exploring the external environment: macro and industry dynamics exploring the external environment:...
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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”
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
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.
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
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
KEY QUESTION TO ASKKEY QUESTION TO ASK
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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?
UNDERSTANDING THE MACRO ENVIRONMENT USING A UNDERSTANDING THE MACRO ENVIRONMENT USING A PESTEL ANALYSISPESTEL ANALYSIS
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• 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
PRESSURES FAVORING INDUSTRY GLOBALIZATIONPRESSURES FAVORING INDUSTRY GLOBALIZATION
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• 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
COMPETITION DRIVES PROFITS TO A “NORMAL” LEVELCOMPETITION DRIVES PROFITS TO A “NORMAL” LEVEL
10
CompetitionProfits (abovenormal)
CostsRevenue
Profits (abovenormal)
CostsRevenue
Co
mp
etit
ion
ANALYZING INDUSTRY STRUCTURE USING FIVE – FORCESANALYZING INDUSTRY STRUCTURE USING FIVE – FORCES
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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
KEY SUCCESS FACTORS AS BARRIERS TO ENTRYKEY SUCCESS FACTORS AS BARRIERS TO ENTRY
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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
INDUSTRY FRAGMENTATION AND CONCENTRATIONINDUSTRY FRAGMENTATION AND CONCENTRATION
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Monopoly Duopoly Fragmented
CONCENTRATION IN SELECT U.S. INDUSTRIESCONCENTRATION IN SELECT U.S. INDUSTRIES
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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
Low, risky ReturnsLow, stable Returns
High, stable Returns High, risky Returns
Low High
Exit Barriers
Entry Barriers
Low
High
CAUSES OF RIVARLYCAUSES OF RIVARLY
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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.
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
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Supplier
Plan
Customer Customer’sCustomer
Suppliers’Supplier
Make DeliverSource Make DeliverMakeSourceDeliver SourceDeliver
Your Company
Source
Return Return ReturnReturn Return Return Return Return
Supply Chain
Supply ChainSupply Chain
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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
20
Firm Competitors
buyers
Suppliers
Competitors
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
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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
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Interpreting Industry Interpreting Industry AnalysesAnalyses
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Low entry barriers
UnattractiveIndustry
Suppliers and buyers have
strong positions
Strong threats from substitute
productsIntense rivalry
among competitors
Low profit potential
Interpreting Industry Interpreting Industry AnalysesAnalyses
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AttractiveIndustry
High entry barriers
Suppliers and buyers have weak
positions
Few threats from substitute
productsModerate rivalry
among competitors
High profit potential
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
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Competitor Analysis Competitor Analysis ComponentsComponents
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SUPPLIER POWERSUPPLIER POWER
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When firms in the supply industry can dictate terms, they can extract greater profits
Diamond supplyPercent
DeBeers
Others
50
Diamond Retailers
50
BUYER POWERBUYER POWER
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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
THREAT OF SUBSTITUTESTHREAT OF SUBSTITUTES
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Soft drinks
Coke Pepsi
Movie rentals
Block buster
Hollywood videoB
ott
led
wat
er
Cab
le T
V
IMPACT OF COMPLEMENTORIMPACT OF COMPLEMENTOR
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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
MAPPING STRATEGY GROUPS: U.S. BICYCLE MAPPING STRATEGY GROUPS: U.S. BICYCLE INDUSTRYINDUSTRY
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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
HOW WOULD YOU DO THAT? – U.S. AIRLINE INDUSTRYHOW WOULD YOU DO THAT? – U.S. AIRLINE INDUSTRY
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Rivalry?
Newentrants?
Buyerpower?
Substitutes?
Supplierpower?
Complementors?
How would youdefine the industry?
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
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
INDUSTRY LIFE CYCLEINDUSTRY LIFE CYCLE
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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
WHEN INDUSTRIES DIVIDE OR COLLIDEWHEN INDUSTRIES DIVIDE OR COLLIDE
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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
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
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
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