e

Low

High

Page 32: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

HOW WOULD YOU DO THAT? – U.S. AIRLINE INDUSTRYHOW WOULD YOU DO THAT? – U.S. AIRLINE INDUSTRY

32

Rivalry?

Newentrants?

Buyerpower?

Substitutes?

Supplierpower?

Complementors?

How would youdefine the industry?

Page 33: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

IMPORTANCE OF DYNAMIC STRATEGIC ANALYSISIMPORTANCE OF DYNAMIC STRATEGIC ANALYSIS

33

Pineapple industrypre-1980s

Fresh Del-Monte introduces the “Extra Sweet Gold” brighter

color, sweeter, resistant to nothing

FreshDel-Monte

(70%)

Pineapple industry post introduction

Page 34: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics
Page 35: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

Time

ProductDevelopment

Introduction

Profits

Sales

Growth Maturity Decline

Losses/Investments ($)

Sales andProfits ($)

ترغيب به افزايشمصرف

تخفيف و فروشاقساط

تنوع در محصول

مصارف جديد

استفاده از بستهبنديهای جديد

تخفيف و فروشاقساط

تخفيف و فروشاقساط

استفاده از آرمتجاری مشترک

استفاده از بسته بنديهای جديد

مصارف جديد

تنوع در محصول

ترغيب به افزايشمصرف

تخفيف و فروشاقساط

رسوخ به بازارهایجديد

جايابي جديد با کاربر روی نگرشها

استفاده از آرمتجاری مشترک

Page 36: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

INDUSTRY LIFE CYCLEINDUSTRY LIFE CYCLE

36

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)

Mar

ket

Siz

e

Time

Embryonic

Technological uncertainty

Niche market – selected products for selected markets

Participants emphasize problem solving – product as “solution”

Growing

Customers become better informed

Market expands beyond niche

More competitors enter

Mature

Aggressive customers

Proliferation of products and markets served

Market volatility and beginnings of industry consolidation

In Decline

Product/market contraction

Further consolidation and industry regeneration

Page 37: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

WHEN INDUSTRIES DIVIDE OR COLLIDEWHEN INDUSTRIES DIVIDE OR COLLIDE

37

Modems

Industries Divide

Invents new interface

Radio

Cable

TV Production

TV networks

Media conglomerate

• Time Warner

• Viacom

• Disney

• Etc.

Launches palm pilot/ creates first PDA

Industries Collide

3-Com

Modems

Page 38: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics
Page 39: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

TECHNOLOGICAL DISCONTINUITIESTECHNOLOGICAL DISCONTINUITIES

39

Discontinuities

Process-related

Product-related

Southwest airlines radically changed the airline business model by adopting new processes (e.g., a point-to-point model)

In disk-drive industry, virtually every new generation of technology led to demise of market leader

Example

Page 40: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

SCENARIO PLANNINGSCENARIO PLANNING

40

Assess the strategic implications of each scenario

6

Specify indicators that can signal which scenario is unfolding

5

Flesh out the picture4

Develop the framework by defining two specific axes3

Brainstorm key drivers, decision factors, and possible scenario departure or divergence points

2

Define target issue, time frame, and scope for scenarios1

An understanding of the big picture and a plan to manage uncertainty

Page 41: Exploring the External Environment: Macro and Industry Dynamics Exploring the External Environment: Macro and Industry Dynamics

HOW WOULD YOU DO THAT? – CREDIT – UNION INDUSTRYHOW WOULD YOU DO THAT? – CREDIT – UNION INDUSTRY

41

Changes in the playing field

Minor Major

Source: Adapted from Credit Union Society, 2005: Scenarios for Credit Unions, an Executive Report (Madison, WI: Credit Union Executives Society, 1999)

Tec

hn

olo

gic

al C

han

ge

Rad

ical

Gra

du

al

Technocracy 2005:

The wide-scale adoption of the internet by U.S. consumers has led to massive technological innovation for financial-services companies, increasing their range of distribution channels, as well as their products, services, and geographic scope. Regulations and other changes in the playing field, however, have been slow to follow

Chameleon 2005:

Radical changes occurring in the playing field and in technology make this a highly tumultuous scenario for all credit unions. The nature of competition has evolved so much that banks and credit unions compete directly – under the same rules of the game. This situation has caused a wide-scale convergence of cultures among various financial-services providers, testing the boundaries of the traditional credit-union mission

Credit-Union Power 2005:

Both technology and the playing field have changed at a moderate pace, making this the most stable scenario. Even with moderate change in these areas, however, the changing basis of competition, new business models, human resource challenges, and industry dynamics are different enough to pose significant challenges for many financial-services companies

Wallet Wars 2005:

Prompted by free-market economics, the playing field is changing radically, enabling credit unions and other financial-services institutions to compete more intensely. At the same time, technical innovations have not developed as quickly as many observers and analysts had predicted