1. Business Strategy & Policy PSU MGMT #562
Week # 2 – External Analysis
Dave Garten
4/16/2017

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. Industry Structure - Strategic Group Example
Geographical Scope
Vertical Balance
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

9. 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

10. 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

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

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

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

14. 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

15. 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

16. 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