Business Strategy & Policy PSU MGMT #562 Week # 2 – External Analysis Dave Garten daveoutside@alum.mit.edu 4/16/2017

Dave Garten- Business Strategy What is Strategy? Productivity Frontier Unique and valuable position Tradeoffs and decisions Glue that puts pieces together Greatest threat from within… 4/16/2017 Dave Garten- Business Strategy

Dave Garten- Business Strategy External Analysis The 3 Components of external analysis Trends Industry structure Company/organization analysis 4/16/2017 Dave Garten- Business Strategy

Trends & Environment: “PESTAL” Political Telecom, deregulation, govt ownership, trade barriers, subsidies, free speech, etc. Economic Income, spending, interest rates, GDP, stock mkts, etc. Sociocultural Demographic, psychographic, education, etc. Technological New standards, new processes, new features, etc. Environmental International pressure groups, env. laws, waste regulations Legal Intellectual property, antitrust, etc. 4/16/2017 Dave Garten- Business Strategy

Trends: Common Types Entry/exit of major firms, changes in industry growth rate Changes in degree of uncertainty and risk Diffusion of technical knowledge and innovations Changes in cost and efficiency Shift from standardized to differentiated products Regulatory policies / government legislation Changing societal concerns, attitudes, and lifestyles Internet and e-commerce opportunities Increasing globalization of industry Changes in long-term industry growth rate Changes in nature of product usage Product innovation/technological change

Industry Structure Opportunities Fragmented -> consolidation Mature ->incremental innovations, service Declining ->shakeout leadership, niche, divest Emerging -> TTM, locking up resources, switching cost “Network effect” -> standards, n**2 Source: Derived from Barney, Gaining & Sustaining Competitive Advantage 4/16/2017 Dave Garten- Business Strategy

Industry Structure Threats - Applying Porter’s 5 Forces Threat of Entry Economies of scale (production, distribution), Product differentiation (brand, switching costs), other cost advantage (know-how, patent, access to raw materials, location), contrived deterrence, govt Threat of Rivalry # of competitors, size/influence of competitors, industry growth rate, level of differentiation (vs. price), step function of capacity Threat of substitutes Deliver the product/service in a different way? Suppliers Bargaining power, # of companies, level of differentiation, threat of vertical integration, threat of substitutes Customers Mirror image of suppliers Vertical Horizontal Source: Derived from Barney, Gaining & Sustaining Competitive Advantage 4/16/2017 Dave Garten- Business Strategy

Industry Structure - Strategic Group Example Geographical Scope 0 10 20 30 40 50 60 70 80 Vertical Balance 0 0.5 1.0 1.5 2.0 INTERNATIONAL DOWNSTREAM OIL COMPANIES PRODUCTION COMPANIES INTEGRATED INTERNATIONAL MAJORS NATIONALLY-FOCUSED DOWNSTREAM COMPANIES INTEGRATED DOMESTIC Neste Petrofina Chevron Shell Total Mobil Exxon Statoil PDVSA Kuwait Unocal Arco Petrobras ENI Repsol Nippon Sun BP Texaco Elf Phillips Amoco Indian Oil DIVERSIFIED MAJORS 4

Dave Garten- Business Strategy Defining an Industry Direct competitors Substitutes Complementors Tomorrow’s Competitors Be careful .. Are you in the buggy business or the transportation business? 4/16/2017 Dave Garten- Business Strategy

Industry Transformation Evolutionary Predictable, stable Revolutionary – many changes simultaneously Latitude to influence industry structure Leader vs underdogs & entrants Experimentation -> convergence & stability Strategy implications Uncertainty Substitution Adapt – flexibility, options 4/16/2017 Dave Garten- Business Strategy

Forecasting Disruption Source: Disruptive Technologies, catching the Wave, Joseph L. Bower and Clayton M. Christensen, HBR, 2000. 4/16/2017 Dave Garten- Business Strategy

Forecasting Disruption Source: Rules of the Game, Scott D. Anthony, Strategy & Innovation, 2004 4/16/2017 Dave Garten- Business Strategy

Forecasting Disruption Why do organizations get disrupted? Strategies to deal with disruption? X 4/16/2017 Dave Garten- Business Strategy

Dave Garten- Business Strategy Competitors Benchmarking competitors The obvious -- financial ratios, market share The less obvious -- get into their head… Primary research (customers, channel partners, etc) How/why are they winning? Losing? Project ahead Industry 2x2, 3x3, 4x4…. Relative MSS, industry growth rate, industry attractiveness, relative competitive position, maturity of business, SWOT summary (ext + int)… 4/16/2017 Dave Garten- Business Strategy

Competitors – Game Theory What is it? Framing strategic decisions as interactions between competitors Predicting outcomes of competitive situations w/ a few players Key concepts Cooperate or compete? Can show conditions where cooperation is more advantageous than competition Deter? Changing the payoffs in order to deter a competitor from certain actions Commit? Irrevocable deployments of resources that give credibility to threats Signal? Communication to influence a competitor’s decision. Problems with game theory Useful in explaining past behavior- weak in predicting the future Outcomes highly sensitive to small changes in assumptions 4/16/2017 Dave Garten- Business Strategy

Dave Garten- Business Strategy BMG Case Objective: How/when does change alter an industry and a company? Learnings: Understanding the impact of change on an industry -> back to fundamental analysis. Incumbents need to make tradeoffs when facing uncertainty and change. When to make a big bet? Do you know better than your competitors where the industry is headed? Can you resolve the uncertainty? Organizational structure must reflect strategy 4/16/2017 Dave Garten- Business Strategy