Strategic Issue Assignment

Mission and Objectives Decisions about Business Definition Mission and Objectives Managers’ Mental Models Beliefs and Understandings about: Macro Env. Industry Env. Appropriate Size and Diversity How to Organize Decisions about Corporate Strategy and Diversification Activities, Resources and Capabilities Market Position Performance and Competitive Advantage Decisions about Business Strategy Decisions about Organizational Structure and Implementation 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)

Managing Task Env. Relationships Industry Environment Macro Environment Sociocultural Economic Demographic Buyers Rivalry Among Firms Competitor Analysis Managing Task Env. Relationships Potential Entrants Supplies Other Stakeholders Substitute Products Political/Legal Technological 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 general health 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 external environment 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 within which 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, protectionist sentiment, terrorist activity, legal system, government’s attitude toward 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 industry spending for R&D, focus of technological efforts, patent protection, new developments in technology transfer, productivity improvements through automation. Global: Regulations on technology transfer, information flow infrastructure, 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. Impending Competitors Small/Med players in growth mode Large players in related markets Invisible Competitors Large Players from another industry moving secretly into the market Immediate Competitors Large Players, well established

Industry Analysis What 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)

Bargaining Power of the Bargaining Power of the Porter’s Five Forces Model Threat of New Entrants Bargaining Power of the Suppliers Inter-Firm Rivalry Bargaining Power of the Buyers Threat of Substitutes

Bargaining Power of the Porter’s Five Forces Model (Competitive Forces) Who are the Buyers? Factors impacting the bargaining power of the buyers: Standardized industry product Purchases are made in large volume Number of buyers is small Significant threat of backward integration Switching costs are low Buyers are well-informed about the seller’s costs Bargaining Power of the Buyers

Bargaining Power of the Porter’s Five Forces Model (Competitive Forces) 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 Bargaining Power of the Suppliers Strong? Medium? Weak?

Porter’s Five Forces Model (Competitive Forces) Threat of New Entrants Strong? Medium? Weak? Why are New Entrants a threat? Factors impacting the threat of New Entrants: Economies of scale Capital Requirements Access to Distribution Channels Other entry barriers (regulation) Competitive retaliation High industry profitability and growth

Porter’s Five Forces Model (Competitive Forces) What is a substitute? Why are substitute products a threat? Factors impacting the threat of substitute products: Price of available substitutes Switching costs Industry growth and demand Comparability of substitute in terms of quality, performance, other features Threat of Substitutes Strong? Medium? Weak?

Porter’s Five Forces Model (Competitive Forces) Factors impacting Inter-Firm Rivalry: Concentration Product Differentiation Excess Capacity Exit Barriers Cost Conditions Industry Life Cycle # of equally balanced competitors Inter-Firm Rivalry Strong? Medium? Weak?

Bargaining Power of the Porter’s Five Forces Model (Competitive Forces) Relative Power of other Stakeholders Threat of New Entrants Bargaining Power of the Suppliers Inter-Firm Rivalry Bargaining Power of the Buyers Threat of Substitutes

Governments (particularly overseas) Special Interest Groups/Lobbyists Relative Power of Other Stakeholders Governments (particularly overseas) Special Interest Groups/Lobbyists Local Communities International Stakeholders (e.g., WTO, IMF, EU) Trade Associations Unions

What do you need to know? Key Success Factors Prerequisites for Success What do customers want? How does the firm survive competition? Analysis of Demand Who are the customers? What do they want? What drives competition? What are the main dimensions of competition? How intense is competition? How can the firm obtain superior performance? KEY SUCCESS FACTORS

Aerospace and Defense Industry Example

Aerospace and Defense Industry: Broadly Defined Key Segments Military Weapons Commercial Aircraft Space (Rockets and Satellites)

(Source: Standard and Poors Aerospace Industry Commercial Aircraft Further Segmentation Large Commercial Jets ($49 Billion) Maintenance Repair and Overhaul ($36.4 Billion) Business and Regional Aircraft ($21.1 Billion) Jet Engines ($33.1 Billion) Civil Avionics ($11.2 Billion) (Source: Standard and Poors Nov. 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 Long-Term Airline Industry Profitability Capacity Issues in Airline Industry Fuel Prices Air Traffic Forecasts Price Pressure from Customers (Delta, Northwest, etc) Globalization Presence of Low Cost Air Carriers

Key Success Factors: Commercial Aircraft Excellence in R&D Effective Production Utilization Free Cash Flow On-Time Delivery

External Environment Company Mission and Objectives Strategic Options Macro Industry Operating Company Mission and Objectives Strategic Options and Choice Desired? Possible? Internal Environment Resources Current Strategy Costs