MAN 4720: Strategic Management Week 4: External analysis

1. MAN 4720: Strategic Management Week 4: External analysis Dr. Marshall Schminke Spring, 2011 These slides are intended to be a supplement to your class notes, not a replacement for them. For specific references, etc., see me.

2. Today: Finish up material from last time New stuff: Environmental analysis External (today); internal (next time)

3. Housekeeping: You have the materials for the 10-K Integration project You have the materials for the industry analysis (Case 1) You have the documents and links to industry analysis sources See your instructor about any questions on any of these

4. Housekeeping: You already had the full case analysis materials (Case 2: Target) The “home” run involves the home.

5. Topic: Environmental Analysis(SWOT)

6. The External Environment(OT)

7. Conversation: What’s out there and why does it matter? Outside your business’ walls, what keeps you awake at night? What gets you out of bed in the morning? What’s the one think you think about (worry about, obsess about, fret about get excited about) the most?

8. External analysis: External analysis useful because it allows you to explore the O&T side of the SWOT It’s so critical as a building block, that after the 10-K project, our first case analysis is an industry analysis.

9. Let’s consider opportunities, broadly defined:

10. Opportunities: Large and growing global markets (e.g., US) But tough logistics dealer & service networks; transportation Also, Korean and Japanese firms already manufacturing in US Solutions?

11. Build them for other firms: • Daimler(Chrysler) AG partnered with • China’s Chery Automobile Co. • Small cars worldwide • Chrysler dealerships • Dodge • Chrysler • Jeep

12. Participant sports industry • ? • ? • ?

13. Threats: • Consider auto manufacturers • What about that $2500 car? (1/2 price of Chery QQ3Y, Maruti 800)

14. Threats: • Consider auto manufacturers • What about that $2500 car? • The Tata Nano: 65 mph; 50 mpg • Tata: Indian conglomerate (Purchased Jaguar & Land Rover)

15. Beyond the obvious Ts:

16. Looking beyond the obvious for possibilities of threat: • e.g., Why haven’t the Japanese done to us in large appliances what they’ve done in autos, electronics? • Matsushita makes more large appliances than anyone in the world • Why don’t we see Matsushita ranges, refrigerators down at Best Buy? • For GE, Matsushita as potential entrant?

17. Tools for external analysis: Industry Porter’s Five Forces Beyond the industry Macro-environment (PESTLE forces)

18. External analysis: Beyond the industry (the macro-environment) PESTLE forces Political Economic Socio-cultural Technological Legal Environmental For each: What keeps your company’s execs up at night? What gets them up in the morning

19. External analysis: Beyond the industry (the macro-environment) PESTLE forces Political Economic Socio-cultural Technological Legal Environmental (Note: May be domestic and/or global) (Note: Issues like demography may touch several)

20. How do each of these influence the business? • PESTLE forces • Political • Economic • Socio-cultural • Technological • Legal • Environmental

21. What are the major issues, developments, trends, in each? • PESTLE forces • Political • Economic • Socio-cultural • Technological • Legal • Environmental

22. Assess each for Os & Ts • PESTLE forces • Political • Economic • Socio-cultural • Technological • Legal • Environmental

23. Do any deserve a place at the table (on par with the 5 Forces)? • PESTLE forces • Political • Economic • Socio-cultural • Technological • Legal • Environmental

24. Recall where we are; external analysis: Industry Porter’s Five Forces Beyond the industry Macro-environment (PESTLE forces) We began here

25. Industry analysis • Remember, at the end of this analysis we’re interested in industry attractiveness • That involves an industry look at • Opportunities • Threats

26. The search for Os and Ts within an industry isn’t random Porter guides us in it

27. There are “Five Forces” that influence the competitive structure of an industry Current competitors Potential entrants Buyers (customers) Suppliers Substitute products (More on each of these soon)

28. Industry analysis: • Within each of these forces, different kinds of Os and Ts tend to emerge • We’ll go into one a little more deeply, as an example: The threat of new entrants. • For example, barriers to entry is a prime driver of this threat. • But others have similar drivers. • (See text, and see “Competitive Strategy” for an extended discussion of this.)

29. We’re exploring industry attractiveness And the Five Forces help to explain why some are more attractive (and/or profitable) than others For example… External Analysis:

30. (This is a biggie) Source: Porter’s (2008) “The five competitive forces that shape strategy,” HBR

31. Porter’s Five Forces of Competition Current competitors: Rivalry among them Potential entrants: Threat of entry Buyers/customers: Their bargaining power Suppliers: Their bargaining power Substitute products: Threat of use All matter, because they place caps on your strategic options (like pricing) and thus, industry attractiveness

33. Porter’s Five Forces of Competition Descriptions from Porter’s “Competitive Strategy” book (the supplemental text)

34. Rivalry among current competitors • "Rivalry among existing competitors takes the familiar form of jockeying for position -- using tactics like price competition, advertising battles, product introductions, and increased customer service warranties."

35. Threat of new entrants • "The threat of entry into an industry depends on the barriers to entry that are present, coupled with the reaction from existing competitors that the entrant can expect."

36. Bargaining power of buyers • "Buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other -- all at the expense of industry profitability."

37. Bargaining power of suppliers • "Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods and services."

38. Threat of substitute products • "All firms in an industry are competing, in a broad sense, with industries producing substitute products. ... Identifying substitute products is a matter of searching for other products that can perform the same function as the product of the industry."

39. A single firm may reside in more than one cell:

40. But to really do this right… you need to “SWOT” all (major) players in all cells (How can you assess the Os and Ts they represent, w/out knowing their strengths & weaknesses?)

41. So how will this help? Downstream issues: • These Five Forces, in conjunction with macro- environmental (PESTLE) Os and Ts, constitute the set of things we need, to understand two issues: • Is this an attractive industry? (Do we want to play this game?) • If so, how do we take advantage of (or defend ourselves against) these Os & Ts as we move ahead with our strategic thinking and planning?

42. Relates directly to Case 1 (Industry Analysis): Explore each of the Five Forces (Your group might consider consulting “Competitive Strategy” book) Porter does this by: Overall, or not for each force? Brings those together for overall assessment of industry attractiveness: (no s to ) (But don’t forget PESTLE forces, too…)

43. Relates directly to Case 1 (Industry Analysis): Recall the macro-environment issues: All of these matter somewhat. Some picked up in 5 Forces. Beyond that, any worthy of a special spot at the table? (If so, add/subtract s) In all: Is this an attractive industry?

44. Relates to Case 2: Moving from industry analysis to (firm) strategic analysis: Top 3 (or so) opportunities and threats resulting from each of the five forces Top 3 (or so) opportunities and threats resulting from any macro-environmental issues you’ve elevated to the table Cull those to top 3 (or so) overall Those flow directly into the SWOT for Case 2

45. Let’s dig a little deeper on the threats front (from “CS” book)…

46. Threat of new entrants

47. Barriers to entry Expected reaction from incumbents Factors affecting severity of threat from potential entrants

48. Barriers to entry: Economies of scale (airlines, to follow) Product differentiation (soft drink branding) Capital requirements (airliner mfg, to follow) Switching costs (consumer, producer) Access to dist. channels (new automakers in US) Cost disadvantages independent of scale (airline mfg. learning curve, to follow) Government policy Factors affecting threat severity from potential entrants

49. Barriers to Entry: Airline Ind. • 20-40 year gate leases • 95% landing rights • Reservation systems • Frequent flyer programs • Computer pricing systems • Hub and spoke feeder system • Deep pockets

50. Barriers to Entry: Aircraft Ind. Boeing: 787 “Dreamliner” $13 billion