ADM 5261 Strategy Formulation Session 2: The Environment

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ADM 5261 Strategy FormulationSession 2 The
Environment

• MBA Program
• Faculty of Administration
• University of Ottawa
• September 12th, 2001

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The Environment

• Early strategy research
• Porters 5 forces of competition
• Todays environment
• Arthur and increasing returns
• Financial markets
• Assignment 2

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Early Strategy Research

• Grew out of economics
• Considered the impact of the environment on the
  choices available to firms
• Concluded that to be successful, firms must fit
  their strategies and their structures to their
  environments

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Environment -gt Firm
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Structure-Conduct-Performance

• Industry structure
• barriers to entry
• the number and size distribution of firms
• product differentiation
• overall elasticity of demand
• Conduct
• price
• advertising
• capacity
• quality
• Performance
• profitability
• cost minimization
• innovativeness

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Chandler

• Strategy and Structure (1962)
• Sears, Standard Oil, GM, Dupont
• Increased scope product line and geographic
• Increased need for communication, coordination,
  and information consolidation
• The rise of the multidivisional structure
• The Visible Hand (1977)
• Changes in transportation and communication
  increased the role of strategic choice

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Contingency Theory

• Burns and Stalker (1961)
• compared mechanistic and organic modes of
  organizing
• Woodward (1965)
• best performing firms match organizational
  structures to their tasks
• Lawrence and Lorsch (1967)
• better performing firms match organizational
  structure (differentiation and integration) to
  degree of environmental uncertainty

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Diversification Strategies

• Compared strategy and the adoption of the
  multidivisional structure
• Strategic classifications single, dominant,
  related, unrelated
• Adoption of MD structure depends on
• strategic classification (more diversified more
  likely to adopt)
• year (increases from 1950 to 1970)
• home country (US, UK more likely to adopt)

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Porters Five Forces Model of Competition
Threat of New Entrants
Threat of New Entrants
Rivalry Among Competing Firms in Industry
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of Substitute Products
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Bargaining Power of Buyers
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Bargaining Power of Suppliers
Suppliers exert power in the industry by
Threatening to raise
prices or to reduce quality
Powerful suppliers can squeeze industry
profitability if firms are unable to recover cost
increases
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Threat of Substitute Products
Keys to evaluate substitute products
Products with similar function limit the prices
firms can charge
Products with improving price/performance
tradeoffs relative to present industry products

For Example
Electronic security systems in place of security
guards
Fax machines in place of overnight mail delivery
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Threat of New Entrants
Economies of Scale

Product Differentiation

Barriers to Entry
Capital Requirements

Switching Costs

Access to Distribution Channels

Cost Disadvantages Independent of Scale

Government Policy

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Todays EnvironmentBrian Arthur Increasing
Returns

• Old Economy
• Resource-based
• Diminishing returns
• Firms strive to optimize

• New Economy
• Knowledge-based
• Increasing returns
• Firms strive to adapt

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Increasing Returns

• Why do they exist?
• Up-front costs
• Network effects
• Customer groove-in
• How should a firm respond?
• Be an early mover
• Build partnerships
• Invest for market share
• Manage commitment/adaptability requirement

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Todays EnvironmentFinancial Markets NASDAQ
COMPX
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COMPX vs.Networking Equipment Suppliers
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COMPX, NT vs. Internet Icons
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So What?

• Is this aspect of the environment important to
  your business?
• If so, how will it affect your business?
• Will strategy researchers consider this Internet
  bubble to have been important?
• If so, what will they have to say about it?

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Assignment 2 The Environment

• Analyze your firms environment
• Porters 5 forces model
• Be sure to consider
• Current and future forces
• Effect of increasing returns as appropriate
• Use real data
• Start with bookmarks on course website

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Criteria for Evaluation

• Quality of data sources and data
• Pertinent
• Diverse
• Quality of analysis
• Identification of key forces and their expected
  evolution