MGMT450 Strategy and Competitive Advantage Week2, Session 1

1. MGMT450Strategy and Competitive AdvantageWeek2, Session 1 HIH Chapter 2: The External Environment Professor: Dr. Jade Lo

2. Plan for Today: • HIH Chapter 2: The External Environment • The firm’s external environment: General, Industry, and Competitor Environments • General environmental segments • Industry environment: Porter’s 5 Forces Model

3. What do you think about the following statements…. • It’s about choosing the right game– the profitability of a firm largely depends on the structure of the industry that it competes in. • It’s about how you manage the firm– a company can be profitable even in the worst industry, if it makes good use of its resources and capabilities.

4. Strategic competitiveness lies in the “Fit” between External Environment and Internal Condition MATCHES

5. THE EXTERNAL ENVIRONMENT

6. External Environmental Analysis… why bother? • External environmental analysis is necessary for identifying opportunities and threats • Opportunity: environmental condition that, if exploited, helps a company achieve strategic competitiveness and AAR • Threat: environmental condition that may hinder a company's efforts to achieve strategic competitiveness and AAR

7. General & Industry Environment • The General Environment • The broader society dimensions that indirectly influence an industry and the firms, including 7 dimensions: Demographic, economic, political/Legal, sociocultural, technological, physical and global segments (interrelated and somewhat overlapping) • Industry Environment • Set of factors directly influencing a firm’s competitive actions/responses. • Porter’s five forces analysis is useful here. Details later.

8. The General Environment… • Demographic segment • population size, age structure, geographic distribution, ethnic mix, income distribution • Examples: baby boom vs. age boom

9. United States birth rate (births per 1000 population) postwar baby boom By 2020, 25% of employees will be at least 55 years old

10. The General Environment…Cont’d • Economic segment • Example: do we need any? • Political/ Legal (Institutional) segment • Example: Sarbanes-Oxley Act (SOX) • Increased audit cost and affected stock retunes, especially for smaller firms • Technological segment • Example: the invention of Internet

11. The General Environment…Cont’d • Sociocultural segment • New values, attitudes, and lifestyles, etc. • Example: Burger King’s new “healthy” fries • Physical environment segment • Global warming, energy consumption, and sustainability issues • Example: “green” products and industries • Global segment • Involving all the dimensions mentioned above, plus more…

12. Industry Environment Analysis • Industry • Definition: Group of firms producing products that are close substitutes. • In comparison to the general environment, • industry environment has more direct effect on firm’s strategic competitiveness and profitability; • firms are more likely to have (at least some) control on their industry environment.

13. How / Why does industry matter?

14. Even within the same general environment, firms in different industries can still have very different profitability… (why?)

15. Intensity of competition and profit potential of an industry are a function of five competitive forces.

16. INDUSTRY ENVIRONMENT ANALYSIS: The Five Forces of Competition Model

17. Industry Environment Analysis:Porter’s Five Forces • 1/5: Threat of new entrants • New entrants can reduce market share and profitability of incumbent firms if overall demand does not increase. • Function of two factors • 1: Barriers to entry • Economies of scale • Product differentiation (brand awareness) • Switching costs • Capital requirements • Access to distribution channels • Cost disadvantages independent of scale (favorable access to materials, desired location, etc.) • Government policy (regulated industry, public utility industry) • 2: Expected retaliation from existing firms

18. Industry Environment Analysis: Porter’s Five Forces (Cont’d) • 2/5: Bargaining power of suppliers • Supplier groups are powerful when … 1. Few large companies and more concentrated than the industry to which they sell 2. Lack of substitutes 3. Industry firms not significant customer to supplier group 4. Supplier’s goods are critical to buyer’s success 5. Supplier’s offers are differentiated 6. High switching costs 7. Threat of forward integration into the buyers’ industry (more likely when suppliers have substantial resources)

19. Industry Environment Analysis: Porter’s Five Forces (Cont’d) • 3/5: Bargaining power of buyers • Buyer groups are powerful when … 1. Purchase large portion of industry’s total output 2. Product sales accounts for significant seller revenue 3. Low switching costs 4. Industry products being sold are undifferentiated or standardized 5. Threat of backward integration into sellers’ industry • The threats from buyers will be stronger if they are price-sensitive

20. Industry Environment Analysis: Porter’s Five Forces (Cont’d) • 4/5: Threat of substitute products • Goods or services outside of a given industry performing same or similar functions • e.g., paper or plastic; soft drink vs. water; email vs. postal service; DVD vs. streaming video • Threat is high if • a substitute offers attractive price-performance tradeoff • Switching cost is low

21. Industry Environment Analysis: Porter’s Five Forces (Cont’d) • 5/5: Intensity of rivalry among existing competitors • Numerous or equally balanced competitors (many or few) • Slow industry growth • High fixed costs, often leading to excess capacity • High storage costs, causing pressure to reduce inventories • Lack of differentiation or low switching costs • High strategic stakes • High exit barriers (specialized assets, fixed costs of exist, strategic interrelationships, emotional barriers, etc.)

22. More on rivalry • The degree to which rivalry drives down industry’s profit depends not just on the intensity with which competitors, but also on the basis on which they compete. • Competition can take place on many dimensions • Priced-based competition is often the worst • If existing firms compete on a variety of dimensions and carve out many different segments, the average profitability may actually increase (examples?)

23. Watch out for… • Not just direct competitors, but also potential competitors. For example: • Suppliers can become competitors by integrating forward. • Buyers or customers can become competitors by integrating backward. • Changes in technology can blur industry boundaries, creating new competitors • Examples: newspaper vs. online news, PDAs vs. smartphones, Wal-Mart vs. Amazon, ect.

24. INDUSTRY ENVIRONMENT ANALYSIS AttractiveIndustry THE FIVE FORCES OF COMPETITION MODEL • INTERPRETING INDUSTRY ANALYSES High entry barriers Suppliers and buyers have weak positions Few threats from substitute products Moderate rivalry among competitors HIGH PROFIT POTENTIAL

25. INDUSTRY ENVIRONMENT ANALYSIS UnattractiveIndustry THE FIVE FORCES OF COMPETITION MODEL • INTERPRETING INDUSTRY ANALYSES Low entry barriers Suppliers and buyers have strong positions Strong threats from substitute products Intense rivalry among competitors LOW PROFIT POTENTIAL

26. Why bother? • Help a firm know how to best compete within an existing industry • Revealing opportunities and threats within an industry • Find a position where the forces are weakest (or relatively weaker), or build defense against the competitive forces • Helping a firm decide whether/ how to enter or exit an industry • Answering the question “what is the potential of this business?”

27. Interaction between General and industry environment • General environmental factors can also affect industry structures and the perceived attractiveness of an industry. • Examples: • The U.S. housing market, 2006-2010

30. Interaction between General and industry environment • General environmental factors can also affect industry structures and the perceived attractiveness of an industry. • Examples: • The U.S. housing market, 2006-2010 • Health consciousness and CSD (carbonated soft drinks) consumption • Newspaper industry

32. WSJ: Yesterday and today • 1965 • 1989 • 2011 • What did you see in the WSJ commercials of three different eras? • You need information; we deliver it • You need information and you need it everyday • You can access WSJ anytime, anywhere, in any way

33. Group Discussion • As a group, please analyze the external environment of the newspaper industry in the U.S. in terms of (1) the general environment and (2) the 5 forces (threat of new entrant, threat of substitutes, rivalry among existing competitors, and bargaining power of buyers and suppliers) • Some analysts have argued that newspapers are dying. Do you agree? Why (not)? • What are the threats and opportunities (if nay) facing the newspapers industry? • What should newspapers do to in this changing industry?

34. Reminders • Quiz available at BbLearn • Read the case “Cola Wars” and be prepared for Thursday’s discussion