Class Plan 2 “If you are not part of the solution, you’re part of the precipitate” Henry Tillman Housekeeping (groups, cards…) Questions for the Apollo case Ethics and Strategy (video) Intro to External Analysis Macroenvironmental Analysis Accounting practice Video and exercises on External Analysis

Guiding questions for the Apollo Group Case Using Porter’s 5-forces model, evaluate the attractiveness of the online-education industry. What internal factors and macroenvironmental factors will impact the industry in general and Apollo specifically ? What recommendation (s) have you to make to Apollo to sustain or improve their current position?

Planned, Deliberate, Emergent and Realized Strategies Source: Adapted from H. Mintzberg and A. McGugh, Administrative Science Quarterly, Vol. 30. No. 2, June Figure 1.7 p. 24

Governance Mechanisms The Board of Directors Elected by stockholders Legally accountable Monitors corporate strategy decisions Authority to hire, fire, and compensate Ensures accuracy of audited financial statements Inside directors Outside directors Stock-Based Compensation Pay-for-performance Stock options: The right to buy company shares at a predetermined price at some point in the future Financial Statements Auditors, GAAP The Takeover Constraint Limits strategies that ignore shareholder interests Corporate raiders

Ethics and Strategy Business ethics are the accepted principles of right or wrong governing the conduct of businesspeople. Ethical dilemmas occur when: There is no agreement over what the accepted principles are None of the available alternatives seem ethically acceptable Many accepted principles are codified into laws: Tort laws – governing product liability Contract law – contracts and breaches of contracts Intellectual property law – protection of intellectual property Antitrust law – governing competitive behavior Securities law - issuing and selling securities Behaving ethically goes beyond staying within the law

Ethical Issues in Strategy Self-dealing Managers feather their nest with corporate monies through stock trades Information manipulation Distort or hide information to enhance competitive or personal situation Anticompetitive behavior Actions aimed at harming actual or potential competitors Opportunistic exploitation Of other players in the value chain in which the firm is embedded Substandard working conditions Underinvest in working conditions or pay below market wages Environmental degradation Directly or indirectly take actions that result in environmental harm Corruption Companies pay bribes to gain access to lucrative business contracts.

The Roots of Unethical Behavior Why do some managers behave unethically? 1. Personal ethics code: will have a profound influence on behavior as a businessperson 2. Do not realize they are behaving unethically: by failing to ask the right questions 3. Organization’s culture: de-emphasizes ethics and considers primarily economic consequences 4. Unrealistic performance goals: encouraging and legitimizing unethical behavior 5. Unethical leadership: that encourages and tolerates behavior that is ethically suspect

Managers should: 1. Favor hiring and promoting people with a well-grounded sense of personal ethics. 2. Build an organizational culture that places a high value on ethical behavior. 3. Make sure that leaders not only articulate but also act in an ethical manner. 4. Put decision-making processes in place that require people to consider the ethical dimension of business decisions. 5. Use ethics officers. 6. Put strong corporate governance processes in place. 7. Act with moral courage and encourage others to do the same. Behaving Ethically

Industry Analysis The Structure – Conduct – Performance Model originally developed to spot anti-competitive conditions for anti-trust purposes came to be used to assess the possibilities for above normal profits for firms within an industry Porter’s Five Forces Model was developed from this economic tradition

The Structure-Conduct- Performance Model Industry Structure Number of competing firms Homogeneity of products Cost of entry and exit Firm Conduct Price taking Product differentiation Tacit collusion Exploiting market power Performance Firm level performance: Normal, below normal, above normal Society: efficiency, level of employment, progress

Industry Analysis I ndustry A group of companies offering products or services that are close substitutes for each other and that satisfy the same basic customer needs Industry boundaries may change as customer needs evolve and technology changes Sector A group of closely related industries Market Segments Distinct groups of customers within an industry Can be differentiated from each other with distinct attributes and specific demands

Porter’s Five Forces Model (Fig 2.2 p50 adapted) Rivalry among established firms Risk of entry by potential competitors Bargaining power of suppliers Bargaining power of buyers Threat of substitute products Special role of complements

Rivalry Rivalry among established companies is a function of : industry’s competitive structure – fragmented vs consolidated demand conditions – growth and rate of growth exit barriers – emotional, economic, strategic

Product Lifecycle Time DemandDemand EmbryonicGrowthShakeoutMature Declining

New Entrants Potential Competitors: not currently competing in an industry but capable of doing so. incumbent companies (those already in an industry) are at an advantage when barriers to entry are high. Main barriers to entry are: (plus examples?) 1) brand loyalty 2) absolute cost advantage based on production superiority & control of inputs 3) economies of scale due to mass production, increased purchasing power, spreading of fixed costs, advertising economies 4) consumer switching costs 5) government regulation

Power of Buyers Bargaining power of buyers is high when: - many sellers and few buyers (at extreme, a monopsony) - purchases are made in large $ amounts or quantities - purchases represent a large percentage of total orders - buyers have low switching costs - each buyers can have multiple suppliers possibility of vertical integration

Power of Suppliers Bargaining power of suppliers is high when: few substitutes for input they supply industry is not an important customer high switching costs (sometimes due to differentiation) possibility of vertical integration (supplier) no possibility of vertical integration (buyer)

Subtitutes and Complements Threat of substitute products Are there other industries that serve the similar consumer needs? Are there strong competitive forces in those other industries? The “Sixth Force” : Complementors Complementors sell or supply complementary products to an enterprises existing product offerings. If an industry’s complementors are weak or supply unattractive products they can be a threat to the industry

Macro-environmental Forces [Environmental Scanning] Macroeconomics: growth rate of the economy, interest rates, currency exchange rates, inflation rates Technological: “creative destruction”, shifting barriers to entry Social: lifestyles, trends and attitudes Demographics: composition of the population, factors such as income distribution, education, labour mobility, gender Political & Legal : deregulation and free trade Global: falling barriers to trade, new economic development Environmental Scanning should: be a continuous formal & informal process explore beyond the boundaries of the business environment identify the potential impacts of events in a timely fashion be a context & a trigger for industry and business analysis can be carried too far

More on 5-forces model Strategic Groups Def.: subsections of industry with the same basic strategy in-group Implications: closest competitors are in the same group groups, to some extent, face different 5+-forces exit & entry barriers exist between groups Limitations of 5+-Forces & Strategic Groups models Static picture with limited attention to innovation. Industries evolve “unfrozen and reshaped” by technology : punctuated equilibrium hyper-competitive industries with no equilibrium downplays individual company differences studies show that industry only accounts for 10%-20% of variance in firms’ profit rates