Competing For Advantage

1. Competing For Advantage Part II – Strategic Analysis Chapter 3 – The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis

2. “Computers in the future may weigh no more than 1.5 tons”

3. “Computers in the future may weigh no more than 1.5 tons” • Popular Science Magazine, forecasting the relentless march of Science - 1949

4. In 1968, a 100 megabyte hard drive weighed 4,500 pounds cost more than $130,000

5. “I think there is a world market for maybe five computers” • Thomas Watson, Chairman of IBM, 1943

6. “But what….is it good for?” • Engineer at IBM, commenting on the microchip, 1968

7. “The idea is interesting and well-formed, but in order to earn better than a “C” the idea must be feasible” • Yale University Professor in response to Fred W. Smith’s paper proposing an overnight delivery service

8. FedEx now delivers well over 7.5 million packages a day – 2.7 billion a year

9. “We don’t like their music and guitar music is on the way out” • Decca Records Company in rejecting the Beatles, 1962

10. “ Who the hell wants to hear actors talk” H. M. Warner, 1927

11. “There is no reason why anyone would want a computer in their home” Ken Olson, president, chairman, and founder of Digital Equipment Corporation, 1977

12. “This ‘telephone” has too many shortcoming to be seriously considered a means of communication. The device is inherently of no value to us.” Internal Memo, Western Union, 1876

13. “Everything that can be invented has been invented” Charles H. Duell, Commissioner of the U.S. Patents Office, 1899

14. “640K of RAM ought to be enough for anybody” Bill Gates, 1981

15. Subway opens a new store every 3 hours Starbucks every 11 hours Quiznos every 16 hours WSJ, Oct 1, 2003

16. “I see no scenario whatsoever where Toyota will pass us in share” Chrysler CEO, January 2002

17. “I see no scenario whatsoever where Toyota will pass us in share” Chrysler CEO, January 2002 September 2003, “The Big Three” became GM, Ford, and Toyota

18. “Nothing important happened today” Journal entry made by King George III, July 4, 1776, the day the United States declared independence from England

19. Competitive strategy must grow out a sophisticated understanding of the rules of competition that determine industry attractiveness. Michael Porter • When an industry with a reputation for bad economics meets a manager with a reputation for excellence, it’s usually the industry that leaves with its reputation intact. Warren Buffett • Skate to where the puck is going, not to where the puck has been. Wayne Gretsky

20. External Environments • Key Terms • General Environment –composed of dimensions in the broader society that influence an industry and the firms within it • Industry Environment –set of factors that directly influence a firm and its competitive actions and competitive responses • Competitor Environment –details about a firm’s direct and indirect competitors and the competitive dynamics expected to impact a firm's efforts to generate above-average returns

21. Components of External Analysis • Scanning – Identifying early signals • Monitoring – Following signals or change identifies in scanning to identify patterns • Forecasting – Projections of what might happen • Assessing – Determining the timing and significance of forecasted change

22. Assessing the General Environment

23. General Environment • Demographic • Economic • Political • Socioculture • Technical • Global

24. 1) Demographic Segment • Characteristics of the population • e.g., age, race, gender, sexual orientation and social classes • Ethnic structure • Income distribution • Geographic distribution

25. 2) Economic Segment • General health/wellbeing of the local, regional, national or global economy. • e.g., Interest rates, unemployment rates, consumer spending, confidence and savings, energy costs, personal disposable income, inflation rates, housing costs

26. 3) Political/Legal Segments • Tax laws, minimum wages, environmental laws, labor laws, consumer protection, product liability, etc.

27. 4) SocioculturalSegment • Attitudes of society towards work, careers, products, services and consumer activism. • e.g., concern for quality of life, birth rates, woman in the work force, low-carb dieting, health consciousness, respect for intellectual property, desire for “green retailing”, savings rates, etc.

28. 5) Technological Segment • Changes in technology that affect the workplace, and the products and services consumers expect • e.g., Information technologies, entertainment technologies, product technologies.

29. 6) Global Segment • New and existing markets around the world, and changes in the political, cultural and institutional terrain.

30. General Environment • Firms can not influence them, but they can have a significant influence on the firm, its industry, its strategy, and its performance • Cast a wide net and to identify the emerging trends • Then determine which factors are relevant, and how these changes will have an effect upon the firm.

31. ROIC Across Industries 1995-2004

32. Porter’s Five Forces • Competitive Rivalry • Power of Buyers • Power of Suppliers • Potential Entrants • Substitute Products Each of these forces affect costs/prices, therefore, profitability

33. Substitute Products (of firms in other industries) Rivalry Among Competing Sellers Suppliers of Key Inputs Buyers Potential New Entrants

34. Porter’s 5-forces is all about margins { Price What factors increase/decrease margins within an industry, or industry segment, thus affecting profitability. Profits Costs

35. When industry structural variables are weak…... Prices can be kept high { Profits can soar Costs can be kept low

36. When industry structural variables are strong Prices will be pushed down { Profits shrink Costs will rise

37. Potential New Entrants • Suppose you had to start a new business and start generating revenues… … today … in a week … in 2 months … in 1 year What kind of businesses might you start? Some industries, by their nature, are easier to enter than others

38. Potential New Entrants • Firms and individuals search for industries to enter that at attractive/profitable… • ….unless they find themselves at an immediate disadvantage relative to incumbents • Industries possess, and firms can create “barriers to enter” • Barriers of entry are desirable for entrenched firms

39. Barriers to Entry – Prevent New Entrants • Economies of scale • Product differentiation & loyalty • Capital & resource requirement • Switching costs • Distribution • Cost disadvantage independent of size • Regulatory policies • Access to technology & know-how • Learning, costs and experience curves • Threat of retaliation

40. Suppliers • Who are you key suppliers? • Suppliers are a strong competitive force when: • Only a few suppliers exist and is more concentrated than industry to which it is selling (few selling to many) • Few substitutes available to the industry firm • Industry firms not important to supplier group • Supplier group provides a product crucial to production process, and/or significantly affects buyers’ product quality • It is costly for buyers to switch suppliers • Forward integration by suppliers is a credible threat

41. Buyers • Who are your key buyers? - who provides your revenues? • Can they force: • lower prices, higher quality and service – affect the terms and conditions of the exchange? • When do you, as a consumer, have power? • Two issues • Price sensitivity • Can you actually bargain?

42. Buyers • What affect buyers’ power? • Volume/Frequency of purchase • When buyers represent a large portion of sellers revenues • When buyers can easily switch to another product • When the product the buyers are buying is undifferentiated • When buyers can self-source or backwards integration • Criticality • Buyers’ knowledge • Buyers’ profitability

43. Substitutes • Product/service which fulfills similar need • Price cap • 3 Questions • Are they available? • Can we switch? • Price-performance relationship?

44. Substitutes and Business Definition • How we define our business defines our substitutes and our rivals Carbonated Soft Drink Soft Drinks Beverages Many Substitutes Few Substitutes Few Rivals Many Rivals

45. Rivalry and Profitability • Industry profitability is a collective good. • Collective good is served by coordination • Are there industries were pricing is coordinated? • Incentive to violate

46. Rivalry – What drives it? • Numerous or equally balanced competitors • Slow growth, excess capacity • High fixed costs • High storage costs • High obsolescence costs • Lack of differentiation • Low switching costs • Perceptions of high payoff from competitive actions • High exit barriers

47. Exit Barriers • Specialized assets • Fixed costs of exit • Strategic interrelationships among business units • Emotional barriers

48. Industries and Segments • What is a segment? • Different segments….. • posses different combinations of 5-forces • therefore: • reward different strategies • possess different levels of profitability

49. Segments in the Automotive Industry Economy Luxury Which segment is more attractive? Why?

50. Segments in the Automotive Industry Economy Luxury More Rivalry More Substitutes More Entrants More Buyer Power