The External Environment

THE UNIVERSITY OF SYDNEY

BUSINESS SCHOOL

The Playing to Win Strategy Framework

*Lafley and Martin, 2013

Setting Winning Aspiration

Purpose why do we exist?

Values what do we believe in?

Vision where are we going?

SMART
Strategy how will we get there?

Levels of the Environment

PEST FRAMEWORK
Political / legal

Economic

Monopolies legislation,
Environmental protection laws,
Taxation policy, Foreign trade
regulations, Employment law,
Government stability

Business cycles, GNP trends,

Interest rates, Money supply,
Inflation, Unemployment,
Disposal income, Energy
availability and cost

Socio-cultural

Which factors will drive

change in our industry?
What scenarios can we
envisage for the
future?
Technological

Population demographics,
Income distribution, Social
mobility, Lifestyle changes,
Attitudes to work and leisure,
Consumerism, Levels of
education

Government spending on
research, Government and
industry focus of
technological effort, New
discoveries / development,
Speed of technology transfer

PEST Environmental Factors

(global/national/local)

FACTORS

Political
Economic
Socio-Cultural
Technological

CURRENT
ISSUES

TRENDS

DISRUPTIONS

How might this

effect my business?

Profitability of selected U.S. industries (av. 1990-2010)

Return on Invested Capital (ROIC)

Prepackaged Software
Semiconductors
Groceries - Wholesale
Surgical/Medical Instruments
Homebuilding
Petroleum Refining
Trucking

Average ROIC in the U.S.

Economy: 11.6%

Radio, TV Broadcast & Comm Equipment

Natural Gas Distribution
Cable & Other Pay TV Services
Airlines
0%

5%

10%

15%

20%

25%

30%

35%

The winning formula - simplified

Dynamic
Long-Term
Profit Rate

Attractiveness of
Industry
Structure

+
-

Competitive
Advantage
or Disadvantage

Environment

5 FORCES INDUSTRY ANALYSIS MODEL

THREAT OF NEW ENTRANTS
Economies of scale
High capital requirements
Access to distribution
channels
Government policy
Product differentiation
Switching costs
Low industry margins

Cost disadvantages
Independent of scale
Technology
Raw materials
Locations
Experience
Expected retaliation

CUSTOMERS
SUPPLIERS

INTERNAL RIVALRY

Concentrated suppliers
Product is critical to buyer
No substitutes
Threat of forward
integration

Industry structure
Lifecycle stage
Lack of differentiation or switching costs
Level of cooperation
Strategic groups
Exit barriers

THREAT OF SUBSTITUTES
What are the potential substitutes?
What future impact will they have?
Is the performance or cost position of substitute improving?

Concentrated customers
Product undifferentiated
Switching costs are low
Buyers have full information
Buyers industry earns low
profits
Buyers threaten backward
integration
Product unimportant to buyer
Product presents a significant
proportion of buyers costs

How industries change: the life-cycle concept

Development

Growth

Shakeout

Maturity

Decline

Early
Adopters

Entry of
Competitors

Selective
Purchase

Saturation

Drop-Off
in usage

Fight for
share

Strong
Competition

Fight to
maintain
share

Exit of
some
competitors

Undifferentiated
products

Pricecutting for
volume

Efficiency,
low cost

Few
Competitors

Market Sector Attractiveness/

Competitive Intensity Summary
Factor
Threat of new entrants

Threat of substitutes

Bargaining power of
suppliers

Degree of internal rivalry

Bargaining power of
buyers

Bargaining power of
Consumers

Overall competitive
intensity

Low

Med

High

Key Issues, Trends & Strategic Options

Strategic options
POWERFUL SUPPLIERS
Diversify supply base
Reduce supplier costs
Standardise requirements
Integrate backwards

NEW ENTRANTS
Build entry barriers
Watch out for mavericks!

INTERNAL RIVALRY
Strengthen competitive advantage
Re-segment
Outsource to reduce fix costs
Acquire competitors with care!

POWERFUL BUYERS
Select customers
Build customer switching costs
- specifications
- relationships
- service
Integrate forward

SUBSTITUTES
Understand customer
preferences before reacting
Critically examine indirect
substitutes
Consider diversification

New Entrant
Threats

Supplier
Power

Internal Rivalry

Substitute
Threats

Changing the game

Buyer
Power

Consumer
Power

How can I reduce buyer power?

How can I create pull through?
How can I gain competitive advantage?
How can I raise barriers to entry/substitution?

The new strategic game: Beyond Porter

Old Game

Porters
Five Forces

New types of
cooperation
and competition:
more than arms
length competition
New sources of
value: competitive
advantages no
longer based only
on structural
advantages
Increasing
uncertainty:
todays industry
structure is
probably not a
good indicator
of the future

The new game board

Insight/foresight
Creating value by exploiting
superior knowledge or insight due
to scientific or technical expertise,
pattern recognition, or sheer
creativity

Frontline execution
Creating value by consistently outperforming
competitors in the execution of day-to-day tasks
through cost, quality, or time

Insight/
foresight

Codependent systems
Privileged
relationships

Industry
structure/
conduct

Traditional arms
length

Frontline
execution
Structural
advantage

Basis of
competition

Structural advantage
Traditional
microeconomic
assumption that
creating value is
only possible by
exploiting structural
advantages over
competitors and
potential industry
entrants due to
scale, know how,
technology,
patents, market
access, etc.

The new game board

Insight/
foresight

Codependent systems

Frontline
execution

Privileged
relationships

Industry
structure/
conduct

Traditional arms
length

Uncertainty

Structural
advantage

Basis of
competition

A new approach to industry structure/conduct

Codependent systems
Cross-industry structures such as:
Networks
Economic webs: Sets of
companies that use a common
architecture to deliver independent
elements of an overall value
proposition that grows stronger as
more companies join the web
Privileged relationships
Companies single out other
companies (often in the
same market) for a special
price or treatment because of
financial interest, friendship,
trust, or ethnic loyalty
Traditional arms length
Microeconomic model based on
rational industry structure with
competition for control of economic
surplus, not only with competitors but
also with suppliers and customers

Codependent systems
Privileged
relationships

Industry
structure/
conduct

Traditional arms
length

Porters Five
Forces as basis of
new approach

Key success factors (KSF)

KSF are the major factors that determine

competitive success in a particular industry
KSF can be a skill, competitive capability or a
condition the company must achieve (technology,
manufacturing, distribution, marketing or
organisational resources)
KSF vary from industry to industry and change
over time

KSF are driven by what the customer wants

Possible KSF

Basis of competition
Competitive price

Efficient raw material sourcing

Productive plant
Low overheads

Good product quality

Product design skills

Quality control procedures
Understanding what customer

wants
Service

Reassurance

Company reputation or image

Reliable delivery system

Flexible logistics operation
Good sales and marketing team
Ability to offer technical support

The Competitive Analysis Sequence

MARKET
SEGMENTATION

WHO ARE THE

COMPETITORS?

PESTER

WHAT ARE
THEY DOING?

INDUSTRY
ANALYSIS

PERFORMANCE
( FINANCIAL, SHARE,
SALES, ETC )

CURRENT STRATEGY

CORE COMPETENCES

HOW ARE THEY

DOING IT?
CULTURE

COMMITMENT

COMPETITIVE
ADVANTAGES

WHY ARE THEY

DOING IT?
WHAT ARE THEIR
FUTURE STRATEGIES
LIKELY TO BE?

HISTORY AND
ASSUMPTIONS

IMPLICATIONS
FOR US?
HOW SHOULD
WE RESPOND?