Exploring the External Environment

2

THE COLA WARS (TIMELINE)

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

3

External Environmental Factors Shaping A External Environmental Factors Shaping A Company’s Choice of StrategyCompany’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.

The Firm’s External Environment

REMOTE ENVIRONMENT

Economic Factors

1. Prime interest rates2. Inflation rates3. Trends in the growth of the

gross national product 4. Unemployment rates5. Globalization of the

economy6. Outsourcing

Social Factors

Present in the external environment: Beliefs & Values Attitudes & Opinions Lifestyles

Developed from: Cultural conditioning Ecological conditioning Demographic makeup Religion Education Ethnic conditioning

Political Factors

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

Technological FactorsTechnological forecasting helps protect and improve theprofitability 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.

Ecological Factors• 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

International EnvironmentMonitoring 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.

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.

CableCompanies

Long DistanceTelephone

Companies

InternetProvider

Companies

Industry Environment

Harvard professor Michael E. Porter propelled theconcept of industry environment into the foreground of strategic thought and business planning.

The cornerstone of Porter’s work first appeared in theHarvard Business Review, in which he explains the fiveforces 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’soperating environment.

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Competitive Forces Shape Strategy

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, andcompetitive forces exist that go well beyond the established combatants in a particular industry.

The corporate strategists’ goal is to find a position in the industrywhere his or her company can best defend itself against these forcesor can influence them in its favor.

4-15

Forces Driving Industry Competition

What Causes Rivalry To Be What Causes Rivalry To Be Stronger?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

What Causes Rivalry To Be What Causes Rivalry To Be Weaker?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

What Are the What Are the Typical Typical Weapons for Weapons for Competing?Competing?

•Vigorous price competition

•More or different performance features

•Better product performance

•Higher quality

•Stronger brand image and appeal

•Wider selection of models and styles

• 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

• 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

When is the Bargaining Power of BuyersWhen is the Bargaining Power of Buyers Stronger?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

When is the Competition From SubstitutesWhen is the Competition From Substitutes Stronger?Stronger?

Substitutes are alternative product types (not brands) that perform essentially the same function.

THREAT OF SUBSTITUTES

Soft drinks

Coke Pepsi

Movie rentals

Block buster

Hollywood videoB

ottle

d w

ater

Cab

le T

V

IMPACT OF 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

Complementor:

Hot dogs

+

Buns

More sales

Examples

Music

+

MP3 player

More attractive offering

When is the Bargaining Power of Supplier When is the Bargaining Power of Supplier Stronger?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

Common Barriers to EntryCommon 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

Strategic Implications of theStrategic Implications of theFive Competitive ForcesFive Competitive Forces

• Competitive environment is unattractive from a profit-making standpoint when– Rivalry is vigorous– Entry barriers are low

and entry is likely– Competition from

substitutes is strong– Suppliers and customers have

considerable 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

Analyzing Driving ForcesAnalyzing 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

PRESSURES FAVORING INDUSTRY GLOBALIZATION

• 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

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)

Mar

ket S

ize

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

“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