SIB-429 D: Strategic Management

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SIB-429 D Strategic Management
Looking Outside the Firm The External Environment

• Russell Seidle
• Wednesday February 4th, 2015

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

• Political factors
• Economic factors
• Sociocultural factors
• Technological factors
• Ecological factors
• Legal factors

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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

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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

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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)

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

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Porters 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

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Porters 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

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Porters Five Forces Model

• Threat of Substitutes
• Strongest under the following conditions
• Availability of credible substitutes with
  attractive attributes
• Low customer switching costs

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Porters 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

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Porters Five Forces Model An Example

• Insights from the global jewelry and watch
  industry (Diamonds)
• Threat of new entrants?

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The Industry Environment

• Insights from the global jewelry and watch
  industry (Diamonds)
• Bargaining power of suppliers?

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The Industry Environment

• Insights from the global jewelry and watch
  industry (Diamonds)
• Bargaining power of buyers?

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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)
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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

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The Industry Environment

• Insights from the global jewelry and watch
  industry (Diamonds)
• Rivalry among competitors?

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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
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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)
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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

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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).