1-1 McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved C H A P T E R FOUR Understanding Market Opportunities 4

Exhibit: 4.1 The Seven Domains of Attractive Opportunities Macro Level Micro Level Market Domains Industry Domains Mission, Ability to Aspirations, Execute Propensity on CSFs for Risk Connectedness up and down Value Chain Team Domains Market Attractiveness Target Segment Benefits and Attractiveness Industry Attractiveness Sustainable Advantage

Difference between Markets and Industries ‡ A market is a group of individuals or organizations having the willingness and ability to buy goods or services to satisfy a particular class of wants or needs ‡ An industry is a group of organizations offering goods or services that are similar and close substitutes for one another

Macro Trend Analysis  The macroenvironment can be divided into six major components:  Demographic  Sociocultural  Economic  Regulatory  Technological  Natural

Macro Trend Analysis (continued)  Demographic trend examples/businesses affected:  Graying of the population/nursing homes, hospitals  Increase in ethnic population/food, clothing industries  Sociocultural trend examples/businesses affected:  Evolution of the family structure/food, women’s apparel  Exercise for both genders is in/exercise clothing, sports beverage

 Economic trend examples/businesses affected:  Increase or decrease of interest rates/capital goods, real estate  Free trade agreements/goods and services  Regulatory trend examples/businesses affected:  Government regulation/food, drug  Government deregulation/airlines, trucking, railroads, telecommunications, and banking Macro Trend Analysis (continued)

 Technological trend examples/businesses affected:  Development of fiber-optic cables/telecommunications, computers  Production of more disease-resistant livestock and plants/farming and ranching, food  Physical trend examples/businesses affected:  Global warming/ ski resorts, winter tourism Macro Trend Analysis (continued)

Exhibit 4.7 The Major Forces that Determine Industry Attractiveness Threat of substitute products Bargainingpower of suppliers Threat of new entrants entrants Bargainingpower of buyers Rivalry among existing industry firms

Porter’s Five Competitive Forces  Rivalry among present competitors  Rivalry is greater under the following conditions:  There is high investment intensity  There are many small firms in an industry or no dominant firms exist  There is little product differentiation  It is easy for customers to switch from one seller’s products to those of others

Porter’s Five Competitive Forces (continued)  Threat of new entrants  Entry is more difficult under the following conditions:  When strong economies of scale and learning effects are present  When strong product differentiation exists among current players  If gaining distribution is particularly difficult

 Bargaining power of suppliers  Their power is increased under the following conditions:  If the cost of switching suppliers is high  If prices of substitutes are high  If suppliers can realistically threaten forward integration  When the supplier’s product is a large part of the buyer’s value added Porter’s Five Competitive Forces (continued)

 Bargaining power of buyers:  The extent to which buyers succeed in their bargaining efforts depends on several factors:  The extent of buyer concentration  Switching costs that reduce the buyer’s bargaining power  The threat of backward integration  The product’s importance to the performance of the buyer’s product  Buyer profitability  Threat of substitute products Porter’s Five Competitive Forces (continued)

Information Sources for Macro- Level Analyses  Trade associations  Trade magazines  General business and popular press  The Internet

Understanding Markets at the Micro Level  Opportunities are attractive when market offering meets most/all of the following tests:  There is a clearly identified source of customer pain, for some clearly identifiable set of target customers, which the offering resolves  The offering provides customer benefits that other solutions do not  The target segment is likely to grow  There are other segments for which the currently targeted segment may provide a springboard for subsequent entry

Understanding Industries at the Micro Level  Opportunities are attractive when the company itself meets most/all of the following tests:  It possesses something proprietary that other companies cannot easily duplicate or imitate  The business has or can develop superior organizational processes, capabilities, or resources that others would find it difficult to imitate or duplicate  The company’s business model is economically viable

The Team Domains  Opportunities are only as good as the people who will pursue them  Key questions:  What are the missions, aspirations and risk propensity of the team?  Does the team have the ability to execute on the industry’s critical success factors?  Is the team well connected up and down the value chain?

Exhibit 4.15 Opportunity/Threat Matrix for a Telecommunications Company in the U.K. in 2007 Probability of Occurrence (2012) Level of Impact on Company* High Low 1. Wireless communications technology will make networks based on fiber and copper wires redundant. 2. Technology will provide for the storage and accessing of vast quantities of data at affordable costs. 3. The prices of large-screen (over 36-inch) digitalized TV sets will reach mass-market prices. 4. Voice-over-Internet Protocol (VoIP) will emerge as a dominant force in the telecommunications industry. *Profits or market share or both. High Low

Anticipating and Responding to Environmental Change  Impact and timing of event  Many environmental events that could have an impact on the firm can be detected  Probability of events occurrence and the degree of impact can be determined by using opportunity/threat matrix.