Todays Agenda

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Todays Agenda

• News You Can Use - Anyone?
• General Environment Exercise
• Finish Chapter 2 - Five Forces(not competitor
  analysis)
• Finish Group Formation
• Make sure everyone is assigned to a group.
• Try to finalize the selection of a company.
• Begin to outline industry dynamics.

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The External Environment Part I The General
Environment

• Scanning
• A general look around
• Monitoring
• Keeping track of what looks potentially important
• Forecasting
• Trying to predict where things will be going
• Assessing
• Trying to understand how the changes effect you

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The General Environment and Philip Morris

• Demographic Segment
• Population, age, income, ethnicity
• Economic Segment
• Inflation, exchange rates, savings rates,
  interest
• Political/legal Segment
• Antitrust, (de)regulation, taxation, labor laws

• Sociocultural Segment
• Diversity, social concerns, quality of life
• Technological Segment
• Product and process changes, communications
• Global Segment
• Political events, global and regional crisis,
  exchange rates

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Exercise General Environment and the Tobacco
Industry

• Break in groups of 3 or 4 persons
• Try to identify at least one general trend for
  each segment of the environment
• Determine how this trend impacts Philip Morris
  (positive, negative or neutral)
• How would you respond?

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The General Environment and Philip Morris

• Demographic Segment
• Population, age, income, ethnicity
• Economic Segment
• Inflation, exchange rates, savings rates,
  interest
• Political/legal Segment
• Antitrust, (de)regulation, taxation, labor laws

• Sociocultural Segment
• Diversity, social concerns, quality of life
• Technological Segment
• Product and process changes, communications
• Global Segment
• Political events, global and regional crisis,
  exchange rates

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The External EnvironmentModel of Superior Returns

• 1. Study the external environment.
• 2. Locate an industry with high potential for
  above-average returns.
• 3. Identify strategy called for by the industry
  to earn above-average returns.

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External Environment Part IIIndustry Analysis

• External Environment Model of Superior Returns
• Locate an industry with high potential for
  above-average returns.
• An Industry is a group of firms
  producing products that are close substitutes.

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Porters Five Forces Model of Competition
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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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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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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Bargaining Power of Buyers
Buyers compete with the supplying industry by

• Bargaining down prices
• Forcing higher prices
• Playing firms off of each other

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Threat of Substitute Products
Keys to evaluate substitute products
Products with improving price/performance
tradeoffs relative to present industry products

Products with similar function limit the prices
firms can charge
For Example
Electronic security systems in place of security
guards
Fax machines in place of overnight mail
delivery E-mail in place of fax machines
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Intensity of Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur
when
Numerous or equally balanced competitors

Slow growth industry

High fixed costs

High storage costs

Lack of differentiation or switching costs

Diverse competitors

High strategic stakes

High exit barriers

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Intensity of Rivalry Among Existing Competitors
Intense rivalry often plays out in the following
ways
Jockeying for strategic position

Using price competition

Staging advertising battles

Increasing consumer warranties or service

Making new product introductions

Occurs when a firm is pressured or sees an
opportunity
Price competition often leaves the entire
industry worse off

Advertising battles may increase total industry
demand, but may be costly to smaller competitors

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Intensity of Rivalry Among Existing Competitors
High Exit Barriers are economic, strategic and
emotional factors which cause companies to remain
in an industry even when future profitability is
questionable.
Specialized assets

Fixed cost of exit (e.g., labor agreements)

Strategic interrelationships

Emotional barriers

Government and social restrictions

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Effects of Entry Barriers and Exit Barriers on
Industry Profits
Exit Barriers
High
Low
Low, Stable Returns
Low, Risky Returns
Low
Entry Barriers
High, Stable Returns
High, Risky Returns
High
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Analysis is the critical starting point of
strategic thinking.

• Kenichi Ohmae

• The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill
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What is Competition Like How Strong Are
the Competitive Forces?
Objective

• To identify
• Main sources of competitive forces
• Strength of these forces
• Key analytical tool
• Five Forces Model of Competition

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Analyzing the Five Competitive Forces How
to Do It

• Assess strength of each competitive force
  (Strong? Moderate? Weak? )
• Rivalry among competitors
• Substitute products
• Potential entry
• Bargaining power of suppliers
• Bargaining power of buyers
• Explain how each force acts to create competitive
  pressure
• Decide whether overall competition is brutal,
  fierce, strong, normal/moderate, or weak

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Rivalry Among Competing Sellers

• Usually the most powerful of the five forces
• Check which weapons of competitive rivalry are
  most actively used by rivals in jockeying for
  position
• Price
• Quality
• Performance features offered
• Customer service
• Warranties/guarantees
• Advertising/promotions
• Dealer networks
• Product innovation

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What Causes Rivalry to Be Stronger?

• Lots of firms, more equal in size and capability
• Slow market growth
• Industry conditions tempt some firms to go on the
  offensive to boost volume and market share
• Customers have low costs in switching brands
• One or more firms initiates moves to bolster
  their standing at expense of rivals
• A successful strategic move carries a big payoff
• Costs more to get out of business than to stay in
• Firms have diverse strategies, corporate
  priorities, resources, and countries of origin

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Principle of Competitive Markets

• Competitive jockeying among rival firms is
  dynamic and ever-changing
• As industry members initiate new offensive and
  defensive moves
• As emphasis swings from one mix of competitive
  weapons to another

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Competitive Force of Potential Entry

• Seriousness of threat depends on
• Barriers to entry
• Reaction of existing firms to entry
• Barriers exist when
• Newcomers confront obstacles
• Economic factors put potential entrant at a
  disadvantage relative to incumbent firms

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Common Barriers to Entry

• Economies of scale
• Inability to gain access to specialized
  technology
• Existence of learning/experience curve effects
• Strong brand preferences and customer loyalty
• Capital requirements and/or other specialized
  resource requirements
• Cost disadvantages independent of size
• Access to distribution channels
• Regulatory policies, tariffs, trade restrictions

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Principle of Competitive Markets

• Threat of entry is stronger when
• Entry barriers are low
• Sizable pool of entry candidates exists
• Incumbents are unwilling or unable to contest a
  newcomers entry efforts
• Newcomer can expect to earn attractive profits

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Competitive Force ofSubstitute Products
Concept

• Substitutes matter when customers are attracted
  to the products of firms in other industries

Examples

• Eyeglasses vs. Contact Lens
• Sugar vs. Artificial Sweeteners
• Plastic vs. Glass vs. Metal
• Newspapers vs. TV vs. Internet

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How to Tell Whether Substitute Products Are
a Strong Force

• Sales of substitutes are growing rapidly
• Producers of substitutes are planning to add new
  capacity
• Their profits are up

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Principle of Competitive Markets

• The competitive threat of substitutes
  is stronger when they are
• Readily available
• Attractively priced
• Believed to have comparable or better performance
  features
• Customer switching costs are low

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Competitive Force of Suppliers

• Suppliers are a strong competitive force when
• Item makes up large portion of product costs,
  is crucial to production process, and/or
• significantly affects product quality
• It is costly for buyers to switch suppliers
• They have good reputations and
• growing demand
• They can supply a component cheaper than industry
  members can make it themselves
• They do not have to contend with substitutes
• Buying firms are not important customers

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Principle of Competitive Markets

• Suppliers are a stronger force the more they can
  exercise power over
• Prices charged
• Quality/performance of
  items supplied
• Amounts and delivery times

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Competitive Force of Buyers

• Buyers are a strong competitive force when
• They are large and purchase a sizable
• percentage of industrys product
• They buy in volume quantities
• They can integrate backward
• Industrys product is standardized
• Their costs in switching to substitutes or other
  brands are low
• They can purchase from several sellers
• Product purchased does not save buyer money

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Principle of Competitive Markets

• Buyers are a stronger competitive force the
  more they have leverage to bargain
  over
• Price
• Quality
• Service
• Other terms and conditions of sale

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Strategic Implications of theFive
Competitive Forces

• Competitive environment is unattractive when
• Rivalry is strong
• Entry barriers are low
• Competition from substitutes is
  strong
• Suppliers and customers have considerable
  bargaining power

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Strategic Implications of theFive
Competitive Forces

• Competitive environment is ideal when
• Rivalry is moderate
• Entry barriers are high
• Good substitutes do not exist
• Suppliers and customers are in a weak bargaining
  position

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Coping With theFive Competitive Forces

• Objective is to craft a strategy that will
• Insulate firm from competitive forces
• Influence competitive pressures in ways that
  favor company
• Build a sustainable competitive advantage

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Things to Consider inAssessing Industry
Attractiveness

• Industrys market size and growth potential
• Whether competitive conditions are conducive to
  rising/falling industry profitability
• Will competitive forces become stronger or weaker
  
• Whether industry will be favorably or unfavorably
  impacted by driving forces
• Potential for entry/exit of major firms
• Stability/dependability of demand
• Severity of problems facing industry
• Degree of risk and uncertainty in industrys
  future

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Conducting an Industry andCompetitive
Situation Analysis

• Two things to keep in mind
• 1. Evaluating industry and competitive
  conditions cannot be reduced to a formula-like
  exercise--thoughtful analysis is essential
• 2. Sweeping industry and competitive analyses
  need to done every 1 to 3 years

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Five Forces and Pharmaceuticals

• Threat New Entry
• 7 years to get approval
• No new since mid 1970s
• VERY LOW
• Supplier Power
• Cheap bulk chemicals
• VERY LOW
• Buyer Power
• Needy sickly consumer
• Cost oriented HMOs
• LOW BUT RISING

• Substitutes
• Alternative health?
• Better living?
• VERY LOW
• Rivalry
• Joint research facilities
• Plenty of specialties
• VERY LOW
• Profits???
• Huge, enormous, monstrously large!!!

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Five Forces and Restaurants

• Threat New Entry
• Small capital (50,000)
• Can be run by a family
• VERY HIGH
• Supplier Power
• Real Estate controls all
• VERY HIGH
• Buyer Power
• Do you always go to the exact same restaurant?
• VERY HIGH

• Substitutes
• How often does the average family eat out?
• VERY HIGH
• Rivalry
• Why work together?
• Fierce competition
• VERY HIGH
• Profits???
• Ouch! Not so good, many dont survive

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Discussion Points

• How do we define industry?
• What industry is Microsoft in?
• What industry is That Textbook Place in?
• What does this tell us about the Five Forces
  model in general?

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Pres./Memo One - Expectations

• Provide a brief company overview (none is fine)
• Highlight results of the general environment
  analysis
• Scanning, monitoring, forecasting, assessing
• Conduct a detailed Five Force analysis
• Provide a rough determination of the impact of
  each force (support your position)
• Summarize the overall model results
• Explain where your company fits in the industry
• Briefly mention the type of generic
  business-level strategy pursued by the company
• The memo should replicate the presentation

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THE Project Question(Your conclusion should
address this question)

• What did we learn from the analysis that can be
  useful to someone within the company?

Application, application and more application
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Next time