copyright © 2012 pearson canada inc. 0 chapter 4 exploring the external environment: macro and...

1Copyright © 2012 Pearson Canada Inc.

Chapter 4 Exploring the External Environment: Macro and Industry Dynamics


LEARNING OBJECTIVES

1. Explain the importance of the external environment for strategy and company performance.

2. Use PESTEL to identify the macro characteristics of the external environment.

3. Identify the major features of an industry and the forces that affect industry profitability.

4. Understand the dynamic characteristics of the external environment.

5. Show how industry dynamics may redefine industries.


Trading Punches

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


The External Environment of Strategy

• 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.


The External Environment of Strategy

Macro Environment Political, Economic, Sociocultural,

Technological, Environmental, Legal

Industry Environment

Strategic Group

The Organization


The External Environment of Strategy - KEY QUESTIONS TO ASK

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?


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.


Macro Environment – PESTEL analysis

Political

• How stable is the political environment? • What are local taxation policies and how do these affect your business?• Is the government involved in trading agreements such as EU, NAFTA, ASEAN, or others?• What are the foreign-trade regulations? • What are the social-welfare policies?



Economic

• What are current and projected interest rates?• What is the level of inflation, what is it projected to be,

and how does this projection reflect the growth of your market?

• What are local employment levels per capita and how are they changing?

• What are the long-term prospects for gross domestic product (GDP) per capita and so on?

• What are exchange rates between critical markets and how will they affect production and distribution of your goods?



Sociocultural

• What are local lifestyle trends?• What are the current demographics and how are they

changing?• What is the level and distribution of education and income? • What are the dominant local religions and what influence

do they have on consumer attitudes and opinions? • What is the level of consumerism and what are popular

attitudes toward it? • What pending legislation affects corporate social policies

(e.g., domestic-partner benefits or maternity/paternity leave)?

• What are the attitudes toward work and leisure?



Technological

• What is the level of research funding in government and industry and are those levels changing?• What is the government and industry’s level of interest and focus on technology?• How mature is the technology?• What is the status of intellectual-property issues in the local environment?• Are potentially disruptive technologies in adjacent industries creeping in at the edges of the focal industry?



Environmental

• What are local environmental issues?• Are there any pending ecological or environmental issues relevant to your industry?• How do the activities of international pressure groups (e.g., Greenpeace, Earth First, PETA) affect your business?• Are there environmental-protection laws?• What are the regulations regarding waste disposal and energy consumption?



Legal

• What are the regulations regarding monopolies and private property?• Does intellectual property have legal protections?• Are there relevant consumer laws?• What is the status of employment, health and safety, and product-safety laws?


Macro Environment - PRESSURES FAVOURING INDUSTRY GLOBALIZATION

• Interdependent countries

• Homogeneous customer needs

• Favourable 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

Competition Markets Governments Costs

• Favourable 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


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.”


Industry Analysis – THE FIVES FORCES MODEL

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 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• Intermittent overcapacity• Product differences • Switching costs• Brand identity• Diversity of rivals• Corporate stakes

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

Complementors Number of complementsRelative value added Barriers to complement entryDifficulty of engaging complementsBuyer perception of complementsComplement exclusivity


Industry Analysis - CAUSES OF RIVARLY

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.


Industry Analysis - SUPPLIER POWER

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

Diamond supply Percent

DeBeers

Others

50

Diamond Retailers

50


Industry Analysis - BUYER POWER

Suppliers Buyers

Profits

I

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

Industry A

Suppliers Buyers

Industry B

Profits


Industry Analysis - THREAT OF SUBSTITUTES

Soft drinks

Coke Pepsi

Movie rentals

Blockbuster

Hollywood videoB

ott

led

wat

er

Cab

le T

V


Industry Analysis - IMPACT OF COMPLEMENTOR

Any factor that makes it more attractive for suppliers to supply an industry on favourable 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

+

MP3 player

More attractive offering

Westjet plane orders

+

Air Canadaplane orders

Lower costs from Boeing


Competitor Analysis

Mapping Competitors The Value Curve

Predicting Competitors’ Behaviours


Dynamic Characteristics of the External Environment - INDUSTRY LIFE CYCLE

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


Dynamic Characteristics of the External Environment - TECHNOLOGICAL DISCONTINUITIES

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

copyright © 2012 pearson canada inc. 0 chapter 4 exploring the external environment: macro and...

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political environment

companys external environment

industry dynamics slide

macro characteristics

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macro environmental

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