What forces in the industry environment might affect Starbucks’ choice of strategy?
(Chapter 2)
PowerPoint Presentation Analyzing the External Environment of the Firm Chapter Two McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Creating the Environmentally Aware Organization Firms cannot just focus on the efficiency of internal operations, Manager’s need to analyze: The general environment, The firm’s industry and competitive environment 2-2 Creating the Environmentally Aware Organization 2-3 3 Creating the Environmentally Aware Organization Environmental Scanning Surveillance of a firm’s external environment: Predict environmental changes to come Detect changes already under way Proactive mode Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them Environmental Monitoring Track evolution of environmental trends, sequence of events or streams of activities 2-4 Creating the Environmentally Aware Organization What indicators do you believe a firm should monitor that produces both: (1) weapon systems for the military, (2) key components for the commercial aircraft industry? 2-5 Commercial Aircraft: Oil prices Economic outlook Technological changes in aircraft manufacturing Age of fleet of airlines Profitability of airlines … Defense Department: Political Conflicts Where weapons are in the life cycle Mission requirements of the military … 5 Competitive Intelligence Define and understand a firm’s industry Identify rivals’ strengths and weaknesses Intelligence gathering (data) Interpretation of intelligence data Helps a company to avoid surprises by effectively anticipating and responding to competitors’ moves. Internet has accelerated the speed at which firms can find competitive intelligence 2-6 Competitive Intelligence What industries is CI extremely important? How is information collected? “A firm advertises a position in order to get a chance to interview employees of a rival company with no intention to hire them.” Is this legal?.. ethical? 2-7 SWOT Analysis SWOT Analysis (analytical tool to assess the following dimensions) In depth look at Os and Ts : Analysis of general and industry environments Internal Conditions External Conditions Strengths Weaknesses Opportunities Threats Strengths: where your firm excels Weaknesses: where the firm is lacking relative to competitors External assessment of the business environment to identify the uncontrollable events that might impact management decisions. 8 8 The General Environment Demographic Sociocultural Legal/Political Technological Economic Global 2-9 Factors external to an industry, usually beyond a firm’s control: Little ability to predict them Even less ability to control them Can vary across industries 9 Demographic Segment Aging population and workforce Rising or declining affluence Changes in ethnic composition Geographic distribution of population Greater disparities in income levels 2-10 10 Sociocultural Segment Sociocultural forces influence the values, beliefs, and lifestyles of a society More women in the workforce Dual-income families Increase in temporary workers Greater concern for healthy diets and physical fitness Greater interest in the environment Postponement of having children 2-11 https://www.youtube.com/watch?v=W-u4azftNbE http://www.youtube.com/watch?v=A2sxE2wL2dU http://www.youtube.com/watch?v=xFFu8sHod-4 11 Political/Legal Segment Americans with Disabilities Act (ADA) Repeal of Glass-Steagall Act in 1999 Deregulation of utility and other industries Increases in federally mandated minimum wages Taxation at local, state, federal levels Legislation on corporate governance reforms (Sarbanes-Oxley Act) 2-12 Technological Segment Genetic engineering Emergence of Internet technology Computer-aided design/computer-aided manufacturing systems (CAD/CAM) Wireless communication Nanotechnology 2-13 13 Economic Segment Interest rates Unemployment Consumer Price index Trends in GDP Changes in stock market valuations 2-14 Global Segment Increasing global trade Currency exchange rates Emerging economies Trade agreements (NAFTA, EU, ASEAN) Creation of WTO (decreasing tariffs/free trade in services) 2-15 The Competitive Environment Competition in an industry & profitability of a firm directly influenced by the competitive environment Includes: Competitors – existing or potential Customers Suppliers Porter’s five-forces model – used to examine an industry’s dynamics and root causes of profitability 16 Does Industry Matter? Profitability of US Industries (Median ROE, 99-07) HIGH PROFITABILITY%LOW PROFITABILITY% Household & Personal Products26.0Automotive9.3 Pharmaceuticals21.0Insurance Life & Health9.1 Petroleum20.1Forest & Paper Products7.3 Tobacco21.6Food Production6.5 Food Consumer Products19.5Semiconductors & Electronics Components6.2 Securities and Investment Banking18.4Network & Communications Equipment5.9 Beverages17.2Telecommunications5.8 Medical Products & Equipment17.2Entertainment2.7 Scientific & Photographic Equipment15.6Airlines(12.6) Commercial Banks14.8 Computer Software14.0 Aerospace & Defense13.9 17 Between 1992-2006, average industry ROIC 14.9% (Porter) The US Auto Industry 10 5 15 20 25% 0 0 100% Share of industry revenue Auto loans Leasing Warranty Gasoline Auto insurance Aftermarket parts Auto rental Operating margin Auto manufacturing New car dealers Used car dealers Service & repair 18 Operating margin – return on sales 19 20 Industry Competition Porter’s Five Forces Model http://www.youtube.com/watch?v=mYF2_FBCvXw&feature=player_embedded#! Five Forces Model is a tool for assessing likely industry profits. These forces are the very forces that make markets competitive. As such, if threats of these forces are high, then we would expect there to be normal economic profits in the industry. We would expect possible above normal profits if one or more of these forces were weak in an industry. 20 The Threat of New Entrants Profits of established firms in the industry may be eroded by new competitors High entry barriers lead to a low threat of new entries: Economies of scale Firms that can’t produce at the minimum efficient scale will be at a disadvantage Product differentiation Entrants are forced to overcome customer loyalties to existing products Capital requirements Formidable upfront costs of plant, R&D, etc. Switching costs One time cost of switching from one product to another (i.e. contracts with wireless telecom providers) 21 21 More on entry barriers: economies of scale the minimum efficient scale of production may be so high that firms not already in the industry could not afford the plant size needed to enter the minimum efficient scale may be so high that the entry of another firm of sufficient size to compete on cost would create excess capacity in the industry and drive down prices—would be entrants recognize this and rationally choose not to enter product differentiation product differentiation means that customers can recognize a difference between products and therefore have a preference for the product of one firm over another new entrants face the prospect of having to both offer a newer, better product and convince customers to try the new product—new entrants face additional costs and rationally choose not to enter cost advantages independent of scale incumbent firms may enjoy cost advantages over would-be entrants due to supplier relationships, experience (learning curve advantages), proprietary technology, location advantages (close to rail terminals, harbors, etc.), favorable access to raw materials, etc.—firms outside the industry recognize these advantages and rationally choose not to enter government policy a government may decide to regulate an industry, like electricity, and either explicitly forbid additional entry or make it so costly that entry is not cost effective governments may decide to protect domestic industries by not allowing foreign firms to invest in certain industries or raising the cost of entry so high that foreign firms find it difficult to compete governments can use tariffs, quotas, and nontariff trade barriers as barriers to entry Economies of Scale the minimum efficient scale of production may be so high that: Firms not already in the industry could not afford the plant size needed to enter. The entry of another firm (of sufficient size to compete on cost) would create excess capacity in the industry and drive down prices Would be entrants recognize this and rationally choose not to enter. 22 22 23 QUESTION If you are considering opening a new pizza restaurant in your community, what would be the threat of new entrants? How would you evaluate Porter’s other forces for this industry? The threat of new entrants in the food industry is very high, which is why a majority of new food restaurants fail within their first year. 23 The threat of new entrants in the food industry is very high, which is why a majority of new food restaurants fail within their first year. The minimum requirements to open a pizza shop are an oven and a small amount of capital. The potential number of competitors is unlimited due to these factors. Based on other forces also, this industry is not very attractive. 24 Oligopoly / Duopoly Fragmented Monopoly INDUSTRY FRAGMENTATION AND CONCENTRATION The Bargaining Power of Buyers Buyers threaten an industry: Force down prices Bargain for higher quality or more services Play competitors against each other When is a buyer powerful? # of buyers is small, or they buy large in volume Products are standard/undifferentiated Few switching costs Buyers are not earning significant profits Pose a credible threat of backward integration Industry’s product is unimportant to quality of buyers’ products 25 Buyers are most powerful when the company depends on them for their business, but they themselves are not dependent on the company. Have you ever sold a car? Reflect a moment on how you tried to manage your power vis-à-vis the buyers, in order to get the most $. (i.e. placing the ad on multiple sites to make buyers compete, doing some make-up and advertise all unique details in order to differentiate the car, etc.) From the seller’s perspective, all these efforts are to reduce the buyer’s power. 25 The Bargaining Power of Buyers 26 Suppliers Buyers Profits In industries characterized with many suppliers and few buyers, buyers often capture a greater share of profits Industry A Suppliers Buyers Industry B Profits The Bargaining Power of Suppliers Suppliers will be powerful when: They are dominated by few companies and more concentrated than the industry they sell to The industry is not an important customer of the suppliers Their product is an important input to the buyer’s business Their products are differentiated or they have built up switching costs for the buyer 27 Powerful suppliers can ‘squeeze’ the profits of the focal firm 27 Suppliers are most powerful when the company depends on them for their business, but they themselves are not dependent on the company. a small number of firms in the supplier’s industry an industry marked by small numbers is more likely to behave as an oligopoly—they have figured out that it is in their best interests not to compete on price the product being supplied is unique or highly differentiated a supplier with a unique or highly differentiated product is not subject to the pricing pressure of a perfectly competitive market—if a focal firm wants the product, it will have to pay the supplier’s price there are no close substitutes for the supplier’s product if there are no close substitutes, the supplier is not constrained in pricing the supplier could vertically integrate forward if a supplier can present a credible threat of becoming the focal firm’s competition (entering the same business), then the supplier has bargaining power over the focal firm—pay my price or I’ll become your competition the focal firm is an insignificant customer to the supplier if the focal firm is one of many buyers of the supplier’s output and/or purchases a small percentage of the supplier’s output, then the supplier will have little incentive to offer price concessions The Bargaining Power of Suppliers 28 When firms in the supply industry can dictate terms, they can extract greater profits Diamond supply Percent DeBeers Others 50 Diamond Retailers 50 The Threat of Substitutes Substitutes fill in the