1. Copyright © 2012 Pearson Canada Inc. 0 Chapter 4 Exploring the External Environment: Macro and Industry Dynamics

2. Copyright © 2012 Pearson Canada Inc. 1 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.

3. Copyright © 2012 Pearson Canada Inc. 2 The External Environment of Strategy Macro Environment Political, Economic, Sociocultural, Technological, Environmental, Legal Industry Environment Strategic Group The Organization

4. Copyright © 2012 Pearson Canada Inc. 3 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.

5. Copyright © 2012 Pearson Canada Inc. 4 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

6. Copyright © 2012 Pearson Canada Inc. 5 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.”

7. Copyright © 2012 Pearson Canada Inc. 6 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 complements Relative value added Barriers to complement entry Difficulty of engaging complements Buyer perception of complements Complement exclusivity

8. Copyright © 2012 Pearson Canada Inc. 7 Competitor Analysis Mapping Competitors The Value Curve Predicting Competitors’ Behaviours

9. Copyright © 2012 Pearson Canada Inc. 8 Dynamic Characteristics of the External Environment - INDUSTRY LIFE CYCLE Market Size 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

10. Copyright © 2012 Pearson Canada Inc. 9 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