environmental uncertainty & porter.ppt
TRANSCRIPT
-
8/10/2019 Environmental Uncertainty & Porter.ppt
1/54
ENVIRONMENTAL UNCERTAINTYLiterature Review and Strategic Classification
-
8/10/2019 Environmental Uncertainty & Porter.ppt
2/54
Managerial Decision-Making
Bounded rationality
Information required vs. information available
Cost of obtaining missing information
Temporal window for making the decision
Limitations of human cognition
Environmental uncertainty
Dimensions of the environment
Vectors and rates of change
-
8/10/2019 Environmental Uncertainty & Porter.ppt
3/54
Definition
An inability to assign probabilities as to the likelihood of
future events (Duncan, 1972; Pennings & Tripathi, 1978;
Pfeffer & Salancik, 1978)
A lack of information about cause-effect relationships
(Duncan, 1972; Lorsch & Lawrence, 1965)
An inability to predict accurately what the outcomes of a
decision might be (Downey, Hellriegel, & Slocum Jr, 1975;
Hickson, Hinings, Lee, Schneck, & Pennings, 1971;
Schmidt & Cumming, 1976)
(Milliken, 1987)
-
8/10/2019 Environmental Uncertainty & Porter.ppt
4/54
-
8/10/2019 Environmental Uncertainty & Porter.ppt
5/54
Management Field
-
8/10/2019 Environmental Uncertainty & Porter.ppt
6/54
Sample Population
141 journal articles
Divided into three timeframes
19661980 (early development)
19811995 (refinement of measures)
1996present (construct frozen)
Article count by fields of management
General = 69
Strategy = 47
Operations = 14
Information = 7
Entrepreneurship = 4
-
8/10/2019 Environmental Uncertainty & Porter.ppt
7/54
Two Types
Objective (OEU)
Economic in origin (Simon, 1957)
Supply uncertainty
Demand uncertainty
Cost uncertainty
Perceptual (PEU)
Market, scientific, and plant sectors of the environment along with
certainty of information, rate of change of the environment, and
time range of task as the vectors impacting bounded rationality
(Lorsch and Lawrence, 1965)
-
8/10/2019 Environmental Uncertainty & Porter.ppt
8/54
Construct Research
-
8/10/2019 Environmental Uncertainty & Porter.ppt
9/54
Construct Research
-
8/10/2019 Environmental Uncertainty & Porter.ppt
10/54
PEUOEU Test
Tosi, Aldag, and Storey (1973) investigated Lorsch and
Lawrences perceived measures and scales, and checked
their results against objective measures of the
environment.
They found little correlation between perceived and
objective data
The debate continued for seven years
-
8/10/2019 Environmental Uncertainty & Porter.ppt
11/54
PEU-OEU Resolution
Bourgeois (1985) recognized that each type of measure
had a place in management studies.
Objective measures of environmental uncertainty were well suited
for the initial stage of strategic planning that is domain identification
and selection. Perceptual measures of environmental uncertainty were a better
indicator when studying managerial decision making involved with
domain navigation as the firm attempted to fit the environment.
-
8/10/2019 Environmental Uncertainty & Porter.ppt
12/54
PEU-OEU Measures and Scales Integration
Miller and Friesen (1982) recognized three dimensions
Environmental dynamism
Environmental heterogeneity
Environmental hostility
Dess and Beard (1984) recognized three dimensions
Dynamism
Munificence
Complexity
-
8/10/2019 Environmental Uncertainty & Porter.ppt
13/54
Miller & Friesen (1982)
-
8/10/2019 Environmental Uncertainty & Porter.ppt
14/54
Miller & Friesen (1982)
-
8/10/2019 Environmental Uncertainty & Porter.ppt
15/54
Miller & Friesen (1982)
-
8/10/2019 Environmental Uncertainty & Porter.ppt
16/54
OEU Measures and Scales
Keats and Hitt (1988) refined the Dess and Beard
measures with regression equations:
Growth and volatility in industry sales
Growth and volatility in industry operating income
Three-part calculation of industry concentration
Grossacks(1965) dynamic measure
Four-firm concentration ratio
HerfindahlHirschman Index (Hirschman, 1964)
-
8/10/2019 Environmental Uncertainty & Porter.ppt
17/54
EU Research
EnvironmentalUncertainty
Objective Perceived
EconomyIndustry sales
Industry growthConcentrationCosts of inputs
Technology (R&D cost& patents)
Capital markets
EconomyCustomers
CompetitorsSuppliers
Technology (pace)Capital markets
Regulators
Unions
Range ofunpredictability
DynamismMunificence
Complexity
-
8/10/2019 Environmental Uncertainty & Porter.ppt
18/54
Strategic Classification
Following Bourgeois (1985), use OEU as means of
identifying and selection strategic domains.
-
8/10/2019 Environmental Uncertainty & Porter.ppt
19/54
Porters Five Forces
Threat ofNew
Entrants
CustomerPower
SupplierPower
Threat ofSubstitutes
Threat ofCompetitive
Rivalry
-
8/10/2019 Environmental Uncertainty & Porter.ppt
20/54
Porters Five Forces as OEU
Bargaining power of suppliers
Impact of inputs on cost or differentiation
Importance of volume to the supplier
Differentiation of inputs
Competition between producers
Size and concentration of suppliers relative to industry
Switching costs
Asymmetry of suppliers information
Suppliers ability to forward integrate
-
8/10/2019 Environmental Uncertainty & Porter.ppt
21/54
Bargaining power of suppliers
Impact of inputs on cost or differentiation
Calculate the suppliers contribution to margin, take the natural logarithm of
that figure and regress over at least five years against an index such as
the S&P 500. The antilog of the regression coefficient will represent
munificence (growth) while the antilog of the standard error indicates the
dynamism (volatility).
Yi
^
= b0+ b1Xi+ i
eb1 = munificence measure
e
= dynamism measure
where Y = ln(supplier's contribution to margin)
and X = index/year measure
-
8/10/2019 Environmental Uncertainty & Porter.ppt
22/54
Bargaining power of suppliers
Importance of volume to the supplier
Determined using the measures of supplier industry concentration: Grossacks(1965) dynamic measure of industry concentration, the four-firm concentrationratio, and the HerfindahlHirschman Index (Hirschman, 1964).
Grossack is a regression of current-year market shares of all firms in a given industryupon their shares 5 years ago. The reciprocal of the regression coefficient indicatesthe decrease or increase of monopoly power in the industry and is used as onemeasure of complexity.
HerfindahlHirschman measures the smallness among the number of firm and the
variation among the sizes of firms
-
8/10/2019 Environmental Uncertainty & Porter.ppt
23/54
Bargaining power of suppliers
Supplier industry concentration
GrossacksMeasure
Herfindahl-Hirschman Index
b=1+ wii
yi xi
xi
wi=xi
2
xi2
i
b=r y
x
y
x
=
yi2
xi2
C(HI) =HI
y
HIx=
yi2+
1
ny
xi2+
1
nx
HIx= Xi2
i
+1
n
where X is the market share of the iith
firm expressedas a ratio and nis the number of firms in the industry
-
8/10/2019 Environmental Uncertainty & Porter.ppt
24/54
Bargaining power of suppliers
Differentiation of inputs
Differentiation is linked to above-average profits
Regress the natural log of the operating profit margin for the supplier
industry against an index variable of years
Antilog of the regression coefficient represents supplier OPM growth Antilog of the standard error represents supplier OPM volatility
Yi= b0+ b1Xi+ i
where Y = ln(supplier OPM)
and X = index/years
eb1 = supplier OPM munificence
e = supplier OPM dynamism
-
8/10/2019 Environmental Uncertainty & Porter.ppt
25/54
Bargaining power of suppliers
Competition between producers
Determined by regressing unit prices against an index variable of
years.
Regression coefficient represents price growth (complexity)
Standard error represents price volatility
Yi= b0+ b1Xi+ i
where Y = unit prices
and X = index/years
b1= unit price complexity
= unit price dynamism
-
8/10/2019 Environmental Uncertainty & Porter.ppt
26/54
Bargaining power of suppliers
Size and concentration of suppliers relative to industry
Calculate Grossacksconcentration index for producer and supplier
industries and regress this ratio against an index variable of years.
Regression coefficient represents producer/supplier complexity
Standard error of regression indicates producer/supplier volatility
b=1+ wii
yi xi
xi
wi=xi
2
xi2i
Y= b0+ b1Xi+ i
bp
bs= Y=producer/supplier concentration ratio
X = index variable of years
-
8/10/2019 Environmental Uncertainty & Porter.ppt
27/54
Bargaining power of suppliers
Switching costs Static measure using ranked scale
1 = low impact
2 = moderate impact
3 = high impact
Determined using NPV of switching costs Measure of complexity
-
8/10/2019 Environmental Uncertainty & Porter.ppt
28/54
Bargaining power of suppliers
Asymmetry of suppliers information
Static measure using ranked scale
1 = Supplier provides financial data, producer does not
2 = Both producer and supplier share financial data
3 = Neither producer nor supplier share financial data 4 = Producer provides financial data, supplier does not
-
8/10/2019 Environmental Uncertainty & Porter.ppt
29/54
Bargaining power of suppliers
Suppliers ability to forward integrate Determined by computing the number and strength of related
acquisitions by suppliers and regressed over an index variable ofyears.
Using logistic regression over an index variable of years, determine the
probability of supplier-sourced related acquisition Multiply this number by the natural log of the value of the acquisitions
ln p
1 p
= b0+ b1Xi
eln
p
1
p
= odds ratio
Probability =OR
1+OR
-
8/10/2019 Environmental Uncertainty & Porter.ppt
30/54
Bargaining power of suppliers
Suppliers ability to forward integrate
Determined by multiplying the number and value of related
acquisitions by suppliers in each year of the period; take the natural
log of these figures and regress over an index variable of years.
Antilog of regression coefficient represents complexity Antilog of standard error indicates volatility
Y= b0+ b1Xi+
i
where Y = ln(number ivalue of acquisitions)
X = index variable of years
-
8/10/2019 Environmental Uncertainty & Porter.ppt
31/54
Bargaining power of suppliers
OEU Summary
-
8/10/2019 Environmental Uncertainty & Porter.ppt
32/54
Bargaining power of customers
Cost of product relative to total customer purchases
Differentiation of outputs (product differentiation)
Importance of volume to customers
Competition between customers Customer profitability
Size and concentration of customers relative to industry
Customers switching costs
Asymmetry of customers information Customers ability to backward integrate
-
8/10/2019 Environmental Uncertainty & Porter.ppt
33/54
Threat of New Entrants
Economies of scale
Absolute cost advantages
Capital requirements
Product differentiationAccess to distribution channels
Government and legal barriers
Retaliation by established producers
Market share shifts
-
8/10/2019 Environmental Uncertainty & Porter.ppt
34/54
Threat of New Entrants
Economies of scale
Perform industry concentration computation for producer industry:
Grossacksmeasure
Four-firm concentration ratio
Herfindahl-Hirschman index Higher concentration indices represent greater economies of scale
as a complexity measure
-
8/10/2019 Environmental Uncertainty & Porter.ppt
35/54
Threat of New Entrants
Absolute cost advantages Dependent upon unique contingencies
However, proxy measure could be implemented as:
Tobins q
Measure of value of technological assets; brand equity; intangible value
Number of patents awarded to the industry and regressed over an indexvariable of years
f2Rqirmi
Y
qK+Mp
qK+M
p( ) =M
p
-
8/10/2019 Environmental Uncertainty & Porter.ppt
36/54
Threat of New Entrants
Capital requirements Specific capital requirements are contingent by entrant.
Better understanding may come from access to and cost of capital
Take the natural logarithm of the total liquidity of the credit market andregressing against an index variable of years provides the foundationfrom which the antilog of the regression coefficient is used as ameasure for capital market growth. Further, the antilog of the standarderror of the regression coefficient represents the measure of creditmarket volatility.
Additional measure could be added in the form of a regression equationcomputing the coefficient and standard error of capital rates over anindex variable of years.
-
8/10/2019 Environmental Uncertainty & Porter.ppt
37/54
Threat of New Entrants
Product differentiation
Take the natural logarithm of the total operating profit margin of the
producer industry cataloged by four-digit NAICS code and regress
against an index variable of years; the antilog of the regression
coefficient is used as a measure for operating profit margin growth.Further, the antilog of the standard error of the regression coefficient
represents the measure of operating profit margin volatility.
-
8/10/2019 Environmental Uncertainty & Porter.ppt
38/54
Threat of New Entrants
Access to distribution channels
A suitable proxy is the four or eight-firm concentration ratio; higher
levels of industry concentration will inhibit access to distribution.
Capturing several years of data could then be regressed and
examined as complexity and dynamism measures.
-
8/10/2019 Environmental Uncertainty & Porter.ppt
39/54
Threat of New Entrants
Government and legal barriers
The uncertainty of government and legal barriers might be captured
as the number of regulatory actions taken at the national, provincial,
and local levels against the industry and ranked by severity:
3 = strategic impact 2 = operational impact
1 = paperwork impact
Means could be calculated by year for an index variable of years.
The Friedman Two-Way ANOVA by Ranks could be applied to
ensure a significant differentiation between ranked categories. Capturing this data by year would allow a regression equation
where the regression coefficient is a measure of complexity while
the standard error is volatility.
-
8/10/2019 Environmental Uncertainty & Porter.ppt
40/54
Threat of New Entrants
Retaliation by established producers
Dependent upon the market entry strategy employed by new
entrants (Kotler and Keller, 2009):
Frontal attack
Flanking attack Encirclement
Guerilla warfare
-
8/10/2019 Environmental Uncertainty & Porter.ppt
41/54
Threat of New Entrants
Market share shifts
Use Grossacksexpanded measure of the producer industry to
discover if new entrants are affecting industry concentration.
b=r y
x
y
x
=
yi2
xi2
C(HI) =HIy
HIx=
yi2+
1
ny
xi2+
1
nx
-
8/10/2019 Environmental Uncertainty & Porter.ppt
42/54
Threat of New Entrants
OEU Summary
-
8/10/2019 Environmental Uncertainty & Porter.ppt
43/54
Threat of Competitive Rivalry
Cost conditions (fixed and storage)
Unique to producers dependent on their strategy
Cost-based
Differentiation
Niche Contingencies include
Organizational structure
Supply chain
Intellectual and human capital
-
8/10/2019 Environmental Uncertainty & Porter.ppt
44/54
Threat of Competitive Rivalry
Concentration of producers
Grossacksdynamic measure of industry concentration, the four-firm
concentration ratio, and the HerfindahlHirschman Index.
However, we caution researchers about the use of producer
concentration as the sole measure of complexity because of thecompetitive stratification generated as a result of niche strategies.
-
8/10/2019 Environmental Uncertainty & Porter.ppt
45/54
Threat of Competitive Rivalry
Diversity of competitors
Regress the number of producers against the number of strategic
business units over an index variable of years.
Regression coefficient represents producer diversity complexity
Standard error indicates diversity volatility
Yi= b0+ b1Xi+
where Y = number of producersXi= number of SBUs
-
8/10/2019 Environmental Uncertainty & Porter.ppt
46/54
Threat of Competitive Rivalry
Product differentiation Take the natural logarithm of the total operating profit margin of the
producer industry cataloged by four-digit NAICS code and regressagainst an index variable of years
The antilog of the regression coefficient is used as a measure for
operating profit margin growth. The antilog of the standard error of the regression coefficient
represents the measure of operating profit margin volatility.
-
8/10/2019 Environmental Uncertainty & Porter.ppt
47/54
Threat of Competitive Rivalry
Excess capacity
Regress the natural logarithm of the industry capital investment
against the natural logarithm of the industry sales to uncover
capacity breakpoints and estimate excess capacity.
-
8/10/2019 Environmental Uncertainty & Porter.ppt
48/54
Threat of Competitive Rivalry
Exit barriers
Detect growth in the number of producers as determined by the
measures for industry concentration ratio and map against
moderate to high sales growth; this indicates lower exit barriers
because a market exists to dispose of structural elements.
Detect a decline or stasis in the number of producers as determined
by the measures for industry concentration ratio and map against
slow sales; lack of growth indicates higher exit barriers because a
market does not exist to dispose of structural elements.
These measures represent complexity components
-
8/10/2019 Environmental Uncertainty & Porter.ppt
49/54
Threat of Competitive Rivalry
OEU Summary
-
8/10/2019 Environmental Uncertainty & Porter.ppt
50/54
Threat of Substitutes
Switching costs
Buyer inclination to substitute
Price-performance trade-off of substitutes
-
8/10/2019 Environmental Uncertainty & Porter.ppt
51/54
The Dess and Beard OEU Classification Framework
-
8/10/2019 Environmental Uncertainty & Porter.ppt
52/54
The Porter
Four Forces
as OEU
Dynamism Munif icence Compl exit y
Suppl ier Mar g inCon t r ibut ion,
Suppl ierConcentr at ion,
Oper ating Mar gin,Uni t Pr ice,
Pr oducer Revenue/Cust omer Cost Rat io,
Cust omer
Concentr at ion,Cust omer OPM,Capital Liquidit y Size,
Capital Rates,Dist r ibu t ion
Channel s,# of Pr oducer s,
Suppl ier Mar g inCon t r ibu t ion ,
Oper ating Mar gin,Uni t Pr ice,
Cust omer OPM,Capit al Liquidit y
Size,Capit al Rat es,
Dis t r ibut ionChannel s,# of Pr oducer s,Excess Capacit y
Cal cu l at ion,
Obj ect ive Envir onmental Uncer t ainty
Pr oducer/Suppl ierRevenue Rati o,
Suppl ierConcentr at ion,
Pr oducer Switch ingCosts (r anked),
Inf or mati on Asymmet r y(P/S r anked),
Suppl ier Rel at edAcqu isi t ion Pr obabi l i t y
& Power ,Pr oducer Revenue/
Cust omer Cost Rati o,Cust omer Pur chase/Pr oducer Revenue
Rat io,Cust omer
Concentr at ion,Cust omer Swit ching
Costs (r anked),Inf or mati on Asymmet r y
(P/C r anked),Cust omer Rel ated
Acqu isi t ion Pr obabi l i t y& Power ,Four -f i r m
Concent r at ion Rat io ,Pr oducer Tobin's q
Gover nment Act ions(r anked),Pr oducer
Concentr at ion,Pr oducer Rel at ed
Acquisi t ion s,Exi t Bar r ie rCal cu l at ion
-
8/10/2019 Environmental Uncertainty & Porter.ppt
53/54
Limitations
Access to financial and regulatory information
Public vs. Private
U.S. vs. ROW
Lack of empirical evidence as of yet
-
8/10/2019 Environmental Uncertainty & Porter.ppt
54/54
Future Research
Instrument development process(Chen and Paulraj, 2004)