Assignment

( 33 ) ( 34 ) ( 35 ) ( 36 ) ( 37 ) ( 38 )

( Session 1 Agenda - Part 2 Business-Level Strategy •   General environment analysis •   Industry analysis •   Five-Forces Model •   Video: Michael Porter on the 5 forces BUS 690 G. Desa 33 ) ( BUS 690 Where we are… Introduction to Strategy Business-Level Strategy External Environment Internal Environment Competitive Positioning Competitive Dynamics (Rivalry) Innovation & Entrepreneurship G. 34 Corporate-Level Strategy Diversification Mergers & Alliances Acquisitions International Strategy Corporate Governance )

( Learning Objectives •   Understand: –   Importance of analyzing a firm ’ s external environment. –   Di ff erence be t ween a f ir m ’ s general an d indus t ry environment. –   The six segments of the general environment and how to use them as an analytical tool. –   How to identify industry boundaries. –   The five forces and how to use them to analyze industries. –   Limitations of the five forces framework BUS 690 G. Desa 35 ) ( Environments of the firm General Industry Competitive Firm BUS 690 G. 36 )

( Purpose of External Analysis •   Identify –   Opportunities •   conditions that may help firm achieve strategic competitiveness –   Threats •   h in de r s o r c on s t r a in s f ir m ’ s p u r s u it o f s t r a t e g ic competitiveness •   By –   scanning, monitoring, forecasting, assessing BUS 690 G. Desa 37 ) ( The External Environment The firm embedded in a global world: PESTEL factors, industry and strategic group BUS 690 G. Desa 38 )

( 1 )

( 39 ) ( 40 ) ( 41 ) ( 42 ) ( 43 ) ( 44 )

( PESTEL forces • P   oli t ical –   Actions of government bodies that influence firm decisions and behavior. • E   conomic – N a   t u r e a n d dir ec t io n o f macroeconomy (e.g. Interest rates, growth rates, unemployment, price stability, exchange rates) • S   ociocul t ural – S   o c ia l a tt i t u d e s , c u l t u r a l v a l u e s – D e   mo g r a ph i c s ( e . g . P op u la t io n size, age structure, geographic mix, ethnicity, income dist.) •   Technological –   Institutions and activities that effect knowledge creation – T   r a n s la t io n o f n e w k no w l e d g e into new products and processes • E   cological – E   ff ec t s on t h e n a t u r a l environment, climate change, sustainable economic growth. • L   egal –   Law and regulations guiding competition and access to resources (e.g. tax laws, antitrust, patent laws) BUS 690 G. 39 ) ( Identify General Environments for… •   Coca-Cola •   Krispy Kreme •   Lyft •   Amazon •   Tiffany •   Netflix BUS 690 G. Desa 40 )

( BUS 690 Where do we go from here? •   Industry Analysis Why are some firms more successful than others? •   What is an Industry? •   Industrial Organization Model of Superior Returns •   Key Tool: Porters Five Forces Model •   Video •   Application •   Limitations G. Desa 41 ) ( BUS 690 Industry Boundaries •   What is an industry? –   collection of firms whose products (or services) are perfect or near perfect substitutes •   similarity of products/services is key •   Importance of industry boundaries –   helps managers understand arena of competition •   enables identification of competitors •   helps managers identify key success factors •   provides basis to evaluate firm goals G. Desa 42 )

( BUS 690 Model I: IO Model of Superior Returns •   Why are some firms more successful than others? –   Profits = f(industry structure) •   Characteristics of external environment largely determine appropriate firm strategies and performance –   Choose “ attractive ” industries •   Largely focuses on industry structure or attractiveness rather than internal firm characteristics G. Desa 43 ) ( IO Model of Superior Returns •   Assumptions –   firms in industry are strategically similar –   strategic resources are highly mobile across firms –   strategists are rational and profit-maximizing •   Empirical evidence –   20% of firm profitability explained by industry characteristics BUS 690 G. Desa 44 )

( 45 ) ( 45 ) ( 46 ) ( 47 ) ( 48 ) ( 49 ) ( 50 )

( G.Desa BUS 690 ) ( BUS 690 Industry Analysis •   Key t ool: Por t e r ’ s “ F ive F orce s ” model –   identifies the potential profitability of an industry (attractiveness) –   the forces represent threats to the profitability of firms in the industry –   recall the classic I/O model •   industry structure → firm performance •   t h is w a s o r i g in a lly a po li c y ma k e r s ’ mo d e l; P o r t e r ma de it a ma n a g e r s ’ mo d e l. G. Desa 46 )

( BUS 690 Industry Analysis: The Five Forces Model Bargaining power of suppliers G. 47 Risk of entry by potential competitors Rivalry Among Established Firms Bargaining power of buyers Threat of substitute products ) ( BUS 690 Process of Industry Analysis BUYERS •   Defining industry boundaries •   Identifying the participants •   Highlighting each of the five forces •   Identifying the factors that drive each force •   Assessing the strength of each force •   Assessing industry profitability SUPPLIERS G. 48 ENTRY EXISTING RIVALRY SUBSTITUTES )

( BUS 690 Industry Analysis: The Five Forces Model Bargaining power of suppliers G. 49 Risk of entry by potential competitors Rivalry Among Established Firms Bargaining power of buyers Threat of substitute products ) ( BUS 690 Threat of Entry BUYERS High when Ø   Customer switching costs are low Ø   Capital requirements are low Ø   Incumbents do not possess q   Proprietary technology q   Established brand equity Ø   New entrants expect that little retaliation from incumbents SUPPLIERS ENTRY G. 50 EXISTING RIVALRY SUBSTITUTES )

( 51 ) ( 52 ) ( Bargaining Power of Buyers High when ENTRY EXISTING RIVALRY Ø   Few large buyers Ø   Each buyer purchases large quantities relative to the size of a single seller Ø   Industry products are standardized or commodities Ø   Buyers face little or now switching costs Ø   Buyers can credibly backward-integrate into the industry G. 51 SUPPLIERS SUBSTITUTES BUYERS BUS 690 ) ( BUS 690 BUYERS )Bargaining Power of Suppliers ENTRY

( SUPPLIERS )

( SUBSTITUTES )High when

Ø  Incumbent firms face significant switching costs when changing suppliers.

Ø  No relatively available substitutes for the products/services that suppliers offer.

Ø  Suppliers offer products that are differentiated.

Ø  Suppliers can credibly forward-integrate into the industry

EXISTING RIVALRY

G. Desa 52

( 53 ) ( 54 ) ( SUPPLIERS ) ( BUS 690 BUYERS ) ( BUS 690 BUYERS )Threat of Substitute Products ENTRY Intensity of Rivalry is High When:

High when

( SUBSTITUTES )EXISTING RIVALRY

High when

( SUPPLIERS )ENTRY

( EXISTING RIVALRY )

( SUBSTITUTES )

Ø  Substitute offers an attractive price- performance trade-off.

Ø  Buyer’s cost of switching to a substitute product is low.

Ø  There are many competitors in the industry.

Ø  The competitors are roughly of equal size. Ø  Industry growth is slow, zero or negative. Ø  Exit barriers are high

Ø  Products and services have direct substitutes.

G. Desa 53 G. Desa 54

( 55 ) ( 56 ) ( Attractive Industry High profit potential BUS 690 ) ( BUS 690 )Interpreting Industry Analyses Interpreting Industry Analyses

Low entry barriers High entry barriers

Suppliers and buyers have strong positions

Strong threats from substitute products

Intense rivalry among competitors

Unattractive Industry

Low profit potential

Suppliers and buyers have weak positions

Few threats from substitute products

Moderate rivalry among competitors

G. Desa 55 G. Desa 56

( 57 )

( To do before the next class… BUS 690 1.   Make sure you have the Syllabus (iLearn 2.   Fill in Student Information Sheet (iLearn) 3.   Sign up for a Current Event Report date (iLearn) 4.   Read Ch 1-2. Intro to Strategic Management concepts 5.   Read Ch 3. Strategy and the External Environment 6.   Read Ch 4. Strategy and the Internal Environment 7.   Prepare Apple case (iLearn) 8.   Answer the Online Quiz this week (iLearn) ) G.Desa 57