Copyright © Houghton Mifflin Company. All rights reserved. STRATEGIC MANAGEMENT Lecture 2 Dr. John Kraft Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Opening Case U.S. Steel Industry Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Opening Case Boom and Bust in Telecommunications Lucent Technologies JDS Uniphase Nortel Networks Cisco Systems AT&T Global Crossing Level 3 Communications Copyright © Houghton Mifflin Company. All rights reserved.

Abell’s Framework-Defining the Business Source: D. F. Abell, Defining the Business: The Starting Point of Strategic Planning (Englewood Cliffs, Prentice Hall, 1980), p. 7. Copyright © Houghton Mifflin Company. All rights reserved.

Porter’s Five Forces Model Source: Adapted and reprinted by permission of Harvard Business Review. From “How Competitive Forces Shape Strategy,” by Michael E. Porter, Harvard Business Review, March/April 1979 © by the President and Fellows of Harvard College. All rights reserved. Copyright © Houghton Mifflin Company. All rights reserved.

Risk of Entry by Potential Competitors Barriers to entry Brand loyalty Absolute cost advantage Superior production operations and processes Control of particular inputs required for production Access to cheaper funds because existing companies represent lower risks than new entrants Source: Publisher’s PowerPoint, Ch2-Slide 7 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Risk of Entry (cont’d) Barriers to entry (cont’d) Economies of scale Cost reductions from mass producing a standardized output Discounts on bulk purchases of inputs Advantages of spreading fixed costs over a large production volume Cost savings from marketing and advertising for a large volume of output Customer switching costs Government regulation Source: Publisher’s PowerPoint, Ch2-Slide 8 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Entry Barriers Circumventing Entry Barriers into the Soft Drink Industry Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Strategy in Action Entry Barriers into the Japanese Brewing Industry Copyright © Houghton Mifflin Company. All rights reserved.

The Bargaining Power of Buyers Buyers are most powerful when The indstry that is supplying a particular product or service is composed of many small companies and the buyers are large and few in number Buyers purchase in large quantities The supply industry depends on the buyers for a large percentage of its total orders Switching costs are low It is economically feasible for buyers to play one supplier against another Buyers can threaten to produce the product themselves Source: Publisher’s PowerPoint, Ch2-Slide 10 Copyright © Houghton Mifflin Company. All rights reserved.

Rivalry Among Established Companies Industry competitive structure Fragmented vs. consolidated (oligopoly or monopoly) Industry demand Exit barriers Investments in assets of little or no alternative value or that cannot be sold High fixed costs of exit Emotional attachments to an industry Economic dependence Need to maintain an expensive collection of assets in order to participate effectively in an industry Source: Publisher’s PowerPoint, Ch2-Slide 9 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Strategy in Action Price Wars in the Breakfast Cereal Industry Copyright © Houghton Mifflin Company. All rights reserved.

The Bargaining Power of Suppliers Suppliers are most powerful when There are few substitute products The industry is not an important customer to the supplier Switching costs are high for companies switching to a different supplier Suppliers can threaten to compete directly with buyers by entering their industry Buyers cannot threaten to enter the suppliers’ industry Source: Publisher’s PowerPoint, Ch2-Slide 11 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Running Case Wal-mart’s Bargaining Power over Suppliers. Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Substitute Products Many substitute products Are a threat and limit the price that companies in one industry can charge for their product, and thus industry profitability Few or weak close substitutes Gives the industry the opportunity to raise prices and earn additional profits Source: Publisher’s PowerPoint, Ch2-Slide 12 Copyright © Houghton Mifflin Company. All rights reserved.

A Sixth Force: Complementors When complementors are important and their number is increasing Demand and profits in the industry are boosted When complementors are weak Industry growth can slow and profits can be limited Source: Publisher’s PowerPoint, Ch2-Slide 13 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Course Pack Alpha Chip Copyright © Houghton Mifflin Company. All rights reserved.

Stages in the Industry Life Cycle Copyright © Houghton Mifflin Company. All rights reserved.

Shakeout: Growth in Demand and Capacity Copyright © Houghton Mifflin Company. All rights reserved.

Strategic Groups Within Industries Strategic Groups are groups of companies that follow a business model similar to other companies within their strategic group – but are different from that of other companies in other strategic groups. The basic differences between business models in different strategic groups can be captured by a relatively small number of strategic factors. Implications of Strategic Groups – The closest competitors are within the same Strategic Group and may be viewed by customers as substitutes for each other. Each Strategic Group can have different competitive forces and may face a different set of opportunities and threats. Mobility Barriers – factors within an industry that inhibit the movement of companies between strategic groups Include barriers to enter another group or exit existing group Copyright © Houghton Mifflin Company. All rights reserved.

Strategic Groups (continued) Formed within an industry when some companies follow the same basic product positioning strategy, which is different from that of other companies in other groups Companies can position their products in terms of distribution channels, market segments, product quality, technological leadership, customer service, pricing policy, advertising policy, promotions Source: Publisher’s PowerPoint, Ch2-Slide 16 Copyright © Houghton Mifflin Company. All rights reserved.

The Role of Mobility Barriers A company may decide to move from one strategic group to another where the five forces are weaker and higher profits are possible Mobility barriers are similar to industry entry and exit barriers and must be weighed carefully Source: Publisher’s PowerPoint, Ch2-Slide 17 Copyright © Houghton Mifflin Company. All rights reserved.

The Role of the Macroenvironment Figure 2.7 Changes in the forces in the macro-environment can directly impact: The Five Forces Relative Strengths Industry Attractiveness Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Closing Case U.S. Beer Industry Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Closing Case How the Internet Revolutionized the Stockbrokerage Industry                                         Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Film Click for Video- GM Driving World Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Real World: “FedEx to Buy Kinko’s for $2.2 Billion” Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Course Pack Items China’s Bicycle Makers Shift to Exports Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Course Pack Items The Importance of Sex Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. End of Lecture 2 Copyright © Houghton Mifflin Company. All rights reserved.