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 Instructor: Michael Cooke  Address:  Office:IC room 817  Class hours:Tuesday 09:00-12:00  Class Location:IC.

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Presentation on theme: " Instructor: Michael Cooke  Address:  Office:IC room 817  Class hours:Tuesday 09:00-12:00  Class Location:IC."— Presentation transcript:

1  Instructor: Michael Cooke  E-mail Address:  Office:IC room 817  Class hours:Tuesday 09:00-12:00  Class Location:IC room 822

2 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -2

3 A Google Data Center in Finland Goggle reacts to news that the US National Security Agency broke into communications through their data centers. Technology companies usually take care to not criticize the US government. Why would Google react to this external event? San Jose Mercury-News October 30 th, 2013 Ch 3 -3

4 Asia Beats US and Europe in B2C Mobile App Usage Reading Material for Bank Executives* * From Fair Isaac Corp: Finds-Asia-Tops-in-B2C-Mobile-App-Usage-US-and-Europe-Lag.aspx Finds-Asia-Tops-in-B2C-Mobile-App-Usage-US-and-Europe-Lag.aspx Are you a “Mobile Native”? You are if you interact with businesses every day on your mobile phone or tablet. And if you are, you’re more likely to be living in China than in the U.S. or Europe, according to FICO’s latest research. In an international survey of businesses and consumers, China (51 percent) and Korea (50 percent) were joined by India (49 percent) as the countries with the highest percentage of Mobile Native consumers. The countries with the lowest percentage of mobile natives were France (12 percent), Japan (15 percent) and — surprisingly — the United States (16 percent).international survey of businesses and consumers Respondents said they are most likely to use their mobile devices to interact with retailers, followed by banks, then insurers, Among the applications offered by retailers and financial institutions, the most popular type in every one of the 14 countries surveyed is alerts, such as apps that notify consumers of suspicious transactions. More than 72 percent of respondents described such apps as attractive. What does this mean for banks? There is a huge opportunity to engage more customers, around the world. This validates FICO’s own observations, as we have noted here before: customers are leading the mobile revolution.

5 International Survey of 2,200 Adult Smartphone Users Mobile Natives tend to be technologically savvy. They are typically under 34 years of age) affluent males who consider themselves early adopters of technology. App Shoppers and Bankers are frequent app users that use their devices for the limited purposes of banking or retail shopping. M:webs have adopted mobile technology but are not accustomed to using mobile apps. Mobile Intenders plan to do more mobile interactions in the future Abc-Mobiles use a mobile phone but don’t interact with organizations via mobile devices. This is often due to an unwillingness to share personal data and a low level of trust with online businesses.

6 – Environmental Scanning – Industry Analysis Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -6 External Strategic Management Audit

7 Identify & evaluate factors beyond the control of a single firm, such as: – Increased foreign competition – Population shifts – Aging society – Fear of traveling – Stock market volatility Purpose of an External Audit – Develop a list of opportunities that could benefit a firm threats that should be avoided – Focus on key factors that influence business and which the company can address through action External Strategic Management Audit

8 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -8

9 Gather competitive intelligence and information about the external environment – Many large organizations have specialized departments to sift through news reports, journals, blogs, etc – Suppliers, distributors, customers, and competitors are information sources – Marketing often has a key role – Competitive intelligence gathering occurs on a daily basis The walking CEO In Eastern and Western traditions, effective leaders bypass chains of command Assimilate information Evaluate opportunities and threats via ranking by importance to the organization – Key factors vary among businesses and over time – May include interest rates, exchange rates, population shifts, changes in the competition, political or regulatory changes technological changes, and so on T he most important key external factors – Important to achieving goals – Measurable – Apply to competing firms – Some will apply to the entire firm, others to a function or division The Process of an External Audit

10 Suppose your Company Does Business in or with Indonesia Indonesia FDI falls while CPI increases to annual 8.4% pace – Implications for exchange rates? – How do decisions by the US FRB affect flows of money into Indonesia? Decisions by Indonesian government last year – New export tax on minerals – New regulations about foreign investment in mining and banking sectors – New import tax on agricultural products – Actions may relate to nationalist sentiment prior to 2014 elections Labor disputes due to inflation cause garment firms to move to Cambodia and Vietnam Biggest investors in Indonesia are Japan and Singapore How do commodities cycles effect the Indonesian economy? Wall Street Journal, 24-October, 2013

11 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -11 Performing External Audit External Factors Measurable Long-term Orientation Applicable to Competing Firms Hierarchical (companywide or applies only to parts)

12 Industrial Organization (I/O) View Industry factors are more important than internal factors Performance determined by industry forces Michael Porter is a proponent This fits with patterns in equity prices – covariance Success from this point of view entails Competing in an attractive industry Understanding the key success factors in that industry Economies of scale Barriers to entry Product differentiation The economy Levels of competition

13 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -13 Economies of Scale Industry Properties Barriers to Market Entry Product Differentiation The Economy I/O Perspective Firm Performance Level of Competitiveness

14  GDP growth rate ◦ Disposable income ◦ Consumer optimism  Currency trends ◦ Affect export/import strategy ◦ Where to manufacture  Interest rates and liquidity ◦ Slope of yield curve affects GDP growth and access to capital ◦ Cost of borrowing affects investment decisions  At the macro level interest rates affect GDP growth  At the micro level it affects hurdle rates and choices -Example 1: Net rental income 6%, interest cost 8% -Example 2: Average P/E ratio 15/1, risk free interest 7%

15  Financial risk factors The Company is exposed to credit risk, liquidity risk and market risk. Market risk arises from currency risk, interest rate risk and fair value risk associated with investments. The Company has a risk management program in place to monitor and actively manage such risks.  Market Risk ◦ Foreign exchange risk The Company is exposed to foreign exchange risk arising from various currency exposures. To minimize foreign exchange risk arising from operating activities, the Company’s foreign exchange management policy requires all normal business transactions to be in local currency, or cash- in currency be matched up with cash-out currency. The Company limits all speculative foreign exchange transactions and operates a system to manage receivables and payables denominated in foreign currency. ◦ Interest rate risk Interest rate risk is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk mainly arising through interest bearing liabilities and assets. In order to avoid interest rate risk, the Company maintains minimum external borrowing by facilitating cash pooling systems on a regional and global basis.  Credit risk Credit risk arises during the normal course of transactions and investing activities, where clients or other party fails to discharge an obligation. The Company monitors and sets the counterparty’s credit limit on a periodic basis based on the counterparty’s financial conditions, default history and other important factors. To minimize such risk, the Company transacts only with banks which have strong international credit rating  Liquidity risk  The Company manages its liquidity risk to maintain adequate net working capital by constantly managing projected cash flows.

16  The US dollar is the most common reserve currency (held by central banks) ◦ Oil and many other commodities traded in dollars ◦ Easily converted nearly anywhere in the world ◦ An artifact from post WWII when US dollar was the only strong currency  Euro is relatively new, sometimes considered an alternative to the dollar  Japanese yen is important because of Japan’s role in the world economy  Chinese yuan is not widely used outside China due to restrictions - this could quickly change

17 ◦ In a fixed exchange system the local currency is pegged to another currency  Hong Kong Dollar pegged to US dollar  No exchange risk in trade between the two countries  Requires intervention by Hong Kong government ◦ Basket of currencies approach  Singapore Dollar managed against several currencies  Chinese Yuan thought to be managed against a basket  Not tied to the fortunes of one foreign currency ◦ Variable (floating) exchange rates  Pose risks for importers and exporters  Rates are an extremely important factor for international trade  Difficult or impossible to predict  Governments may intervene in the float without warning to protect exports ◦ Barter might be used where countries impose rigid FX controls (USSR) or where local currencies are worthless

18 ◦ Goods imported from Japan to USA become more expensive in USA  Company purchasing equipment made in Japan would pay more in US dollars for the same product  Banks will agree to a forward rate, locking in the current rate to a future period ◦ Japanese companies might choose to relocate manufacturing facilities to USA as the yen rises  Profits of US subsidiaries lower in yen terms  Foreign exchange losses on parts imported from Japan

19 19941995199619971997f Korea 8037718049511695 Indonesia 2160.82248.62342.32909.44650 Malaysia 2.622.52.522.813.89 Phillippines 26.4225.7126.2229.4739.98 Singapore 1.531.421.411.481.68 Thailand 25.1524.9125.3431.3647.25 Hong Kong 7.737.747.737.747.75 China 8.628.358.318.298.28 Taiwan 26.4626.4927.4628.732.64 Sources: Columbia University and IMF

20  Exports became cost competitive in world markets ◦ How would a Japanese manufacturer with operations in Thailand and Japan respond to a 50% devaluation of the baht? ◦ Products from Thailand became cheaper relative to currencies that did not devalue  Imports and foreign travel for Thai people became more expensive  Thailand’s tourism industry gained ◦ Airlines chose to base fares to and from BKK in Thai baht ◦ Tourists perceived ‘value for money’ in Thailand, with services and local products in Thai baht  Multinational in-country company response to the crisis ◦ Emphasize product value ◦ Change the product mix or package size (cheaper, smaller) ◦ Increase local procurement (use Thai goods rather than use imports)  Inflow of foreign currencies caused baht to gain

21  Currency can be under or overvalued relative to another  PPP is an estimate of real purchasing power ◦ When Thai baht were officially 55-1 dollar  Currency undervalued  Thai economy looked small in dollar terms  But Thai people could buy Thai products and services  In PPP terms the Thai economy was larger than in $ terms ◦ In theory, currency nominal value will eventually = PPP  Currently, W Europe overvalued, many Asian currencies (excl Japan) undervalued

22 Economic Forces 22 Demographic variables are a factor in country wealth Working age population relative to non-working China and Thailand will soon have shrinking % working age Often overlooked implications of large % population = elderly Socioeconomic Variables Per Capita income Issues in using per capita income as an indicator: Transactions are valued in an international currency (monetization of transactions) Official exchange rates seldom reveal true buying power within a country oServices are provided in-country using local currency oGoods not traded across borders (housing, etc) oUse Purchasing Power Parity to estimate buying power Gray and Black Market sectors of the economy (cash or barter) Income inequality – Gini index Lower number means more income equality Scandinavian countries have least inequality Thailand, China, USA relatively unequal (higher index) Patterns of migration Rural to urban From low wage, low opportunity areas to higher wages and opportunities


24 World Gini Compared to USA The Atlantic

25 Income Inequality in Selected Countries South Africa (2)65 (2005) 59.3 (1994)South Africa Thailand (12)53.6 (2009) 42 (2002) China (27)48 (2009) 41.5 (2007)China USA (42)45 (2007) 40.8 (1997) Germany (124)27 (2006) 30 (1994)Germany Sweden (136)23 (2005) 25 (1992) Implication: Low per capita GNP can mask affluent areas/segments.

26  Low population growth rate, falling rate by 2050 ◦ 69MM 2010 world 6.9BB Thailand = 1.00% of world ◦ 73MM 2030 world 8.3BBThailand = 0.88% of world ◦ 68MM 2060world 9.6BBThailand = 0.71% of world  Low birth rate ◦ 12.8/1,000 is similar to China ◦ 20.1/1,000 is replacement rate ◦ Declining family size. Declining % under 15 years of age. ◦ More women delay marriage or never marry  Low urbanization, high rate of change ◦ Thailand 34% urban, change 1.8% per year ◦ China 47% urban, change 2.3% per year ◦ USA 82% urban, change 1.2% per year  Longer lives ◦ Increasing number of retired (age 65+ =11.4% in 2020) ◦ Decreasing number of working age (similar to China) Population forecast: /



29 Population Pyramid Thailand

30 Population Pyramid China Ch 3 -30

31 Population Pyramid Philippines 2008 population 96MM2050 population 172MM

32 Population Pyramid Malaysia 2008 population 25MM 2050 population 43MM

33 Population Pyramid Cambodia 2008 population 14MM2050 population 24MM

34 Population Pyramid Japan 2008 population 127MM 2050 population 94MM

35 Ethiopia 2008 population 83MM 2050 population 278MM

36 Implications of Demographic Shift Smaller households require different housing Families with fewer children spend more/child With fewer people of working age – Cost of labor will rise – Lower skill jobs will go to countries with younger populations – Need to move to higher value added activities (skills) More retirees and elderly – a unique market Japanese model – Higher value added industries at home – Investment abroad Pressures for immigration from labor surplus countries

37 Trends ◦ More households with people living alone ◦ Aging populations in developed countries, including Thailand, affects all organizations ◦ The combination of the one-child policy and rising rates of college education is affecting China’s prime factory work force: 18- to 21-year-olds not in college.  Their numbers will drop by 29 percent from 2010 to 2020 - even if higher education enrollment holds steady.  Companies face rising factory labor costs  Foxconn will install 1MM robots in their China electronics assembly operations by 2014  While moving factory work away from high cost coastal areas of China *  Improved transportation infrastructure makes relocation possible ◦ Workforce skills matching – technical skills requiring less than four years of college often not found *

38 Ch 3 -38 Political, Governmental, and Legal Forces Government Regulatory Activity Enforcement of Antitrust legislation Tax rates Lobbying activities Patent laws Restrictions on business activities Business or consumer incentives May apply unequally Last year, Brazil used subsidies and the threat of high tariffs on imports to persuade Foxconn to start producing iPhones, iPads in Brazil Subsidies often have ‘withdrawal’ effects

39 Incentive plan Backfires * *Reuters 23-09-2013 An incentive program for first-time car buyers in Thailand has backfired with more than 100,000 indebted consumers defaulting World Bank says the tax breaks cost Thailand $2.5 billion Thailand's household debt is among the highest in Asia at nearly 80 percent of GDP Research shows around 10 percent of the 1.2 million Thais who signed on to the incentive scheme either changed their minds or couldn't pay monthly installments When buyers cancel, the vehicles are seized by auto finance companies and sold as used cars Smaller car dealers struggle to survive. After people realize they can't afford to pay, their barely used cars are on the market, driving down prices even further The glut of almost-new vehicles has forced auto-makers to offer promotions or discounts to sell inventory The incentives distorted the market Thailand is Southeast Asia's largest auto market Tax breaks were intended to help auto manufacturing in the region's car-making hub after 2011 floods Creating a boom as production rose 70% from 2011 to meet new demand The demand collapsed when tax breaks expired in December, 2012 Japanese automakers, with 80 percent of the Thai market, reported an average 30 percent drop in sales 2Q, 2013 Thailand remains vital to Japanese automakers as a regional export base Excess capacity might be exported to Indonesia

40  Protectionist policies ◦ Can be a result of nationalistic sentiments ◦ May arise from economic distress ◦ Role of political interest groups, such as American shrimp fishermen (versus SE Asian exporters) or Japanese farmers  Governments buy equity stakes in companies ◦ AIG, GM in USA ◦ RBS and Lloyds in UK ◦ Companies then must accept largest stakeholder’s priorities  Protectionism or unequal legal recourse relative to domestic companies affect mode of entry decisions

41  Internet ◦ Alters product life cycles ◦ Speed of distribution ◦ Consumer access to information about products and companies  Automation – capital intensive versus labor intensive, note Foxconn’s new robots  Data mining – access to aggregated information about consumers  Communication technologies

42  Bigger and more profound than e-commerce or internet alone  Growth of worldwide secure financial settlements ◦ Rapid spread of ATMs from the mid-90s for example ◦ Ease of doing financial transactions across borders  Rapid spread of cellular technology connected whole regions to the outside world, from late 1990s  Rapid decrease in the price of bandwidth late 1990s ◦ Large scale long distance data transfer became viable  Fiber optic technology means very cheap prices across oceans  Google and others have mix of local and central content ◦ Offshore factories and suppliers have real time access ◦ Distributors have real time access to retail inventory ◦ Medical information and other data intensive documents exchanged real time  Cultural diffusion via better communication ◦ Often thought of as from developed countries to LDCs ◦ Growing exposure and interest work in both directions

43 Ch 3 -43 Competitive Forces Collection & evaluation of data on competitors is essential for successful strategy formulation Identify Rival Firms’ Strengths Weaknesses Capabilities Opportunities Threats Objectives Strategies

44 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -44 Competitive Forces Competition in most industries is intense, but may vary from country to country

45 Key Questions Concerning Competitors Their strengths Their weaknesses Their objectives and strategies Their responses to external variables Their vulnerability to alternative strategies Our vulnerability to strategic counterattack Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -45

46 Key Questions Concerning Competitors Our product/service positioning Entry and exit of firms in the industry Key factors for our current position in industry Sales/profit ranking of competitors over time Nature of supplier and distributor relationships The threat of substitute products/services Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -46

47 ◦ Market share matters ◦ Understanding what business you are in ◦ Constant innovation ◦ Acquisition is essential to growth ◦ People make a difference ◦ No substitute for quality Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

48  A systematic and ethical process for gathering and analyzing information about the competition’s activities and general business trends to further a business’s own goals Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 - 48

49  Internet  Employees  Managers  Suppliers  Distributors  Customers  Creditors  Consultants  Trade journals  Want ads  Newspaper articles  Government filings  Competitors Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 - 49

50 Objectives of Competitive Intelligence Provide a general understanding of industry and competitors Identify areas where competitors are vulnerable and assess impact of actions on competitors Identify potential moves that a competitor might make Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -50

51 Market Commonality The number and significance of markets that a firm competes in with rivals Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -51

52 Resource Similarity Extent to which the type and amount of a firm’s internal resources are comparable to a rival Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -52


54 1. Identify key aspects or elements of each competitive force 2. Evaluate how strong and important each element is for the firm 3. Decide whether the collective strength of the elements is worth the firm entering or staying in the industry  Discussion of 5 Forces in pages 106-110

55 1. High number of competing firms 2. Similar size of firms competing 3. Similar capability of firms competing 4. Falling demand for the industry’s products 5. Falling product/service prices in the industry 6. Consumers can switch brands easily 7. Barriers to leaving the market are high 8. Barriers to entering the market are low 9. Fixed costs are high among firms competing 10. The product is perishable Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

56 11. Rivals have excess capacity 12. Consumer demand is falling 13. Rivals have excess inventory 14. Rivals sell similar products/services 15. Mergers are common in the industry Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 - 56

57  Bargaining Power of Suppliers is increased when there are: ◦ Small numbers of suppliers ◦ Few substitutes ◦ Costs of switching raw materials is high  Backward integration is gaining control or ownership of suppliers Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 - 57

58 The Five-Forces Model Development of substitute product pressures increases when: Relative price of substitutes decrease Consumers’ switching costs decrease Both factors are present in oil industry Long term crude prices tend to stay just below cost of alternative fuels (subsidies made Tar Sands viable) Difficult to establish consumer infrastructure for alternative fuels

59  Often overlooked or underestimated by established industry players ◦ HP in 2004 saw Personal Computers as a commodity  Build cheap in high volume  Main competitor thought to be Dell Computer of TX  $3BB R&D under-utilized  Substitutes can restructure entire industries ◦ Common in technology industries ◦ Always a threat in the petroleum industry  But cost of entry for substitutes is high  Once a substitute gains entry, costs may rapidly drop  Pattern is to have price spikes, followed by periods of prices too low for substitutes to thrive ◦ Synthetic rubber became a substitute when war cut natural rubber supplies

60 The Five-Forces Model Bargaining power of consumers ◦Customers being concentrated or buying in volume affects intensity of competition ◦Consumer power is higher where products are standard or undifferentiated Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -60

61 Conditions Where Consumers Gain Bargaining Power If buyers can inexpensively switch If buyers are particularly important If sellers are struggling in the face of falling consumer demand If buyers are informed about sellers’ products, prices, and costs (internet role) If buyers have discretion in whether and when they purchase the product Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -61

62 Sources of External Information: Unpublished Sources Customer surveys Market research Speeches at professional or shareholder meetings Television programs Interviews and conversations with stakeholders Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -62

63 Sources of External Information: Published Sources Periodicals Journals Reports Government documents Abstracts Books Directories Newspapers Manuals Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -63

64 Sources of External Information: Web Sites Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -64

65  Forecasts use or make assumptions about future trends and events  Quantitative techniques – most appropriate when historical data is available and there is a constant relationship  Qualitative techniques (opinions, intuition)  All forecasts should be informed by knowledge of business and markets

66 Assumptions Estimates of future events based upon the best available information in the present Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 -66

67 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Ch 3 - 67

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