BOS 200: Sept. 10, 2013 Evaluating a Company’s External Environment

Sara Jane McCaffrey

Values What is our mission? What is our scope? What do we value?

Capabilities

What are our strengths? Where might we have a competitive advantage?

Opportunities What does the market demand? Who, if anyone else, offers this value proposition?

Valuable competitive

position

How do we create and

sustain value?

Source: Harris and Lenox, 2013.

This week

Fundamental Principal of Competitive Strategy

--or-- }  In a perfectly competitive market, no firm realizes

economic profits (rents).

The Fundamental Principal }  If everyone can do it, it’s difficult to create and capture

value from it – or

In a perfectly competitive market, no firm realizes economic profits (rents) (straight from Econ 100).

}  The existence of economic profits suggests some type of

market inefficiency.

}  The strategist’s tasks is to identify ways in which firms may capitalize on these market imperfections.

}  Multiple frames: who does this benefit?

5.9% 5.9%

10.4% 10.5%

11.7% 12.6%

13.4% 13.4% 13.7% 13.8% 13.9%

15.0% 15.4% 15.6% 16.0% 16.5% 17.0% 17.6%

19.0% 19.2% 19.5% 19.5%

21.0% 21.3%

26.4% 27.3%

28.6% 31.7%

37.6% 37.6%

40.9%

0.0% 10.0% 20.0% 30.0% 40.0%

Catalog, Mail-Order Houses Airlines Hotels

Knitting Mills Soft Drink Bottling

Oil and Gas Machinery Book Publishing

Laboratory Equipment Engines and Turbines

Bakery Products Wine and Brandy

Mobile Homes Cookies and Crackers

Iron and Steel Foundries Grocery Stores

Drug Stores Household Furniture

Child Day Care Services Malt Beverages

Household Appliances Men’s and Boys’ Clothing

Tires Medical Instruments

Semiconductors Distilled Spirits

Advertising Agencies Perfume, Cosmetics, Toiletries

Pharmaceuticals Soft Drinks

Prepackaged Software Security Brokers and Dealers

Source: Porter (2008)

Average Return on Invested

Capital (ROIC), Selected US Industries, 1992-2006

5.9% 5.9%

10.4% 10.5%

11.7% 12.6% 13.4% 13.4% 13.7% 13.8% 13.9%

15.0% 15.4% 15.6% 16.0% 16.5% 17.0% 17.6%

19.0% 19.2% 19.5% 19.5%

21.0% 21.3%

26.4% 27.3%

28.6% 31.7%

37.6% 37.6%

40.9%

0.0% 10.0% 20.0% 30.0% 40.0%

Catalog, Mail-Order Houses Airlines Hotels

Knitting Mills Soft Drink Bottling

Oil and Gas Machinery Book Publishing

Laboratory Equipment Engines and Turbines

Bakery Products Wine and Brandy

Mobile Homes Cookies and Crackers

Iron and Steel Foundries Grocery Stores

Drug Stores Household Furniture

Child Day Care Services Malt Beverages

Household Appliances Men’s and Boys’ Clothing

Tires Medical Instruments

Semiconductors Distilled Spirits

Advertising Agencies Perfume, Cosmetics, Toiletries

Pharmaceuticals Soft Drinks

Prepackaged Software Security Brokers and Dealers

Source: Porter (2008)

Average Return on Invested Capital (ROIC), Selected US Industries, 1992-2006

Porter’s Five Forces framework

Threat of substitute

products or services

Threat of new entrants

Rivalry among existing

competitors

Bargaining power of suppliers

Bargaining power of buyers

Five Forces framework

Threat of substitute

products or services

Threat of new entrants

Rivalry among existing

competitors

Bargaining power of suppliers

Bargaining power of buyers

Rivalry is intense when

1.  Many competitors, roughly equal in size and power

2.  Slow industry growth

3.  High barriers to exit

4.  Rivals are highly committed

5.  Difficulty reading competitors’ signals

6.  Lack of product differentiation/ low switching costs

Five Forces framework

Threat of substitute

products or services

Threat of new entrants

Rivalry among existing

competitors

Bargaining power of suppliers

Bargaining power of buyers

Threat of entry: less likely when 1.  Economies of scale

2.  Brand identity/ proprietary product differences

3.  Network effects/ customer switching costs are high

4.  Large capital requirements (especially for sunk costs)

5.  Unequal access distribution channels

and/or product inputs

6.  Restrictive government policy

7.  Expected retaliation

Five Forces framework

Threat of substitute

products or services

Threat of new entrants

Rivalry among existing

competitors

Bargaining power of suppliers

Bargaining power of buyers

Threat of Substitutes: higher when

1.  Demand is elastic http://www.youtube.com/watch?v=COf2bQEQ7Zw

2.  Attractive price-performance trade-off for industry’s products

3.  Switching costs are low

Five Forces framework

Threat of substitute

products or services

Threat of new entrants

Rivalry among existing

competitors

Bargaining power of suppliers

Bargaining power of buyers

Bargaining power of buyers

HIGHER when

Buyer groups are weaker/ more price sensitive

1.  Buyers are concentrated (monopsony)

2.  Industry’s products standardized and prices are transparent

3.  Buyers have low switching costs

4.  Buyer can credibly threaten to backward integrate

1.  Industry’s product affects buyers’ quality

2.  Product has little effect on buyers’ other costs

Five Forces framework

Threat of substitute

products or services

Threat of new entrants

Rivalry among existing

competitors

Bargaining power of suppliers

Bargaining power of buyers

Supplier threat is higher when . . . 1.  Sellers (suppliers) are

concentrated (monopoly) }  Suppliers do not depend heavily

on one industry for revenues 2.  Changing suppliers à high

switching costs

3.  Suppliers offer differentiated (not commodity) products

4.  No (few) substitutes available

5.  Supplier can forward integrate

Monopoly Power Competitive

Mutual Dependence

Monopsony Power

many

many

few

few

BUYER

SUPPLIER

More forces?

Threat of substitute

products or services

Threat of new entrants

Rivalry among existing

competitors

Bargaining power of suppliers

Bargaining power of buyers

Role of Complements

Role of Institutions

Role of Complements

Role of Institutions

Critiques of Porter’s Five Forces Framework

}  Zero sum; no collaboration }  But, strategic alliances happen and buyers and suppliers often

work together }  Toyota way

}  Too static/ stable – markets change!

}  Doesn’t consider non-market environment, social responsibility, and ethics

But, still a useful tool for understanding a firm’s external environment!

What if an industry is unattractive?

}  Raise switching costs

}  Differentiate

}  Coordinate – tacitly of course!

}  Consolidation, vertical integration

}  Innovate

}  Certify / Lobby

}  frequent flyer programs

}  Swatch watches

}  best-price clauses

}  Telecoms; media

}  Dupont: CFCs to HCFCs

}  lawyers, doctors

(Time Permitting): Five Forces Analysis

Industry forces that limit economic rents

}  Entry is less likely when incumbent firms have a

competitive advantage and can credibly retaliate against new entrants.

}  Substitution is less likely when switching costs are high and cross-price elasticity is low.

}  Buyer and supplier power depend on relative concentration, the viability of alternatives, and information availability.

}  Rivalry is more intense when incentives to fight are large and tacit coordination is difficult.

Housekeeping }  Memos: ready to hand back

}  Good news: they are only 1/7 of your final grade

}  Bad news: they are only 1/7 of your final grade

}  For next time }  Use the rubric in the syllabus }  Deeply engage the readings