1. SIB-429 D: Strategic Management Russell Seidle Wednesday February 4 th, 2015 Looking Outside the Firm: The External Environment

2. The Firm in its External Environment Source: Rothaermel, 2013: Exhibit 3.1 (p. 56) Larger macro environment

3. Wednesday February 4 th, 2015 - 3 - Macro Environment: PESTEL Framework P olitical factors E conomic factors S ociocultural factors T echnological factors E cological factors L egal factors

4. Wednesday February 4 th, 2015 - 4 - Macro Environment: PESTEL Framework Political factors Actions and decisions of governments that influence firm behaviour Economic factors Growth rates  Expansion (boom) vs. contraction (recession)  Initiating strategic action during periods of downturn Interest rates  Impact on consumer demand and business borrowing Levels of employment  Availability of (in)expensive human capital Price stability  Inflation vs. deflation Currency exchange rates  Role of higher interest rates in driving strength in currencies

5. Wednesday February 4 th, 2015 - 5 - Macro Environment: PESTEL Framework Sociocultural factors Cultures, norms and values within a society Demographic considerations Technological factors The “application of knowledge to create new processes and products” (Rothaermel, 2013: 60) Process technology and product innovations Ecological factors ‘Green’ environmental issues relevant to organizational operations Legal factors Laws, mandates, regulations and court decisions

6. Wednesday February 4 th, 2015 - 6 - Industry Environment: S-C-P Model Industry: “a group of companies offering similar products or services” (Rothaermel, 2013: 61) S-C-P model argues that industry structure (S) determines organizational conduct (C), which ultimately influences performance (P) Industries can be characterized as  Fragmented (low profitability) vs. consolidated (high profitability)  Perfectly competitive (firms as price-takers) vs. monopolistic (firms as price-makers)

7. Industry Environment: S-C-P Model Source: Rothaermel, 2013: Exhibit 3.2 (p. 62) ▪ Temporary competitive advantage (at best) ▪ Competitive parity ▪ Coordination of strategic actions ▪ Natural monopolies ▪ Near monopolies

8. Porter’s Five Forces Model The stronger the forces, the lower the profit potential and the less attractive the industry Goal is to minimize strong forces and exploit weak forces Source: Rothaermel, 2013: Exhibit 3.3 (p. 65)

9. Wednesday February 4 th, 2015 - 9 - Porter’s Five Forces Model Threat of New Entrants Entry barriers: “obstacles that determine how easily a firm can enter an industry” (Rothaermel, 2013: 65) Especially relevant to potential competitors considering whether or not to compete in the industry Expected retaliation to entry on the part of incumbents

10. Wednesday February 4 th, 2015 - 10 - Porter’s Five Forces Model Bargaining Power of Suppliers Strongest under the following conditions:  Few available substitutes  Low competition among suppliers  Unique product  High customer switching costs  Possibility of forward integration  High dispersion of buyers

11. Wednesday February 4 th, 2015 - 11 - Porter’s Five Forces Model Bargaining Power of Buyers Strongest under the following conditions:  Purchases made in large quantities  Single (monopsonistic) buyer  Commodity product  Low customer switching costs  Possibility of backward integration

12. Wednesday February 4 th, 2015 - 12 - Porter’s Five Forces Model Threat of Substitutes Strongest under the following conditions:  Availability of credible substitutes with attractive attributes  Low customer switching costs

13. Wednesday February 4 th, 2015 - 13 - Porter’s Five Forces Model Rivalry among Competitors Exit barriers: “obstacles that determine how easily a firm can leave an industry” (Rothaermel, 2013: 68) Role of economic and social factors in determining existence of exit barriers High competitive stakes in a given industry can increase rivalry

14. Porter’s Five Forces Model: An Example Insights from the global jewelry and watch industry (Diamonds) Threat of new entrants?

15. The Industry Environment Insights from the global jewelry and watch industry (Diamonds) Bargaining power of suppliers?

16. The Industry Environment Insights from the global jewelry and watch industry (Diamonds) Bargaining power of buyers?

17. The Industry Environment Insights from the global jewelry and watch industry (Diamonds) Bargaining power of buyers? Industry efforts to counteract the trend towards standardization and commodification Source: Luxury Goods – The Global Jewelry and Watch Market: A Bullish Outlook for Baubles. Bear Stearns (2004); www.thesocietypages.org (Accessed May 4, 2011)www.thesocietypages.org

18. The Industry Environment Insights from the global jewelry and watch industry (Diamonds) Threat of substitutes? No direct substitute for diamonds and diamond jewelry  Other jewelry types: cultured pearls, precious gemstones, costume jewelry Low value is realized through ‘consumption’ of these indirect substitutes

19. The Industry Environment Insights from the global jewelry and watch industry (Diamonds) Rivalry among competitors?

20. The Industry Environment Insights from the global jewelry and watch industry (Diamonds) Do you consider this to be an attractive industry? Threat of new entrants Moderate Bargaining power of suppliers High Bargaining power of buyers Low to moderate Threat of substitutes Low Rivalry among competitors High

21. The Sixth Force: Complements Complement is “a product, service, or competency that adds value to the original product offering when the two are used in tandem” (Rothaermel, 2013: 70) Source: Rothaermel, 2013: Exhibit 3.5 (p. 71)

22. Wednesday February 4 th, 2015 - 22 - Strategic Groups So far we have considered both the (broad) general environment and the (more specific) industry environment Analysis can also be undertaken at a more targeted ‘sub-industry’ level Strategic group is a collection of companies pursuing a similar strategy within a given industry Deeper, more nuanced view of the industry and its competitive implications

23. Strategic Groups Example of a strategic group mapping (UK pharmaceutical industry) Source: Leask, G. & Parker, D. An application of strategic group theory to the UK pharmaceuticals industry. European Business Journal (2004).