Evaluating a Firm’s External
Environment

TiVo

What is TiVo?

What are the strengths and weaknesses of
TiVo?

Opportunities & Threats


Structure Conduct Performance Model
– S-C-P
– Structure
 Number of competing firms
 Homogeneity of products
 Cost of entry and exit
– Firm Conduct
 Strategies firms pursue to gain competitive advantage
– Performance
 Firm Level
– Normal, below-normal, above-normal performance
 Society
– Productive and allocative efficiency, level of employment, progress


Ethics
– Do firms that achieve a competitive advantage hurt social welfare?

Types of Competition and Expected firm performance
Type of
Competition
Perfect competition
Attributes Examples
Stock market
Crude oil
Expected firm performance
Normal
Monopolistic
Competition
Oligopoly
Monopoly
Large number for firms
Homogeneous products
Low cost of entry and exit
Large number for firms
Heterogeneous products
Low cost of entry and exit
Small number for firms
Homogeneous products
Costly entry and exit
One Firm
Costly Entry
Toothpaste
Shampoo
Golfballs
Airlines
U.S. breakfast cereal
Mail delivery
Above Normal
Above Normal
Above Normal

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Amazon.com
– Barnes and Noble.com
– Borders
– Powell’s Bookstore

ESPN
– Fox Regional Sports
Network
– CSTV


Economies of scale

Product differntiation

Cost advantges independent of scale

Government regulation of entry


Numerical example
– 5 firms
– Demand 22,000
– Optimal size factory 4000

Sources of cost advantage,
Independent of scale that can act as barriers to entry

Proprietary Technology
– When incumbent firms have secret or patented technology that reduces their costs below the costs of potential entrants.
 Eastman Kodak/Polaroid $873
 Intel/Digital $700
 Roche Holding/Igen $505
 Genetech/City of Hope $500


Managerial Know-how
– When incumbent firms have taken for granted knowledge, skills and information that take years to develop not possessed by potential entrants

Favorable Access to Raw Materials

Learning Curve Advntages

Government Policy as a Barrier to
Entry


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IGT in Japan
Did not meet government slot machine standards
Only Japanese companies had access to the standards
Japanese beer Market
– Kirin , Asahi , Sapporo , Suntory
Must already be producing 2 million liters of beer


Price cutting

Frequent introduction of new products

Intense advertisng

Rapid competitive actions and reactions in an industry

Attributes of an Industry that
Increase the threat of Rivalry

Large number of competing firms that roughly the same size

Slow Industry Growth

Lack of product differentiation

Capacity added in large increments


Close
– Amazon.com other book stores
– E-books

Distant
– Other forms of entertainment

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Suppliers’ Industry dominated by small number of firms
Suppliers sell unique or highly differentiated products
Suppliers are not threatened by substitutes
Suppliers threaten forward integration
Firms are not important customers for suppliers


Michael Jordan in basketball

Intel in Computers

Oprah Winfrey in talk shows (King World )


Number of Buyers is small

Products sold to buyers are undifferentiated and standard

Products sold to buyers are a significant percentage of a buyer’s final costs

Buyers are not earning significant economic profits

Buyers threaten backward integration


Wal Mart

Estimating the level of average
Performance
Threats Industry I Industry II Industry III Industry IV
Low High Low Entry
Rivalry
Substitute
Suppliers
High
High
High
High
Buyers High
Performance Low
Low
Low
Low
Low
High
Low
High
Low
High
?
High
Low
High
Low
?

Industry Structure and
Environmental Opportunities
Industry Structure
Fragmented Industry
Emerging Industry
Mature Industry
Declining Industry
International Industry
Opportunities
Consolidation
First-mover advantages
Product refinement
Investment in Service quality
Process Innovation
Leadership
Niche
Harvest
Divestment
Multinational Strategies
Global Strategies
Transnational Strategies


Fragmented Industries
– Industries in which a large number of small or medium-sized firms operate and no small set of firms has dominant market share or creates dominate technolgies
– Few barriers to entry
– Few economies of scale
– Need for close local control


KOA

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Video rentals
– Block Buster
– Hollywood
Movie Theatres
– Regal
– Cinemark


First-mover advantages
– Technological Leadership
 May lead to low cost advantage
 Patents immitated quickly (4 years) 65%
– Preemption of strategically valuable assets
 Access to raw materials
 Favorable geographic location
 Market positioning
– Creation of customer switching costs
 Computer software
 Pharmaceuticals


First Mover Disadvantages
– Commit early to unproven technologies
– Carry the bulk of research and development costs

Oracle example
– From emerging to mature
– Improve customer service
– Unfriendly takeovers

Opportunities in Mature Industries

Slowing growth in total industry demand

Experienced repeat customers

Slowdown in increases in production capacity

Slowdown in the introduction of new products and services

Increase in International competition

Overall reduction the profitability of firms


Barbie breaks up with Ken

The broken arches


Refining current products
– Motor Oil
– Gillette

Emphasis on Service
– McDonalds Vs. Chili’s, Applebee’s

Process Innovation
– Product innovation early
– Process Innovation later
 The death of lemons


Market Leader
– Last man standing after a shakeout

Market Niche
– Vacuum Tubes
– Harmonicas

Divestment

Harvest

Opportunities in International
Industries

Multinational Opportunities
– Operate independently in various countries
 Respond to changes in local conditions
 Hard to get economies of scale
 Best practices

Global Opportunities
– Move to standardization
 Country differences, language, culture
 Interdependent units


Transnational
– Combination
– Experiments