04/18/23 1

Business Strategy & Policy PSU MGMT #562

Dave Gartendaveoutside@alum.mit.edu

Week # 2 – External Analysis

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What is Strategy?1. Productivity Frontier2. Unique and valuable position3. Tradeoffs and decisions 4. Glue that puts pieces together5. Greatest threat from within…

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External AnalysisThe 3 Components of external analysis

1. Trends2. Industry structure3. Company/organization analysis

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Trends & Environment: “PESTAL”

Political Telecom, deregulation, govt ownership, trade barriers,

subsidies, free speech, etc.

Economic Income, spending, interest rates, GDP, stock mkts, etc.

Sociocultural Demographic, psychographic, education, etc.

Technological New standards, new processes, new features, etc.

Environmental International pressure groups, env. laws, waste

regulations

Legal Intellectual property, antitrust, etc.

Trends: Common TypesEntry/exit of major firms, changes in industry growth rate

Changes in degree of uncertainty and risk

Diffusion of technical knowledge and innovations

Changes in cost and efficiency

Shift from standardized to differentiated products

Regulatory policies / government legislation

Changing societal concerns, attitudes, and lifestyles

Internet and e-commerce opportunities

Increasing globalization of industry

Changes in long-term industry growth rate

Changes in nature of product usage

Product innovation/technological change

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Industry Structure Opportunities

Fragmented -> consolidationMature ->incremental innovations, serviceDeclining ->shakeout leadership, niche, divestEmerging -> TTM, locking up resources, switching cost “Network effect” -> standards, n**2

Source: Derived from Barney, Gaining & Sustaining Competitive Advantage

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Industry Structure Threats - Applying Porter’s 5 Forces

1.Threat of Entry Economies of scale (production, distribution), Product

differentiation (brand, switching costs), other cost advantage (know-how, patent, access to raw materials, location), contrived deterrence, govt

2.Threat of Rivalry # of competitors, size/influence of competitors, industry

growth rate, level of differentiation (vs. price), step function of capacity

3.Threat of substitutes Deliver the product/service in a different way?4.Suppliers

Bargaining power, # of companies, level of differentiation, threat of vertical integration, threat of substitutes

5.Customers Mirror image of suppliers Vert

ical

Hori

zon

tal

Source: Derived from Barney, Gaining & Sustaining Competitive Advantage

Industry Structure - Strategic Group Example

Geographical Scope

0 10 20 30 40 50 60 70 80

Ver

tica

l Bal

ance

00.

51.

01.

52.

0

INTERNATIONALDOWNSTREAM OIL COMPANIES

PRODUCTION COMPANIES

INTEGRATED INTERNATIONAL MAJORS

NATIONALLY-FOCUSEDDOWNSTREAM COMPANIES

INTEGRATED DOMESTICOIL COMPANIES

Neste Petrofina

ChevronShell

TotalMobil

Exxon

Statoil

PDVSA Kuwait

Unocal Arco

Petrobras ENI

Repsol

NipponSun

BP

Texaco

Elf

Phillips

Amoco

Indian Oil

Elf

ENI

DIVERSIFIED MAJORS

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Defining an IndustryDirect competitorsSubstitutesComplementorsTomorrow’s Competitors

Be careful .. Are you in the buggy business or the transportation

business?

Be careful .. Are you in the buggy business or the transportation

business?

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Industry TransformationEvolutionary Predictable, stable

Revolutionary – many changes simultaneously Latitude to influence industry structure Leader vs underdogs & entrants Experimentation -> convergence & stability

Strategy implications Uncertainty Substitution Adapt – flexibility, options

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Forecasting Disruption

Source: Disruptive Technologies, catching the Wave, Joseph L. Bower and Clayton M. Christensen, HBR, 2000.

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Forecasting Disruption

Source: Rules of the Game, Scott D. Anthony, Strategy & Innovation, 2004

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Forecasting DisruptionWhy do organizations get disrupted?

Strategies to deal with disruption?

X

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CompetitorsBenchmarking competitors The obvious -- financial ratios, market share The less obvious -- get into their head…

Primary research (customers, channel partners, etc)

How/why are they winning? Losing? Project ahead

Industry 2x2, 3x3, 4x4…. Relative MSS, industry growth rate, industry

attractiveness, relative competitive position, maturity of business, SWOT summary (ext + int)…

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Competitors – Game Theory

What is it? Framing strategic decisions as interactions between

competitors Predicting outcomes of competitive situations w/ a few

players

Key concepts Cooperate or compete? Can show conditions where

cooperation is more advantageous than competition Deter? Changing the payoffs in order to deter a competitor

from certain actions Commit? Irrevocable deployments of resources that give

credibility to threats Signal? Communication to influence a competitor’s decision.

Problems with game theory Useful in explaining past behavior- weak in predicting the

future Outcomes highly sensitive to small changes in assumptions

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BMG CaseObjective: How/when does change alter an industry and a company?Learnings:

1. Understanding the impact of change on an industry -> back to fundamental analysis.

2. Incumbents need to make tradeoffs when facing uncertainty and change.

3. When to make a big bet? Do you know better than your competitors where the

industry is headed? Can you resolve the uncertainty?

4. Organizational structure must reflect strategy