Chapter 2 Outline J370 General Environment- Broad trends in the context within which a firm operates that can

have an impact on a firms strategic choices. Consists of 6 elements: 1 Technological Change- creates opportunities as firms begin to explore how to use technology to create new products and services; and also creates threats that forces firms to rethink their technological strategies. 2 Demographics- The distribution of individuals in a society in terms of age, gender, marital status, income, and other personal attributes that may determine buying patterns. 3 Culture- Values, beliefs, and norms that guide behavior in a society. 4 Economic climate- the overall health of the economic systems within which a firm operates. 5 Legal and Political conditions- The legal and political dimensions of an organizations general environment are the laws and the legal systems impact on business. 6 International Events- Include events such as civil wars, political coups, terrorism, wars, famines, and recessions. Structure-Conduct-Performance (S-C-P) Model- Created by economists in the 1930s to understand when competition was not developing in an industry, and whether government regulations should be implemented or not. Industry Structure: Measured by such factors as the number of competitors, the heterogeneity of products, and the cost of entry or exit in an industry. Conduct: The strategies that firms in an industry implement Performance: (Two meanings) 1) The performance of individual firms (more important) & 2) The performance of the economy as a whole.

The Five Forces Model of Environmental Threats- Identifies the five most common threats faced by firms in their local competitive environments and the conditions under which these threats are more or less likely to be present. Can only be used to anticipate the average level of firm performance in an industry. (Porter) Environmental threat- any individual, group, or organization outside the firm that seeks to reduce the level of that firms performance.

Five most common threats: 1) The threat of entry- New entrants are motivated to enter the industry due to the superior profits that some firms are earning. Competition increases and performance reduces. Barriers to Entry- attributes of an industrys structure that increase the cost of entry. Economies of Scale: When a firms costs fall as a function of its volume of production Diseconomies of Scale: When a firms costs rise as a function of its volume of production. Product Differentiation: incumbent firms possess brand identification and customer loyalty that potential entrants do not. Cost Advantages: Proprietary technology (secret or patented), managerial knowhow, favorable access to raw materials. Government Policy: government sometimes increases the cost of entry to keep industry prices at a reasonable level or even blocks entry for certain industries (power, education). 2) The threat of rivalry- the intensity of competition among a firms direct competitors. Increase threat of rivalry: 1) Large number of competing firms that are roughly the same size 2) Slow industry growth: firms increase rivalry and start acquiring market share from other competitors (Burger King vs. Wendys value menu) 3) Lack of product differentiation 4) Capacity added in large increments 3) Threat of Substitutes- the products or services provided by a firms rivals meet approximately the same customer needs as the firm itself. - Substitutes place a ceiling on the prices a firm can charge. - Substitutes can also eliminate other products if the innovation is clearly superior. 4) The Threat of Suppliers- Can threaten the performance of some firms by increasing prices or by reducing quality of their supplies. Indicators of Threat of Suppliers:

1) 2) 3) 4)

Suppliers industry dominated by small number of firms Suppliers sell unique or highly differentiated products Suppliers are not threatened by substitutes Suppliers threaten forward vertical integration: suppliers stop being suppliers only and start becoming suppliers and rivals. 5) Firms are not important customers for suppliers. 5) The Threat of Buyers- Buyers act to decrease a firms revenue. Indicators of Threat of Buyers: 1) 2) 3) 4) 5) Number of buyers is small Products sold to buyers are undifferentiated and standard Products sold to buyers are a significant percentage of a buyers final cost Buyers are not earning significant economic profits. Buyers threaten backward vertical integration: A buyer has a strong incentive to enter into its suppliers business to capture some of the economic profits being earned by that supplier.

Competitor- when a customer values your product less when they have the other firms products. Complementor- when a customer values your product more when they have this other firms product. Brandenburger and Nalebuff- Argue that an important difference between complementors and competitors is that a firms complementors help to increase the size of the market, whereas a firms competitors divide the market amongst a set of firms. Fragmented Industry- are industries in which a large number of small or medium-sized firms operate and no small set of firms has a dominant market share. (Service industries) - Consolidation strategy: a major opportunity that begins implementing strategies to consolidate the industry into a smaller number of firms. Emerging Industry- newly created or re-created industries formed by technological innovations, changes in demand, the emergence of new customer needs, and so forth. (computer industry) First-mover advantages: advantages that come to firms that make important strategic and technological decisions early in the development of an industry.

1) Technological Leadership Strategy: firms that make early investments in particular technologies in an industry. Creates a low-cost position based on production volume and some firms may even obtain patent protections. 2) Preemption of Strategically Valuable Assets: Resources required to successfully compete in an industry. (Access to raw materials such as oil/steel) 3) Customer Switching Costs: When customers make investments in order to use a firms particular products or services. These investments tie customers to a single firm and make it difficult for competitors. - First-mover disadvantages: Emerging industries are characterized by a great deal of uncertainty and risk. Mature Industry Mature industries include: 1) 2) 3) 4) 5) 6) Slowing growth in total industry demand Experienced repeated customers A slowdown in production capacity A slowdown in the introduction of new products An increase in the amount of international competition An overall reduction in the profitability of firms in the industry.

- Refining current products, emphasis on service, and process innovation are great ways to improve in a mature industry. Declining Industry- an industry that has experienced an absolute decline in unit sales over a sustained period of time. Rivalry is likely to be high as well as many other threats. - Market Leader- the firm with the largest market share in that industry. The leaders objective is to facilitate the exit of firms that are not likely to survive a shakeout. - Niche Strategy- Reduces a firms scope of operations and focuses on narrow segments of the declining industry. - Harvest Strategy- Firms engage in a long, systematic, phased withdrawal, extracting as much value as possible during the period. Firms do not expect to remain in the industry in the long term. (can reduce range of products, reducing quality, etc.) - Divestment- Objective is to extract a firm from a declining industry. Unlike a harvest strategy, divestment occurs quickly, often soon after a pattern of decline has been established.

International Industry Tariffs- taxes levied on goods or serviced imported into a country. 1) Ad valorem tariffs: a tariff is calculated as a % of the market value of an import. 2) Specific tariffs: tariff is calculated as a % of the weight and volume of the goods being imported 3) Compound tariffs: both the market value and weight are used in calculating a tariff Quotas- a numerical limit on the number of particular items allowed to be imported into a country. Other Nontariff trade barriers Establishing performance standards Restricting access to domestic distribution channels Labor regulations

Multinational opportunities- operates simultaneously in several national or regional markets, but these operations are independent of each other and are free to choose how to respond to the marketplace. (Nestle & General Motors) Global opportunities- seeks to optimize production, distribution, and other business functions throughout the world by addressing all the markets in which they operate. Transactional Opportunity- Treat global operations as an integrated network of distributed and interdependent resources and capabilities.