Part 1 Strategy Analysis3-*

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LO 3-1 Apply the PESTEL model to organize and assess the impact of external forces on the firm.LO 3-2 Apply the structure-conduct-performance (SCP) model to explain the effect of industry structure on firm profitability.LO 3-3Apply the five forces model to understand the profit potential of the firms industry.LO 3-4Describe the strategic role of complements in creating positive-sum co-opetition.LO 3-5Understand the role of industry dynamics and industry convergence in shaping the firms external environment.LO 3-6Apply the strategic group model to reveal performance differences between clusters of firms in the same industry.3-*

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ChapterCase 3 Build Your Dreams to Sidestep Entry BarriersChanging U.S. car marketMore competition from outside the U.S.However, NO new entry firms in the last 2 decadesHigh barriers to entry

BYD in China is entering the car market

Batteries to carsbypassing many hurdlesElectric cars have fewer partsBYD has the battery technologySelling in China, Africa, & S. AmericaHybrid Car Video3-*

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BYD Electric VehiclesWhat are their chances of success?Warren Buffet invested for 10% equity.Sticker price that of a Chevy Volt.Many obstacles lay ahead

Which PESTEL factors will be most important for electric vehicles in the 21st century? 3-*

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THE PESTEL FRAMEWORKKey forces in the external environmentSimple way to categorize & analyze external forcesForces embedded in global environmentCreates BOTH opportunities and threats

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EXHIBIT 3.1 The Firm Embedded in Its External Environment3-*

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Political VariablesGovernments influence behavior of firmsSubsidies for renewable energyHigh-mileage automobilesInvestments in R&DCampaigns by candidates for officeTaxation at local, state, federal levelsPolitical pressure on firmsNegotiations on pharmaceutical pricesModify home loans

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STRATEGY HIGHLIGHT 3.1UBS Relents to Pressureby U.S. GovernmentLarge Swiss bank in troubleU.S. government accused UBS of aiding in tax evasionBillions of $ moved offshoreNames of 52,000 U.S. citizens soughtEventually over 4,000 names were releasedImperils Swiss Bank secrecyHistorically, a competitive advantage 3-*

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Economic VariablesGrowth RatesGDP TrendsInterest RatesEmployment LevelsInflation RatesCurrency & Money SupplyDisposable & Discretionary Income3-*

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Socio-Cultural VariablesLifestyle ChangesCareer ExpectationsDemographicsLife expectanciesAging populationRising affluenceChanges in ethnic compositionMore women in workforce globallyIncrease in temporary workersGeographic distribution of global population

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Technological VariablesProductivity ImprovementsFocus of Technological EffortsIndustrial Spending for R&DPatent ProtectionDigital CommunicationsE-tailersMobile devicesBiotechnologyGenetic engineeringNanotechnology 3-*

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Ecological VariablesGlobal WarmingSustainable Economic GrowthCarbon FootprintFossil Fuel ConsumptionPollution of air & waterToxins in food and productsBusiness Sustainability Video3-*

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Legal VariablesAntitrust RegulationsTort ReformEnvironmental Protection LawsCARB zero-emission regulation passed in 1990.GM, Toyota, & Honda all had EVs by 1997. Regulation was revoked & EVs withdrawn in 2002.Hiring and Promotion LawsAmericans with Disabilities Act of 1990Sarbanes-Oxley Act of 20023-*

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PESTEL FrameworkPoliticalGovt pressuresSubsidies & incentivesDifferences in countries, states, Countries & regions

EconomicGrowth ratesInterest ratesEmployment levelsCurrency exchange

SocioculturalNorms, culture, valuesDemographicsLifestyle changes

TechnologicalInnovationDiffusionResearch & development

EnvironmentalGlobal warmingSustainabilityPollution

LegalCourt systemLegislationHiring laws, ADA, SBOX

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LO 3-1 Apply the PESTEL model to organize and assess the impact of external forces on the firm.LO 3-2 Apply the structure-conduct-performance (SCP) model to explain the effect of industry structure on firm profitability.LO 3-3Apply the five forces model to understand the profit potential of the firms industry.LO 3-4Describe the strategic role of complements in creating positive-sum co-opetition.LO 3-5Understand the role of industry dynamics and industry convergence in shaping the firms external environment.LO 3-6Apply the strategic group model to reveal performance differences between clusters of firms in the same industry.3-*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

THE STRUCTURE-CONDUCT PERFORMANCE (SCP)Perfect CompetitionMany small firms commodity productsEx. Pet supply stores

Monopolistic CompetitionMany firms differentiated productsEx. Computer hardware, organic foods

OligopolyFew large firms interdependentEx. Express mail, soft drinks

MonopolyOne supplier often government approvedEx. Utilities for electricity, gas, and water

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EXHIBIT 3.2 Industry Structures along the ContinuumBank Oligopolies Video3-*

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LO 3-1 Apply the PESTEL model to organize and assess the impact of external forces on the firm.LO 3-2 Apply the structure-conduct-performance (SCP) model to explain the effect of industry structure on firm profitability.LO 3-3Apply the five forces model to understand the profit potential of the firms industry.LO 3-4Describe the strategic role of complements in creating positive-sum co-opetition.LO 3-5Understand the role of industry dynamics and industry convergence in shaping the firms external environment.LO 3-6Apply the strategic group model to reveal performance differences between clusters of firms in the same industry.3-*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

COMPETITIVE FORCES AND FIRM STRATEGYThe Five Forces ModelThe classic industry analysis model

Threat of EntryPower of SuppliersPower of BuyersThreat of SubstitutesRivalry Among Existing Competitors

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EXHIBIT 3.3Porters Five Forces ModelSource: Porter, M. E. (2008), The five competitive forces that shape strategy, Harvard Business Review5 forces video- M. Porter3-*

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Threat of Entry HIGH IF: Customer Switching Costs are LowCapital Needs are LowRetaliation is Not ExpectedIncumbents dont have:Proprietary technologyEstablished brandsClosed distribution channelsBYD entrance??Electric vehicles level the auto fieldBYD has strength working multinational firms3-*

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Power of Suppliers HIGH IF: Forward Integration is a credible threatNo substitutes for supplier productsSuppliers products are differentiatedIncumbents face high switching costsProduct is important input to buyerBYD suppliers??They make the batteriesChevy, Ford are buying from suppliers! 3-*

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Power of Buyers HIGH IF: A few large buyersLarge buyers relative to a sellerProducts are standardizedBuyers face few switching costsBackward Integration is credibleBuyer has full informationBYD Buyers??Product is differentiatedSwitching costs from gas to electric 3-*

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Threat of Substitutes HIGH IF: Substitute is good price-performance trade-offBuyers switching costs to substitute is low

BYD Substitutes??Electric vs. gas carsBus, train, bikes

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Incumbent Rivalry HIGH IF: Many competitors in the industryFirms are equal sizeIndustry growth is slow or shrinkingExit barriers are highContractual obligationsGeographic or historical attachmentsProducts and services are direct substitutesBYD rivals??Entrance of BYD (& Tesla) increases rivalry3-*

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Five Forces in Airlines vs. Soft DrinksAirlines low profits for decadesEntry threats small airlines popping upSuppliers few & large: aircraft, engines, unionsBuyers no switching costs, perfect info nowSubs drive for shorter flightsRivalry intense and low profit

ZERO star industry, each force is strong Yieldinginferior profits

5 forces video- M. Porter3-*

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Five Forces in Airlines vs. Soft DrinksSoft Drinks high profits for decadesEntry threats strong brands (Coke & Pepsi)Suppliers mostly commoditiesBuyers bottlers lock into long-term contractsSubs other drinks (water, coffee, etc.)Rivalry advertizing-based

FIVE star industry, each force is weak Yielding

strong profits3-*

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LO 3-1 Apply the PESTEL model to organize and assess the impact of external forces on the firm.LO 3-2 Apply the structure-conduct-performance (SCP) model to explain the effect of industry structure on firm profitability.LO 3-3Apply the five forces model to understand the profit potential of the firms industry.LO 3-4Describe the strategic role of complements in creating positive-sum co-opetition.LO 3-5Understand the role of industry dynamics and industry convergence in shaping the firms external environment.LO 3-6Apply the strategic group model to reveal performance differences between clusters of firms in the same industry.

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Substitutes and ComplementsSubstitute: An alternative from outside the given industry for its product or service. When its performance increases or its price falls, industry demand decreases.Plastic vs. aluminium containersVideo conference vs. business travel3-*

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Substitutes and Complements

Complement: A product or service or competency that adds value to original product. When its performance increases or its price falls, industry demand increases.Paper for Xerox copiersiTunes for iPod music players

Complementor: If customers value your product more when combined with another firms product or service.Michelin tires for Ford & GM3-*

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EXHIBIT 3.5Determining Industry Attractiveness3-*

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STRATEGY HIGHLIGHT 3.2Microsofts BusinessMicrosoft has 90% share of PC operating systemsThey shaped the industry structure Long-term relations with Dell, HP (OEMs)Wintel standard has power over OEMsCustomer switching costs highIntel chip great complement for OSA virtuous cycle Microsoft & IntelBUT Linux & Cloud ComputingWhat is the future?3-*

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Small Group Exercise 2 - Textbook vs. iPadTraditional textbook publishing industry consider the impact new electronic devices on this industry.Kindles, iPads, & $200 Netbooks all enabling e-readersUse the Porters 5 forces or the 6 force industry attractiveness model to consider the impacts of this technology shift on the textbook publishing industry.

How should managers in the textbook industry respond to these developments?Is it likely to raise or lower the industry-level profits?3-*

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CHANGES OVER TIME: INDUSTRY DYNAMICSIndustry Growth Rates Highly Variable (Exh. 3.6)Metals & Internet at the topRetailers and food at the bottomStructures Change tooU.S. banking industry major consolidationsBig 8 accountants are now Big FOURStock brokerage firms have grown Internet catalystIndustry ConvergenceFormerly unrelated industries collideMedia newspapers, TV, movies Online business model?

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2013 by The McGraw-Hill Companies, Inc. All rights reserved.

LO 3-1 Apply the PESTEL model to organize and assess the impact of external forces on the firm.LO 3-2 Apply the structure-conduct-performance (SCP) model to explain the effect of industry structure on firm profitability.LO 3-3Apply the five forces model to understand the profit potential of the firms industry.LO 3-4Describe the strategic role of complements in creating positive-sum co-opetition.LO 3-5Understand the role of industry dynamics and industry convergence in shaping the firms external environment.LO 3-6Apply the strategic group model to reveal performance differences between clusters of firms in the same industry.3-*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Strategic GroupsMapping GroupsAuto industry exampleGM, Ford, Toyota gasBYD, Tesla electricID best dimensionsChoose two for mapLocate firms on mapBubble size = market shareRivalry is strongest in SAME groupSome groups more profitable than others

Mobility BarriersFirms would try to move to the profit spots BUTSpecific factors that separate groupsAirlines International routesRegulations: airport slots

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EXHIBIT 3.7Strategic Groups and Mobility Barrier U.S. Airlines3-*

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CHAPTERCASE 3 /Consider ThisBYD was China's fastest-growing carmaker! Sold more the 500,000 in 2010 Shanghai govt subsidy of $9k for EVsWhich PESTEL factors are most salient for the electric vehicle industry? How is your home country auto industry structured?Use Exhibit 3.5 for traditional auto industry.What changes for electric auto industry?

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LO 3-1Apply the PESTEL model for external forces.Macro environment has a wide range of domestic & global forces.The political environment describes the influence government bodies can have on firms.The economic environment is mainly affected by five factors: growth rates, interest rates, levels of employment, price stability (inflation and deflation), and currency exchange rates.Sociocultural factors capture a societys cultures, norms, and values.Technological factors capture the application of knowledge to create new processes and products.Ecological factors concern a firms regard for environmental issues such as the natural environment, global warming, and sustainable economic growth.Legal environment factors capture the official outcomes of the political processes that manifest themselves in laws, mandates, regulations, and court decisions.

Take-Away Concepts3-*

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Take-Away Concepts (contd)LO 3-2 Apply the SCP model for industry structure.Helps explain differences in industry performance. A perfectly competitive industry is characterized by many small firms, a commodity product, low entry barriers, and no pricing power for individual firms.A monopolistic industry is characterized by many firms, a differentiated product, medium entry barriers, and some pricing power.An oligopolistic industry is characterized by few (large) firms, a differentiated product, high entry barriers, and some degree of pricing power.A monopoly exists when there is only one (large) firm supplying the market. The firm may offer a unique product, the barriers to entry are high, and the monopolist has considerable pricing power.3-*

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Take-Away Concepts (contd)LO 3-3 Apply the five forces model for profit potential of industry.Five competitive forces shape an industrys profit potential: (1) threat of entry, (2) power of suppliers, (3) power of buyers, (4) threat of substitutes, and (5) rivalry among existing competitors.The stronger a competitive force, the greater the threat it represents.The weaker the competitive force, the greater the opportunity it presents.Firm can shape industry structure through its strategy.Industry attractiveness determined by 3 pairs of forces.3-*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Take-Away Concepts (contd)LO 3-4Describe the strategic role of complements in creating positive- sum co-opetition.Co-opetition (co-operation among competitors) can create a positive-sum game, resulting in a larger pie for everyone involved.Complements increase demand for the primary product, enhancing the profit potential for the industry and the firm.Industry attractiveness can be determined by three pairs of two forces: (1) supplier and buyer power, (2) entry and exit barriers, and (3) available complements and the threat of substitutes.Attractive industries for co-opetition are characterized by high entry barriers, low exit barriers, low buyer and supplier power, a low threat of substitutes, and the availability of complements.3-*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Take-Away Concepts (contd)LO 3-5Understand the role of industry dynamics and industry convergence in shaping the firms external environment.Industries are dynamicthey change over time.Different conditions prevail in different industries, directly affecting the firms competing in these industries and their profitability.In industry convergence, formerly unrelated industries begin to satisfy the same customer need. It is often brought on by technological advances.LO 3-6Apply the strategic group model for differences between clusters of firms in the same industry.A strategic group is a set of firms within a specific industry that pursue a similar strategy in their quest for competitive advantage.Rivalry within the same group is more intense than between groups.Mobility barriers restrict movement between groups.

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ComplementComplementorEntry barriersExit barriersFive forces modelIndustryIndustry convergenceMobility barriersPESTEL modelSCP (structure-conduct- performance) modelStrategic groupStrategic group model

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INSTRUCTOR: The embedded video (click on Hybrid Car Video while in slideshow mode) is 3 minutes on some thoughts on the future of cars in the U.S. URL link is below also.

http://bigthink.com/felixkramer#!video_idea_id=18790

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INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text. *

*INSTRUCTOR: An embedded video link is found on this slide. If your students are especially interested in this subject, you may want to show parts of the clip in class or make it available for the students to view outside of class. NOTE: This is one of the longer clips we are providing with links. It runs nearly 8 minutes.

https://www.mckinseyquarterly.com/When_sustainabillity_means_more_than_green_2404

*Official outcomes laws, mandates, regs, courts*INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.

*INSTRUCTOR: A 3-minute embedded video from CNBC is found at the bottom of this slide (click on Bank Oligoplolies Video while in slideshow mode). It discusses banking in Australia as an oligopolistic industry.

http://www.cnbc.com/id/15840232?play=1&video=1614100860

*INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.

*INSTRUCTOR: The embedded video at the bottom of this slide is a 13-minute-long interview with Michael Porter. He uses the airline vs. soft drinks industries as examples of applying the five forces model. The URL is also posted below. It was taped in summer 2008 and is referenced in the text (endnote 37).

THIS LINK IS REPEATED IN SLIDE 27 IF YOU PREFER TO WAIT TO USE IT UNTIL THE APPLICATION OF THE 5 FORCES TOOL THERE.

http://www.youtube.com/watch?v=mYF2_FBCvXw

*INSTRUCTOR: The embedded video at the bottom of this slide is a 13-minute-long interview with Michael Porter. He uses the airline vs. soft drinks industries as examples of applying the five forces model. The URL is also posted below. It was taped in summer 2008 and is referenced in the text (endnote 37).

http://www.youtube.com/watch?v=mYF2_FBCvXw

****INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.

**INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.

*INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text.

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