Strategic Issue Assignment

Managers’Mental Models

Beliefs andUnderstandings

about:

Macro Env.Industry Env.

Appropriate Size and Diversity

How to Organize

Decisions aboutBusiness Definition

Mission and Objectives

Decisions aboutCorporate Strategy and Diversification

Decisions aboutBusiness Strategy

Decisions aboutOrganizational Structure and

Implementation

Activities,Resources

and Capabilities

Market Position

Performance and

CompetitiveAdvantage

Feedback (Reinforces or suggests changes in managers’ mental models)

Decisions about Where and How to Compete

Corporate Level Strategy (Defines Scope: What industries should the firm compete in?)

Business Level Strategy (Defines Positioning: How will the firm compete?)

Functional Level Strategy (Maximizes resource productivity)

Decisions about Where and How to Compete

Corporate Level Strategy (Defines Scope: What industries should the firm compete in?)

(None)

Business Level Strategy (Defines Positioning: How will the firm compete?)

Best Cost (Value for Low Price)What are some of the key differentiators?

Functional Level Strategy (Maximizes resource productivity)How do they do this?

Define the Issue

Background and Boundaries of the Issue

How is this issue related to your firm’s value proposition?What do customers want?

What do you offer relative to what they want?

Evidence What are the relevant external facts?

(Consumers, Customers, Competitors, and the External Environment)

What do you already know?

What do you need to know?

Alternatives and Implications

Potential Impact (Strategic and Financial)

Rivalry Among Firms

Competitor Analysis

Managing Task Env. Relationships

Demographic

EconomicSociocultural

TechnologicalPolitical/Legal

Supplies

Substitute Products

Buyers

PotentialEntrants

Other Stakeholders

Macro Environment IndustryEnvironment

Task Environment

What do you need to know?(External Analysis)

Macro Environment Factors

Economic

Technological

Political/Legal

Social/Cultural

Economic Factors

The state of the macroeconomic environment determines the generalhealth and well-being of the economy. This in turn affects a company’s ability to earn an adequate rate of return.

Examples: GDP trends, interest rates, money supply, inflation, unemployment levels, wage/price controls, energy availability, and costs, disposable and discretionary income.

Globally: Monetary and Fiscal policies, currency convertibility, exchange rates, economic development, political economy

Social/Cultural Factors

This category of factors describe the beliefs, values, attitudes,opinions, and lifestyles of persons in the firm’s externalenvironment as developed from cultural, demographic, religious,educational and ethnic conditioning.

Examples: Lifestyle changes, career expectations, age distribution,regional shifts in population, birth rates, life expectancies,growth rate in population, consumer activism, rate of family formation.

Global: Human rights, literacy levels, language, social institutions,skill level of the workforce

Political/Legal Factors

These factors define the legal and regulatory parameters withinwhich a firm must operate.

Examples: Antitrust regulations, environmental protection, tax laws,employment laws, stability of government, foreign trade protection

Global: Form of government, political ideology, protectionistsentiment, terrorist activity, legal system, government’s attitudetoward foreign firms.

Technological Factors

This factor deals with the general technological infrastructure, the rate of change in technology, and those things impacting the development and introduction of new technologies.

Examples: Total government spending for R&D, Total industryspending for R&D, focus of technological efforts, patent protection,new developments in technology transfer, productivity improvements through automation.

Global: Regulations on technology transfer, information flowinfrastructure, patent and trademark protection.

Industry Analysis

What do you need to know?Industry Boundaries and Substitutability

1. Helps firms to determine the relative attractiveness of different segments.

2. Helps firms to appropriately classify competitors into groups and determine direct and indirect competitors.

3. Helps firms to predict behavior of individual firms in light of ability to deliver value.

InvisibleCompetitorsLarge Players

from another industrymoving secretly into

the market

ImpendingCompetitors

Small/Med players in growth mode

Large players in related markets

Immediate CompetitorsLarge Players, well established

Industry AnalysisWhat do you need to know?

The Value of the Product/Service to Customers

The Bargaining Power of Firms Relative to their Suppliers and Buyers

The Intensity of Competition

What’s driving change in the industry?(e.g., Shifts in competition, macro factors, entry/exit of major

players)

Porter’s Five Forces Model

Threat of New Entrants

Threat of Substitutes

Bargaining Power of the Suppliers

Bargaining Power of the Buyers

Inter-FirmRivalry

Porter’s Five Forces Model (Competitive Forces)

Bargaining Power of the Buyers

Who are the Buyers?

Factors impacting the bargaining power of the buyers:

Standardized industry productPurchases are made in large volumeNumber of buyers is smallSignificant threat of backward integrationSwitching costs are lowBuyers are well-informed about the seller’s costs

Porter’s Five Forces Model (Competitive Forces)

Bargaining Power of the Suppliers

Factors impacting the bargaining power of the suppliers:

Product represents a significant % of purchaser’s final product Few suppliers Unique product or input Significant threat of forward integration Supplied product is less expensive for the purchaser to buy than make

Strong? Medium? Weak?

Porter’s Five Forces Model (Competitive Forces)

Threat of New Entrants

Why are New Entrants a threat?

Factors impacting the threat of New Entrants:

Economies of scaleCapital RequirementsAccess to Distribution ChannelsOther entry barriers (regulation)Competitive retaliationHigh industry profitability and growth

Strong? Medium? Weak?

Porter’s Five Forces Model (Competitive Forces)

Threat of Substitutes

What is a substitute? Why are substitute products a threat?

Factors impacting the threat of substitute products:

Price of available substitutesSwitching costs

Industry growth and demandComparability of substitute in terms of quality, performance,

other features

Strong? Medium? Weak?

Porter’s Five Forces Model (Competitive Forces)

Inter-FirmRivalry

Factors impacting Inter-Firm Rivalry:

ConcentrationProduct DifferentiationExcess CapacityExit BarriersCost ConditionsIndustry Life Cycle# of equally balanced competitors

Strong? Medium? Weak?

Porter’s Five Forces Model (Competitive Forces)

Threat of New Entrants

Threat of Substitutes

Bargaining Power of the

SuppliersBargaining Power of the

BuyersInter-Firm

Rivalry

Relative Power of other Stakeholders

Relative Power ofOther Stakeholders

Governments (particularly overseas)Special Interest Groups/Lobbyists

Local CommunitiesInternational Stakeholders (e.g., WTO, IMF, EU)

Trade AssociationsUnions

What do you need to know?Key Success Factors

How does the firm survive competition?

What drives competition?What are the main

dimensions of competition?How intense is competition?

How can the firm obtain superior performance?

What do customers

want?

Analysis of Demand

Who are the customers?

What do they want?

Prerequisites for Success

KEY SUCCESS FACTORS

Aerospace and Defense Industry Example

Key Segments

Aerospace and Defense Industry: Broadly Defined

CommercialAircraft

MilitaryWeapons

Space (Rockets and

Satellites)

MaintenanceRepair

and Overhaul($36.4 Billion)

LargeCommercial

Jets($49 Billion)

Aerospace Industry Commercial Aircraft Further Segmentation

Business andRegional Aircraft

($21.1 Billion)Jet Engines ($33.1 Billion) Civil Avionics

($11.2 Billion)

(Source: Standard and PoorsNov. 2006)

Economic Traits (2006) Commercial Aircraft

Market Size (Defense and Aerospace): $468 billion

Market Size (Commercial aircraft): $151 billion (slow growth)

Types of Distribution Channels: Few (mostly direct)

Economies of Scale: Present

Capital Requirements: Extremely High

Product Differentiation: High (needs explanation)

Presence of Vertical Integration: Yes (Boeing and Airbus also produce jet engines)

Industry Structural Characteristics (Commercial Aircraft)

Oligopoly Competition (Boeing/45% and Airbus/55%)

Concentration (Yes)

Economies of Scale (Present)

Product Differentiation* (High)

Barriers to Entry/Exit (Extremely High)

Driving Forces: Commercial Aircraft

Driving Forces

Long-Term Airline Industry ProfitabilityCapacity Issues in Airline Industry

Fuel PricesAir Traffic Forecasts

Price Pressure from Customers (Delta, Northwest, etc)Globalization

Presence of Low Cost Air Carriers

Key Success Factors: Commercial Aircraft

Key Success Factors

Excellence in R&D Effective Production Utilization

Free Cash FlowOn-Time Delivery

CompanyMission

andObjectives

ExternalEnvironment

MacroIndustry

Operating

Internal Environment

ResourcesCurrent Strategy

Costs

StrategicOptions

andChoice

Desired? Possible?