Transcript Chapter#2.ppt

Chapter #2
Evaluating a Firm’s External
Environment
TiVo
What is TiVo?
 What are the strengths and weaknesses of
TiVo?
 Opportunities & Threats


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

Ethics
– Do firms that achieve a competitive
advantage hurt social welfare?
Types of Competition and Expected
firm performance
Type of
Competition
Attributes
Examples
Expected firm
performance
Perfect
competition
Large number for firms
Stock market
Homogeneous products
Crude oil
Low cost of entry and exit
Normal
Monopolistic
Competition
Large number for firms
Toothpaste
Heterogeneous products
Shampoo
Low cost of entry and exit Golfballs
Above Normal
Oligopoly
Small number for firms
Homogeneous products
Costly entry and exit
Airlines
U.S. breakfast
cereal
Above Normal
Monopoly
One Firm
Costly Entry
Mail delivery
Above Normal
Michael Porter
5 forces
The threat of Entry

Amazon.com
– Barnes and Noble.com
– Borders
– Powell’s Bookstore

ESPN
– Fox Regional Sports
Network
– CSTV
Barriers to Entry
Economies of scale
 Product differntiation
 Cost advantges independent of scale
 Government regulation of entry

Economies of Scale

Numerical example
– 5 firms
– Demand 22,000
– Optimal size factory 4000
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

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

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
The threat of Rivalry
Price cutting
 Frequent introduction of new products
 Intense advertisng
 Rapid competitive actions and reactions in
an industry

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

Threat of Substitutes

Close
– Amazon.com other book stores
– E-books

Distant
– Other forms of entertainment
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

Michael Jordan in basketball
 Intel in Computers
 Oprah Winfrey in talk shows (King World)

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


Wal Mart
Estimating the level of average
Performance
Threats
Industry I Industry II
Industry III Industry IV
Entry
High
Low
High
Low
Rivalry
High
Low
Low
High
Substitute
High
Low
High
Low
Suppliers
High
Low
Low
High
Buyers
High
Low
High
Low
Performance
Low
High
?
?
Does Industry Structure Matter
Industry Structure and
Environmental Opportunities
Industry Structure
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

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
Fragmented to Consolidated
KOA
 Video rentals

– Block Buster
– Hollywood

Movie Theatres
– Regal
– Cinemark
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

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
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

Barbie breaks up with Ken
 The broken arches


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
Declining Industry

Market Leader
– Last man standing after a shakeout

Market Niche
– Vacuum Tubes
– Harmonicas
Divestment
 Harvest

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

Transnational
– Combination
– Experiments