Chapter #2Chapter #2

Evaluating a Firm’s External Evaluating a Firm’s External EnvironmentEnvironment

TiVoTiVo

What is TiVo?What is TiVo? What are the strengths and What are the strengths and

weaknesses of TiVo?weaknesses of TiVo? Opportunities & ThreatsOpportunities & Threats

Structure Conduct Performance ModelStructure Conduct Performance Model– S-C-PS-C-P– StructureStructure

Number of competing firmsNumber of competing firms Homogeneity of productsHomogeneity of products Cost of entry and exitCost of entry and exit

– Firm ConductFirm Conduct Strategies firms pursue to gain competitive Strategies firms pursue to gain competitive

advantageadvantage

– PerformancePerformance Firm LevelFirm Level

– Normal, below-normal, above-normal performanceNormal, below-normal, above-normal performance

SocietySociety– Productive and allocative efficiency, level of Productive and allocative efficiency, level of

employment, progressemployment, progress

Ethics Ethics – Do firms that achieve a competitive Do firms that achieve a competitive

advantage hurt social welfare?advantage hurt social welfare?

Types of Competition and Types of Competition and Expected firm performanceExpected firm performance

Type of Type of CompetitionCompetition

AttributesAttributes ExamplesExamples Expected firm Expected firm performanceperformance

Perfect Perfect competitioncompetition

Large number for Large number for firmsfirms

Homogeneous Homogeneous productsproducts

Low cost of entry and Low cost of entry and exitexit

Stock marketStock market

Crude oilCrude oilNormalNormal

MonopolistiMonopolistic c CompetitionCompetition

Large number for Large number for firmsfirms

Heterogeneous Heterogeneous productsproducts

Low cost of entry and Low cost of entry and exitexit

ToothpasteToothpaste

ShampooShampoo

GolfballsGolfballs

Above NormalAbove Normal

OligopolyOligopoly Small number for firmsSmall number for firms

Homogeneous Homogeneous productsproducts

Costly entry and exitCostly entry and exit

AirlinesAirlines

U.S. breakfast U.S. breakfast cerealcereal

Above NormalAbove Normal

MonopolyMonopoly One FirmOne Firm

Costly EntryCostly EntryMail deliveryMail delivery Above NormalAbove Normal

Michael PorterMichael Porter

5 forces5 forces

The threat of EntryThe threat of Entry

Amazon.comAmazon.com– Barnes and Barnes and

Noble.comNoble.com– BordersBorders– Powell’s BookstorePowell’s Bookstore

ESPNESPN – Fox Regional Sports Fox Regional Sports

NetworkNetwork– CSTVCSTV

Barriers to EntryBarriers to Entry

Economies of scaleEconomies of scale Product differntiationProduct differntiation Cost advantges independent of scaleCost advantges independent of scale Government regulation of entryGovernment regulation of entry

Economies of ScaleEconomies of Scale

Numerical exampleNumerical example– 5 firms5 firms– Demand 22,000Demand 22,000– Optimal size factory 4000Optimal size factory 4000

Sources of cost advantage, Sources of cost advantage, Independent of scale that can Independent of scale that can

act as barriers to entryact as barriers to entry Proprietary TechnologyProprietary Technology

– When incumbent firms have secret or When incumbent firms have secret or patented technology that reduces their patented technology that reduces their costs below the costs of potential costs below the costs of potential entrants.entrants. Eastman Kodak/Polaroid $873Eastman Kodak/Polaroid $873 Intel/Digital $700Intel/Digital $700 Roche Holding/Igen $505Roche Holding/Igen $505 Genetech/City of Hope $500Genetech/City of Hope $500

Managerial Know-howManagerial Know-how– When incumbent firms have taken for When incumbent firms have taken for

granted knowledge, skills and granted knowledge, skills and information that take years to develop information that take years to develop not possessed by potential entrantsnot possessed by potential entrants

Favorable Access to Raw MaterialsFavorable Access to Raw Materials Learning Curve AdvntagesLearning Curve Advntages

Government Policy as a Barrier Government Policy as a Barrier to Entryto Entry

IGTIGT in Japan in Japan Did not meet government slot Did not meet government slot

machine standards machine standards Only Japanese companies had access Only Japanese companies had access

to the standardsto the standards Japanese beer MarketJapanese beer Market

– KirinKirin, Asahi, Sapporo, Suntory, Asahi, Sapporo, Suntory Must already be producing 2 million Must already be producing 2 million

liters of beerliters of beer

The threat of RivalryThe threat of Rivalry

Price cuttingPrice cutting Frequent introduction of new Frequent introduction of new

productsproducts Intense advertisngIntense advertisng Rapid competitive actions and Rapid competitive actions and

reactions in an industryreactions in an industry

Attributes of an Industry that Attributes of an Industry that Increase the threat of RivalryIncrease the threat of Rivalry

Large number of competing firms Large number of competing firms that roughly the same sizethat roughly the same size

Slow Industry GrowthSlow Industry Growth Lack of product differentiationLack of product differentiation Capacity added in large incrementsCapacity added in large increments

Threat of SubstitutesThreat of Substitutes

CloseClose– Amazon.com other book storesAmazon.com other book stores– E-booksE-books

DistantDistant– Other forms of entertainmentOther forms of entertainment

Threat of suppliersThreat of suppliers

Suppliers’ Industry dominated by Suppliers’ Industry dominated by small number of firmssmall number of firms

Suppliers sell unique or highly Suppliers sell unique or highly differentiated productsdifferentiated products

Suppliers are not threatened by Suppliers are not threatened by substitutessubstitutes

Suppliers threaten forward integrationSuppliers threaten forward integration Firms are not important customers for Firms are not important customers for

supplierssuppliers

Michael Jordan in basketballMichael Jordan in basketball Intel in ComputersIntel in Computers Oprah Winfrey in talk shows (King Oprah Winfrey in talk shows (King

WorldWorld))

The Threat of BuyersThe Threat of Buyers

Number of Buyers is smallNumber of Buyers is small Products sold to buyers are Products sold to buyers are

undifferentiated and standardundifferentiated and standard Products sold to buyers are a Products sold to buyers are a

significant percentage of a buyer’s final significant percentage of a buyer’s final costscosts

Buyers are not earning significant Buyers are not earning significant economic profitseconomic profits

Buyers threaten backward integrationBuyers threaten backward integration

Wal MartWal Mart

Estimating the level of average Estimating the level of average PerformancePerformance

ThreatsThreats Industry Industry II

Industry IIIndustry II Industry Industry IIIIII

Industry Industry IVIV

EntryEntry HighHigh LowLow HighHigh LowLow

RivalryRivalry HighHigh LowLow LowLow HighHigh

SubstituteSubstitute HighHigh LowLow HighHigh LowLow

SuppliersSuppliers HighHigh LowLow LowLow HighHigh

BuyersBuyers HighHigh LowLow HighHigh LowLow

PerformancPerformancee

LowLow HighHigh ?? ??

Does Industry Structure Does Industry Structure MatterMatter

Industry Structure and Industry Structure and Environmental OpportunitiesEnvironmental OpportunitiesIndustry StructureIndustry Structure OpportunitiesOpportunities

Fragmented IndustryFragmented Industry ConsolidationConsolidation

Emerging IndustryEmerging Industry First-mover advantagesFirst-mover advantages

Mature IndustryMature Industry Product refinementProduct refinement

Investment in Service qualityInvestment in Service quality

Process InnovationProcess Innovation

Declining IndustryDeclining Industry LeadershipLeadership

NicheNiche

HarvestHarvest

DivestmentDivestment

International IndustryInternational Industry Multinational StrategiesMultinational Strategies

Global StrategiesGlobal Strategies

Transnational StrategiesTransnational Strategies

Fragmented IndustriesFragmented Industries– Industries in which a large number of Industries in which a large number of

small or medium-sized firms operate small or medium-sized firms operate and no small set of firms has dominant and no small set of firms has dominant market share or creates dominate market share or creates dominate technolgiestechnolgies

– Few barriers to entryFew barriers to entry– Few economies of scaleFew economies of scale– Need for close local controlNeed for close local control

Fragmented to ConsolidatedFragmented to Consolidated

KOAKOA Video rentalsVideo rentals

– Block BusterBlock Buster– HollywoodHollywood

Movie TheatresMovie Theatres– RegalRegal– CinemarkCinemark

Emerging IndustriesEmerging Industries First-mover advantagesFirst-mover advantages

– Technological LeadershipTechnological Leadership May lead to low cost advantageMay lead to low cost advantage Patents immitated quickly (4 years) 65%Patents immitated quickly (4 years) 65%

– Preemption of strategically valuable Preemption of strategically valuable assetsassets Access to raw materialsAccess to raw materials Favorable geographic locationFavorable geographic location Market positioningMarket positioning

– Creation of customer switching costsCreation of customer switching costs Computer softwareComputer software Pharmaceuticals Pharmaceuticals

First Mover DisadvantagesFirst Mover Disadvantages– Commit early to unproven technologiesCommit early to unproven technologies– Carry the bulk of research and Carry the bulk of research and

development costsdevelopment costs Oracle exampleOracle example

– From emerging to matureFrom emerging to mature– Improve customer serviceImprove customer service– Unfriendly takeoversUnfriendly takeovers

Opportunities in Mature Opportunities in Mature IndustriesIndustries

Slowing growth in total industry demandSlowing growth in total industry demand Experienced repeat customersExperienced repeat customers Slowdown in increases in production Slowdown in increases in production

capacitycapacity Slowdown in the introduction of new Slowdown in the introduction of new

products and servicesproducts and services Increase in International competitionIncrease in International competition Overall reduction the profitability of firmsOverall reduction the profitability of firms

Barbie breaks up with KenBarbie breaks up with Ken The broken archesThe broken arches

Refining current productsRefining current products– Motor OilMotor Oil– GilletteGillette

Emphasis on ServiceEmphasis on Service– McDonalds Vs. Chili’s, Applebee’sMcDonalds Vs. Chili’s, Applebee’s

Process InnovationProcess Innovation– Product innovation earlyProduct innovation early– Process Innovation laterProcess Innovation later

The death of lemonsThe death of lemons

Declining IndustryDeclining Industry

Market LeaderMarket Leader– Last man standing after a shakeoutLast man standing after a shakeout

Market NicheMarket Niche– Vacuum TubesVacuum Tubes– HarmonicasHarmonicas

DivestmentDivestment HarvestHarvest

Opportunities in International Opportunities in International IndustriesIndustries

Multinational OpportunitiesMultinational Opportunities– Operate independently in various Operate independently in various

countriescountries Respond to changes in local conditionsRespond to changes in local conditions Hard to get economies of scaleHard to get economies of scale Best practicesBest practices

Global OpportunitiesGlobal Opportunities– Move to standardizationMove to standardization

Country differences, language, cultureCountry differences, language, culture Interdependent unitsInterdependent units

TransnationalTransnational– CombinationCombination– ExperimentsExperiments