20
Driving Forces Analysis

Short Description

Performing an industry analysis (see Chapter 6, "Industry Analysis (The Nine Forces)") can reveal much about the current state of an industry and the potential for it to generate profitability for its incumbents; nevertheless, change and uncertainty are ever present in the competitive environment. Driving forces analysis (DFA) is a way of understanding and accounting for change at the industry level. "Drivers" are clusters of trends that create influences on changes to an industry's structure and a rival's competitive conduct.

Background

Change, particularly longer-term change, became a topic of interest to researchers, managers, and policy makers following the First and Second World Wars. DFA was developed in the 1950s as a means for helping organizations and individuals deal with changes in the business environment. Techniques such as force field analysis (FFA), developed by Kurt Lewin in 1951, included the concepts of driving and hindering forces. FFA was used to analyze the conditions that support or restrain a given outcome and was seen to be an effective way both to analyze an existing set of conditions and determine the most effective methods to achieve a desired outcome. This work captured the fancy of economists and set the stage for the further development of DFA within the competitive industrial context.

So what are driving forces (DFs)? There are forces in every situation that cause things to remain as they are or to change. Forces that push toward change are called "driving" or "helping" forces. Forces that resist change are called "restraining" or "hindering" forces. When these forces are balanced, no change is likely to occur. When the net effect of these forces is altered and moves away from balance, change occurs in either a helpful or obstructive manner.

Change is not the only factor associated with DFs that firms need to take into account; uncertainty is another key element that a firm must confront as it makes decisions and develops strategies.

The term "force" refers to the broad cluster of events, state of affairs, and/or trends that impact the firm's future. DFs are those significant, underlying "currents" that define and drive events and trends in certain directions. These forces are typically quite broad in scope, long-term in nature, and associated with some degree of uncertainty as to their evolution. Examples of DFs include global population growth, advancing use of technology like the World Wide Web or portable phones, and changes in the global climate.

In order to plan appropriate strategies for change, the forces in the situation must be clearly understood and identified. Understanding the DFs is the first step toward establishing a framework for analyzing critical trends, particularly as they may impact the competitive environment facing an industry. Taking this a step further, Tregoe and Zimmerman saw them as the primary determiners of the scope of future products and markets and a dominant factor that heavily influences major decisions.

Strategic Rationale

Industry conditions change because forces are driving industry participants (competitors, customers, or suppliers) to alter their actions. Some DFs originate from within a firm's industry and competitive environment and can create uncertainty for industry participants—this is always an element present in a competitive environment that a firm can exploit with a well-deployed strategy.

The first task in understanding industry evolution is to look for the DFs of the macroenvironment that influence industry structure and competitive behavior; for example, changing government regulations and regulatory regimes. There are also less-obvious external factors. Identifying and assessing these fundamental factors is both the starting point and one of the objectives of scenario analysis.¹

DFs may seem obvious to one person but be hidden to another; therefore, the identification of DFs should be done in a team environment. It is helpful to run through this common list of categories of DFs: social forces/demographic developments, technological developments, economic developments and events, political developments and events, and environmental developments. Normally, firms have little control over DFs—their ability to deal with them comes from recognizing them and understanding their effects.

DFA also plays a critical role in the larger strategy development process. DFs indicate the external factors likely to have greatest impact on a firm in the near future. The firm must proactively address these forces if it is to achieve success.

Strengths and Advantages

DFA is an essential component of several other analytical techniques, including environment and industry analysis. The first task in building a scenario is to look for DFs of the macro-environment that influence the key industry or customer factors likely to impact the firm.² For example, government regulations might influence future competition, but there are also many less-obvious external factors. Identifying and assessing these factors is both the starting point and one of the objectives of the DFA method. DFs are also a key part of doing any industry analysis, which cannot be performed effectively in their absence.

DFs by nature imply change. Understanding them and their impacts requires managers to consider how conditions will evolve in and around their industries and to consider these forces in their decisions and strategy.

DFA tends to receive a higher than average degree of managerial agreement—particularly when the managers are involved in the consensus process used for developing them. Senior managers often have insights developed over time that can provide valuable perspectives in the DFA process. The inclusion of managers and decision makers in the DF identification and prioritization process can be a valuable facet of getting everyone in the firm focused on the type of strategic thinking and competitive learning that tends to serve firms well in the long run.³

DFA can be done in a less data-intense fashion than many other techniques and doesn't necessarily require the firm to gather data on a continual basis like many other analytical techniques do. The use of brainstorming, popular group consensus methods, and participative technology facilitates its achievement, and it can be done on a less-frequent basis than required for many other tools while still being effective.

Weaknesses and Limitations

DFA cannot drive strategy formulation alone and seldom specifically answers clients' strategy questions. There are other steps that need to be performed before determining organizational actions (that is, strategies or tactics) even after gaining agreement on DFs. In other words, just recognizing and agreeing upon a critical driving force does not tell decision makers what they need to do, but it does tell them that this driving force will impact their future and that the decisions or strategies that need to be developed must take these impacts into account.

DFs tend to be outside the control of any single firm to change. What can be done is to change how the firm's strategy or tactics takes them into account. Firms do not manage the DFs, but instead must manage their own responses to them.

The process used to perform DFA nearly always needs to be inclusive and participatory. This can be a problem in some firms where key personnel are not available to participate or lack the time to give the necessary consideration to the DF development and prioritization process. Mostly due to organizational structure reasons or internal politics, some firms have experienced great difficulties in generating agreements on the DFs or their prioritization.

DF analysis can suffer from many of the common internal, organizational biases when they are generated using only internal personnel. This is because internal personnel tend to see the world through the same (potentially distorted) organizational lens. As such, it is often useful to employ external resources to reach consensus around the DFs.

Process for Applying the Technique

There are two essential steps involved in performing DFA, each of which includes a number of sub-elements that need to be performed before moving forward. The primary analytical task in performing DFA is to:

1. Identify what the relevant DFs are—this requires separating the major causes of industry change from less important ones.
2. Assess the impact they will have on the industry—this involves identifying the small number of DFs that are likely to have greatest impact on the industry and the firm over the next few years.

Step 1: Identifying an Industry's DFs

Some DFs are unique and specific to a particular industry's situation; nevertheless, most DFs cut across broad swaths of the business environment. They are usually identified by the presence of patterns seen as events and trends, or combinations of trends that combine to create a force. Some of the more common DFs across various industries are shown next.⁴

Common Types of DFs

• Changes in long-term industry growth rate
• Changes in who buys the product and how it is used
• Changing societal concerns, attitudes, and lifestyles
• Diffusion of expertise across more firms and locations
• Election trends, government decisions, and/or shifting regulatory influences
• Growing use of the Internet and its applications
• Important firms that enter or exit the industry
• Increasing globalization of the industry
• Innovation in communication and marketing
• Innovation in processes and products
• Changes in the long-term industry growth rate
• Major changes in customer needs and preferences
• Major changes in production costs and efficiencies
• Prominent changes in uncertainty and business risk
• Technological change and manufacturing process innovation

So how do you discover an industry's DFs? You should start by pruning the generated list of all those DFs that are not relevant to your industry. For example, if you are a wholesaler or B2B firm, you can probably eliminate end-user type forces from the list. After eliminating the obvious ones, determine if there is another driving force that cannot be readily subsumed inside one of those remaining on the list. If the answer is no, then the force should be included.

Another way of trying to understand DFs is to understand how trends (that is, T₁ . . . T_n) or events (E₁ . . . E_n) relate to one another and a potential driving force. This is diagrammed in Figure 20.1. This process helps you to understand the relationship between trends and events and to determine the truly independent driving forces as opposed to overlapping ones.

Figure 20.1 Relating trends and events to a driving force

It is a rare analyst or group of managers that can look at their first list and focus in on the key DFs. When these are presented to a group of managers, as most analysts will do in their development of DFs, someone invariably throws cold water on some of the suggested forces and suggests others. Our experience suggests that some of the most constructive debates occur when the DFs determination team tries to identify their relevant set of forces. Of course, it can often get even more interesting once this step is completed and their impacts are discussed.

This list shows the completion of the first stage by a management group of a large, publicly funded university in Canada.

Representative DFs in the Macro-Environment for a Large Public University

Societal and Demographic

• Increased diversity of students seeking university education
• Question over the value of some credentials—particularly relative to experience
• Increasing desire by individuals for lifelong learning
• Concerns over social inequities and fragmentation
• Increasing complexity of social problems
• Continuing aging of population in primary catchment regions
• Changing views regarding the appropriate role of universities

Economic

• Continued globalization
• Growth increasingly powered by entrepreneurship
• Huge increases in participation rate of university students in some regions of the globe—for example, China and Mexico
• Downturn of the economic cycle
• Rising interest rates and impact on student loans

Political

• Uncertainties in direction of public support for universities
• Declining public funding
• Increasing governmental demand for accountability
• Increased student activism due to raised tuition fees

Technological

• Increasing demand for distance learning availability
• Origination of new pedagogical platforms
• Expanded use of information technology in and out of the classroom
• Escalating rates of innovation
• Increasing value placed on knowledge

This list illustrates a typical array of factors to emerge from this step. We recommend that the analyst complete at least one other iteration to reduce these even further, prior to assessing their relative impact in Step 2. At the end of this step, the analyst should have a manageable list of DFs to consider. Our experience suggests that the list should be in the range of five to 10 forces to facilitate the next step of this analysis process.

Step 2: Assessing the Impact of the DFs

Step 2 will require a more intense analytical effort than Step 1 because DFs that remain on the list from Step 1 are all deemed to be important to some degree to the success of your industry and firm. All firms need to offer customers in their target markets products or services that meet their needs in a profitable manner, and the forces already identified impact all rivals in the industry. Now rank these DFs in order of their importance in driving the attractiveness of the industry, the level of profitability that may be achieved in the near future, and provide a context in which strategy changes can be considered and thoughtful decisions made.

The analyst's objective in this second step is to understand the external factors that will shape change in the industry and the difference these factors will make to it. Once the DFs have been identified from Step 1, the analyst needs to ask the following questions:

• Are they valid?
• How do we know?
• How significant are each of them?
• What is their strength?
• Which ones can be altered?
• Which ones cannot be altered?
• Which ones can be altered quickly?
• Which ones can only be altered slowly?
• Which ones, if altered, would produce rapid change?
• Which ones would only produce slow change?
• What skills and/or information are needed and are available to change the forces?
• Can you get the resources/capabilities needed to change them?

There are three common approaches applied at this point.

The first approach is to use a structured ranking approach. With a structured ranking approach, the analyst considers all the DFs listed from Step 1 in pair-wise progression. In other words, take DF 1 and compare it with DF 2, and decide which is more important to the industry and the firm in the determination of strategy, making major decisions, and setting of important policies. Next, compare DF 1 with the remaining DFs, then take DF 2 and compare it with the remaining DFs, and continue the process until all possible comparisons have been exhausted.

As the analyst can quickly calculate, the number of pair-wise comparisons grows rapidly with the number of DFs. For six DFs, there are 15 comparisons; for eight DFs, there are 28 comparisons; and for 10 DFs, there are 45 comparisons. You can readily see the advantages to taking care in selecting the initial DFs.

Our experience using this method is that some of the comparisons will be quickly accomplished, while others will bog down the group in discussion. It ordinarily takes half a day to achieve consensus about the final list of DFs ranked in order of their impact. It is critical that the analyst put in the appropriate effort at this point since it will enhance the quality of any complementary efforts that they subsequently perform, particularly in support of regularly conducted planning activities.

A second approach that many analysts take at this point is to assign a score to each force, from 1 (weak) to 7 (strong). The score is based on the strength of the force and the degree to which it is possible to influence this force. Next, they calculate a total score for each force by adding across the two columns. An example of this is given in Table 20.1 for an operator in the transportation manufacturing industry.

Table 20.1
Ranking Driving Forces

The third approach is to use a matrix that separates the forces on pre-selected dimensions. The following example uses "importance" and "uncertainty" to distinguish between the set of DFs. Importance rankings can be assigned to each of the DFs in the list with a 1–4 Likert-type scale, with 1 being assigned to the DFs of "lowest importance" and 4 being assigned to the DFs of "highest importance." The same process can be used for "uncertainty," whereas 1 is assigned to DFs with the "lowest uncertainty" and 4 is assigned to the DFs of "highest uncertainty" in terms of their depth, direction, impact. and/or evolution. Those with mean scores above 2.5 in the relevant range are rated "high" in Table 20.2, while those scoring below it are rated as "low."

Table 20.2
Importance Ranking of Driving Forces

Regardless of which of the three approaches is taken, another key facet of this stage is to determine whether these DFs are acting to make the industry environment more or less attractive; as such, they should be combined with an industry analysis, possibly using the Porter's Five Forces model⁵ or the Nine Forces/Industry Analysis (see Chapter 6) or something similar. Four questions related to the DF's impact on the industry environment that must be answered are as follows:

• Are the DFs causing demand for the industry's product to increase or decrease?
• Are the DFs making the bargaining power of other industry participants higher or lower?
• Are the DFs acting to make competition more or less intense?
• Will the DFs lead to higher or lower industry profitability?

The case study provides an illustration of DFA as it is applied to the digital music player industry. This newly emergent industry is an interesting case study for DFA because in 2006, it was still in a relatively early stage of its life cycle relative to the use of players for MP3 digital file formats, as well as being a spin-off of portable music players that used to play music formatted on CDs, which are in a mature stage of their life cycle.

Once the analysts have performed these steps, their next task is to decide whether (strategic or tactical) actions taken to change the firm's strategy to address the driving force are feasible or not. If so, their goal is to devise a manageable course of action that does the following:

• Strengthens areas where DFs have positive impacts on the industry and firm.
• Creates organizational buffers for areas in which DFs have adverse impacts.
• Creates areas in which neutral DFs may eventually result in benefits.

At this point, it is usually helpful for the analyst to develop another set of tables, one for each of the DFs that has been identified as a priority. For each of these tables, outline in the first column the range of likely impacts that the DFs are expected to have on the industry. In the second column, begin identifying potential solutions that the firm may bring to bear in constructively addressing (that is, minimizing the negative effects and maximizing the positive effects of) the impact. The tables should look similar to what is shown in Table 20.3.

Table 20.3
Impact and Proposed Solutions for Driving Force 1

The next step would require the analysts to work through each of the proposed solutions. They would need to compare these options in terms of costs/benefits, risks/benefits or via a pre-determined set of criteria used for assessing the relative attractiveness and value of the options. Comparing them against the current strategy of the firm is another key task to perform at this point in order to gauge the degree of the change required should the firm adopt the proposed solution, as well as the likelihood that the firm could implement it effectively; and the final task is to analyze and identify the nature of competitor responses that the action may engender.

Summary

Sound analysis of an industry's DFs is a prerequisite to good strategic decision making. What should be noted is that DFs and competitive pressures do not affect all competitors in an industry in the same manner. Profit prospects vary from rival to rival based on the relative attractiveness of their market positions and their strategies in addressing the DFs.

Case Study: The Digital Music Industry

This case study provides an example of DFA as applied to the digital music player industry in 2006.

What are the major DFs affecting the digital music player industry? Are the forces indicating a more or less attractive industry environment from a profitability standpoint?

Growth in levels of demand. A side from being the most popularly given category of gifts during the 2005 holiday season globally, figures released by the organizers of the Consumer Electronics Show (CES) in Las Vegas, Nevada, in January 2006, showed that sales of MP3 players soared by 200 percent in 2005 to USD$3 billion or £1.73 billion.⁶ As these figures, plus related recent sales figures and the media "buzz," will attest, both the digital music player market and the market for digital music are expected to continue experiencing healthy growth. As technological advances spur the enhancement of the devices with more and more valuable features, sales both to new users as well as existing device owners will continue to remain robust.

Product innovation. Frequent product innovation is another characteristic of the industry.⁷ This product innovation is largely focused on new product designs; enhanced functionality; and aesthetics that make the products more portable, pleasant to look at (that is, some of these items are viewed as "status symbols" when worn by their owners in some parts of the world), and easier to use. Firms continue to add useful features to MP3 players such as telephone capability, video-playing capacity, appointment schedulers, contact databases, and photographic capabilities. Many of the manufacturers are known for their product innovation capabilities, including Apple, Creative, Microsoft, Samsung, and Sony, among others.

Format war and rights management. There are multiple formats of MP3 digital music files, some of which can only be played on the format owner's own devices. RealNetworks offers its own formats, which also support Apple's basic format of choice, AAC, but does not support the extended proprietary version of AAC, which integrates an Apple-developed digital rights management system called FairPlay. Microsoft continues to promote its Windows Media Audio (WMA) standard that it would like to see emerge as the industry standard. Sony music players only work with their proprietary software. Fighting digital piracy and promoting fairness in using files, while making sure artists and music firms are properly compensated for their rights, remains at the heart of an ongoing global regulatory battle.

Convergence. Coupled with product innovation, firms are increasingly working to make MP3 players and other personal electronics more versatile. For example, Apple developed the iPod Photo that allows users to transport and display photos; cell phone makers, such as Sony and Nokia, are developing MP3-compatible sets; and personal digital assistant (PDA) makers, such as HP and PalmOne, have or are developing PDAs with phone, game, MP3 playing, and digital photography capabilities. Most traditional home stereo manufacturers already offer stand-alone players that can play MP3 formats. Finally, MP3 playing capabilities are being increasingly included in new automotive stereo products, adding a different form of portability for playing music (at far higher speeds than while walking).

Growing use of the Internet. The increasing global adoption of broadband Internet service will help drive the market forward by increasing the source of supply and demand for the music to be played on the industry's devices. This also creates a need for a portable method for maintaining one's MP3 collection. This factor could especially benefit the manufacturers whose players are identified with popular subscription services. The ability to download a large amount of music in a relatively short time is a success factor for that segment of the MP3 value chain. Growing use of the Internet will also lead to better informed and more MP3-amenable customers.

Changes in who uses the product and how it is used. An increasingly diverse, global customer base is using the industry's products in more varied ways. The industry's products are moving up the product life cycle from the early adopters to the mainstream; consequently, users are becoming less technologically sophisticated and more demanding on functionality, style, and price. This also changes the nature of tactics and strategies that the major players in the industry will use in order to be successful, particularly around areas like pricing, promotion, advertising, manufacturing, and branding concerns.⁸

The effect of DFs in this market can also be further analyzed by answering the following four questions:

1. What is the effect of the DFs on demand?—Virtually all of these changes should increase the level of demand for the industry's products. Increasing product innovation, especially in the area of convergence with PDA or telephone functionality, should lead to higher demand, especially from existing device owners. Growing use of the Internet should also be a demand driver, as it increases the volume of content available, as well as the population of individuals who can potentially use the product.
2. Are the DFs making the bargaining power of other industry participants higher or lower?—The resolution of the digital rights issue will clearly empower some players, whether it will be consumers who will have liberalized choice options for their digital music enjoyment, record firms, and/or artists. Also the eventual resolution of the format wars will also clearly empower some industry participants while neutralizing the prospects of others. As such, there remains a high degree of uncertainty surrounding the resolution of this driving trend; however, it will have a significant impact on some firms, and industry participants will need to develop flexible strategies and contingency plans in case the trends go against their current strategy.
3. Are the DFs increasing competition?—There is no doubt that the increased demand for and increasing profitability of products like Apple's iPod will entice new and potentially powerful electronics manufacturers into the industry. The threat of new entrants is a key factor in the rivalry among sellers in the market. The high threat will cause the current players to compete against both each other and possible new entrants, specifically in the area of product innovation.
4. Will the DFs lead to higher profitability?—New entrants are expected to arise in the market, which will in turn increase supply. Demand will continue to be increased due to product innovations, market growth, and the increased evolution and advancement in Internet usage globally. It will be interesting to see whether demand or supply will be the stronger force in the coming years. It is reasonable to conclude that profitability will likely be based more on volume than margin in the future. This is a natural occurrence as a market matures. However, the rapid expansion of the market should help to prevent price wars from cutting margins to too great a degree. Because of these factors, the market should still be profitable at least in the short term, especially for firms that can add innovative features to their products that appeal to the more mainstream users.

FAROUT Summary

Figure 20.2 Driving forces analysis FAROUT summary

Future orientation—High. The emphasis on continued monitoring and forward-oriented conceptualizations, with its natural links to strategic planning that underlies applications of this tool, infer a future orientation.

Accuracy—Medium. Gaining consensus on the DFs impacting an industry tends to be fairly easy, but determining how to address them is where accuracy will suffer.

Resource efficiency—Medium. Generating the broad and comprehensive range of data needed to identify and gain group consensus of the DFs can be resource intensive, particularly where external experts (futurists, advisors, and custom industry data sets) need to be acquired and organized.

Objectivity—Low to medium. The degree of objectivity will depend on which discovery methods have been used. If an analyst has relied primarily on secondary data or less-experienced respondents, the objectivity will be lower.

Usefulness—Medium to high. The notion of DFs links directly to industry analysis, performance measurement, and strategic planning. DFs emphasize the need to change strategy and resource allocation decisions to reflect changing environmental conditions; as such, decision makers find it very useful.

Timeliness—Medium. The initial process of identifying and determining the importance of DFs can be time consuming, particularly to the extent that broader participation in their determination is sought. Once they are identified, they are quick and easy to use unless the industry environment is undergoing a dramatic change.

Related Tools and Techniques

• Competitive positioning
• Critical success factor analysis
• Event and timeline analysis
• Industry analysis
• Issue management
• Linchpin analysis
• PEST/STEEP analysis
• Scenario analysis
• Strategic group analysis
• War gaming

References

Albrecht, K. (2000). Corporate Radar: Tracking the Forces That Are Shaping Your Business. New York, NY: AMACOM.

Fahey, L., and R.M. Randall (1998). Learning from the Future: Competitive Foresight Scenarios. New York, NY: John Wiley & Sons.

Fleisher, C.S., and B.E. Bensoussan (2003). Strategic and Competitive Analysis: Methods and Techniques for Analyzing Business Competition. Upper Saddle River, NJ: Prentice Hall.

Hermida, A. (2006). "Music players lead digital surge," January 4 on BBC's Web site, found at http://news.bbc.co.uk/1/hi/technology/4580244.stm.

Lewin, K. (1951). "Field theory in social science; selected theoretical papers." D. Cartwright (ed.). New York, NY: Harper & Row.

Marino, L., and K.B. Jackson (2006). "Competition in the digital music industry," c88–109 in Thompson, A.A., Gamble, J.E., and A.J. Strickland. Strategy: Winning in the Marketplace, 2^nd edition. New York, NY: McGraw-Hill.

Thompson, A.A., Gamble, J.E., and A.J. Strickland (2006). Strategy: Winning in the Marketplace, 2^nd edition. New York, NY: McGraw-Hill.

Tregoe, B.B., and J.W. Zimmerman (1980). Top Management Strategy: What It Is and How to Make It Work, New York, NY: Simon & Schuster.

Tregoe, B.B., Zimmerman, J.W., Smith, R.A., and P.M. Tobia (1989). Vision in Action: Putting a Winning Strategy to Work. New York, NY: Simon & Schuster.

Wack, P. (1985). "Scenarios: Shooting the rapids," Harvard Business Review, 63(6), pp. 139–150.

Wilson, I. (1992). "Realizing the power of strategic vision," Long Range Planning, 25(5), pp. 18–28.

Wilson, I. (1994). "Strategic planning isn't dead—It changed," Long Range Planning, 27(4), pp. 12–24.

Endnotes

¹ See Fleisher and Bensoussan (2003), Chapter 18.

² Fahey and Randall, 1998; Wack, 1985; Wilson, 1992; 1994.

³ Fahey and Randall, 1998.

⁴ Thompson, Gamble, and Strickland, 2006; Tregoe, Zimmerman, Smith, and Tobia, 1989.

⁵ See Fleisher and Bensoussan (2003), Chapter 6.

⁶ Hermida, 2006.

⁷ Marino and Jackson, 2006.

⁸ See Fleisher and Bensoussan (2003), Chapter 23.