Class Plan 2“If you are not part of the solution, you’re part of

the precipitate” Henry Tillman

Housekeeping (groups, cards…) Questions for the Apollo case Ethics and Strategy (video) Intro to External Analysis Macroenvironmental Analysis Accounting practice Video and exercises on External Analysis

Guiding questions for the Apollo Group Case

Using Porter’s 5-forces model, evaluate the attractiveness of the online-education industry.

What internal factors and macroenvironmental factors will impact the industry in general and Apollo specifically ?

What recommendation (s) have you to make to Apollo to sustain or improve their current position?

Planned, Deliberate, Emergent and Realized Strategies

Source: Adapted from H. Mintzberg and A. McGugh, Administrative Science

Quarterly, Vol. 30. No. 2, June 1985.

Figure 1.7p. 24

Governance Mechanisms

The Board of Directors Elected by stockholders Legally accountable Monitors corporate

strategy decisions Authority to hire, fire,

and compensate Ensures accuracy of

audited financial statements

Inside directors Outside directors

Stock-Based Compensation

Pay-for-performance Stock options: The right to buy company

shares at a predetermined price at some point in the future

Financial StatementsAuditors, GAAP

The Takeover Constraint Limits strategies that ignore

shareholder interests Corporate raiders

Ethics and Strategy

Business ethics are the accepted principles of right or wrong governing the conduct of businesspeople.

Ethical dilemmas occur when: There is no agreement over what the accepted principles

are None of the available alternatives seem ethically acceptable

Many accepted principles are codified into laws: Tort laws – governing product liability Contract law – contracts and breaches of contracts Intellectual property law – protection of intellectual property Antitrust law – governing competitive behavior Securities law - issuing and selling securities

Behaving ethically goes beyond staying within the law

Ethical Issues in Strategy

Self-dealing Managers feather their nest with corporate monies through stock trades Information manipulation Distort or hide information to enhance competitive or personal situation Anticompetitive behavior Actions aimed at harming actual or potential competitors Opportunistic exploitation Of other players in the value chain in which the firm is embedded Substandard working conditions Underinvest in working conditions or pay below market wages Environmental degradation Directly or indirectly take actions that result in environmental harm Corruption Companies pay bribes to gain access to lucrative business contracts.

The Roots of Unethical Behavior

Why do some managers behave unethically?

1. Personal ethics code: will have a profound influence on behavior as a businessperson

2. Do not realize they are behaving unethically: by failing to ask the right questions

3. Organization’s culture: de-emphasizes ethics and considers primarily economic consequences

4. Unrealistic performance goals: encouraging and legitimizing unethical behavior

5. Unethical leadership: that encourages and tolerates behavior that is ethically suspect

Managers should:

1. Favor hiring and promoting people with a well-grounded sense of personal ethics.

2. Build an organizational culture that places a high value on ethical behavior.

3. Make sure that leaders not only articulate but also act in an ethical manner.

4. Put decision-making processes in place that require people to consider the ethical dimension of business decisions.

5. Use ethics officers.

6. Put strong corporate governance processes in place.

7. Act with moral courage and encourage others to do the same.

Behaving Ethically

Industry Analysis

The Structure – Conduct – Performance Model

• originally developed to spot anti-competitive conditionsfor anti-trust purposes

• came to be used to assess the possibilities for above normal profits for firms within an industry

• Porter’s Five Forces Model was developed fromthis economic tradition

The Structure-Conduct- Performance Model

Industry StructureNumber of competing firmsHomogeneity of products

Cost of entry and exit

Firm ConductPrice taking

Product differentiationTacit collusion

Exploiting market power

PerformanceFirm level performance:

Normal, below normal, above normal

Society: efficiency, level of employment, progress

Industry Analysis

Industry A group of companies offering products or services

that are close substitutes for each other and that satisfy the same basic customer needs

Industry boundaries may change as customer needs evolve and technology changes

Sector A group of closely related industries

Market Segments Distinct groups of customers within an industry Can be differentiated from each other with distinct

attributes and specific demands

Porter’s Five Forces Model (Fig 2.2 p50 adapted)

Rivalry among established

firms

Risk of entry by potential competitors

Bargaining power of suppliers

Bargaining power of buyers

Threat of substitute products Special role of

complements

Rivalry

Rivalry among established companies is a function of : industry’s competitive structure –

fragmented vs consolidated demand conditions – growth and rate

of growth exit barriers – emotional, economic,

strategic

Product Lifecycle

Time

Demand Embryonic

Growth Shakeout Mature Declining

New Entrants

Potential Competitors: not currently competing in an industry but capable of doing so.

incumbent companies (those already in an industry) are at an advantage when barriers to entry are high.

Main barriers to entry are: (plus examples?)1) brand loyalty 2) absolute cost advantage based on production

superiority & control of inputs3) economies of scale due to mass production,

increased purchasing power, spreading of fixed costs, advertising economies

4) consumer switching costs 5) government regulation

Power of Buyers

Bargaining power of buyers is high when:- many sellers and few buyers (at extreme,

a monopsony)- purchases are made in large $ amounts

or quantities- purchases represent a large percentage

of total orders- buyers have low switching costs- each buyers can have multiple suppliers possibility of vertical integration

Power of Suppliers

Bargaining power of suppliers is high when: few substitutes for input they supply industry is not an important customer high switching costs (sometimes due to

differentiation) possibility of vertical integration (supplier) no possibility of vertical integration

(buyer)

Subtitutes and Complements

Threat of substitute products Are there other industries that serve the similar

consumer needs?Are there strong competitive forces in those other

industries?The “Sixth Force” : ComplementorsComplementors sell or supply complementary

products to an enterprises existing product offerings.

If an industry’s complementors are weak or supply unattractive products they can be a threat to the industry

Macro-environmental Forces [Environmental Scanning]

Macroeconomics: growth rate of the economy, interest rates, currency exchange rates, inflation rates

Technological: “creative destruction”, shifting barriers to entrySocial: lifestyles, trends and attitudesDemographics: composition of the population, factors such as

income distribution, education, labour mobility, genderPolitical & Legal : deregulation and free trade Global: falling barriers to trade, new economic development

Environmental Scanning should: be a continuous formal & informal process explore beyond the boundaries of the business environment identify the potential impacts of events in a timely fashion be a context & a trigger for industry and business analysis can be carried too far

More on 5-forces model

Strategic Groups Def.: subsections of industry with the same basic strategy in-group

Implications: closest competitors are in the same group groups, to some extent, face different 5+-forces exit & entry barriers exist between groups

Limitations of 5+-Forces & Strategic Groups models Static picture with limited attention to innovation.

Industries evolve “unfrozen and reshaped” by technology : punctuated equilibrium hyper-competitive industries with no equilibrium

downplays individual company differences studies show that industry only accounts for 10%-20% of

variance in firms’ profit rates