1. Evaluating a Firm’s External Environment
Chapter #2
Evaluating a Firm’s External Environment

2. TiVo What is TiVo? What are the strengths and weaknesses of TiVo?
Opportunities & Threats

3. Structure Conduct Performance Model
S-C-P
Structure
Number of competing firms
Homogeneity of products
Cost of entry and exit
Firm Conduct
Strategies firms pursue to gain competitive advantage
Performance
Firm Level
Normal, below-normal, above-normal performance
Society
Productive and allocative efficiency, level of employment, progress

4. Ethics
Do firms that achieve a competitive advantage hurt social welfare?

5. Types of Competition and Expected firm performance
Type of Competition
Attributes
Examples
Expected firm performance
Perfect competition
Large number for firms
Homogeneous products
Low cost of entry and exit
Stock market
Crude oil
Normal
Monopolistic Competition
Heterogeneous products
Toothpaste
Shampoo
Golfballs
Above Normal
Oligopoly
Small number for firms
Costly entry and exit
Airlines
U.S. breakfast cereal
Monopoly
One Firm
Costly Entry
Mail delivery

6. Michael Porter

7. 5 forces

8. The threat of Entry Amazon.com ESPN Barnes and Noble.com Borders
Powell’s Bookstore
ESPN
Fox Regional Sports Network
CSTV

9. Barriers to Entry Economies of scale Product differntiation
Cost advantges independent of scale
Government regulation of entry

10. Economies of Scale Numerical example 5 firms Demand 22,000
Optimal size factory 4000

11. Sources of cost advantage, Independent of scale that can act as barriers to entry
Proprietary Technology
When incumbent firms have secret or patented technology that reduces their costs below the costs of potential entrants.
Eastman Kodak/Polaroid $873
Intel/Digital $700
Roche Holding/Igen $505
Genetech/City of Hope $500

12. Favorable Access to Raw Materials Learning Curve Advntages
Managerial Know-how
When incumbent firms have taken for granted knowledge, skills and information that take years to develop not possessed by potential entrants
Favorable Access to Raw Materials
Learning Curve Advntages

13. Government Policy as a Barrier to Entry
IGT in Japan
Did not meet government slot machine standards
Only Japanese companies had access to the standards
Japanese beer Market
Kirin, Asahi, Sapporo, Suntory
Must already be producing 2 million liters of beer

14. The threat of Rivalry Price cutting
Frequent introduction of new products
Intense advertisng
Rapid competitive actions and reactions in an industry

15. Attributes of an Industry that Increase the threat of Rivalry
Large number of competing firms that roughly the same size
Slow Industry Growth
Lack of product differentiation
Capacity added in large increments

16. Threat of Substitutes Close Distant Amazon.com other book stores
E-books
Distant
Other forms of entertainment

17. Threat of suppliers
Suppliers’ Industry dominated by small number of firms
Suppliers sell unique or highly differentiated products
Suppliers are not threatened by substitutes
Suppliers threaten forward integration
Firms are not important customers for suppliers

18. Michael Jordan in basketball
Intel in Computers
Oprah Winfrey in talk shows (King World)

19. The Threat of Buyers Number of Buyers is small
Products sold to buyers are undifferentiated and standard
Products sold to buyers are a significant percentage of a buyer’s final costs
Buyers are not earning significant economic profits
Buyers threaten backward integration

20. Wal Mart

21. Estimating the level of average Performance
Threats
Industry I
Industry II
Industry III
Industry IV
Entry
High
Low
Rivalry
Substitute
Suppliers
Buyers
Performance ?

22. Does Industry Structure Matter

23. Industry Structure and Environmental Opportunities
Fragmented Industry
Consolidation
Emerging Industry
First-mover advantages
Mature Industry
Product refinement
Investment in Service quality
Process Innovation
Declining Industry
Leadership
Niche
Harvest
Divestment
International Industry
Multinational Strategies
Global Strategies
Transnational Strategies

24. Fragmented Industries
Industries in which a large number of small or medium-sized firms operate and no small set of firms has dominant market share or creates dominate technolgies
Few barriers to entry
Few economies of scale
Need for close local control

25. Fragmented to Consolidated
KOA
Video rentals
Block Buster
Hollywood
Movie Theatres
Regal
Cinemark

26. Emerging Industries First-mover advantages Technological Leadership
May lead to low cost advantage
Patents immitated quickly (4 years) 65%
Preemption of strategically valuable assets
Access to raw materials
Favorable geographic location
Market positioning
Creation of customer switching costs
Computer software
Pharmaceuticals

27. First Mover Disadvantages
Commit early to unproven technologies
Carry the bulk of research and development costs
Oracle example
From emerging to mature
Improve customer service
Unfriendly takeovers

28. Opportunities in Mature Industries
Slowing growth in total industry demand
Experienced repeat customers
Slowdown in increases in production capacity
Slowdown in the introduction of new products and services
Increase in International competition
Overall reduction the profitability of firms

29. Barbie breaks up with Ken
The broken arches

30. Refining current products
Motor Oil
Gillette
Emphasis on Service
McDonalds Vs. Chili’s, Applebee’s
Process Innovation
Product innovation early
Process Innovation later
The death of lemons

31. Declining Industry Market Leader Market Niche Divestment Harvest
Last man standing after a shakeout
Market Niche
Vacuum Tubes
Harmonicas
Divestment
Harvest

32. Opportunities in International Industries
Multinational Opportunities
Operate independently in various countries
Respond to changes in local conditions
Hard to get economies of scale
Best practices
Global Opportunities
Move to standardization
Country differences, language, culture
Interdependent units

33. Transnational
Combination
Experiments