ENGR 193 A/293 A: INDUSTRY ANALYSIS IN THE TELECOM/IT SPACE

1. ENGR 193 A/293 A: INDUSTRY ANALYSIS IN THE TELECOM/IT SPACE Week 3: October 12, 2010

2. Tonight’s Schedule • Any issues to discuss? • Library lecture • Finish Porter analysis – Smartphones • Brief introduction to SWOT analysis • Project teams assigned

3. Any Questions So Far? • Thoughts on RightScale presentation last week? • Finding materials on Harvard Online? • Anything else to discuss?

4. Beverly Ryan – Economics Librarian Introduction Presentation Questions Thank you! Link to guide: http://guides.library.ucsb.edu/Industry_Analysis

5. Porter 5 Forces Model • Review Framework • Smartphone/Mobile Phone (device) application of framework

6. Porter’s Five Forces Model Developed by Michael Porter in 1979/1980 Considered a classic industry analysis tool Provides a framework for perspective on multiple competitive factors affecting your company and industry Five basic competitive forces whose “collective strength” determines the long-run profit potential of an industry

7. The Five Forces Threat of New Entrants/ Barriers to Entry Rivalry Among Existing Competitors Bargaining Power of Suppliers Bargaining Power of Customers Threat of Substitutes Sources for this section: Michael E. Porter, Understanding Industry Structure, Revised 2007 and How Competitive Forces Shape Strategy, Harvard Business Review, 1979

8. Threat of New Entrants/ Barriers to Entry Threat of potential entrants determined by: Attractiveness of industry Height of entry barriers (e.g., start-up costs, brand loyalty, regulation, etc.) Customer switching costs (high fixed costs involved in switching to another supplier) Capital requirements (e.g., very high in gas exploration) Incumbency advantages independent of size (e.g., proprietary technology, patents) Unequal access to distribution channels (how much have existing competitors tied up distribution channels) Restrictive government policy

9. Bargaining Power of Suppliers Strength of suppliers determined by: Number of suppliers and their degree of differentiation Portion of a firm’s inputs obtained from a particular supplier Portion of a supplier’s sales sold to a particular firm Switching costs Potential for vertical integration

10. Bargaining Power of Suppliers A supplier group is powerful if: It is more concentrated than the industry it sells to (e.g., Microsoft: near-monopoly in operating systems, with fragmentation among PC-making customers) Industry participants face high switching costs when changing suppliers Differentiated products offered by suppliers No substitutes for what the supplier group offers Supplier group does not depend heavily on a particular industry

11. Power of Customers Power of customers determined by: Number of buyers Firm’s degree of differentiation Portion of a firm’s inputs sold to a particular buyer Portion of a buyer’s purchases bought from a particular firm Switching costs Potential for vertical integration

12. Threat of Substitutes A substitute performs the same function as an industry’s product or service, but by a different means Determined by the number of potential substitutes, their closeness in function and relative price Not just another product: sometimes the substitute is to “do without” the product or to do it themselves Long distance phone service providers vs. VoIP providers (Skype and Vonage) Mobile phone as primary phone vs. landline

13. Rivalry Among Existing Competitors Rivalry determined by number of firms, relative size, degree of differentiation between firms, demand conditions and barriers to exit Competition among rivals is greatest when: There are many competitors, nearly equal in size or power Slow industry growth High barriers to exit

14. Rivalry Among Existing Competitors Industry competition is based on price when: There is low differentiation and/or low switching costs between competitors Fixed costs are high, but marginal costs are low Capacity must be expanded in large increments, disrupting the supply and demand balance The product is perishable (groceries, airline seats, information)

15. Smartphone Application • Article review • Background of Smartphones • List of competitors • Porter’s Five Forces analysis

16. Background of Smartphones • Simon designed by IBM in 1992 • Palm started the concept/evolved from PDAs (non-wireless context) • Advanced productivity tools (calendars, emails, etc.) • High cost/high end devices • Look and feel of a mini PC • Perceived sense of increased efficiency • Ability to expand and add-on to augment the user experience • Started primarily for business- expanded to consumers/entertainment

17. Smartphone Definition: Many functions other than a regular cellular phone Mini computer inside a “normal” cell phone Can upload applications Revolutionary phone, media flare and internet access Competitors: RIM Apple LG Samsung Motorola HTC Nokia Operating systems: Apple Android Microsoft Windows Phone 7 Facebook? Smartphone Competitors

18. Threat of New Entrants/ Barriers to Entry • For continued discussion: • Knowledge barrier • Brand recognition • Carrier relationship • Highly fragmented • Exclusive technology? • Operating system: high barrier to entry/open source? • Device: lower manufacturing barriers to entry

19. Power of Suppliers • Who are they: • Chip mfrs, circuit boards, cameras, touch screen (raw materials) - mixed • Carriers – traditionally carriers had power; Apple now has changed this • Distribution channels – carrier store, big box retailer – carriers primarily • Software/operating system – shifting toward OS?

20. Power of Customers • Who are they: • Consumer – power on a group/demographic level; trend seekers • Enterprise – can choose device; longer term view • Carriers – very powerful

21. Threat of Substitutes • Email • Skype/Gizmo/VoIP • iPad – notebook/computer • Regular old cell phone • Landlines • Visit in person • No mobile device

22. Rivalry Among Existing Competitors • Huge • Very fast moving/phones becoming obsolete

23. Conclusions • Very strong, but lots of competition • Quickly changing • Innovation is key • Huge opportunity for growth – upside • Carrier dependent

24. Our Recommendations • Form good relationship with carrier • Innovate • Operating system • Don’t forget voice

25. SWOT Analysis Strengths: capabilities that enable your company to perform well (how can they be leveraged) (Internal) Weaknesses: characteristics that prohibit your company from performing well (that need to be addressed) (Internal) Opportunities: trends, forces, events and ideas that could be important in the future of your company (External) Threats: possible events/forces outside of the company’s control that the company needs to plan for (External) Source for section: Harvard Business School Press, excerpted from Strategy: Create and Implement the Best Strategy for Your Business, 2005, Harvard Business School Publishing Corporation

26. SWOT Analysis

27. SWOT Analysis in Week 4 We’ll apply SWOT analysis in Week 4 Class to pick a smartphone company - or, we can use a different industry and competitor We will examine LG as a smartphone device company

28. Industry Analysis Project • Team assignments

29. Industry Analysis Project • Team structure: • Small teams of students – work throughout quarter to complete • Topic: Cloud computing • UCSB Faculty Project Partner • Dr. Ben Zhao: Dept. of Computer Science • Industry Partner • Betsy Zikakis – CEO, RightScale • Final presentation – Week 9

30. Presentation Details • PowerPoint Format • 15 – 20 minutes • Approximately 15 slides • Oral presentation, and hand in your slides • Panel will provide comments and feedback

31. What to Include in Your Report: For Your Industry • Clearly define your industry/segment. Provide a detailed description • Porter 5 Forces analysis of the industry/segment • Discussion of technical standards: Is there a current standard? How is this likely to evolve? • Highlight what you think are the key issues/challenges for the industry/segment • Top competitors • Key ratios, financials in this industry/segment (and why you think these are relevant). If possible, by competitor • Market share information, if available • Any other relevant information

32. What to Include in Your Report: For Your Company • SWOT analysis of your company • An assessment of how your company compares to the competition: • Use ratios, market share, qualitative information and any other information you’ve discovered from your research that will give a sense of your company versus its competition

33. What to Include in Your Report: Key Questions to Answer • What will this industry/segment look like in 5 years? • What should your company do to be the dominant player in the next 5 to 10 years in this industry/ segment? • What key strategic advice would you give to this company? • Partner with another player? Who? • Exit this industry/segment? Why? • Acquire a new technology? Which one? Why? • Sell to a larger company? Why? • Why would you give this advice?

34. What to Include in Your Report: Project Assessment • What sources did you use to complete this project? • Which sources were most valuable? Why? • What other information do you wish you had available in order to complete this analysis? • What was the most challenging part of this project? • What would you do differently next time?

35. For Next Week’s Class • Read “SWOT Analysis I: Looking Outside for Threats and Opportunities” (5528BC-PDF-ENG) • Read “SWOT Analysis II: Looking Inside for Strengths and Weaknesses” (5535BC-PDF-ENG) • Begin working with your team!! • Check course website for any updates: www.tmp.ucsb.edu/classpages/ENGR193A/index.html www.tmp.ucsb.edu/classpages/ENGR293A/index.html