The Honda Question (via Rumelt)

In 1977 my MBA final exam on Honda motorcycle case asked “Should Honda enter the global automobile business”?

Giveaway question. Anyone who said yes flunked.

- Markets saturated; efficient competition existed globally; Honda had little or no experience in autos; Honda had no distribution system

In 1985, my wife drove a Honda

Analyzing the external environment

MGMT 619Prof. Sanjay Jain

Learning Objectives

Understand: Strategizing under different levels of uncertainty The five forces framework and how to use them to

analyze industry profitability. Applicability of the framework

Traditional approaches to managing uncertainty

By applying a set of powerful analytic tools, executives can predict future accurately enough to allow them to choose a clear strategic direction

Discounted cash flow analysis Underlying assumption: likely outcomes identifiable

Binary approach World is open to precise predictions about the future or is completely unpredictable

Types of Uncertainty Uncertainty

Clear enough future Alternate futures Range of futures True ambiguity

Identify right tools of strategic analysis for different levels of uncertainty

Strategy under uncertainty

Stances

- Shape

- Adapt

- Reserve right to play

Portfolio of actions

- Big bets

- No-regret moves

- Options

Defining the General Environment

EnvironmentaEnvironmentall

TechnologicalPolitical/Legal

Economic

Sociocultural Demographic

Global

Industry Analysis

Key tool: Porter’s “Five Forces” model identifies the potential profitability of an

industry (attractiveness) specifies the forces that represent

threats to the profitability of firms in the industry

Industry Boundaries What is an industry?

collection of firms whose products (or services) are perfect or near perfect substitutes similarity of products/services is key

Importance of industry boundaries helps managers understand arena of

competition enables identification of competitors helps managers identify key success factors provides basis to evaluate firm goals

Industry Analysis: The Five Forces Model

Risk of entry by potential competitors

Risk of entry by potential competitors

RivalryAmong

Established Firms

RivalryAmong

Established Firms

Threat of substitute products

Threat of substitute products

Bargainingpower ofsuppliers

Bargainingpower ofsuppliers

Bargaining power ofbuyers

Bargaining power ofbuyers

Threat of Entry Entry barriers

reduce threat of entry protect incumbents from competition

Barriers to entry Product/service differentiation (Brand identity) Capital requirements Absolute cost advantages Economies of scale Government regulation Switching costs

Buyer Power

Buyer concentration / Buyers purchase in large quantities

Buyer accounts for large percentage of sellers’ total orders

Buyers can switch suppliers at low cost Buyers can vertically integrate

Supplier Power

Suppliers’ product has few substitutes and is important to buyer

The buyers’ industry is not an important customer to the supplier’s

Suppliers can vertically integrate and compete with buyer

Buyers can’t vertically integrate backward and supply their own needs

Supplier concentration

Threat of Substitute Products

Products with similar function(s) limit the prices firms can charge

Switching costs Buyer inclination to substitute Variety/quality of substitutes

Intensity of Rivalry

Numerous competitors Industry is growing slowly (or

contracting) High fixed costs Little product differentiation Minimal customer switching costs Significant exit barriers

Process of Industry Analysis

Define industry boundaries

Identify the participants

Highlight each of the five forces

Identify the factors that drive each force

Assess the strength of each force

Conclude: Assess industry profitability

potential

Strategic implications of Industry Analysis

Decide whether to participate Guide entry strategy Locate profitable positions Improve competitive strategy

Exploit industry change Shape/define industry

Limitations of Five Forces Analysis

Static snapshot of industry attractiveness

Exogenous forces vs. endogenous change

Individual firm actions that change industry structure are not considered

Example: role of innovation de-emphasized

Limitations of five forces analysis

Certain actors (government, complementers, etc) underemphasized

Porter’s response- These are factors, not forces: can be

incorporated into framework

Limitations of Five Forces Analysis Assumes buyers, suppliers,

competitors and substitute providers interact at arm’s length ignores role of cooperation and

complementors Assumes low-moderate uncertainty

often difficult to accurately identify relevant actors, industry boundaries, and predict competitor behavior

Firm differences underestimated

Key points External analysis is fundamental starting

point for strategy development Opportunities and threats

Five forces framework is a useful tool to understand the competitive environment With some limitations

Environments evolve, often as a result of firms’ actions endogenous vs. exogenous influence

For next time

Read the Cola Wars case Prepare answers to discussion questions

Be prepared to discuss and debate!