instructor: michael cooke e-mail address: [email protected]@kku.ac.th office:ic room 817 ...

Instructor: Michael Cooke E-mail Address: [email protected] Office: IC room 817

Class hours: Tuesday 09:00-12:00 Class Location: IC room 822

Business Strategy050 322

mailto:[email protected]

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch 3 -2

A Google Data Center in Finland

Goggle reacts to news that the US National Security Agency broke into communications through their data centers. Technology companies usually take care to not criticize the US government. Why would Google react to this external event?San Jose Mercury-News October 30th, 2013

Ch 3 -3

Asia Beats US and Europe in B2C Mobile App UsageReading Material for Bank Executives*

* From Fair Isaac Corp: http://www.fico.com/en/Company/News/Pages/10-17-2013-FICO-Survey-Finds-Asia-Tops-in-B2C-Mobile-App-Usage-US-and-Europe-Lag.aspx

Are you a “Mobile Native”? You are if you interact with businesses every day on your mobile phone or tablet. And if you are, you’re more likely to be living in China than in the U.S. or Europe, according to FICO’s latest research.

In an international survey of businesses and consumers, China (51 percent) and Korea (50 percent) were joined by India (49 percent) as the countries with the highest percentage of Mobile Native consumers. The countries with the lowest percentage of mobile natives were France (12 percent), Japan (15 percent) and — surprisingly — the United States (16 percent).

Respondents said they are most likely to use their mobile devices to interact with retailers, followed by banks, then insurers, Among the applications offered by retailers and financial institutions, the most popular type in every one of the 14 countries surveyed is alerts, such as apps that notify consumers of suspicious transactions. More than 72 percent of respondents described such apps as attractive.

What does this mean for banks? There is a huge opportunity to engage more customers, around the world. This validates FICO’s own observations, as we have noted here before: customers are leading the mobile revolution.

http://www.fico.com/en/Company/News/Pages/10-17-2013-FICO-Survey-Finds-Asia-Tops-in-B2C-Mobile-App-Usage-US-and-Europe-Lag.aspx



International Survey of 2,200 Adult Smartphone Users

Mobile Natives tend to be technologically savvy. They are typically under 34 years of age) affluent males who consider themselves early adopters of technology. App Shoppers and Bankers are frequent app users that use their devices for the limited purposes of banking or retail shopping. M:webs have adopted mobile technology but are not accustomed to using mobile apps.Mobile Intenders plan to do more mobile interactions in the futureAbc-Mobiles use a mobile phone but don’t interact with organizations via mobile devices. This is often due to an unwillingness to share personal data and a low level of trust with online businesses.

– Environmental Scanning

– Industry Analysis


Ch 3 -6

External Strategic Management Audit

• Identify & evaluate factors beyond the control of a single firm, such as:– Increased foreign competition– Population shifts– Aging society– Fear of traveling– Stock market volatility

• Purpose of an External Audit– Develop a list of

• opportunities that could benefit a firm • threats that should be avoided

– Focus on key factors that influence business and which the company can address through action

External Strategic Management Audit

• Gather competitive intelligence and information about the external environment

– Many large organizations have specialized departments to sift through news reports, journals, blogs, etc

– Suppliers, distributors, customers, and competitors are information sources– Marketing often has a key role– Competitive intelligence gathering occurs on a daily basis

• The walking CEO • In Eastern and Western traditions, effective leaders bypass chains of command

• Assimilate information• Evaluate opportunities and threats via ranking by importance to the

organization– Key factors vary among businesses and over time– May include interest rates, exchange rates, population shifts, changes in the competition,

political or regulatory changes technological changes, and so on

• The most important key external factors– Important to achieving goals– Measurable– Apply to competing firms– Some will apply to the entire firm, others to a function or division

The Process of an External Audit

Suppose your Company Does Business in or with Indonesia

• Indonesia FDI falls while CPI increases to annual 8.4% pace– Implications for exchange rates?– How do decisions by the US FRB affect flows of money into Indonesia?

• Decisions by Indonesian government last year– New export tax on minerals– New regulations about foreign investment in mining and banking

sectors– New import tax on agricultural products– Actions may relate to nationalist sentiment prior to 2014 elections

• Labor disputes due to inflation cause garment firms to move to Cambodia and Vietnam

• Biggest investors in Indonesia are Japan and Singapore• How do commodities cycles effect the Indonesian economy?

Wall Street Journal, 24-October, 2013

Copyright © 2011 Pearson Education, Inc.

Publishing as Prentice HallCh 3 -11

Performing External Audit

External Factors

Measurable

Long-term Orientation

Applicable to Competing Firms

Hierarchical (companywide or applies only to parts)

Industrial Organization (I/O) View

Industry factors are more important than internal factors Performance determined by industry forces Michael Porter is a proponent This fits with patterns in equity prices – covariance

Success from this point of view entails Competing in an attractive industry Understanding the key success factors in that industry

Economies of scale Barriers to entry Product differentiation The economy Levels of competition


Publishing as Prentice HallCh 3 -13

Economies of Scale

Industry Properties

Barriers to Market Entry

Product Differentiation

The Economy

I/O Perspective Firm Performance

Level of Competitiveness

GDP growth rate◦ Disposable income◦ Consumer optimism

Currency trends◦ Affect export/import strategy◦ Where to manufacture

Interest rates and liquidity◦ Slope of yield curve affects GDP growth and access to

capital◦ Cost of borrowing affects investment decisions

At the macro level interest rates affect GDP growth At the micro level it affects hurdle rates and choices

-Example 1: Net rental income 6%, interest cost 8%-Example 2: Average P/E ratio 15/1, risk free

interest 7%

Economic and Financial Forces

Financial risk factors The Company is exposed to credit risk, liquidity risk and market risk. Market risk arises from currency risk, interest rate risk and fair value risk associated with investments. The Company has a risk management program in place to monitor and actively manage such risks.

Market Risk◦ Foreign exchange risk The Company is exposed to foreign exchange risk arising from various

currency exposures. To minimize foreign exchange risk arising from operating activities, the Company’s foreign exchange management policy requires all normal business transactions to be in local currency, or cash- in currency be matched up with cash-out currency. The Company limits all speculative foreign exchange transactions and operates a system to manage receivables and payables denominated in foreign currency.

◦ Interest rate risk Interest rate risk is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk mainly arising through interest bearing liabilities and assets. In order to avoid interest rate risk, the Company maintains minimum external borrowing by facilitating cash pooling systems on a regional and global basis.

Credit risk Credit risk arises during the normal course of transactions and investing activities, where clients or other party fails to discharge an obligation. The Company monitors and sets the counterparty’s credit limit on a periodic basis based on the counterparty’s financial conditions, default history and other important factors. To minimize such risk, the Company transacts only with banks which have strong international credit rating

Liquidity risk The Company manages its liquidity risk to maintain adequate net working

capital by constantly managing projected cash flows.

Samsung Annual Report 2011Financial Risk Factors

Major World Currencies The US dollar is the most common reserve

currency (held by central banks)◦ Oil and many other commodities traded in dollars◦ Easily converted nearly anywhere in the world◦ An artifact from post WWII when US dollar was the

only strong currency Euro is relatively new, sometimes considered

an alternative to the dollar Japanese yen is important because of Japan’s

role in the world economy Chinese yuan is not widely used outside China

due to restrictions - this could quickly change

Fixed or Variable Exchange Rates◦ In a fixed exchange system the local currency is pegged to

another currency Hong Kong Dollar pegged to US dollar No exchange risk in trade between the two countries Requires intervention by Hong Kong government

◦ Basket of currencies approach Singapore Dollar managed against several currencies Chinese Yuan thought to be managed against a basket Not tied to the fortunes of one foreign currency

◦ Variable (floating) exchange rates Pose risks for importers and exporters Rates are an extremely important factor for international

trade Difficult or impossible to predict Governments may intervene in the float without warning

to protect exports◦ Barter might be used where countries impose rigid FX

controls (USSR) or where local currencies are worthless

Variable Exchange Rates - When US Dollar Weakens versus the Japanese Yen

◦ Goods imported from Japan to USA become more expensive in USA Company purchasing equipment made in Japan would

pay more in US dollars for the same product Banks will agree to a forward rate, locking in the

current rate to a future period◦ Japanese companies might choose to relocate

manufacturing facilities to USA as the yen rises Profits of US subsidiaries lower in yen terms Foreign exchange losses on parts imported from Japan

The Thailand example, 1997-1998 Nominal Exchange Rate (to the US Dollar). Period average

1994 1995 1996 1997 1997f

Korea 803 771 804 951 1695Indonesia 2160.8 2248.6 2342.3 2909.4 4650Malaysia 2.62 2.5 2.52 2.81 3.89Phillippines 26.42 25.71 26.22 29.47 39.98Singapore 1.53 1.42 1.41 1.48 1.68Thailand 25.15 24.91 25.34 31.36 47.25Hong Kong 7.73 7.74 7.73 7.74 7.75China 8.62 8.35 8.31 8.29 8.28Taiwan 26.46 26.49 27.46 28.7 32.64

Sources: Columbia University and IMF

Effects of the Devaluation Exports became cost competitive in world markets

◦ How would a Japanese manufacturer with operations in Thailand and Japan respond to a 50% devaluation of the baht?

◦ Products from Thailand became cheaper relative to currencies that did not devalue

Imports and foreign travel for Thai people became more expensive

Thailand’s tourism industry gained◦ Airlines chose to base fares to and from BKK in Thai baht◦ Tourists perceived ‘value for money’ in Thailand, with services and local products in

Thai baht

Multinational in-country company response to the crisis◦ Emphasize product value◦ Change the product mix or package size (cheaper, smaller)◦ Increase local procurement (use Thai goods rather than use imports)

Inflow of foreign currencies caused baht to gain

PPP (Purchasing Power Parity)

Currency can be under or overvalued relative to another

PPP is an estimate of real purchasing power◦ When Thai baht were officially 55-1 dollar

Currency undervalued Thai economy looked small in dollar terms But Thai people could buy Thai products and services In PPP terms the Thai economy was larger than in $ terms

◦ In theory, currency nominal value will eventually = PPP

Currently, W Europe overvalued, many Asian currencies (excl Japan) undervalued

Economic Forces

22

Demographic variables are a factor in country wealth Working age population relative to non-working China and Thailand will soon have shrinking % working age Often overlooked implications of large % population = elderly

Socioeconomic Variables Per Capita income

Issues in using per capita income as an indicator: Transactions are valued in an international currency

(monetization of transactions) Official exchange rates seldom reveal true buying power within

a countryo Services are provided in-country using local currencyo Goods not traded across borders (housing, etc)o Use Purchasing Power Parity to estimate buying power

Gray and Black Market sectors of the economy (cash or barter) Income inequality – Gini index

Lower number means more income equality Scandinavian countries have least inequality Thailand, China, USA relatively unequal (higher index)

Patterns of migration Rural to urban From low wage, low opportunity areas to higher wages

and opportunities

World Income Inequality

World Gini Compared to USA

The Atlantic http://cdn.theatlantic.com/static/mt/assets/international/gini%20map%20twotonefull%20pos.jpg

Income Inequality in Selected Countries

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2172rank.html

South Africa (2) 65 (2005) 59.3 (1994)

Thailand (12) 53.6 (2009) 42 (2002)

China (27) 48 (2009) 41.5 (2007)

USA (42) 45 (2007) 40.8 (1997)

Germany (124) 27 (2006) 30 (1994)

Sweden (136) 23 (2005) 25 (1992)

Implication: Low per capita GNP can mask affluent areas/segments.

https://www.cia.gov/library/publications/the-world-factbook/geos/sf.html

https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html

https://www.cia.gov/library/publications/the-world-factbook/geos/gm.html

Low population growth rate, falling rate by 2050◦ 69MM 2010 world 6.9BB Thailand = 1.00% of world◦ 73MM 2030 world 8.3BB Thailand = 0.88% of world◦ 68MM 2060 world 9.6BB Thailand = 0.71% of world

Low birth rate◦ 12.8/1,000 is similar to China◦ 20.1/1,000 is replacement rate◦ Declining family size. Declining % under 15 years of age.◦ More women delay marriage or never marry

Low urbanization, high rate of change◦ Thailand 34% urban, change 1.8% per year◦ China 47% urban, change 2.3% per year◦ USA 82% urban, change 1.2% per year

Longer lives◦ Increasing number of retired (age 65+ =11.4% in 2020)◦ Decreasing number of working age (similar to China)

Population forecast: http://populationpyramid.net/Thailand/2050/

Thailand Statistics

http://link.springer.com/article/10.1007%2FBF03031794?LI=true#page-4

Population Pyramids

Population Pyramid Thailand

Population Pyramid China

Ch 3 -30

Population Pyramid Philippines

2008 population 96MM 2050 population 172MM

Population Pyramid Malaysia


Population Pyramid Cambodia


Population Pyramid Japan


Ethiopia


Implications of Demographic Shift• Smaller households require different housing• Families with fewer children spend more/child• With fewer people of working age

– Cost of labor will rise– Lower skill jobs will go to countries with younger

populations– Need to move to higher value added activities (skills)

• More retirees and elderly – a unique market• Japanese model

– Higher value added industries at home– Investment abroad

• Pressures for immigration from labor surplus countries

Trends◦ More households with people living alone◦ Aging populations in developed countries, including Thailand, affects

all organizations◦ The combination of the one-child policy and rising rates of college

education is affecting China’s prime factory work force: 18- to 21-year-olds not in college. Their numbers will drop by 29 percent from 2010 to 2020 - even if

higher education enrollment holds steady. Companies face rising factory labor costs Foxconn will install 1MM robots in their China electronics assembly

operations by 2014 While moving factory work away from high cost coastal areas of

China * Improved transportation infrastructure makes relocation possible

◦ Workforce skills matching – technical skills requiring less than four years of college often not found

*http://www.zdnet.com/cn/foxconn-on-mass-recruitment-in-china-puts-robot-plan-in-question-7000019546

Social, Cultural, Demographic, and Natural Environmental Forces

Ch 3 -38

Political, Governmental, and Legal Forces

• Government Regulatory Activity• Enforcement of Antitrust legislation• Tax rates• Lobbying activities• Patent laws• Restrictions on business activities

• Business or consumer incentives• May apply unequally• Last year, Brazil used subsidies and the threat of

high tariffs on imports to persuade Foxconn to start producing iPhones, iPads in Brazil

• Subsidies often have ‘withdrawal’ effects

Incentive plan Backfires*

*Reuters 23-09-2013

An incentive program for first-time car buyers in Thailand has backfired with more than 100,000 indebted consumers defaultingWorld Bank says the tax breaks cost Thailand $2.5 billionThailand's household debt is among the highest in Asia at nearly 80

percent of GDP Research shows around 10 percent of the 1.2 million Thais who signed on to the

incentive scheme either changed their minds or couldn't pay monthly installments When buyers cancel, the vehicles are seized by auto finance companies and sold as used cars Smaller car dealers struggle to survive. After people realize they can't afford to pay, their barely

used cars are on the market, driving down prices even further The glut of almost-new vehicles has forced auto-makers to offer promotions or discounts to sell inventory

The incentives distorted the marketThailand is Southeast Asia's largest auto market Tax breaks were intended to help auto manufacturing in the region's

car-making hub after 2011 floods Creating a boom as production rose 70% from 2011 to meet new demand The demand collapsed when tax breaks expired in December, 2012 Japanese automakers, with 80 percent of the Thai market, reported an average 30

percent drop in sales 2Q, 2013 Thailand remains vital to Japanese automakers as a regional export base Excess capacity might be exported to Indonesia

Protectionist policies◦ Can be a result of nationalistic sentiments◦ May arise from economic distress◦ Role of political interest groups, such as American

shrimp fishermen (versus SE Asian exporters) or Japanese farmers

Governments buy equity stakes in companies◦ AIG, GM in USA◦ RBS and Lloyds in UK◦ Companies then must accept largest stakeholder’s

priorities Protectionism or unequal legal recourse relative to

domestic companies affect mode of entry decisions

Political, Governmental, and Legal Forces

Internet◦ Alters product life cycles◦ Speed of distribution◦ Consumer access to information about products and

companies

Automation – capital intensive versus labor intensive, note Foxconn’s new robots

Data mining – access to aggregated information about consumers

Communication technologies

Technological Forces

Revolution in Communication Technology Bigger and more profound than e-commerce or

internet alone Growth of worldwide secure financial settlements

◦ Rapid spread of ATMs from the mid-90s for example◦ Ease of doing financial transactions across borders

Rapid spread of cellular technology connected whole regions to the outside world, from late 1990s

Rapid decrease in the price of bandwidth late 1990s◦ Large scale long distance data transfer became viable

Fiber optic technology means very cheap prices across oceans Google and others have mix of local and central content

◦ Offshore factories and suppliers have real time access◦ Distributors have real time access to retail inventory◦ Medical information and other data intensive documents

exchanged real time Cultural diffusion via better communication

◦ Often thought of as from developed countries to LDCs◦ Growing exposure and interest work in both directions

Ch 3 -43

Competitive Forces

• Collection & evaluation of data on competitors is essential for successful strategy formulation

• Identify Rival Firms’

• Strengths

• Weaknesses

• Capabilities

• Opportunities

• Threats

• Objectives

• Strategies


Ch 3 -44

Competitive Forces

Competition in most industries is intense, but may vary from country to country

Key Questions Concerning Competitors

Their strengthsTheir weaknessesTheir objectives and strategiesTheir responses to external variablesTheir vulnerability to alternative

strategiesOur vulnerability to strategic

counterattack


Ch 3 -45

Key Questions Concerning Competitors

Our product/service positioningEntry and exit of firms in the industryKey factors for our current position in

industrySales/profit ranking of competitors over

timeNature of supplier and distributor

relationshipsThe threat of substitute products/services


Ch 3 -46

◦ Market share matters◦ Understanding what business you are

in◦ Constant innovation◦ Acquisition is essential to growth◦ People make a difference◦ No substitute for quality


Publishing as Prentice Hall

Competitive Forces Characteristics of Most Competitive Firms

A systematic and ethical process for gathering and analyzing information about the competition’s activities and general business trends to further a business’s own goals



Ch 3 -48

Competitive Intelligence

Internet Employees Managers Suppliers Distributors Customers Creditors

Consultants Trade journals Want ads Newspaper

articles Government

filings Competitors



Ch 3 -49

Sources of Competitive Intelligence

Objectives of Competitive Intelligence

Provide a general understanding of industry and competitors

Identify areas where competitors are vulnerable and assess impact of actions on competitors

Identify potential moves that a competitor might make


Ch 3 -50

Market Commonality

The number and significance of markets that a firm competes in with rivals


Ch 3 -51

Resource Similarity

Extent to which the type and amount of a firm’s internal resources are comparable to a rival


Ch 3 -52

1. Identify key aspects or elements of each competitive force

2. Evaluate how strong and important each element is for the firm

3. Decide whether the collective strength of the elements is worth the firm entering or staying in the industry

Discussion of 5 Forces in pages 106-110

Steps to Determine if an Acceptable Profit Can Be Earned

1. High number of competing firms2. Similar size of firms competing3. Similar capability of firms competing4. Falling demand for the industry’s products5. Falling product/service prices in the industry6. Consumers can switch brands easily7. Barriers to leaving the market are high8. Barriers to entering the market are low9. Fixed costs are high among firms competing10. The product is perishable


Conditions that Cause High Rivalry Among Competing Firms

11. Rivals have excess capacity12. Consumer demand is falling13. Rivals have excess inventory14. Rivals sell similar products/services15. Mergers are common in the

industry



Ch 3 -56

Conditions that Cause High Rivalry Among Competing Firms

Bargaining Power of Suppliers is increased when there are:◦Small numbers of suppliers◦Few substitutes◦Costs of switching raw materials is high

Backward integration is gaining control or ownership of suppliers



Ch 3 -57

The Five-Forces Model

The Five-Forces Model• Development of substitute product

pressures increases when:• Relative price of substitutes decrease• Consumers’ switching costs decrease

• Both factors are present in oil industry• Long term crude prices tend to stay just below cost of

alternative fuels (subsidies made Tar Sands viable)• Difficult to establish consumer infrastructure for

alternative fuels

Often overlooked or underestimated by established industry players◦ HP in 2004 saw Personal Computers as a commodity

Build cheap in high volume Main competitor thought to be Dell Computer of TX $3BB R&D under-utilized

Substitutes can restructure entire industries◦ Common in technology industries◦ Always a threat in the petroleum industry

But cost of entry for substitutes is high Once a substitute gains entry, costs may rapidly drop Pattern is to have price spikes, followed by periods of prices

too low for substitutes to thrive◦ Synthetic rubber became a substitute when war cut

natural rubber supplies

Competitive Industry StructureSubstitute Products or Services

The Five-Forces Model

Bargaining power of consumers◦Customers being concentrated or buying in volume affects intensity of competition

◦Consumer power is higher where products are standard or undifferentiated


Ch 3 -60

Conditions Where Consumers GainBargaining Power

If buyers can inexpensively switchIf buyers are particularly importantIf sellers are struggling in the face of

falling consumer demandIf buyers are informed about sellers’

products, prices, and costs (internet role)If buyers have discretion in whether and

when they purchase the product


Ch 3 -61

Sources of External Information: Unpublished Sources

Customer surveysMarket researchSpeeches at professional or shareholder

meetingsTelevision programsInterviews and conversations with

stakeholders


Ch 3 -62

Sources of External Information: Published Sources

PeriodicalsJournalsReportsGovernment documentsAbstractsBooksDirectoriesNewspapersManuals


Ch 3 -63

Sources of External Information: Web Sites

http://marketwatch.multexinvestor.comhttp://moneycentral.msn.comhttp://finance.yahoo.comwww.clearstation.comhttps://us.etrade.com/e/t/invest/marketswww.hoovers.comWWW.Bloomberg.com


Ch 3 -64

http://marketwatch.multexinvestor.com/

http://moneycentral.msn.com/

http://finance.yahoo.com/

http://www.clearstation.com/

https://us.etrade.com/e/t/invest/markets

http://www.hoovers.com/

http://www.bloomberg.com/

Forecasts use or make assumptions about future trends and events

Quantitative techniques – most appropriate when historical data is available and there is a constant relationship

Qualitative techniques (opinions, intuition)

All forecasts should be informed by knowledge of business and markets

Forecasting Tools and Techniques

Assumptions

Estimates of future events based upon the best available information in the present


Ch 3 -66



Ch 3 -67

CPM

instructor: michael cooke e-mail address: [email protected]@kku.ac.th office:ic room 817 ...

Documents

mobile devices

mobile apps

mobile technology

mobile phone

mobile interactions

mobile intenders

mobile revolution

percent of respondents