1. Three Levels of the Environment 2. Industry The External Environment (Part One) Agenda 1. Three Levels of the Environment 2. Industry a. Definition b. Segmentation c. Characteristics Economic Traits, Structure Driving Forces Key Success Factors

A Framework for the Strategy Making Process l e n t a i o Vision and Mission Corporate Strategy P e r f o m a n c Managers’ Mental Models (Beliefs & Understanding Market Position Set Objectives Business Strategy Functional Strategy Business Definition Decisions about Feedback

External Environment Company Mission and Objectives Strategic Options Macro Industry Operating Company Mission and Objectives Strategic Options and Choice Desired? Possible? Internal Environment Resources Current Strategy Costs

Macro Environment Industry Environment Operating Environment Firm

Macro Environment Factors Economic Technological Political/Legal Social/Cultural

Economic Factors The state of the macroeconomic environment determines the general health and well being of the economy. This in turn affects a company’s ability to earn an adequate rate of return. Examples: GDP trends, interest rates, money supply, inflation unemployment levels, wage/price controls, energy availability and costs, disposable and discretionary income. Globally: Monetary and Fiscal policies, currency convertibility, exchange rates, economic development, political economy

US Unemployment Rates 1996 5.4% 1997 4.7% 1998 4.4% 1999 4.0% 2000 3.9% 2001 5.7% 2002 6.0% 2003 2004 2005 5.1% 2006 4.6% Source: Bureau of Labor Statistics (US Government)

Unemployment Rates (2006) Lowest Hawaii (2.4%) Utah (2.9%) Nebraska (3.0%) Virginia (3.0%) Highest Michigan (6.9%) Alaska (6.7%) South Carolina (6.5%) District of Columbia (6.0%) Source: Bureau of Labor Statistics (US Government)

Technological Factors This factor deals with the general technological infrastructure, the rate of change in technology, and those things impacting the development and introduction of new technologies. Examples: Total government spending for R&D, Total industry spending for R&D, focus of technological efforts, patent protection, new developments in technology transfer, productivity improvements through automation. Global: Regulations on technology transfer, information flow infrastructure, patent and trademark protection. 1. Nanotechnology: sun block, stain-resistant clothing, power transmission, disease diagnosis and treatment. 2. Web-enabled telephone technology

Barbados – Technological Factors Source: World Bank (2003) Number of Phones per 100 people = 86 Personal Computers per 1000 people = 104 Internet Users per 1000 people = 371 (up from 112) Haiti Technological Factors Source: World Bank (2003) # of Telephones per 100 people = 3 # of Internet users per 1000 people = 18 (up from 10) Definition: Internet users are people with access to the worldwide network.

Political/Legal Factors These factors define the legal and regulatory parameters within which a firm must operate. Examples: Antitrust regulations, environmental protection, tax laws, employment laws, stability of government, foreign trade protection Global: Form of government, political ideology, protectionist sentiment, terrorist activity, legal system, government’s attitude toward foreign firms.

New Bankruptcy Filings (Through Sept, 2006) Source: Administrative Office of the U.S. Courts Year Business Non-Business Total 2006 27,333 1,085,209 1,112,542 2005 34,222 1,748,421 1,782,643 2004 34,817 1,584,170 1,618,987 2003 36,183 1,625,813 1,661,996 2002 39,091 1,508,578 1,547,669 2001 38,490 1,398,864 1,437,354 2000 36,065 1,226,037 1,262,102

Social/Cultural Factors This category of factors describe the beliefs, values, attitudes, opinions, and lifestyles of persons in the firm’s external environment as developed from cultural, demographic, religious, educational and ethnic conditioning. Examples: Lifestyle changes, career expectations, age distribution, regional shifts in population, birth rates, life expectancies, growth rate in population, consumer activism, rate of family formation. Global: Human rights, literacy levels, language, social institutions, skill level of the workforce

Obesity Trends* Among U.S. Adults BRFSS, 1991, 1996, 2003 (*BMI 30, or about 30 lbs overweight for 5’4” person) 1991 1996 2003 No Data <10% 10%–14% 15%–19% 20%–24% ≥25% Source: Center for Disease Control

Obesity Trends (2004) Source: Center for Disease Control

Obesity Trends (2005)

2006 UB Obesity Report Card

Industry Environment Dominant Economic Traits Industry Structure Driving Forces Key Success Factors Industry Life Cycle Competitive Forces (Porter’s Five Forces)

Operating Environment Specific Competitors Specific Customers Specific Suppliers Specific Pools of Labor Specific Creditors

Where does one end and another begin? What is an Industry? How do we define it? Where does one end and another begin? Why are they important to define?

Segmentation What is it? What does it mean in a marketing context? Why is it important to strategic management?

Segmentation 1. Helps firms to determine the relative attractiveness of different segments and different Key Success Factors. 2. Helps firms to appropriately classify competitors into groups and determine direct and indirect competitors. 3. Helps firms to predict behavior of individual firms. Impending Competitors Invisible Competitors Immediate Competitors

Industry Segments Markets

Segmentation can be based on: Characteristics of the buyers: industrial, household, distribution channel, geographic location. Characteristics of the product: size, price, product features, technology design, inputs used, performance characteristics, pre/post sale service. Segmentation impacts how companies view the competitive landscape!

Aerospace and Defense Industry: Broadly Defined Key Segments Military Weapons Commercial Aircraft Space (Rockets and Satellites)

(Source: Standard and Poors Aerospace Industry Commercial Aircraft Further Segmentation Large Commercial Jets ($49 Billion) Maintenance Repair and Overhaul ($36.4 Billion) Business and Regional Aircraft ($21.1 Billion) Jet Engines ($33.1 Billion) Civil Avionics ($11.2 Billion) (Source: Standard and Poors Nov. 2006)

Economic Traits A set of dimensions that characterize the industry’s cost, revenue and profit potentials. Examples: market size, types of distribution channels used to access customers, economies of scale, economies of learning, pace of technological change, capital requirements, product differentiation, presence of vertical integration.

Economic Traits (2006) Commercial Aircraft Market Size (Defense and Aerospace): $468 billion Market Size (Commercial aircraft): $151 billion (slow growth) Types of Distribution Channels: Few (mostly direct) Economies of Scale: Present Capital Requirements: Extremely High Product Differentiation: High (needs explanation) Presence of Vertical Integration: Yes (Boeing and Airbus also produce jet engines)

Industry Structure Industry Structure refers to those enduring characteristics that give an industry its distinctive character. Consolidation/Fragmentation Concentration Economies of Scale Product Differentiation Barriers to Entry/Exit Information Availability

Industry Structure (Commercial Aircraft) Oligopoly Competition (Boeing/45% and Airbus/55%) Concentration (Yes) Economies of Scale (Present) Product Differentiation* (High) Barriers to Entry/Exit (Extremely High)

Driving Forces Driving Forces are conditions in the industry environment that create significant and lasting change in the industry’s structure and competitive environment. Examples: long-term growth, technology and rate of technological change, product innovation, globalization, diffusion of technical know-how, changes in target market or how a product is used.

Driving Forces: Commercial Aircraft Long-Term Airline Industry Profitability Capacity Issues in Airline Industry Fuel Prices Air Traffic Forecasts Price Pressure from Customers (Delta, Northwest, etc) Globalization Presence of Low Cost Air Carriers

Key Success Factors Industry specific resources or processes that firms competing in a particular industry must either possess or have some competence in doing in order to be profitable and ultimately survive.

Key Success Factors: Commercial Aircraft Excellence in R&D Effective Production Utilization Free Cash Flow

Key Success Factors can differ between an industry segments. US Bicycle Industry Key Success Factors can differ between an industry segments. Key Segments: Low-Priced bikes sold primarily through department and discount stores. Medium-Priced bikes sold primarily under the manufacturer's name and distributed main through specialty bicycle stores High-priced bikes for enthusiasts Children’s bikes and tricycles sold primarily through toy stores.