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Strategy - External Environment
Strategy - External Environment
Strategy - External Environment
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Learning Objectives
Become aware of factors in a company’s broad macro-
environment that may have strategic significance.
Gain command of the basic concepts and analytical tools
widely used to diagnose the attractiveness of a company’s
industry.
Become adept at mapping the market positions of key
groups of industry rivals.
Learn how to use multiple frameworks to determine
whether an industry’s outlook presents a company with
sufficiently attractive opportunities for growth and
profitability.
From Thinking Strategically about the
Company’s Situation to Choosing a Strategy
Thinking
strategically
about a firm’s
external
environment Form a
Identify Select the
strategic
promising best strategy
vision of
strategic and business
where the
options model for
firm needs
for the firm the firm
Thinking to head
strategically
about a firm’s
internal
environment
External Environment: General, Industry
and Competitor
External Environment include:
General (Macro)
Industry
Competitor
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External Environment Analysis
Outcomes
Opportunity
General environment condition that, if exploited, helps a
company achieve strategic competitiveness
Threat
General environment condition that may hinder a company's
efforts to achieve strategic competitiveness
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External Environment Analysis
Components
Scanning
General surveillance of all environmental factors and their
interactions in order to
Identify early signals of possible environmental change, and
Detect environmental change already underway.
Monitoring
Watching or noticing environmental trends and detecting
meaning through ongoing observations
Forecasting
Developing plausible projections of the direction, scope, and intensity
of environmental change
Assessing
Identifying and evaluating how and why current and projected
environmental changes affect or will affect firms’ strategies.
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External Environment Analysis:
The General Environment
The General (Macro) Environment
encompasses the broad environmental context in which a company’s
industry is situated and includes strategically relevant components
over which the firm has no direct control.
Grouped into 6 dimensions OR ‘environmental segments’ (PESTEL)
Each segment composed of different elements
Political factors
Economic conditions (local to worldwide)
Sociocultural forces
Technological factors
Environmental factors (the natural environment)
Legal/regulatory conditions
Focuses on principal components of strategic significance in the
macro-environment.
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External Environment Analysis:
The Components of Macro-Environment
Component Description
These factors include political policies and processes, including the extent to which a
government intervenes in the economy. They include such matters as tax policy, fiscal policy,
Political tariffs, the political climate, and the strength of institutions such as the Central banking
factors system. Some political factors, such as bailouts, are industry-specific. Others, such as energy
policy, affect certain types of industries (energy producers and heavy users of energy) more
than others.
Economic conditions include the general economic climate and specific factors such as
interest rates, exchange rates, the inflation rate, and the unemployment rate, the rate of
economic growth, trade deficits or surpluses, savings rates, and per capita domestic product.
Economic Economic factors also include conditions in the markets for stocks and bonds, which can
affect consumer confidence and discretionary income. Some industries, such as construction,
conditions
are particularly vulnerable to economic downturns but are positively affected by factors such
as low interest rates. Others, such as discount retailing, may benefit when general economic
conditions weaken, as consumers become more price-conscious.
Sociocultural forces include the societal values, attitudes, cultural factors, and lifestyles that
impact businesses, as well as demographic factors such as the population size, growth rate
and age distribution. Sociocultural forces vary by locale and change over time. An example is
Sociocultural the trend toward healthier lifestyles, which can shift spending toward exercise equipment
forces and health clubs and away from alcohol and snack foods. Population demographics can have
large implications for industries such as health care, where costs and service needs vary with
demographic factors such as age and income distribution.
External Environment Analysis:
The Components of Macro-Environment
Component Description
Technological factors include the pace of technological change and technical
developments that have the potential for wide-ranging effects on society, such
as genetic engineering and nanotechnology. They include institutions involved
Technological in creating new knowledge and controlling the use of technology, such as R&D
factors consortia, university-sponsored technology incubators, patent and copyright
laws, and government control over the Internet. Technological change can
encourage the birth of new industries, such as those based on nanotechnology,
and disrupt others, such as the recording industry.
This includes ecological and environmental forces such as weather, climate,
climate change, and associated factors like water shortages. These factors can
Environmental
directly impact industries such as insurance, farming, energy production, and
forces
tourism. They may have an indirect but substantial effect on other industries
such as transportation and utilities.
These factors include the regulations and laws with which companies must
Legal comply such as consumer laws, labor laws, antitrust laws, and occupational
and regulatory health and safety regulation. Some factors, such as banking deregulation, are
factors industry-specific. Others, such as minimum wage legislation, affect certain
types of industries (low-wage, labor-intensive industries) more than others.
External Environment:
General, Industry and Competitor
Industry Environment
Set of factors directly influencing
A firm’s competitive actions/responses
Relates to Porter’s 5 Forces Model
Competitor Environment
Competitor analysis: gather and interpret competitor
information
Gives details about
A firm’s direct and indirect competitors
The competitive dynamics expected to impact a firm's efforts to
generate above-average returns
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Assessing the Company’s Industry and Competitive
Environment
Capital costs A large required capital commitment can deter new entrants. Unrecoverable
and risky investments like product development and advertisement presents
the greatest barriers.
Incumbency advantages Incumbent mining companies may have locked up the best reserves. Patents/
investment that produce cumulative benefits.
Unequal access to Movie producers with a track record and established relationships have an
distribution channels advantage in getting cinema distribution.
Advertising product or service Boosts buyer demand, increases product differentiation and perceived
characteristics, using ads to enhance value (V), acts to increase total sales volume and market share, may
a company’s image increase unit costs (C) and/or lower profit margins per unit sold
Innovating to improve product Acts to increase product differentiation and value (V), boosts buyer
performance and quality demand, acts to boost total sales volume, likely to increase unit costs
(C)
Introducing new or improved features, Acts to increase product differentiation and value (V), strengthens
increasing the number of styles or buyer demand, acts to boost total sales volume and market share,
models to provide greater product likely to increase unit costs (C)
selection
Increasing customization of product or Acts to increase product differentiation and value (V), increases
service switching costs, acts to boost total sales volume, often increases unit
costs (C)
Building a bigger, better dealer Broadens access to buyers, acts to boost total sales volume and market
network share, may increase unit costs (C)
Improving warranties, offering low- Acts to increase product differentiation and value (V), increases unit
interest financing costs (C), increases buyer costs to switch brands, acts to boost total
sales volume and market share
Extending Five Forces Analysis:
Addressing Cooperation and Complements
Extending Five Forces Analysis:
Addressing Cooperation and Complements
The Five Forces Framework deal with competition- Sharing of pie.
Sometimes a business will cooperate with customers or other
businesses in order to grow a market/ make the pie bigger.
Complements: products that are typically consumed together;
enhance the value of the focal firm’s products when they are used
together. Ex. Computer and software – provides an incentive to
cooperate.
Co-opetition: combination of cooperation and competition.
“Business is cooperation when it comes to creating a pie and competition
when it comes to dividing it up.” - Adam Brandenburger and Barry Nalebuff
Complements can have such a powerful influence on an industry that
they can be considered a “sixth force.”
Complements are everywhere and can influence the other five forces
Extending Five Forces Analysis:
Addressing Cooperation and Complements
Factors Influencing Complements
Factor Example/Rationale
Complement A dominant complementor can exert more influence on
concentration/ an industry than many smaller complementors that
dominance compete with one another. Google Chrome
Relative If it is easier for users to switch across competitors than it
switching costs is across complements, complements have significant
power.
Ease of If a product and its complement are difficult to unbundle,
unbundling the complement has more influence over the product’s
customers. Ex. itunes
Influence on Content providers such as the UK’s Premier League
demand football have a powerful influence on the demand for
complementary products such as cable channels.
Asymmetric A complementor that can easily enter the product-
threats maker’s industry has more power than one that cannot.
Rate of growth Industries with low-profit growth are more likely to be
of the profit influenced by complements, as there are fewer alternatives
opportunity to grow profits.
Pankaj Ghemawat
The Value Net
Value Net Model: A tool that
helps business move away from a
"kill or be killed" ethic and achieve
greater success by operating
alongside, or even in association
with, other organizations.
“Strategy can be viewed as building defences against the competitive forces or as finding a
position in an industry where the forces are weakest.”- Porter (Royal Enfield)
Applying Industry Analysis- What to do?
When you start to think about what to do in response to your
industry analysis, bear in mind the following points:
It is possible to make good money in a tough industry. The key is to find
a way to deal effectively with the five forces.
Footnote: Circles are drawn roughly proportional to the sizes of the firms, based on revenues.
Constructing Strategic Group Maps
Assessing the Market Positions of Key Competitors
Constructing a strategic group map:
Identify the competitive characteristics that delineate strategic
approaches used in the industry. Typical variables are:
Price/quality range (high, medium, low)
Geographic coverage (local, regional, national, global)
Product-line breadth (wide, narrow)
Degree of service offered (no frills, limited, full)
Distribution channels (retail, wholesale, Internet, multiple)
Degree of vertical integration (none, partial, full)
Degree of diversification into other industries (none, some, considerable)
Plot the firms on a two-variable map using pairs of the competitive
characteristics.
Assign firms occupying about the same map location to the same
strategic group.
Draw circles around each strategic group, making the circles
proportional to the size of the group’s share of total industry sales
revenues.
Guidelines for Creating Strategic
Group Maps
Variables selected as map axes should not be highly
correlated.
Variables should reflect important (sizable) differences among
rival approaches.
Variables may be quantitative, continuous, discrete and/or
defined in terms of distinct classes and combinations.
Drawing group circles proportional to the combined sales of
firms in each group will reflect the relative sizes of each
strategic group.
Drawing maps using different pairs of variables will show the
different competitive positioning relationships present in the
industry’s structure.
Strategic Group Map
Comparative Market Positions of Producers in the Industry
Identification of Key
Success Factors
Identification of Key Success Factors
Thus the KSFs include a strong network of wholesale distributors
(to get the company’s brand stocked and favourably displayed where
beer is sold) and
clever advertising (to induce beer drinkers to buy the brand and
thereby pull beer sales through the established wholesale and retail
channels).
Because there is a potential for strong buyer power on the part of
large distributors and retail chains, competitive success depends on
some mechanism to offset that power, of which advertising (to
create demand pull) is one. Thus the KSFs also include superior
product differentiation (as in microbrews) or superior firm size and
branding capabilities (as in national brands).
The KSFs also include full utilization of brewing capacity (to keep
manufacturing costs low and offset the high advertising, branding,
and product differentiation costs).
Is the Industry Outlook Conducive to Good
Profitability?
The anticipated industry environment is fundamentally
attractive if it presents a company with good opportunity
for above-average profitability.
Indicators of a rival
firm’s likely strategic
moves and
countermoves
Creating a Strategic Profile of a Rival
Competitor Firm
Current Strategy
How is the competitor positioned in the market?
What is the basis for its competitive advantage?
What kinds of investments is it making (as an indicator of its expected growth
trajectory)?
Objectives
What are its financial performance objectives?
What are its strategic objectives?
How well is it performing in meeting its objectives?
Is it under pressure to improve its performance?
Capabilities
What are the competitor’s current capabilities?
What weaknesses does it have?
Which capabilities is it making efforts to obtain?
Assumptions
What do the competitor’s top managers believe about their strategic situation?
How will their beliefs affect the competitor’s behavior in the market?
Predicting Your Competitor’s Reaction-
Coyne and Horn
WILL YOUR COMPETITORS REACT AT ALL?
If you can answer “no” to any of the following questions, the chances of a
response are low:
Will your rivals see your move? Even if an action seems obvious to you,
your competitors may not recognize it. For instance, if your new product
will affect several of your rivals’ business units, it may not register as
significant to any one unit. So it may be overlooked.
Will your rival feel threatened? If your competitor can still meet its financial
goals despite your planned move, it may not feel threatened. A rival might
not think that mounting a response is worth the expense and distraction.
Will mounting a response be a priority? Your adversary has a full agenda
that would have to be curtailed to react to your move. If your rival is
already committed to plans that will occupy all its attention, it may be
reluctant to shift priorities.
Can your rival overcome organizational inertia? Many within a rival
company might resist if reacting requires major organizational changes.
Predicting Your Competitor’s Reaction
WHAT OPTIONS WILL A COMPETITOR ACTIVELY CONSIDER?
Most companies consider fewer than four responses to a competitor’s move. The
counter action they most commonly consider is often the most obvious. For
example, they weigh the possibility of introducing a me-too product if a rival comes
out with a new offering. And they consider matching a competitor’s price change.
The lesson? There’s a good chance your adversary is seriously considering the most
obvious response to your move.
Unfortunately, the company (and its investors) failed to conduct a basic analysis of
the industry environment. As Rumelt explains, the cable technology was not
proprietary and data-carrying capacity was a commodity. That meant that customers
could easily switch from one supplier to another, putting them in a powerful
bargaining position. Furthermore, customers were price- sensitive. Even worse, the
threat of entry was high, and other companies were entering the business, fueled by
easy financing. High fixed costs but near-zero marginal costs (the cost to carry one
more piece of data) led to fierce price competition within the industry. As Rumelt
says, “One struggles to imagine a worse industry structure.”
As new entrants came into the market and industry competition increased, the
price of fiber capacity collapsed. Rumelt declared that “the collapse of prices could
have been foreseen by anyone doing a simple Five Forces analysis.”