Chapter #2

1. Chapter #2 Evaluating a Firm’s External Environment

2. TiVo • What is TiVo? • What are the strengths and weaknesses of TiVo? • Opportunities & Threats

3. Structure Conduct Performance Model • S-C-P • Structure • Number of competing firms • Homogeneity of products • Cost of entry and exit • Firm Conduct • Strategies firms pursue to gain competitive advantage • Performance • Firm Level • Normal, below-normal, above-normal performance • Society • Productive and allocative efficiency, level of employment, progress

4. Ethics • Do firms that achieve a competitive advantage hurt social welfare?

5. Types of Competition and Expected firm performance

6. Michael Porter

7. 5 forces

8. The threat of Entry • Amazon.com • Barnes and Noble.com • Borders • Powell’s Bookstore • ESPN • Fox Regional Sports Network • CSTV

9. Barriers to Entry • Economies of scale • Product differntiation • Cost advantges independent of scale • Government regulation of entry

10. Economies of Scale • Numerical example • 5 firms • Demand 22,000 • Optimal size factory 4000

11. Sources of cost advantage, Independent of scale that can act as barriers to entry • Proprietary Technology • When incumbent firms have secret or patented technology that reduces their costs below the costs of potential entrants. • Eastman Kodak/Polaroid $873 • Intel/Digital $700 • Roche Holding/Igen $505 • Genetech/City of Hope $500

12. Managerial Know-how • When incumbent firms have taken for granted knowledge, skills and information that take years to develop not possessed by potential entrants • Favorable Access to Raw Materials • Learning Curve Advntages

13. Government Policy as a Barrier to Entry • IGT in Japan • Did not meet government slot machine standards • Only Japanese companies had access to the standards • Japanese beer Market • Kirin, Asahi, Sapporo, Suntory • Must already be producing 2 million liters of beer

14. The threat of Rivalry • Price cutting • Frequent introduction of new products • Intense advertisng • Rapid competitive actions and reactions in an industry

15. Attributes of an Industry that Increase the threat of Rivalry • Large number of competing firms that roughly the same size • Slow Industry Growth • Lack of product differentiation • Capacity added in large increments

16. Threat of Substitutes • Close • Amazon.com other book stores • E-books • Distant • Other forms of entertainment

17. Threat of suppliers • Suppliers’ Industry dominated by small number of firms • Suppliers sell unique or highly differentiated products • Suppliers are not threatened by substitutes • Suppliers threaten forward integration • Firms are not important customers for suppliers

18. Michael Jordan in basketball • Intel in Computers • Oprah Winfrey in talk shows (King World)

19. The Threat of Buyers • Number of Buyers is small • Products sold to buyers are undifferentiated and standard • Products sold to buyers are a significant percentage of a buyer’s final costs • Buyers are not earning significant economic profits • Buyers threaten backward integration

20. Wal Mart

21. Estimating the level of average Performance

22. Does Industry Structure Matter

23. Industry Structure and Environmental Opportunities

24. Fragmented Industries • Industries in which a large number of small or medium-sized firms operate and no small set of firms has dominant market share or creates dominate technolgies • Few barriers to entry • Few economies of scale • Need for close local control

25. Fragmented to Consolidated • KOA • Video rentals • Block Buster • Hollywood • Movie Theatres • Regal • Cinemark

26. Emerging Industries • First-mover advantages • Technological Leadership • May lead to low cost advantage • Patents immitated quickly (4 years) 65% • Preemption of strategically valuable assets • Access to raw materials • Favorable geographic location • Market positioning • Creation of customer switching costs • Computer software • Pharmaceuticals

27. First Mover Disadvantages • Commit early to unproven technologies • Carry the bulk of research and development costs • Oracle example • From emerging to mature • Improve customer service • Unfriendly takeovers

28. Opportunities in Mature Industries • Slowing growth in total industry demand • Experienced repeat customers • Slowdown in increases in production capacity • Slowdown in the introduction of new products and services • Increase in International competition • Overall reduction the profitability of firms

29. Barbie breaks up with Ken • The broken arches

30. Refining current products • Motor Oil • Gillette • Emphasis on Service • McDonalds Vs. Chili’s, Applebee’s • Process Innovation • Product innovation early • Process Innovation later • The death of lemons

31. Declining Industry • Market Leader • Last man standing after a shakeout • Market Niche • Vacuum Tubes • Harmonicas • Divestment • Harvest

32. Opportunities in International Industries • Multinational Opportunities • Operate independently in various countries • Respond to changes in local conditions • Hard to get economies of scale • Best practices • Global Opportunities • Move to standardization • Country differences, language, culture • Interdependent units

33. Transnational • Combination • Experiments