BLOG#1 - Week 3: Analyzing the External Strategic Environment and Evaluating Industry Dynamics

Week 3: Analyzing the External Strategic Environment and Evaluating Industry Dynamics

Author: Tejas Kashyap (tkashyap@andrew.cmu.edu)

In order for companies to be successful, they need to provide unique value to their users.
The keyword here is ‘unique’, as no company functions in isolation, and it needs to account for
in its strategy, the external factors that might influence its bottom line. 

Michael Porter helps realize these forms of competition, through his Five Forces Analysis.
According to Porter, there are five forces that can be utilized to measure competition intensity,
attractiveness, and profitability of an industry or market. These forces are explained as follows
with the help of an example: 

1. Competition in the Industry: This refers to the number of competitors in an industry and their capability to undercut in terms of price or outperform in terms of service/ quality delivery. When we look at the airline industry in the US, we see that the industry is extremely competitive mostly because of the presence of a large number of providers with similar cost-pricing structures, and overlapping service delivery. This gives more power in the hands of the customers, who can easily switch between these players. 
2. Potential of new entrants into the industry: A company’s power in an industry also depends on how easy it is for new companies to enter the market, and compete with them. The lesser resource a new company might require, or fewer regulations, would make it harder for existing players to fend off new competition. Going back to the US airlines industry, the threat of new entrants in the airline industry can be considered as low. It takes a lot of upfront investment to start an airline business and pursuing licenses and insurances, and establishing distribution channels is a tough feat as seen in the past. In addition to that, companies who have been in the space for a while now have developed the expertise to improve service and reduce costs, which might take years of trial and error for new companies to perfect. Even though the stakes were against new entrants, carriers like Southwest Airlines have successfully employed innovative cost-cutting business models and service delivery techniques, posing a strong threat to more established players like United and Delta. 
3. Power of Suppliers: This force entails the bargaining power in the hands of the supplier i.e. if they tend to increase prices often, and the companies lack other options to make a switch, the power in the hands of the suppliers is high, effectively making it difficult for companies to function well in the long term. This is a big factor, especially in the manufacturing industry, which is why companies like Tesla shift to manufacturing as many components in the house as successfully possible. In terms of the airline industry, the main supplies are fuel and aircraft. Fuel prices are dependant on external geopolitical factors which would be discussed later, however, in terms of aircraft providers, there are only two major players in the world, Airbus and Boeing. They have substantial bargaining power over the airlines, case in point, the recent failure of Boeing’s 737 did not hamper it’s position in the industry at all as no previous orders were canceled. This happened because, with Airbus’s huge waitlist, carriers didn’t really have an option but to stick with Boeing.   
4. Power of Customers: The ability of a customer to bring prices down, also hugely affects the success of a business in an industry. In the airline industry, although the pool of customers is huge, however, they are well informed through services like Expedia, giving them more power to drive prices. 
5. Threat of Substitutes: Any product or service that the customer can utilize to replace a company’s offering, can be termed as a substitute. In terms of the airline industry, people have the option of taking trains, cars etc. to most destinations as well, making them a source of indirect competition. New additions like the Hyperloop concept whose speed has reached 1200km/h in theory, could pose as a huge threat to airlines, considering that subsea Hyperloops will potentially allow for any two destinations in the world to be connected directly. 

Moving on from the industry dynamics, there are other external factors that affect a company
and should be planned for in any strategy development process. A good standard to account
for them is through the acronym PESTLE which stands for Political, Economic, Social, Technological,
Legal and Environmental. In one of my previous projects, wherein I was working with the
VOLVO group to bring autonomous construction equipment to reality, where the transition,
acceptance, and viability of such a huge change would go beyond traditional consumer/ competition
analysis, this process was extremely useful. I strongly believe that as a company grows, it is more
and more affected by these external factors, and should evaluate them in all strategy development
sessions. This would allow them to not only protect the future of their existing lines of businesses
but also uncover new opportunities, in adjacent spaces and beyond. McKinsey’s report “The four
global forces breaking all trends”, uncovers the biggest trends that affected companies across
industries in the last few decades. I would further suggest that in addition to tracking and evaluating
the ongoing changes in the environment, analysis of past changes and how they shape the ‘today’
are also highly imperative to shed light on the future trajectory of an industry.