Connect Link: http://connect.mcgraw-hill.com/class/m_ahsan_fall_2012
PowerPoints:
Glo-Bus Overview
Chapter 1 [PPT]:
Strategy
Chapter 4 [PPT]:
EVALUATING A COMPANY’S RESOURCES, CAPABILITIES, AND COMPETITIVENESS
Chapter 3 [PPT]:
External Analysis
External Analysis [PPT]
OBJECTIVES
-Gain command of the basic concepts and analytical tools widely used to diagnose the competitive conditions in a company’s industry.
-Learn how to diagnose the factors shaping industry dynamics and to forecast their effects on future industry profitability.
-Become adept at mapping the market positions of key groups of industry rivals.
-Understand why in-depth evaluation of a business’s strengths and weaknesses in relation to the specific industry conditions it confronts is an essential prerequisite to crafting a strategy that is well-matched to its external situation.
From Thinking Strategically about the Company’s Situation to Choosing a Strategy
Chapter 3
Thinking strategically about a firm’s external environment
Thinking strategically about a firm’s internal environment
-Forming a strategic vision of where the firm needs to head
-Identifying promising strategic options for the firm
-Selecting the best strategy and business model for the firm
The External Environment
The Macro-Environment
-Is the broad environmental context in which a firm’s industry is situated.
-Includes strategically relevant components over which the firm has no direct control.
+General economic conditions
+Immediate industry and competitive environment
The Components of a Company’s Macro-Environment
(See PPT External Analysis, Slide 5)
The Seven Components of the Macro-Environment
Demographics
-The size, growth rate, and age distribution of different sectors of the population. It includes the geographic distribution of the population, the distribution of income across the population, and trends in these factors.
Social forces
-Societal values, attitudes, cultural factors, and lifestyles that impact businesses. Social forces vary by locale and change over time.
Political, legal, and regulatory factors
-Political policies and processes, as well as the regulations and laws with which companies must comply—labor laws, antitrust laws, tax policy, regulatory policies, the political climate, and the strength of institutions such as the court system.
Natural environment
-Ecological and environmental forces such as weather, climate, climate change, and associated factors like water shortages.
Technological factors
-The pace of technological change and technical developments that have the potential for wide-ranging effects on society, such as genetic engineering, the rise of the Internet, changes in communication technologies, and knowledge and controlling the use of technology,
Global forces
-Conditions and changes in global markets, including political events and policies toward international trade, sociocultural practices and the institutional environment in which global markets operate.
General economic conditions
-Rates of economic growth, unemployment, inflation, interest, trade deficits or surpluses, savings, per capita domestic product, and conditions in the markets for stocks and bonds affecting consumer confidence and discretionary income.
QUESTION 1: DOES THE INDUSTRY OFFER ATTRACTIVE OPPORTUNITIES FOR GROWTH?
Defining Growth:
-What is the current market size in units or sales?
-What is the past, current and expected rate of growth for the market\industry?
Considerations:
-Different sectors\regions of a market grow at different rates.
-Growth varies with the industry’s life cycle stage—emergence, rapid growth, maturity, and decline.
-Growth does not guarantee profitability.
QUESTION 2: WHAT KINDS OF COMPETITIVE FORCES ARE INDUSTRY MEMBERS FACING, AND HOW STRONG ARE THEY?
Porter’s Forces Model:
-Industry Analysis
-External Analysis
-Five Forces Model/Analysis
The Five-Forces Model of Competition: A Key Analytical Tool
(See slide 9)
Competitive Pressures That Act to Increase the Rivalry among Competing Sellers
-Buyer demand is growing slowly or declining.
-It is becoming less costly for buyers to switch brands.
-Industry products are becoming more alike.
-There is unused production capacity, and\or products have high fixed costs or high storage costs.
-The number of competitors is increasing and\or they are becoming more equal in size and competitive strength.
-The diversity of competitors is increasing.
-High exit barriers stop firms from exiting the industry.
Market Entry Barriers Facing New Entrants
-Economies of scale in production, distribution, advertising, or other areas of operation
-Experience and learning curve effects
-Unique cost advantages of industry incumbents
-Strong brand preferences and customer loyalty
-Strong “network effects” in customer demand
-High capital requirements
-Building a network of distributors or dealers and securing adequate space on retailers’ shelves
-Restrictive government policies
-Expected reaction of incumbent firms
Competitive Pressures from the Sellers of Substitute Products
Substitute Products Considerations:
-Ready availability of substitutes
-Pricing, quality, performance, and other relevant attributes of substitutes
-Switching costs that buyers incur
Indicators of Substitutes’ Competitive Strength:
-Increasing rate of growth in sales of substitutes
-Substitute producers adding output capacity
-Increasing profitability of substitute producers
Competitive Pressures Stemming from Supplier Bargaining Power
Supplier Bargaining Power Considerations:
-Ready availability of supplier products
-Criticality of supplier products as industry inputs
-Number of suppliers of standard\commodity items
-Buyers’ costs for switching among suppliers
-Availability of substitutes for suppliers’ products
-Fraction of supplier sales due to industry demand
-Ratio of suppliers relative to industry buyers
-Backward integration into suppliers’ industry
Competitive Pressures Stemming from Buyer Bargaining Power and Price Sensitivity
Buyer Bargaining Power Considerations:
-Buyer costs for switching to competing sellers
-Degree to which industry products are commoditized
-Number and size of buyers relative to sellers
-Strength of buyer demand for sellers’ products
-Buyer knowledge of products, costs and pricing
-Backward integration of buyers into sellers’ industry
-Buyer discretion in delaying purchases
-Buyer price sensitivity due to low profits, size of purchase, and consequences of purchase
Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability?
-Is the state of competition in the industry stronger than “normal”?
-Can industry firms expect to earn decent profits given prevailing competitive forces?
-Are some of the competitive forces sufficiently powerful to undermine industry profitability?
Matching Strategy to Competitive Conditions
-Pursuing avenues that shield the firm from as many competitive pressures as possible.
-Initiating actions calculated to shift competitive forces in the firm’s favor by altering underlying factors driving the five forces.
-Spotting attractive arenas for expansion, where competitive pressures in the industry are somewhat weaker.
QUESTION 3: WHAT FACTORS ARE DRIVING INDUSTRY CHANGE, AND WHAT IMPACTS WILL THEY HAVE?
Strategic Analysis of Industry Dynamics:
1.Identifying the drivers of change.
2.Assessing whether the drivers of change are, individually or collectively, acting to make the industry more or less attractive.
3.Determining what strategy changes are needed to prepare for the impacts of the anticipated change.
The Most Common Drivers of Industry Change
1.Changes in the long-term industry growth rate
2.Increasing globalization
3.Changes in who buys the product and how they use it
4.Technological change
5.Emerging new Internet capabilities and applications
6.Product and marketing innovation
7.Entry or exit of major firms
8.Diffusion of technical know-how across companies and countries
9.Improvements in efficiency in adjacent markets
10.Reductions in uncertainty and business risk
11.Regulatory influences and government policy changes
12.Changing societal concerns, attitudes, and lifestyles
QUESTION 4: HOW ARE INDUSTRY RIVALS POSITIONED—WHO IS STRONGLY POSITIONED AND WHO IS NOT?
A Strategic Group
Is a cluster of industry rivals that have similar competitive approaches and market positions:
-Have comparable product-line breadth
-Sell in the same price/quality range
-Emphasize the same distribution channels
-Use the same product attributes to buyers
-Depend on identical technological approaches
-Offer similar services and technical assistance
Using Strategic Group Maps to Assess the Market Positions of Key Competitors
Constructing a strategic group map:
-Identify the competitive characteristics that differentiate firms in the industry.
-Plot the firms on a two-variable map using pairs of differentiating competitive characteristics.
-Assign firms occupying about the same map location to the same strategic group.
-Draw circles around each strategic group, making the circles proportional to the size of the group’s share of total industry sales revenues.
Choosing Variables for Group Maps
Variables selected as map axes:
-Must not be highly correlated.
-Must reflect key approaches to customer value and expose sizable differences in the marketplace positions of rivals.
-May be quantitative, continuous, discrete and\or defined in terms of distinct classes and combinations.
Guidelines for Constructing Group Maps
-Draw map circles proportional to the combined sales of firms in each strategic group to reflect the relative sizes of each group to the total size of the industry.
-Use different variable sets to show different views of relationships among competitive positions in the industry’s structure—there is no one best map for portraying how competing firms are positioned.
U.S. Bicycle Industry
Follow-up
-Which strategic group is located in the least favorable market position? Which group is in the most favorable position?
-Which strategic group is likely to experience increased intragroup competition?
-Which groups are most threatened by the likely strategic moves of members of nearby strategic groups?
What Can Be Learned from Strategic Group Maps?
-Maps are useful in identifying which industry members are close rivals and which are distant rivals.
-Not all map positions are equally attractive.
1.Prevailing competitive pressures in the industry and drivers of change favor some strategic groups and hurt others.
2.Profit prospects vary from strategic group to strategic group.
QUESTION 5: WHAT STRATEGIC MOVES ARE RIVALS LIKELY TO MAKE NEXT?
Competitive Intelligence
-Information about rivals that is useful in anticipating their next strategic moves.
Signals of the Likelihood of Strategic Moves:
-Rivals under pressure to improve financial performance
-Rivals seeking to increase market standing
-Public statements of rivals’ intentions
-Profiles developed by competitive intelligence units
QUESTION 6: WHAT ARE THE KEY FACTORS FOR FUTURE COMPETITIVE SUCCESS?
Key Success Factors
-Are the strategy elements, product and service attributes, operational approaches, resources, and competitive capabilities that are necessary for competitive success by any and all firms in an industry.
-Vary from industry to industry, and over time within the same industry, as drivers of change and competitive conditions change.
Identification of Key Success Factors
1.What product attributes and service features buyers strongly affect buyers when choosing between the competing brands of sellers?
2.What resources and competitive capabilities are required for a firm to execute a successful strategy in the marketplace?
3.What shortcomings will put a firm at a significant competitive disadvantage?
QUESTION 7: DOES THE INDUSTRY OFFER GOOD PROSPECTS FOR ATTRACTIVE PROFITS?
Industry Profitability Considerations:
-The industry’s overall growth potential
-Effects of strong competitive forces
-Effects of prevailing drivers of change in the industry
-Competitive strength of the firm: its market position relative to its rivals, its capability to withstand competitive forces, and whether its position will change in the course of competitive interactions
-The success of the firm’s strategy in delivering on the industry’s key success factors
*Decisions made should align with the company's goals and direction...
*Company Mission Statement: Current plans and goals...Huffy: "To bring the happiness of riding to every family."
*Company Vision Statement: Future directions, plans, goals, etc...i.e. NASA: "Place a man on the moon in 10 years."
↑
Core Values (do not change frequently with time)
↑
Owners' Values
What are the company's competitively important resources?
Competitive Assets
- Are the firm's resources and capabilities
- are the determinants of its competitiveness and ability to succeed in the marketplace
- are what a firm's strategy depends on to develop sustainable competitive advantage over its rivals.
Resources and Capabilities
A Resource
- is a productive input or competitive asset that is owned or controlled by a company (e.g., a fleet of oil tankers)
- is the capability of a firm to perform some activity proficiently (e.g. superior skils in marketing)
Resources
Tangible Resources
- Physical, financial, technological, organizational resources
- Human assets, intellectual capitol, brands, external relationships, company culture, incentive system
Resources and Capability Analysis
Identify the firm's resources and capabilities
Test the competitive power of the firm's resources and capabilities:
- Is the resource (or capability) competitively valuable?
- Is the resource rare - is it something rivals lack?
- Is the resource hard to copy?
- Can the resource be overcome by different types of resources and capabilities - are the good substitutes available for the resource?
Managing resources and capabilities Dynamically
Threats to resources and Capabilities:
- Rivals providing better substitutes over time
- capabilities decaying from benign neglect
- disruptive competitive environment change
- is the Process of creating new and/or updating existing resources/capabilities to obtain durable value in both resource types
SWOT Analysis
is a powerful tool for sizing up a firm's:
- Internal strengths (the basis for strategy)
- Internal weaknesses (deficient capabilities)
- Market opportunities (strategic objectives)
- External threats (strategic defenses)
Key factors that distinguish one strategy from another
→ is the firm's market target broad or narrow?
→ is the competitive advantage pursued linked to low costs or product differentiation?
The Five generic Competitive Strategies
Low-Cost Provider
- Striving to achieve lower overall costs that rivals on products that attract a broad spectrrum of buyers.
- Differentiating the firm's product offering from rival's with attributes that appeal to broad spectrum of buyers.
- Concentrating on a narrow priced-sensitive buyer segment and costs to offer a lower-priced product
Best-Cost Provider
Low-cost provider strategies
Effective low-cost approaches:
- Pursue cost-savings that are difficult imitate
- avoid reducing product quality to unacceptable levels.
- greater total profits and increased market share gained from underpricing competitors.
- larger profit margins when selling products at prices comparable to and competitive with rivals
- low pricing does not attract enough new buyers
- rivals retaliatory
Major avenues for achieving a costexample of reconfiguring the value chain
When a low-cost provider strategy works best
INTERNATIONAL STRATEGY [PPT]
Why companies Decide to Enter Foregin Markets
To gain access to new customers
To achieve lower costs and economies of scale
To exploit core competencies
To access resources and capabilities in foreign markets
To spread business risk across a wider market base
WHY COMPETING ACROSS NATIONAL BORDERS MAKES STRATEGY MAKING MORE COMPLEX
Industry competitiveness factors that vary from country to country
Location-based advantages for certain countries
Differences in government policies and economic conditions
Currency exchange rate risks
Differences in cultural, demographic, and market conditions
The Diamond of National Advantage
Demand Conditions
-Home-market relative size; domestic buyers’ needs
Related\Supporting Industries
-Proximity of suppliers, end users, and complementary industries
Factor Conditions
-Availability, quality, and relative prices of inputs
(e.g. labor, materials)
Firm Strategy, Structure, and Rivalry
-Different management styles and organization; degree of local rivalry
The Diamond Framework
Answers important questions about competing on an international basis by:
Predicting where new foreign entrants are likely to come from and their strengths.
Highlighting foreign market opportunities where rivals are weakest.
Identifying the location-based advantages of conducting certain value chain activities f the firm in a particular country.
Reasons for Locating Value Chain Activities for Competitive Advantage
Lower wage rates
Higher worker productivity
Lower energy costs
Fewer environmental regulations
Lower tax rates
Lower inflation rates
Proximity to suppliers and technologically related industries
Proximity to customers
Lower distribution costs
Available\unique natural resources
The Impact of Government Policies and Economic Conditions in Host Countries
Positives
Tax incentives
Low tax rates
Low-cost loans
Site location and development
Worker training
Negatives
Environmental regulations
Subsidies and loans to domestic competitors
Import restrictions
Tariffs and quotas
Local-content requirements
Regulatory approvals
Profit repatriation limits
Minority ownership limits
Political and Economic Risks
Political Risks
Stem from instability or weaknesses in national governments and hostility to foreign business.
Economic Risks
Stem from the stability of a country’s monetary system, economic and regulatory policies, lack of property rights protections, and risks due to exchange rate fluctuation.
The Risks of Adverse Exchange Rate Shifts
Effects of Exchange Rate Shifts:
-Exporters experience a rising demand for their goods whenever their currency grows weaker relative to the importing country’s currency.
-Exporters experience a falling demand for their goods whenever their currency grows stronger relative to the importing country’s currency.
Cross-Country Differences in Demographic, Cultural, and Market Conditions
Key Strategic Considerations
-To customize offerings in each country market to match the tastes and preferences of local buyers
-To pursue a strategy of offering a mostly standardized product worldwide.
THE CONCEPTS OF MULTIDOMESTIC COMPETITION AND GLOBAL COMPETITION
Multidomestic Competition
-Exists when competition in each country market is localized and not closely connected to competition in other country markets.
Global Competition
-Exists when competitive conditions and prices are strongly linked across many different national markets.
Features of Multidomestic Competition
-Buyers in different countries are attracted to different product attributes.
-Sellers vary from country to country.
-Industry conditions and competitive forces in each national market differ in important respects.
Features of Global Competition
-The same group of firms competes in countries where sales volumes are large and having a presence is important to a strong global position.
-Competitive advantage is gained from the transfer of expertise, economies of scale, and worldwide brand-name recognition.
-Global competition is increasing in multidomestic markets where custom mass production is coinciding with converging consumer tastes.
STRATEGIC OPTIONS FOR ENTERING AND COMPETING IN INTERNATIONAL MARKETS
-Maintain a national (one-country) production base and export goods to foreign markets.
-License foreign firms to produce and distribute the firm’s products abroad.
-Employ an overseas franchising strategy.
-Establish a wholly-owned subsidiary by either acquiring a foreign company or through a “greenfield” venture.
-Form strategic alliances or joint ventures with foreign companies.
Export Strategies
Advantages
-Low capital requirements
-Economies of scale in utilizing existing production capacity
-No distribution risk
-No direct investment risk
Disadvantages
-Maintaining relative cost advantage of home-based production
-Transportation and shipping costs
-Exchange rates risks
-Tariffs\import duties
-Loss of channel control
Licensing and Franchising Strategies
Advantages
-Low resource requirements
-Income from royalties and franchising fees
-Rapid expansion into many markets
Disadvantages
-Maintaining control of proprietary know-how
-Loss of operational and quality control
-Adapting to local market tastes and expectations
Acquisition Strategies
Advantages
-High level of control
-Quick large-scale market entry
-Avoids entry barriers
-Access to acquired firm’s skills
Disadvantages
-Costs of acquisition
-Complexity of acquisition process
-Integration of the firms’ structures, cultures, operations and personnel
Greenfield Strategies
Advantages
-High level of control over venture
-“Learning by doing” in the local market
-Direct transfer of the firm’s technology, skills, business practices, and culture
Disadvantages
-Capital costs of initial development
-Risks of loss due to political instability or lack of legal protection of ownership
-Slowest form of entry due to extended time required to construct facility
Alliance and Joint Venture Strategies
Advantages
-Avoid entry barriers
-Allow for resource and risk sharing
-Partner’s knowledge of local market conditions
-Joint learning and sharing
-Preservation of partner independence
Disadvantages
-Cultural and language barriers
-Costs of establishing the working arrangement
-Issues of joint control
-Protection of proprietary technology or competitive advantage
COMPETING INTERNATIONALLY: THE THREE MAIN STRATEGIC APPROACHES
Competing Internationally
-Multidomestic Strategy
-Global Strategy
-Transnational Strategy
Approaches to International Strategy
Multidomestic Strategy
-Varies product offerings and competitive approaches from country to country.
Global Strategy
-Employs the same basic competitive approach in all countries where the firm operates.
Transnational Strategy
-Is a think-global, act-local approach that incorporates elements of both multidomestic and global strategies.
(See Ch007, Slide 22)
Advantages and Disadvantages of Multidomestic, Global, and Transnational Approaches
Multidomestic Approach
Advantages
-Can meet the specific needs of each market more precisely
-Can respond more swiftly to localized changes in demand
-Can target reactions to the moves of local rivals
-Can respond more quickly to local opportunities and threats
Disadvantages
-Hinders resource and capability sharing or cross-market transfers
-Higher production and distribution costs
-Not conducive to a worldwide competitive advantage
Transnational Approach
Advantages
-Offers the benefits of both local responsiveness and global integration
-Enables the transfer and sharing of resources and capabilities across borders
-Provides the benefits of flexible coordination
Disadvantages
-More complex and harder to implement
-Conflicting goals may be difficult to reconcile and require trade-offs
-Implementation more costly and time-consuming
Global Approach
Advantages
-Lower costs due to scale and scope economies
-Greater efficiencies due to the ability to transfer best practices across markets
-More innovation from knowledge sharing and capability transfer
-The benefit of a global brand and reputation
Disadvantages
-Unable to address local needs precisely
-Less responsive to changes in local market conditions
-Higher transportation costs and tariffs
-Higher coordination and integration costs
THE QUEST FOR COMPETITIVE ADVANTAGE IN THE INTERNATIONAL ARENA
Build Competitive Advantage in International Markets
-Use international location to lower cost or differentiate product
-Share resources, competencies, and capabilities
-Gain cross-border coordination benefits
Using Location to Build Competitive Advantage
Key Location Issues
-To customize offerings in each country market to match the tastes and preferences of local buyers
-To pursue a strategy of offering a mostly standardized product worldwide.
When to Concentrate Activities in a Few Locations
-The costs of manufacturing or other activities are significantly lower in some geographic locations than in others.
-There are significant scale economies in production or distribution.
-There are sizable learning and experience benefits associated with performing an activity in a single location.
-Certain locations have superior resources, allow better coordination of related activities, or offer other valuable advantages.
When to Disperse Activities across Many Locations
-Buyer-related activities can be conducted at a distance.
-There are high transportation costs.
-There are diseconomies of large size.
-Trade barriers make a central location too expensive.
-Dispersing activities reduces exchange rate risks.
-Dispersion helps prevent supply interruptions.
-Dispersion helps avoid adverse political developments.
-Dispersion allows for location-based technology and production cost competitive advantages.
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