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04/18/23 1
Business Strategy & Policy PSU MGMT #562
Dave [email protected]
Week # 2 – External Analysis
04/18/23 Dave Garten- Business Strategy 2
What is Strategy?1. Productivity Frontier2. Unique and valuable position3. Tradeoffs and decisions 4. Glue that puts pieces together5. Greatest threat from within…
04/18/23 Dave Garten- Business Strategy 3
External AnalysisThe 3 Components of external analysis
1. Trends2. Industry structure3. Company/organization analysis
04/18/23 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.
Trends: Common TypesEntry/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
04/18/23 Dave Garten- Business Strategy 6
Industry Structure Opportunities
Fragmented -> consolidationMature ->incremental innovations, serviceDeclining ->shakeout leadership, niche, divestEmerging -> TTM, locking up resources, switching cost “Network effect” -> standards, n**2
Source: Derived from Barney, Gaining & Sustaining Competitive Advantage
04/18/23 Dave Garten- Business Strategy 7
Industry Structure Threats - Applying Porter’s 5 Forces
1.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
2.Threat of Rivalry # of competitors, size/influence of competitors, industry
growth rate, level of differentiation (vs. price), step function of capacity
3.Threat of substitutes Deliver the product/service in a different way?4.Suppliers
Bargaining power, # of companies, level of differentiation, threat of vertical integration, threat of substitutes
5.Customers Mirror image of suppliers Vert
ical
Hori
zon
tal
Source: Derived from Barney, Gaining & Sustaining Competitive Advantage
Industry Structure - Strategic Group Example
Geographical Scope
0 10 20 30 40 50 60 70 80
Ver
tica
l Bal
ance
00.
51.
01.
52.
0
INTERNATIONALDOWNSTREAM OIL COMPANIES
PRODUCTION COMPANIES
INTEGRATED INTERNATIONAL MAJORS
NATIONALLY-FOCUSEDDOWNSTREAM COMPANIES
INTEGRATED DOMESTICOIL COMPANIES
Neste Petrofina
ChevronShell
TotalMobil
Exxon
Statoil
PDVSA Kuwait
Unocal Arco
Petrobras ENI
Repsol
NipponSun
BP
Texaco
Elf
Phillips
Amoco
Indian Oil
Elf
ENI
DIVERSIFIED MAJORS
04/18/23 Dave Garten- Business Strategy 9
Defining an IndustryDirect competitorsSubstitutesComplementorsTomorrow’s Competitors
Be careful .. Are you in the buggy business or the transportation
business?
Be careful .. Are you in the buggy business or the transportation
business?
04/18/23 Dave Garten- Business Strategy 10
Industry TransformationEvolutionary 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
04/18/23 Dave Garten- Business Strategy 11
Forecasting Disruption
Source: Disruptive Technologies, catching the Wave, Joseph L. Bower and Clayton M. Christensen, HBR, 2000.
04/18/23 Dave Garten- Business Strategy 12
Forecasting Disruption
Source: Rules of the Game, Scott D. Anthony, Strategy & Innovation, 2004
04/18/23 Dave Garten- Business Strategy 13
Forecasting DisruptionWhy do organizations get disrupted?
Strategies to deal with disruption?
X
04/18/23 Dave Garten- Business Strategy 14
CompetitorsBenchmarking 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)…
04/18/23 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
04/18/23 Dave Garten- Business Strategy 16
BMG CaseObjective: How/when does change alter an industry and a company?Learnings:
1. Understanding the impact of change on an industry -> back to fundamental analysis.
2. Incumbents need to make tradeoffs when facing uncertainty and change.
3. When to make a big bet? Do you know better than your competitors where the
industry is headed? Can you resolve the uncertainty?
4. Organizational structure must reflect strategy