Techniques to assess the macro-economic environment March 18 th 2005

1. College of Management of Technology Master/Minor Program Chair MIR – Management of Network Industries Prof. Matthias Finger Spring semester 2005 ODY 16 Techniques to assess the macro-economic environmentMarch 18th 2005

2. Structure of the session Part I : Seminar and course presentation- degree of competition- macro-environmental analysis Part II: Guest speaker: M. J.-M. Revaz, Directeur CREM et Sinergy SA – the case of the electricity industry Previous course presentations available online on the MIR website: PASSWORD: springind05 http://www2.epfl.ch/Jahia/site/mir/op/preview/pid/26026?matrix=1110889639328

3. Identification of an “industry” A certain amount of firms com- peting for the customers of these goods or services Similar ways of “firm organi- zation”: firms structure in similar ways so as to produce goods or services Similar “modes of production”:similar ways of producing the goods or services • Industry analysis does not start out with the customer, but with production • Industry analysis focuses on firms (and related actors)

4. Participants’ work • L’industrie du tabac (Swati) • Telemedicine (e-health?) (Jonathan) • Les PPPs (Nicolas) • The diamond industry (Farouk) • What is the dominant “mode of production”? • Which are the dominant firms in this industry? Others: • can you pls provide a few lines on your industry by tomorrow? • Can you try to answer the same two questions?

5. Firms competing A certain amount of firms com- peting for the customers of these goods or services Similar ways of “firm organi- zation”: firms structure in similar ways so as to produce goods or services Similar “modes of production”:similar ways of producing the goods or services Classification of industries depending on the degree of competition

6. Level of competition Source: Adapted from Samuelson and Nordhaus

7. Perfect competition «In economic theory, perfect competition is a market form in which no producer or consumer has the power to influence prices in the market. The analysis of perfectly competitive markets provides the foundation of the theory of supply and demand. A market is said to be one with perfect competition if: • There are a large number of producers and consumers on a given market • None of the producers or consumers can influence the price on their own -- they are price takers • Goods and services are perfect substitutes -- they are homogeneous • All resources (including information) are perfectly mobile • Transaction costs are zero • The price is determined at the level that equates supply and demand, and moves instantaneously to equilibrium» Source: Wikipedia

8. Imperfect competition «In economic theory, imperfect competition, is the competitive situation in any market where the conditions necessary for perfect competition are not satisfied. • Forms of imperfect competition include: • Monopoly, in which there is only one seller of a good. • Oligopoly, in which there is a small number of sellers. • Monopolistic competition, in which there are many sellers producing highly differentiated goods. • Monopsony, in which there is only one buyer of a good. • Oligopsony, in which there is a small number of buyers. • There may also be imperfect competition in markets due to buyers or sellers lacking information about prices and the goods being traded.» Source: Wikipedia

9. Oligopoly «An oligopoly is a market form in which a market is dominated by a small number of sellers (oligopolists). There are few participants in this type of market, each oligopolist is aware of the actions of the others. Oligopolistic markets are characterised by interactivity. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants.» Source: Wikipedia

10. Natural monopoly «In economics, a natural monopoly is a persistent situation where a single company is the only supplier of a particular kind of product or service due to the fundamental cost structure of the industry. Natural monopolies arise where the largest supplier in an industry, or the first supplier in a local area, has an overwhelming cost advantage over other actual or potential competitors. This tends to be the case in industries where capital costs predominate, creating economies of scale which are large in relation to the size of the market, and hence high barriers to entry; examples include water services and electricity. It may also depend on control of a particular natural resource. Companies that grow to take advantage of economies of scale often run into problems of bureaucracy; these factors interact to produce an "ideal" size for a company, at which the company's average cost of production is minimised. If that ideal size is large enough to supply the whole market, then that market is a natural monopoly». Source: Wikipedia

11. Competition  industry structure Perfect competition  Ideal industry Imperfect competition  Typical industry (somewhat concentrated) Tendency towards concentration Oligopoly (few firms)  Highly concentrated industry Regulate or not regulate? Monopoly (one firm)  Monopolistic industry = regulated industry

12. Influences of the environment Macro environmental forces are external to the industry and the firm Industry A certain amount of firms com- peting for the customers of these goods or services Similar ways of “firm organi- zation”: firms structure in similar ways so as to produce goods or services Similar “modes of production”:similar ways of producing the goods or services “Various types of environmental changes occurring in isolation or combination help define and drive industry” [Fleischer & Bensoussan, 2002: 270]

13. Different ways to look at an industry’s environment Industry structure model (Porter): will be discussed during session 4 = an organizational/institutional analysis of an industry Cognitive model: an analysis of the perception the managers have of their environment  strategy formulation Organization field model: a systematic analysis of the forces affecting and shaping an industry (hirarchical approach vs non-hierarchical approach); relatively a-theoretical (STEEP, PEST); this session Ecological and resource dependence model: resource dependency theory (inspired by ecology)  resources availability and mobilization Era model: a cyclical view (stability, change) inspired by long-term economic cycles

14. STEEP variables Fleischer and Bensoussan, 2002: 274

15. PEST framework Political & Legal • Monopolies legislation • Taxation laws • Regulation • Foreign trade regulations • Employment law • Government stability Economic factors • Business cycles • Gross domestic product • Disposable income • Inflation rates • Interest rates • Saving rates Socio cultural factors • Population demographics • Age structure • Lifestyle changes • Social mobility • Levels of education Technological • Government spending on research • Government and industry focus on technological effort • New discoveries/ Development • Speed of technology transfer Source: Johnson & Scholes ( 1999: p.105)

16. Participants • In the industry you have selected, which are the major influencing factors?- political, legal- economic- technological- ecological- social/cultural • Inside each of these factors, which are the main influencing variables?

17. Scenarios Industry A certain amount of firms com- peting for the customers of these goods or services Similar ways of “firm organi- zation”: firms structure in similar ways so as to produce goods or services Similar “modes of production”:similar ways of producing the goods or services • How is the industry evolving over time? What are the major trends? • Which possible scenarios? Which are the major factors influencing thescenarios?

18. Scenarios II Impact on industry actors Trends in the various factors, i.e., environmentally relevant dimenions (STEEP/PEST) Possible scenarios of industry evolution Interrelation- ships among these trends Impact on industry structure

19. Application of STEEP/PEST analyses • Understand the segment (factors and time horizon) of the environment being analyzed  identify the major trends in each of the environmental factors over a certain time • Understand the interrelationships between trends • Impact of these trends on the main actors in the industry • Impact of actor behavior (change) on the industry structure (cf. Porter) • Possible scenarios for industry evolution

20. Example: drinking water industry Trends: • Environmental pressure:- scarcity- pollution • Economic pressure: - competing usages- rising water pricing (water as an economic good) • Political/social pressure: - increasing cost of water- accessibility • Other forces:- financial problems of the public sector- TNC lobbying (~ World Bank/IMF)- State failure

21. World Bank’s particular role:- Structural adjustment programs- Water resources management concept paper (1993)- World Development Report on Infrastructure (1994) Competition for the market International water fora(i.e., Rio & Dublin):environmental preoccupations  call to treat water as an economic good TNC pressure/lobbying to enter the market Water sector dynamics ? European Union (DG Internal Market, DG Competition, DG Environment) Full privatization in the UK Special historical situation of France (PPP)

22. Characteristics of the water sector • natural monopoly • local nature ( natural monopoly of place)  Competition for the market (not in the market) • water as a public good • health and sustainability externalities: water as a vital element  Heavy politization of the sector

23. The European study: scenario building • Identification of possible end-states (in 2020) derived from currently existing management models:- delegated (regulated and unregulated) management contracts (France)- direct public management (Switzerland, Germany)- community management (Wales) • Drivers of change:- TNC lobbying; TNC growth (thanks to new member states)- role of the European Commission (for & against)- bureaucratization- modernization (technological, management)- social pressure against liberalization- technological developments • Critical events:- social protest- corruption scandals- environmental/health crises- financial crises (of the public authorities

24. 2020 2010 Free market (tender) EU Directive “tender” Lobbying for more liberalization EU pressure for liberalization Social protest Crisis “Market” regulation Administrative reglementation Bureaucratization Status quo Managerialism and fragmentation Public finances Outsourcing Direct Public Management Trust in public authorities Social protest EU pressure for services of general interest New technologies Community Management Public finances

25. An example: Scenario analysis: Shell ‘Energy sector, choices and possibilities scenarios to 2050’ http://shell.com/static/royalen/downloads/scenarios.pdf

26. Context and key questions Source: Shell, p.7

27. Different technology discontinuities in the energy sector Source: Shell, p.33

28. Energy Branching points Source: Shell, p.27

29. Source: Shell, p.27

30. Questions from the two scenarios Source: Shell, p.27

32. Participants Which possible scenarios in your industry? • Which trends in each of the dimensions? • Which interrelationships among these trends? • Which impact on which actors? • Which impact on industry structure?