Finish this case in 2days

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Class Plan 2
“If you are not part of the solution, you’re part of the precipitate” Henry Tillman

Housekeeping (groups, cards…)
Questions for the Apollo case
Ethics and Strategy (video)
Intro to External Analysis
Macroenvironmental Analysis
Accounting practice
Video and exercises on External Analysis

Guiding questions for the Apollo Group Case

Using Porter’s 5-forces model, evaluate the attractiveness of the online-education industry.
What internal factors and macroenvironmental factors will impact the industry in general and Apollo specifically ?
What recommendation (s) have you to make to Apollo to sustain or improve their current position?

Planned, Deliberate, Emergent and Realized Strategies

Source: Adapted from H. Mintzberg and A. McGugh, Administrative Science Quarterly, Vol. 30. No. 2, June 1985.

Figure 1.7

p. 24

Governance Mechanisms

The Board of Directors

Elected by stockholders

Legally accountable

Monitors corporate strategy decisions

Authority to hire, fire, and compensate

Ensures accuracy of audited financial statements

Inside directors

Outside directors

Stock-Based Compensation
Pay-for-performance
Stock options:

The right to buy company shares at a predetermined price at some point in the future

Financial Statements

Auditors, GAAP

The Takeover Constraint
Limits strategies that ignore shareholder interests
Corporate raiders

Ethics and Strategy

Business ethics are the accepted principles of right or wrong governing the conduct of businesspeople.

Ethical dilemmas occur when:
There is no agreement over what the accepted principles are
None of the available alternatives seem ethically acceptable
Many accepted principles are codified into laws:
Tort laws – governing product liability
Contract law – contracts and breaches of contracts
Intellectual property law – protection of intellectual property
Antitrust law – governing competitive behavior
Securities law - issuing and selling securities
Behaving ethically goes beyond staying within the law

Ethical Issues in Strategy

Self-dealing

Managers feather their nest with corporate monies through stock trades

Information manipulation

Distort or hide information to enhance competitive or personal situation

Anticompetitive behavior

Actions aimed at harming actual or potential competitors

Opportunistic exploitation

Of other players in the value chain in which the firm is embedded

Substandard working conditions

Underinvest in working conditions or pay below market wages

Environmental degradation

Directly or indirectly take actions that result in environmental harm

Corruption

Companies pay bribes to gain access to lucrative business contracts.

The Roots of Unethical Behavior

Why do some managers behave unethically?

Personal ethics code: will have a profound influence on behavior as a businessperson

Do not realize they are behaving unethically: by failing to ask the right questions

Organization’s culture: de-emphasizes ethics and considers primarily economic consequences

Unrealistic performance goals: encouraging and legitimizing unethical behavior

Unethical leadership: that encourages and tolerates behavior that is ethically suspect

Managers should:

Favor hiring and promoting people with a well-grounded sense of personal ethics.

Build an organizational culture that places a high value on ethical behavior.

Make sure that leaders not only articulate but also act in an ethical manner.

Put decision-making processes in place that require people to consider the ethical dimension of business decisions.

Use ethics officers.

Put strong corporate governance processes in place.

Act with moral courage and encourage others to do the same.

Behaving Ethically

Industry Analysis

The Structure – Conduct – Performance Model

• originally developed to spot anti-competitive conditions

for anti-trust purposes

• came to be used to assess the possibilities for

above normal profits for firms within an industry

• Porter’s Five Forces Model was developed from

this economic tradition

The Structure-Conduct- Performance Model

Industry Structure

Number of competing firms

Homogeneity of products

Cost of entry and exit

Firm Conduct

Price taking

Product differentiation

Tacit collusion

Exploiting market power

Performance

Firm level performance: Normal, below normal, above normal

Society: efficiency, level of employment, progress

Industry Analysis

Industry
A group of companies offering products or services that are close substitutes for each other and that satisfy the same basic customer needs
Industry boundaries may change as customer needs evolve and technology changes

Sector

A group of closely related industries

Market Segments

Distinct groups of customers within an industry

Can be differentiated from each other with distinct attributes and specific demands

Porter’s Five Forces Model (Fig 2.2 p50 adapted)

Rivalry among established firms

Risk of entry by potential competitors

Bargaining power of suppliers

Bargaining power of buyers

Threat of substitute products

Special role of complements

Rivalry

Rivalry among established companies is a function of :
industry’s competitive structure – fragmented vs consolidated
demand conditions – growth and rate of growth
exit barriers – emotional, economic, strategic

Product Lifecycle

Time

Demand

Embryonic

Growth

Shakeout

Mature

Declining

New Entrants

Potential Competitors: not currently competing in an industry but capable of doing so.

incumbent companies (those already in an industry) are at an advantage when barriers to entry are high.

Main barriers to entry are: (plus examples?)

1) brand loyalty

2) absolute cost advantage based on production superiority & control of inputs

3) economies of scale due to mass production, increased purchasing power, spreading of fixed costs, advertising economies

4) consumer switching costs

5) government regulation

Power of Buyers

Bargaining power of buyers is high when:

- many sellers and few buyers (at extreme, a monopsony)

- purchases are made in large $ amounts or quantities

- purchases represent a large percentage of total orders

- buyers have low switching costs

- each buyers can have multiple suppliers

possibility of vertical integration

Power of Suppliers

Bargaining power of suppliers is high when:
few substitutes for input they supply
industry is not an important customer
high switching costs (sometimes due to differentiation)
possibility of vertical integration (supplier)
no possibility of vertical integration (buyer)

Subtitutes and Complements

Threat of substitute products

Are there other industries that serve the similar consumer needs?

Are there strong competitive forces in those other industries?

The “Sixth Force” : Complementors

Complementors sell or supply complementary products to an enterprises existing product offerings.

If an industry’s complementors are weak or supply unattractive products they can be a threat to the industry

Macro-environmental Forces [Environmental Scanning]

Macroeconomics: growth rate of the economy, interest rates, currency exchange rates, inflation rates

Technological: “creative destruction”, shifting barriers to entry

Social: lifestyles, trends and attitudes

Demographics: composition of the population, factors such as income distribution, education, labour mobility, gender

Political & Legal : deregulation and free trade

Global: falling barriers to trade, new economic development

Environmental Scanning should:

be a continuous formal & informal process
explore beyond the boundaries of the business environment
identify the potential impacts of events in a timely fashion
be a context & a trigger for industry and business analysis
can be carried too far