Business 20. Lecture #2: External and Internal Environments

Transcription

1 Lecture #2: External and Internal Environments

2 Homework Assignment #1 Read Chapter 1 Management Portfolio Read the Closing Case on George David Review Chapter 2

3 Why Did Circuit City Fail?

4 Analyzing an Industry: Michael Porter s Five Forces New Entrants Supplier Power Internal Rivalry Buyer Power Substitutes

5 Analyzing an Industry: Michael Porter s Five Forces New New Entrants Entrants Supplier Supplier Power Power Internal Internal Rivalry Rivalry Buyer Buyer Power Power Substitutes Substitutes

6 Five Forces Model: Threat of Entry If Threat of Entry is HIGH, then the barriers to entry are low and consequently the industry is more competitive and less attractive If Threat of Entry is LOW, then the barriers to entry are high and consequently the industry is less competitive and more attractive

7 Five Forces Model: Threat of Entry Factors that make it costly for competitors to enter an industry knows as BARRIERS TO ENTRY Economies of Scale in Production The more you make, the cheaper it is: Cars vs. Legal Documents Brand Loyalty / Brand Equity / Advertising Costs McDonald s, Coke, Disney, Apple Fixed Capital Costs Over $1 Billion to construct a semi-conductor plant Efficient capital markets can overcome this

8 Five Forces Model: Threat of Entry Complementary Products and Increasing Economies of Scale, sometimes called NETWORK EFFECTS, can also be a barrier to entry Related products or factors that increase the value of existing ones iphone Apps with the iphone ebay Users and auctions with ebay Facebook Users and the Facebook Social Media

9 Barriers to Entry High or Low??? 1. Cell Phone Service 2. Lemonade Stands 3. Automobile Manufacturing 4. Beer Manufacturing 5. Community Colleges 6. Software Design 7. Health Insurance 8. Child Care and Elder Care

10 Analyzing an Industry: Michael Porter s Five Forces New Entrants Supplier Power Internal Rivalry Buyer Power Substitutes

11 Five Forces Model: Bargaining Power of Buyers If Buyers can bargain down the price, then Bargaining Power is HIGH, and consequently the industry is more challenging and less attractive If Buyers cannot bargain down the price, then Bargaining Power is LOW, and consequently the industry is less challenging and more attractive

12 Five Forces Model: Bargaining Power of Buyers Fewer buyers generally have HIGH Bargaining Power Paint Manufacturing: Who are the buyers? Home Depot or Lowe s: HIGH Movie Theatres: Who are the buyers? Millions of consumers, LOW Bargaining Power for movies you want to see

13 Five Forces Model: Bargaining Power of Buyers Lots of Substitute Products Then Buyers have choices and hence High Bargaining Power Fast Food Hamburger: What are the buyers options? Lots of Options: Fried Chicken, Tacos, Hotdogs, Chinese Food: HIGH Electricity: What are the buyer options? Usually only one option: LOW

14 Five Forces Model: Bargaining Power of Buyers Low Switching Costs among Buyers easy for Buyers to change vendors and generally High Bargaining Power Cell Phone Service: How hard is it to switch? Number Portability (2003) makes it easy to switch, previously had to notify all of your contacts: HIGH

15 Bargaining Power of Buyers High or Low??? 1. Cell Phone Service 2. Starbucks Coffee 3. Coffee 4. Cell Phone Handsets 5. Televisions 6. Community Colleges 7. Car Insurance 8. Health Insurance

16 Analyzing an Industry: Michael Porter s Five Forces New Entrants Supplier Power Internal Rivalry Buyer Power Substitutes

17 Five Forces Model: Bargaining Power of Suppliers If Suppliers can command high prices, then Bargaining Power is HIGH, and consequently the industry is more challenging and less attractive If Suppliers cannot command high prices, then Bargaining Power is LOW, and consequently the industry is less challenging and more attractive

18 Five Forces Model: Bargaining Power of Suppliers Quantity Matters Buying in bulk is cheaper, think Costco Buying small quantities is expensive, think Space Shuttles Alternative Sources Matter Lots of clothing manufacturers Few Microchip Manufacturers (Intel, AMD)

19 Five Forces Model: Bargaining Power of Suppliers Low Switching Costs Forever 21 can buy from China or Vietnam Dell must make lots of changes to support AMD vs. Intel No Unique Products Electric Car Batteries are UNIQUE to the car Memory chips are a commodity

20 Bargaining Power of Suppliers High or Low??? 1. Airlines 2. Starbucks Coffee 3. Pharmaceutical Drugs 4. Cell Phone Handsets 5. El Camino College 6. Cell Phone Providers 7. NASA 8. Toys

21 Analyzing an Industry: Michael Porter s Five Forces New Entrants Supplier Power Internal Rivalry Buyer Power Substitutes

22 Five Forces Model: Threat of Substitutes If there are many good substitutes for a product, then customers can easily switch to something else, and the threat is HIGH, and consequently the industry is more challenging and less attractive If there are few good substitutes for a product, then customers cannot easily switch to something else, and the threat is LOW, and consequently the industry is less challenging and more attractive

23 Threat of Substitutes High or Low??? 1. Encyclopedias 2. Cell Phones 3. Fast Food Burgers 4. Television Entertainment 5. Community College 6. Airline Travel 7. Gym Membership 8. Diapers

24 Analyzing an Industry: Michael Porter s Five Forces New Entrants Supplier Power Internal Rivalry Buyer Power Substitutes

25 Five Forces Model: Internal Rivalry If internal rivalry is HIGH, the industry is more challenging and less attractive If internal rivalry is LOW, the industry is less challenging and more attractive

26 Five Forces Model: Internal Rivalry Larger Number of Firms Tends to Increases Rivalry Cell Phones Cellphone Handsets (HIGH) Cell Phone Service(LOW) TV Televisions (HIGH) Cable TV Providers (LOW)

27 Five Forces Model: Internal Rivalry Commodity Products (High) vs. Differentiated Products (Low) Cell Phone vs. iphone Water vs. Evian Carrots vs. Organic Carrots Negative Economic Conditions Can Increase Rivalry Recession (HIGH) vs. Boom Times (LOW)

28 Five Forces Model: Internal Rivalry Excess Capacity or Barriers to Exit Make Rivalry Artificially HIGH Closing costs can be high (pensions, severance) Companies believe Things will get better Government regulations can limit exit (gas stations)

29 Five Forces Model: McDonald s Potato Example Industry: Potato Supplier Buyer Power: VERY HIGH, McDonald s has HUGE power. Easy to switch to other farmers. Not dependent on any one supplier Supplier Power: Seeds, Water, and Storage and Transportation are all low competition. Only labor has some leverage Threat of New Entrants: High. Easy to get into the potato business Threat of Substitutes: Low. People like fries Internal Rivalry: High. Lots of farmers. Unattractive Industry, but

30 Other Industry Forces: External Forces Political and Legal Environment Banking Fees, Airline Security, Software Antitrust Laws World Economy Interest Rates, Currency Rates, National Debt Issues Demographic and Sociocultural Forces Population Growth / Age (India, China) Social Beliefs and values (environmental, health, etc.) Industrialization Technological Change Internet, Communication Costs, Social Media

31 Group Exercise: Industry Analysis Buyer Power Supplier Power New Entrants Substitutes / Complements Internal Rivalry External Environment Hint: What Industry is Cold Stone Creamery in?

32 Homework Assignment #2 Read Chapter 2 Management Portfolio Read the Closing Case on Pharmaceuticals Answer Questions 1 4