Unit 2 Class Discussion

User Generated

xnffnaqenjvyyvf25

Business Finance

Bethel University

Description

Word Count 250 words or more. Everything must be in own words. There must be TWO SCHOLARLY RESOURCES from the Bethel University library. This week I have a word of caution about the DISCUSS assignment. First, please note that the question is specifically applied to China. Your response should have specific facts about Chinese culture, rather than just generic statements about other countries in general. Second, please note that the question requires that you write about yourself – not about Americans in general. Yes, personal pronouns are allowed in the discussion forum. Also there will be TWO attachments one is the Assignment and the other one is the reading. EVERYTHING MUST BE IN OWN WORDS.

Unformatted Attachment Preview

You are an executive of an American company. You have been sent to China to expand your company’s operations in that country. (a) From your knowledge (or research) of cultural differences between the Chinese and Americans, what two cultural mistakes are you likely to commit in China that would irritate the Chinese people? (b) What can you do to minimize chances of making those cultural mistakes, so that you can be more successful in China? P.S. This question is not about Americans in general; it is about you, as an American, in particular. You need to get personal and apply it to yourself. Don’t write in general terms about Americans. Industry Competition W Chapter Outline I 3-1 Industry Life Cycle Stages L 3-2 Industry Structure L3-3 Intensity of Rivalry among Incumbent Firms I 3-3a Concentration of Competitors S 3-3b High Fixed or Storage Costs , 3-3c Slow Industry Growth 3-3d Lack of Differentiation or Low Switching Costs 3-3e Capacity Augmented in Large Increments K 3-3f Diversity of Competitors A 3-3g High Strategic Stakes S 3-3h High Exit Barriers S3-4 Threat of Entry 3-4a Economies of Scale A 3-4b Brand Identity and Product Differentiation N 3-4c Capital Requirements D 3-4d Switching Costs R 3-4e Access to Distribution Channels A 3-4f Cost Advantages Independent of Size 3-4g Government Policy 3-5 Pressure from Substitute Products 23-6 Bargaining Power of Buyers 13-7 Bargaining Power of Suppliers 63-8 Limitations of Porter’s Five Forces Model 13-9 Summary Key Terms TReview Questions and Exercises SPractice Quiz Notes Reading 3-1 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 3 38 Chapter 3 T Industry A group of competitors that produce similar products or services. his chapter marks the beginning of the strategic management process and is one of two that considers the external environment. At this point it is appropriate to focus on factors external to the organization and to view firm performance from an industrial organization perspective. Internal factors are considered later in the process and in future chapters. Each business operates among a group of companies that produces competing products or services known as an industry. The concept of an industry is a simple one, but it is often confused in everyday conversations. The term industry does not refer to a single company or specific firms in general. For example, in the statement, “A new industry is moving to the community,” the word industry should be replaced by company or firm. Although usually differences exist among competitors, each industry has its own set of combat rules governing such issues as product quality, pricing, and W distribution. This is especially true for industries that contain a large number of firms offering standardized products and services. Most competitors—but not I all—follow the rules. For example, most service stations in the United States generally offer regularLunleaded, midgrade, and premium unleaded gasoline at prices that do not differ L substantially from those at nearby stations. Breaking the so-called rules and charting a different strategic course might be possible, but may not be desirable. IAs such, it is important for strategic managers to understand the structure of S the industry(s) in which their firms operate before deciding how to compete successfully. , Defining a firm’s industry is not always an easy task. In a perfect world, each firm would operate in one clearly defined industry; however, many firms compete in multiple industries, and strategic managers in similar firms often differ in their K conceptualizations of the industry environment. In addition, some companies have utilized the Internet A to redefine industries or even invent new ones, such as eBay’s online auction or Priceline’s travel businesses. As a result, the process S of industry definition and analysis can be especially challenging when Internet S 1 competition is considered. Numerous outside A sources can assist a strategic manager in determining “where to draw the industry lines” (i.e., determining which competitors are in Nnot, and why). Government classification systems, such the industry, which are as the Standardized Industrial Classification (SIC), as well as distinctions made D by trade journals and business analysts may be helpful. In 1997, the U.S. Census R system with the North American Industry Classification Bureau replaced the SIC System (NAICS), an alternative system designed to facilitate comparisons of busiA ness activities across North America. Astute managers assess all of these sources, however, and add their own rigorous and systematic analysis of the competition when defining the industry. 2 Numerous descriptive factors can be used when drawing the industry lines. In 1 for example, attributes such as speed of service, types of the case of McDonald’s, products, prices of products, 6 and level of service may be useful. Hence, one might define McDonald’s industry as consisting of restaurants offering easy to consume, 1 moderately priced food products rapidly and in a limited service environment. T food” are often used to describe such industries, but Broad terms such as “fast doing so does not eliminate the need for a clear, tight definition. S Some factors are usually not helpful when defining an industry, however, such as those directly associated with strategy and firm size. For example, it is not a good idea to exclude a “fast-food” restaurant in McDonald’s industry because it is not part of a large chain or because it emphasizes low-priced food. Rather, these 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Industry Competition factors explain how such a restaurant might be positioned vis-à-vis to McDonald’s, a concept discussed in greater detail in Chapter 7. The concept of primary and secondary industries may also be a useful tool in defining an industry. A primary industry may be conceptualized as a group of close competitors, whereas a secondary industry includes less direct competition. When one analyzes a firm’s competition, the primary industry is loosely considered to be “the industry,” whereas the secondary industry is presented as a means of adding clarity to the analysis. For example, McDonald’s primary industry includes such competitors as Burger King and Wendy’s, whereas its secondary industry might also include restaurants that do not emphasize hamburgers and offer more traditional restaurant seating such as Pizza Hut and Denny’s. The distinction between primary and secondary industry may be based on objective criteria such as price, similarity of products, or location, but is ultimately a subjective call. Once the industry is defined, it is important to identify the market share, which is a competitor’s share of the total W industry sales, for the firm and its key rivals. Unless stated otherwise, market share I calculations are usually based on total sales revenues of the firms in an industry rather than units produced or sold by the individual firms. This information L is often available from public sources, especially when there is a high level of agreement as to how an industry should L be defined. I When market share is not available or substantial differences exist in industry definitions, however, relative market share, S or a firm’s share of industry sales when only the firm and its key competitors are considered, can serve as a useful , substitute. Consider low-end discount retailer Dollar Tree as an example and assume that the only available market share data considers Dollar Tree to be part of the broadly defined discount department store industry. If a more narrow K industry definition is proposed—perhaps one limited to deep discount retailers— new market share calculations will be necessary. In addition, it becomes quite A complicated when one attempts to include the multitude of mom-and-pop disS counters in the calculations. In this situation, computing relative market shares S that consider Dollar Tree and its major competitors can be useful. Assume for the sake of this example that four major competitors are identified in this industry— A Dollar General, Family Dollar, Dollar Tree, and Fred’s—with annual sales Nbillion, respectively. Relative market of $6 billion, $5 billion, $2 billion, and $1 share would be calculated on the basis D of a total market size of $14 billion (i.e., 6 + 5 + 2 + 1). In this example, relative market shares for the competitors are 43 percent, 36 percent, 14 percent, and 7R percent, respectively. From a practical standpoint, calculating relative market share A can be appropriate when external data sources are limited. A firm’s market share can also become quite complex as various industry or market restrictions are added. Unfortunately, 2 the precise market share information most useful to a firm may be based on a set of industry factors so com1 task. In a recent analysis, the Mintel plex that computing it becomes an arduous International Group set out to identify the 6 size of the “healthy snack” market in the United States, a task complicated by the fact that many products such as 1 cheese, yogurt, and cereal are eaten as snacks in some but not all instances.2 To overcome this barrier, analysts computed T a total for the healthy snack market by adding only the proportion of each food category consumed as a healthy snack. S In other words, 100 percent of the total sales of products such as popcorn and trail mix—foods consumed as “healthy snacks” 100 percent of the time—were included in the total. In contrast, only 40 percent of cheese consumption, 61 percent of yogurt consumption, and 21 percent of cereal consumption were included 39 Market Share The percentage of total market sales attributed to one competitor (i.e., firm sales divided by total market sales). Relative Market Share A firm’s share of industry sales when only the firm and its key competitors are considered (i.e., firm sales divided by total sales of a select group firms in the industry). 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 40 Chapter 3 Case Analysis 3-1 Step 2: Identification of the Industry and the Competitors After the organization has been introduced, its industry must be specifically identified. This process can be either relatively simple or difficult. For example, most would agree that Kroger is in the “grocery store industry,” and its competition comes primarily from other grocery stores. However, not all decisions are simple. For example, should WalMart be classified in the department store industry (competing with upscale malloriented stores) or in the discount retail industry (competing with low-end retailers such as Family Dollar)? Is Taco Bell in the fast-food industry or in the broader restaurant industry? To further complicate matters, many corporations are diversified and compete in a number of different industries. For example, Anheuser Busch operates breweries and theme parks. In cases in which multiple business units are competing in different industries, one needs W to identify multiple industries. Market shares or relative market shares for the firm and its key competitors—based on the best available data—should I also be identified. It is important to clarify industry definition at the outset so that the L that affect it can be realistically assessed. In addition, a macroenvironmental forces firm’s relative strengths and weaknesses can be classified as such only when compared L to other companies in the industry. I S in the total. Although this approach is reasonable and can be quite useful, it can , only be calculated when one has access to data that may not be readily available. Hence, analysts must use the best data available to describe the relative market positions of the competitors in a given industry (see Case Analysis 3-1). Industry Life Cycle The stages (introduction, growth, shakeout, maturity, and decline) through which industries often pass. K A Life Cycle Stages 3-1 Industry S Like firms, industries develop and evolve over time. Not only might the group of competitors within a fiS rm’s industry change constantly, but also the nature and structure of the industry can change as it matures and its markets become better A defined. An industry’s developmental stage influences the nature of competition N among competitors.3 In theory, each industry passes and potential profitability through five distinct phases D of an industry life cycle (see Figure 3-1). A young industry that is beginning to form is considered to be in the introduction stage. Demand forR the industry’s outputs is low at this time because product and/or service awareness A is still developing. Virtually all purchasers are first-time buyers and tend to be affluent, risk tolerant, and innovative. Technology is a key concern in this stage because businesses often seek ways to improve production and distribution efficiencies 2 as they learn more about their markets. Normally, after key technological issues are addressed and customer demand 1 enters the growth stage. Growth continues but tends to begins to rise, the industry slow as the market demand 6 approaches saturation. Fewer first-time buyers remain, and most purchases tend to be upgrades or replacements. Many competitors are FIGURE 3-1 1 T The I n dustr y S Life Cy cle 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Industry Competition profitable, but available funds may be heavily invested into new facilities or technologies. Some of the industry’s weaker competitors may go out of business in this stage. Shakeout occurs when industry growth is no longer rapid enough to support the increasing number of competitors in the industry. As a result, a firm’s growth is contingent on its resources and competitive positioning instead of a high growth rate within the industry. Marginal competitors are forced out, and a small number of industry leaders may emerge. Maturity is reached when the market demand for the industry’s outputs is completely saturated. Virtually all purchases are upgrades or replacements, and industry growth may be low, nonexistent, or even negative. Industry standards for quality and service have been established, and customer expectations tend to be more consistent than in previous stages. The U.S. automobile industry is a classic example of a mature industry. Firms in mature industries often seek new uses for their Woften through global expansion. products or services or pursue new markets, The decline stage occurs when demand Ifor an industry’s products and services decreases and often begins when consumers turn to more convenient, safer, or L industries. Some firms may divest higher quality offerings from firms in substitute their business units in this stage, whereas others L may seek to “reinvent themselves” and pursue a new wave of growth associated with a similar product or service. I movement along the industry life A number of external factors can facilitate cycle. When oil prices spiked in 2005, forSexample, firms in oil-intensive industries such as airlines and carmakers began to feel the squeeze.4 When an industry is mature, however, firms are often better, able to withstand such pressures and survive. Although the life cycle model is useful for analysis, identifying an industry’s K precise position is often difficult, and not all industries follow these exact stages 5 or at predictable intervals. For example, the A U.S. railroad industry did not reach maturity for many decades and extended over a hundred years before entering S decline, whereas the personal computer industry began to show signs of maturity S an industry’s decline, changes in the after only seven years. In addition, following macroenvironment may revitalize new growth. A For example, the bicycle industry fell into decline some years ago when the automobile gained popularity but has now been rejuvenated by society’s interestN in health and physical fitness. D R 3-2 Industry Structure Factors associated with industry structureAhave been found to play a dominant role in the performance of many companies, with the exception of those that are its notable leaders or failures.6 As such, one needs to understand these factors 2 at the outset before delving into the characteristics of a specific firm. Michael Porter, a leading authority on industry analysis, proposed a systematic means of 1 analyzing the potential profitability of firms in an industry known as Porter’s “five 6 forces” model. According to Porter, an industry’s overall profitability, which is the combined profits of all competitors, depends 1 on five basic competitive forces, the relative weights of which vary by industry (see Figure 3-2). 1. 2. 3. 4. 5. T Intensity of rivalry among incumbent firms S Threat of new competitors entering the industry Threat of substitute products or services Bargaining power of buyers Bargaining power of suppliers 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 41 42 Chapter 3 FIGURE 3-2 Por te r ’s F iv e Force s M ode l W I L L I S These five factors combine to form the industry structure and suggest (but do , prospects for firms that operate in the industry. Each not guarantee) profitability of the factors is discussed in greater detail in sections 3-3 through 3-7. K 3-3 Intensity of Rivalry among A Incumbent Firms S Competition intensifies when a firm identifies the opportunity to improve its S position or senses competitive pressure from other businesses in its industry, A wars, advertising battles, new product introductions or which can result in price modifications, and even increased customer service or warranties.7 Rivalry can N be intense in some industries. For example, a battle wages in the U.S. real-estate D brokers who earn a commission of 5 to 6 percent are industry, where traditional being challenged by discount brokers who charge sellers substantially lower fees. R Agents for the buyer and seller typically split commissions, which usually fall in A agents when a home sells for $250,000. Discount brothe $7,000 range for both kers argue that the primary service provided by the seller’s agent is listing the home in a multiple listing service (MLS) database, the primary tool used by most 2to peruse available properties. Discount brokers provide buyers and their agents sellers with a MLS listing 1 for a flat fee in a number of markets, sometimes less than $1,000. Traditional brokers are angry, however, and argue that discount brokers simply do not6provide the full array of services available at a so-called full-service broker. Traditional brokers dominate the industry, accounting for 1 98 percent of all sales in 2005. They often control the local MLS databases, and T many discount brokers charge that they are not provided equal access to list their 8 properties. Hence, rivalry S in this industry—especially between full-service and discount brokers—remains quite intense. Competitive intensity often evolves over time and depends on a number of interacting factors, as discussed in sections 3-3a through 3-3h. Factors should be assessed independently and then integrated into an overall perspective. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Industry Competition 3-3a Concentration of Competitors The number of companies in the industry and their relative sizes or power levels influence an industry’s intensity of rivalry. Industries with few firms tend to be less competitive, but those with many firms that are roughly equivalent in size and power tend to be more competitive, as each firm fights for dominance. Competition is also likely to be intense in industries with large numbers of firms because some of those companies may believe that they can make competitive moves without being noticed.9 3-3b High Fixed or Storage Costs When firms have unused productive capacity, they often cut prices in an effort to increase production and move toward full capacity. The degree to which prices (and profits) can fall under such conditions is a function of the firms’ cost structures. Those with high fixed costs are mostW likely to cut prices when excess capacity exists, because they must operate near capacity to be able to spread their overhead over more units of production. I L L I S , K A S S A N D R A The U.S. airline industry experiences this problem periodically, as losses gen2 erally result from planes that are flying substantially less than full or those that are not flying at all. This dynamic often results in last-minute fare specials in an 1 effort to fill seats that would otherwise fly vacant. During the difficult times for 6 terrorist attacks, frequent price wars U.S. airlines immediately following the 9/11 10 were often initiated by low-cost airlines such 1 as JetBlue, Southwest, and AirTran. Interestingly, airlines filled 73.4 percent of their seats in 2003 compared to only T 63.5 percent a decade earlier.11 3-3c Slow Industry Growth S Firms in industries that grow slowly are more likely to be highly competitive than companies in fast growing industries. In slow-growth industries, one firm’s increase in market share must come primarily at the expense of other firms’ 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 43 44 Chapter 3 shares. Competitors often attend more to the actions of their rivals than to consumer tastes and trends when formulating strategies. Slow industry growth can be caused by a sluggish economy, as was the case for vehicles during the early 2000s. As a result, manufacturers began to emphasize value by enhancing features and cutting costs. Ford, DaimlerChrysler, Nissan, Toyota, and others began to produce slightly larger trucks with additional features, while trimming prices. Producers also began to develop lower priced luxury cars in a fierce battle for sales.12 Slow industry growth—and even declines—are frequently caused by shifts in consumer demand patterns. For example, per capita consumption of carbonated soft drinks in the United States fell from its peak of fifty-four gallons in 1997 to approximately fifty-two gallons by 2004. During this same period, annual world growth declined from 9 percent to 4 percent as consumption of fruit juices, energy drinks, bottled water, and other noncarbonated beverages continued to W acquired or developed a number of noncarbonated rise. Coca-Cola and PepsiCo brands during this time I in efforts to counter the sluggish growth prospects in soft drinks. Interestingly, these rivals now appear to have modified their industry L “soft drink” focus to a broader perspective including definitions from a narrow noncarbonated beverages. L 13 I 3-3d Lack of Differentiation or Low Switching Costs Switching Costs One-time costs that buyers of an industry’s outputs incur as they switch from one company’s products or services to another’s. S The more similar the offerings among competitors, the more likely customers are to shift from one to another. As a result, such firms tend to engage in price com, petition. Switching costs are one-time costs that buyers incur when they switch from one company’s products or services to another. When switching costs are low, firms are under considerable pressure to satisfy customers who can easily K switch competitors at any time. When products or services are less differentiated, purchase decisions areAbased on price and service considerations, resulting in greater competition. S Interestingly, firms often seek to create switching costs in efforts to encourage S Service Provider (ISP) America Online, for example, customer loyalty. Internet encourages users to obtain A and use AOL e-mail accounts. Historically, these accounts were eliminated if the AOL customer switched to another ISP. Free N and other providers proliferated in the mid-2000s, e-mail accounts with Yahoo however. As a result, AOL D loosened this restriction in 2006, suggesting that most consumers no longer see the loss of an e-mail account as a major factor when R considering a switch to another ISP (see Strategy at Work 3-1). Frequent flier Aiers who fly with one or a limited number of airlines. The programs also reward fl Southwest Airlines generous program rewards only customers who complete a given number of flights within a twelve-month period, thereby effectively raising 2 another airline. the costs of switching to The cellular telephone 1 industry in the United States benefited from key switching costs for a number of years. Until regulations changed in late 2003, consumers 6 were not able to keep their telephone numbers. Hence, who switched providers many consumers were 1 reluctant to change due to the hassle associated with alerting friends and business associates of the new number. Today, however, “number T switching costs, allowing consumers to retain their portability” greatly reduces original telephone number S when they switch providers.14 3-3e Capacity Augmented in Large Increments When production can be easily added one increment at a time, overcapacity is not a major concern. If economies of scale or other factors dictate that 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Industry Competition S T R A T E G Y A T W O R K 3 - 1 Rivalry and Cooperation in Internet Services Amidst a flurry of copromotion agreements between retailers and Internet brands, Microsoft and Best Buy embarked on a strategic alliance that includes Internet, broadcasting, and in-store promotional projects. Microsoft utilizes the new agreement to expand its distribution and increase subscribers to its Internet services. The agreement also displays and promotes the Best Buy logo and BestBuy.com links at Microsoft’s Web sites and broadcasting properties, including the Expedia.com travel service, Microsoft’s e-mail W services, Hotmail, WebTV Network, the new MSN eShop online, and MSNBC. In return, Best Buy Ibecame a major advertiser with Microsoft’s Internet L and broadcast properties. Wal-Mart and America Online (AOL) have also teamed up to drive traffic to Wal-Mart’s Web site and introduce millions of customers to the AOL brand. AOL is most interested in the in-store promotion of its online service in more than four thousand Wal-Mart stores in the United States, in return for promoting Wal-Mart’s online store to its 18 million subscribers. Under the agreement, AOL also provides Web design assistance to the nation’s largest retailer. Sources: R. Spiegel, “Microsoft and Best Buy Join Alliance Frenzy,” E-Commerce Times, 16 December, 1999; C. Dembeck, “WalMart Looking to AOL for E-Commerce Boost,” E-Commerce Times, 13 December, 1999; C. Dembeck, “Yahoo! and Kmart Forge Alliance to Counter AOL,” E-Commerce Times, 14 December 1999. L I production be augmented in large blocks, however, then capacity additions S may lead to temporary overcapacity in the industry, and firms may cut prices to clear inventories. Airlines and hotels, , for example, usually must acquire additional capacity in large increments because it is not feasible to add a few airline seats or hotel rooms as demand warrants. When additional blocks of seats or rooms become available, firms K are under intense pressure to cover the additional costs by filling them. A S Companies that are diverse in their origins, S cultures, and strategies often have different goals and means of competition. Such firms may have a difficult time A agreeing on a set of combat rules. As such, industries with global competitors or N to be diverse and particularly comwith entrepreneurial owner-operators tend petitive. Internet businesses often change the rules for competition by emphasizD ing alternative sources of revenue, different channels of distribution, or a new business model. This diversity can sharplyR increase rivalry. A 3-3f Diversity of Competitors 3-3g High Strategic Stakes Competitive rivalry is likely to be high if firms also have high stakes in achieving success in a particular industry. For instance, 2 many strong, traditional companies cannot afford to fail in their Web-based ventures if their strategic managers 1 believe a Web presence is necessary even if it is not profitable. These desires can often lead a firm to sacrifice profitability. 6 1 T Exit barriers are economic, strategic, or emotional factors that keep companies from leaving an industry even though they S are not profitable or may even be 3-3h High Exit Barriers losing money. Examples of exit barriers include fixed assets that have no alternative uses, labor agreements that cannot be renegotiated, strategic partnerships among business units within the same firm, management’s unwillingness to leave an industry because of pride, and governmental pressure to continue operations 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 45 46 Chapter 3 to avoid adverse economic effects in a geographic region.15 When substantial exit barriers exist, firms choose to compete as a “lesser of two evils,” a practice that can drive down the profitability of competitors as well. 3-4 Threat of Entry Barriers to Entry Obstacles to entering an industry, including economies of scale, brand identity and product differentiation, capital requirements, switching costs, access to distribution channels, cost disadvantages independent of size, and government policy. An industry’s productive capacity expands when new competitors enter. Unless the market is growing rapidly, new entrants intensify the fight for market share, thus lowering prices and, ultimately, industry profitability. When large, established firms control an industry, new entrants are often pelted with retaliation when they establish their operations or begin to promote their products aggressively. For example, when Dr. Pepper launched Like Cola directly against Coke and Pepsi, an effort to make inroads into the cola segment of the soft drink market, the two major competitors responded with strong promotional campaigns to thwart the effort. If prospective entrants anticipate this kind of response, they are W less likely to enter the industry in the first place. As such, entry into an industry I may well be deterred if the potential entering firm expects existing competitors L to respond forcefully. Retaliation may occur if incumbent firms are committed to remaining in the industry or have sufficient cash and productive capacity to meet L anticipated customer demand in the future.16 The likelihood thatI new firms will enter an industry is also contingent on the extent to which barriers to entry have been erected—often by existing S competitors—to keep out prospective newcomers.17 From a global perspective, , many barriers have declined, as firms in countries such as India and China make use of technology—and specifically a developing global fiber-optic network—to gain access to industries in the West. For example, as many as half a million IRS K annually in India. Hence, barriers are always changing tax returns are prepared as technology, politicalAinfluences, and business practices also change.18 The seven major barriers (obstacles) to entry are described in sections 3-4a through 3-4g (see alsoSStrategy at Work 3-2). As with intensity of rivalry, they should be assessed independently and then integrated into an overall perspective S on entry barriers. A 3-4a Economies N of Scale Economies of scale refer D to the decline in unit costs of a product or service that occurs as the absolute volume of production increases. Scale economies occur R drives down costs and can result from a variety of when increased production factors, most namely high A firm specialization and expertise, volume purchase discounts, and a firm’s expansion into activities once performed at higher costs by suppliers or buyers. Substantial economies of scale deter new entrants by forcing 2 industry at a large scale—a costly course of action that them either to enter an risks a strong reaction from existing firms—or to suffer substantial cost disad1 vantages associated with a small-scale operation. For example, a new automobile 6 higher per-unit costs as a result of the massive investmanufacturer must accept ment required to establish 1 a production facility unless a large volume of vehicles can be produced at the outset. T 3-4b Brand Identity S and Product Differentiation Established firms may enjoy strong brand identification and customer loyalties that are based on actual or perceived product or service differences. Typically, new entrants must incur substantial marketing and other costs over an extended time to overcome this barrier. Differentiation is particularly important among products 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Industry Competition S T R A T E G Y A T W O R K 3 - 2 Creating Barriers to Entry in the Airline Industry U.S. airline deregulation in 1978 was intended to encourage new start-up ventures and to foster competition. For a while, it seemed to be working; new companies such as Southwest Airlines and AirTran helped to lower ticket prices significantly. Over time, however, the major airlines have succeeded in erecting enormous barriers to entry, such as the following: 1. The global alliances that exist among major world carriers result in substantial control overW hubs and passenger-loading gates at large airports, where I to fortysuch carriers already typically hold twentyyear leases. In addition, most airlines have L a large number of U.S. hub airports, a feeder system to L those hubs, and international routes that tie into the I hubs. Such systems take decades and hundreds of millions of dollars to acquire. S 2. Major airlines own the computer reservation , systems, negotiate commission arrangements with travel agents for bringing business to them, and charge small carriers hefty fees for tickets K sold through these systems. By operating their own Web sites, U.S. airlines have been A able to eliminate the commission fees paid for domestic S bookings. 3. All major carriers operate frequent flierSprograms that encourage passengers to avoid switching airA lines. Many of the programs expire when a passenN c period ger does not fly on the airline after a specifi of time, often three years. D 4. Airline computer-pricing systems enable R them to selectively offer low fares on certain seats and A to certain destinations (often purchased well in advance or at the last minute), thereby countering a start-up airline’s pricing edge. 5. The dominant major carriers are willing to match or beat the ticket prices of smaller, niche airlines, and often respond to price changes within hours. Most are capable of absorbing some degree of losses until weaker competitors are driven out of business. These barriers are designed to keep control of the airline industry’s best routes and markets in the hands of a few carriers, even after two decades of deregulation. As such, newly formed carriers are often limited to less desirable routes. Although many upstarts fail in their first year or two of operation, others such as Southwest, AirTran, and JetBlue have been successful and are filling viable niches in the industry. Interestingly, the airline industry fallout from the events of 9/11 were felt the most by established competitors such as USAir and United Airlines. Sources: T. A. Hemphill, “Airline Marketing Alliances and U.S. Competition Policy: Does the Consumer Benefit?” Business Horizons, March 2000; P. A. Greenberg, “Southwest Airlines Projects $1B in Online Sales,” E-Commerce Times, 8 December 2000; P. A. Greenberg and M. Hillebrand, “Airlines Band Together to Launch Travel Site,” E-Commerce Times, 8 December 2000; P. A. Greenberg, “Six Major Airlines to Form B2B Exchange,” E-Commerce Times, 8 December 2000; P. Wright, M. Kroll, and J. A. Parnell, Strategic Management: Concepts (Upper Saddle River, NJ: Prentice Hall, 1998); S. McCartney, “Conditions Are Ideal for Starting an Airline, and Many Are Doing It,” Wall Street Journal, 1 April 1996, A1, A7; “Boeing 1st-Quarter Profit Off 34%,” L.A. Times Wire Services, 30 April 1996; A. L. Velocci, Jr., “USAir Defends Aggressive Pricing,” Aviation Week & Space Technology, 21 August 1995, 28; T. K. Smith, “Why Air Travel Doesn’t Work,” Fortune, 3 April 1995, 42–49. 2switching to a competitive product or and services where the risks associated with service are perceived to be high, such as over-the-counter drugs, insurance, and 1 baby-care products. 6 3-4c Capital Requirements 1 Generally speaking, higher entry costs tend to restrict new competitors and ultiT mately increase industry profitability.19 Large initial financial expenditures may be necessary for production, facility construction, research and development, S advertising, customer credit, and inventories. Some years ago, Xerox cleverly created a capital barrier by offering to lease, not just sell, its copiers. As a result, new entrants were faced with the task of generating large sums of cash to finance the leased copiers.20 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 47 48 Chapter 3 3-4d Switching Costs Switching costs are the upfront costs that buyers of one firm’s products may incur if they switch to those of a competitor. If these costs are high, buyers may need to test the new product first, make modifications in existing operations to accommodate the change, or even negotiate new purchase contracts. When switching costs are low—typically the case when consumers try a new grocery store—change may not be difficult. When switching costs are high, however, customers may be reluctant to change. For example, for a number of years, Apple has had the unenviable task of convincing IBM-compatible customers not only that Apple produces a superior product, but also that switching from IBM to Apple justifies the cost and inconvenience associated with software and file incompatibility. In contrast, fast-food restaurants generally have little difficulty persuading consumers to switch from one restaurant to another at the introduction of a new product. W 3-4e Access to Distribution Channels I In some industries, entering existing distribution channels requires a new firm to entice distributors through price breaks, cooperative advertising allowances, or L sales promotions. Existing competitors may have distribution channel ties based L exclusive relationships, requiring the new entrant to on long-standing or even create its own channels I of distribution. For example, certain manufacturers and retailers have formed partnerships with FedEx or UPS to transport merchandise S As a distribution channel, the Internet may offer an directly to their customers. alternative to companies , unable to penetrate the existing channels. 3-4f Cost Advantages Independent of Size Many firms enjoy costK advantages emanating from economies of scale. Existing competitors may haveA also developed cost advantages not related to firm size, however, that cannot be easily duplicated by newcomers. Such factors include S patents or proprietary technology, favorable locations, superior human resources, and experience in the S industry. For example, eBay’s experience, reputation, and technological capability in online auctions have made it difficult for prospective A firms to enter the industry. When such advantages exist for one or more existing N new entrants are usually hesitant to join the industry. competitors, prospective D R Governments often control entry to certain industries with licensing requirements or other regulations. A For example, establishing a hospital, a nuclear power 3-4g Government Policy facility, or an airline cannot be done in most nations without meeting substantial regulatory requirements. Although firms generally oppose government attempts 2 this is not always the case. Existing competitors often to regulate their activity, lobby legislators to enact 1 policies that make entry into their industry a complicated or costly endeavor. Substitute Products Alternative offerings produced by firms in another industry that satisfy similar consumer needs. 6 1 from Substitute Products 3-5 Pressure Firms in one industry T may be competing with firms in other industries that produce substitute products, S offerings produced by firms in another industry that satisfy similar consumer needs but differ in specific characteristics. Note that products and services affected by a firm’s competitors (i.e., companies in the same industry) do not represent substitutes for that firm. By definition, substitutes emanate from outside of a firm’s industry. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Industry Competition Although they emanate from outside the industry, substitutes can limit the prices that firms can charge. For instance, low fares offered by airlines can place a ceiling on the long-distance bus fares that Greyhound can charge for similar routes. Hence, firms that operate in industries with few or no substitutes are more likely to be profitable. 3-6 Bargaining Power of Buyers The buyers of an industry’s outputs can lower that industry’s profitability by bargaining for higher quality or more services and playing one firm against another. Levi Strauss discovered this when negotiating a sizeable contract with megaretailer Wal-Mart. The famous American jean-maker was forced to create a lower cost brand by overhauling production and distribution efforts.21 The following circumstances can raise the bargaining power of an industry’s buyers. W 1. Buyers are concentrated, or each one purchases a significant percentage of total I industry sales. If a few buyers purchase a substantial proportion of an industry’s sales, then they will wield considerable power overLprices. This is especially prevalent in markets for components and raw materials. L 2. The products that the buyers purchase represent a significant percentage of the buyers’ costs. When this occurs, price will Ibecome more critical for buyers, who will shop for a favorable price and will purchase more selectively. S 3. The products that the buyers purchase are standard or undifferentiated. In such cases, , buyers are able to play one seller against another and initiate price wars. 4. Buyers face few switching costs and can freely change suppliers. 5. Buyers earn low profits, creating pressure for them to reduce their purchasing costs. K 6. Buyers have the ability to engage in backward integration by becoming their own supA use the threat of self-manufacture pliers. Large automobile manufacturers, for example, as a powerful bargaining lever. S 7. The industry’s product is relatively unimportant to the quality of the buyers’ products Sthe buyers’ products is greatly affected or services. In contrast, when the quality of by what they purchase from the industry, the A buyers are less likely to have significant power over the suppliers because quality and special features will be the most important characteristics. N 8. Buyers have complete information. The D more information buyers have regarding demand, actual market prices, and supplier costs, the greater their bargaining power. Rquantity and quality of information availThe advent of the Internet has increased the able to buyers in a number of industries. A 3-7 Bargaining Power of Suppliers 2 and their suppliers is similar to that The tug of war between an industry’s rivals between the rivals and their buyers. When 1 suppliers to an industry wield collective power over the firms in the industry, they can siphon away a portion of 6 excess profits that may be gleaned. Alternatively, when an industry’s suppliers are weak, they may be expected frequently to cut 1 prices, increase quality, and add services. This was the case among U.S. automakers during the 1990s and early 2000s. T Marred by mounting financial losses, Detroit’s “Big Three” producers constantly squeezed their suppliers for price concessions. S By the mid to late 2000s, however, many of these suppliers found themselves in Chapter 11 bankruptcy while others had developed a profitable nonauto business. Hence, power shifted from the automakers in favor of the suppliers during this time, an unwelcome reality to struggling GM, Ford, and Chrysler.22 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 49 50 Chapter 3 The struggle between U.S. service stations and their suppliers—big oil companies—is another interesting example. When the popularity of E85 ethanol—a mixture containing 85 percent ethanol and 15 percent gasoline— began to rise in the mid to late 2000s, many U.S. service stations were prohibited from carrying the alternative fuel. Oil companies that do not supply E85 lose sales every time a driver fills the tank with the ethanol mix. As a result, many prohibit their franchisees from carrying fuel from other producers. Service stations that are allowed to carry E85 are often required to dispense it from a pump on a separate island not under the main canopy—a costly endeavor. Because there are only a few major oil companies and thousands of service stations in the United States, the oil companies are able to wield most of the power.23 The conditions that make suppliers powerful are similar to those that affect buyers. Specifically, suppliers are powerful under the following circumstances. Wis dominated by one or a few companies. Concentrated sup1. The supplying industry pliers typically exert considerable control over prices, quality, and selling terms when I selling to fragmented buyers. L products, weakening buyers in relation to their suppliers. 2. There are no substitute 3. The buying industry isLnot a major customer of the suppliers. If a particular industry does not represent a significant percentage of the suppliers’ sales, then the suppliI ers control the balance of power. If competitors in the industry comprise an important customer, however, suppliers tend to understand the interrelationships and are likely S to consider the long-term viability of their counterparts—not just price—when making strategic decisions. , 4. The suppliers pose a credible threat of forward integration by “becoming their own customers.” If suppliers have the ability and resources to operate their own manufacK channels, or retail outlets, then they will possess considerturing facilities, distribution able control over buyers. A 5. The suppliers’ products are differentiated or have built-in switching costs, thereby S reducing the buyers’ ability to play one supplier against another. S 3-8 Limitations of Porter’s Five A N Forces Model D five forces model is based on the assumptions of the Generally speaking, the industrial organizationR(IO) perspective on strategy, as opposed to the resourcebased perspective. Although the model serves as a useful analytical tool, it has several key limitations.AFirst, it assumes the existence of a clear, recognizable industry. As complexity associated with industry definition increases, the ability to draw coherent conclusions from the model diminishes. Likewise, the model 2 of firms in an industry and does not account for the addresses only the behavior role of partnerships, a1growing phenomenon in many industries. When firms work together, either overtly or covertly, they create complex relationships that 6 into industry models. are not easily incorporated Second, the model1does not consider that some firms, most notably large ones, can often take steps to modify the industry structure, thereby increasT ing their prospects for profits. For example, large airlines have been known to lobby for hefty safety S restrictions to create an entry barrier to potential upstarts. Mega-retailer Wal-Mart even employs its own team of lobbyists on Capitol Hill. Third, the model assumes that industry factors, not firm resources, comprise the primary determinants of firm profit. This issue continues to be 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Industry Competition 51 widely debated among both scholars and executives.24 This limitation reflects the ongoing debate between IO theorists who emphasize Porter’s model and resource-based theorists who emphasize firm-specific characteristics. The resource-based perspective is addressed later in the strategic management process. Finally, a firm that competes in many countries typically must analyze and be concerned with multiple industry structures. The nature of industry competition in the international arena differs among nations, and may present challenges that are not present in a firm’s host country.25 One’s definition of McDonald’s industry may be limited to fast-food outlets in the United States, but may also include a host of sit-down restaurants when other countries are considered. Different industry definitions for a firm across borders can make the task of assessing industry structure quite complex. These challenges notwithstanding, a thorough analysis of the industry via the W five forces model is a critical first step in developing an understanding of competsense, Porter’s five forces model itive behavior within an industry.26 In a general I provides insight into profit-seeking opportunities, as well as potential challenges, within an industry (see Case Analysis 3-2).L L I Case Analysis 3-2 S , Step 3: Potential Profitability of the Industry Porter’s five forces model should be applied to the industry environment, as identified in step 2, by examining threat of entry, rivalry K among existing competitors, pressure from substitute products, and the bargaining power of buyers and suppliers. Each of the specific factors identified in the rivalry A and new entrants sections (3-3 and 3-4) should be assessed individually. In addition, S each of the five forces should be evaluated with regard to its positive, negative, or neutral effect on potential profitability in the S industry. It is also useful to provide an overall assessment (considering the composite A that identifies the industry as either effect of all five forces) of potential profitability profitable, unprofitable, or somewhere in between. N D in the Industry, and Why? What Are Step 4: Who Has Succeeded and Failed the Critical Success Factors? R Every industry has recent winners and losers. To understand the critical success A factors (CSFs)—factors that tend to be essential for success for most or all competi- tors within a given industry—one must identify the companies that are doing well and those that are doing poorly, and determine whether their performance levels appear 2 to be associated with similar factors. For example, McDonald’s, Burger King, and Taco 1 Bell are successful players in the fast-food industry. In contrast, Rax and Hardee’s have been noted for their subpar performance. Are any common factors partially responsi6 ble for the differences in performance? Consider that many analysts have noted that 1success factors in the fast-food industry. consistency and speed of service are critical Indeed, McDonald’s, Burger King, and TacoT Bell are all noted for their fast, consistent service, whereas Rax and Hardee’s have struggled in this area. S not possess a key industry CSF; howA business may succeed even if it does ever, the likelihood of success is diminished greatly. Hence, strategies that do not shore up weaknesses in CSF areas should be considered carefully before being implemented. Critical Success Factors (CSFs) Factors that are generally prerequisites for success among most or all competitors in a given industry. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 52 Chapter 3 3-9 Summary An industry is a group of companies that produce similar products or services. Michael Porter has identified five basic competitive industry forces that can ultimately influence profitability at the firm level: intensity of rivalry among incumbent firms in the industry, the threat of new entrants in the industry, the threat of substitute products or services, bargaining power of buyers of the industry’s outputs, and bargaining power of suppliers to the industry. Firms tend to operate quite profitably in industries with high entry barriers, low intensity of competition among member firms, no substitute products, weak buyers, and weak suppliers. These relationships are tendencies, however, and do not mean that all firms will perform in a similar manner because of industry factors. Although Porter’s model has its shortcomings, it represents an excellent starting point for positioning a business among its competitors. Key Terms barriers to entry critical success factors exit barriers W I L L industry industry life cycle I market share S , relative market share substitute products switching costs Review Questions and Exercises K 1. Visit the Web sites of several major restaurant chains. A Identify the industry(s) in which each one operates. Would you categorize them in the same industryS or in different industries (fast food, family restaurants, S etc.)? Why or why not? A 2. Identify an industry that has low barriers to entry and one that has high barriers. Explain how the difference N in entry barriers influences competitive behavior in the D two industries. R A 3. Identify some businesses whose sales have been adversely affected by substitute products. Why has this occurred? 4. Identify an industry in which the suppliers have strong bargaining power and another industry in which the buyers have most of the bargaining power. How does this affect potential profitability in both industries? Practice Quiz True or False 2 1. Each firm operates in a single, distinct industry. 1 2. All industries follow the stages of the industry life 6 cycle model. 3. The likelihood that new firms will enter an industry 1 is contingent on the extent to which barriers to entry T have been erected. 4. Higher capital requirements for entering an indusS try ultimately raise average profitability within that industry. 5. Substitute products are produced by competitors in the same industry. 6. A key limitation of Porter’s five forces model is its reliance on resource-based theory. Multiple Choice 7. Industry growth is no longer rapid enough to support a large number of competitors in which stage of industry growth? A. growth B. shakeout C. maturity D. decline 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Industry Competition 8. The intensity of rivalry among firms in an industry is dependent on which of the following? A. concentration of competitors B. high fixed or storage costs C. high exit barriers D. all of the above 9. The decline in unit costs of a product or service that occurs as the absolute volume of production increases is known as A. production effectiveness. B. effective operations management. C. economies of scale. D. technological analysis. W 10. When switching costs are high, I A. customers are less likely to try a new competitor. B. companies spend more on technology. L C. companies seek new suppliers to reduce L costs. D. none of the above Notes 53 11. Which of the following is not a cost advantage independent of scale? A. proprietary technology B. favorable locations C. experience in the industry D. high volume of production 12. What is occurring when those who purchase an industry’s goods and services exercise great control over pricing and other terms? A. high bargaining power of suppliers B. low bargaining power of suppliers C. balance of power among suppliers D. none of the above I S , 1. M. E. Porter, “Strategy and the Internet,” Harvard Business Review 29(3) (2001): 62–79; M. E. Porter, “Clusters and the New Economics of Competition,” Harvard Business Review 76(6) (1998): 77–90. 2. P. Daniels, “The New Snack Pack,” Prepared Foods (February 2006): 11–17. 3. C. W. Hofer, “Toward a Contingency Theory of Business Strategy,” Academy of Management Journal 18 (1975): 784–810; G. Miles, C. C. Snow, and M. P. Sharfman, “Industry Variety and Performance,” Strategic Management Journal 14 (1993): 163–177. 4. D. Michaels and M. Trottman, “Fuel May Propel Airline Shakeout,” Wall Street Journal (7 September 2005): C1, C5. 5. T. Levitt, “Exploit the Product Life Cycle,” Harvard Business Review 43(6) (1965): 81–94. 6. G. Hawawini, V. Subramanian, and P. Verdin, “Is Performance Driven by Industry- or Firm-Specific Factors? A New Look at the Evidence,” Strategic Management Journal 24 (2003): 1–16. 7. J. R. Graham, “Bulletproof Your Business against Competitor Attacks,” Marketing News (14 March 1994): 4–5; J. Hayes, “Casual Dining Contenders Storm ‘Junior’ Markets,” Nations’ Restaurant News (14 March 1994): 47–52. 8. J. R. Hagerty, “Discount Real-Estate Brokers Spark a War over Commissions,” Wall Street Journal (12 October 2005): A1, A6. 9. See A. Taylor III, “Will Success Spoil Chrysler?” Fortune (10 January 1994): 88–92. 10. S. Carey and E. Perez, “Traveler’s Dilemma: When To Fly the Cheap Seats,” Wall Street Journal (22 July 2003): D1, D3. 11. S. McCartney, “A Middle-seat Manifesto,” Wall Street Journal (3 December 2004): W1, W14. K A S S A N D R A 2 1 6 1 T S 12. L. Hawkins, Jr., “Trucks Get Bigger, Fancier and Cheaper, Wall Street Journal (2 October 2003): D1, D2; N. E. Boudette, “Volkswagen Stalls on Several Fronts after Luxury Drive,” Wall Street Journal (8 May 2003): A1, A17. 13. C. Terhune and B. McKay, “Behind Coke’s CEO Travails: A Long Struggle over Strategy,” Wall Street Journal (4 May 2004): A1, A10. 14. J. Drucker, “How to Dump Your Cellphone Company,” Wall Street Journal (18 November 2003): D1, D4. 15. P. Wright, M. Kroll, and J. A. Parnell, Strategic Management:Concepts (Upper Saddle River, NJ: Prentice Hall, 1998). 16. K. C. Robinson and P. P. McDougall, “Entry Barriers and New Venture Performance: A Comparision of Universal and Contingency Approaches,” Strategic Management Journal 22 (2001): 659–685. 17. J. K. Han, N. Kim, and H. Kim, “Entry Barriers: A Dull-, One-, or Two-Edged Sword for Incumbents? Unraveling the Paradox from a Contingency Perspective,” Journal of Marketing 65 (2001): 1–14. 18. T. L. Friedman, The World Is Flat (New York: Farrar, Straus and Giroux, 2005). 19. M. Pietz, “The Pro-Competitive Effect of Higher Entry Costs,” International Journal of Industrial Organization 20 (2002): 353–364. 20. Wright et al., Strategic Management. 21. Corporate author, “In Bow to Retailers’s New Clout, Levi Strauss Makes Alterations,” Wall Street Journal (17 June 2004): A1, A15. 22. J. McCracken and P. Glader, “New Detroit Woe: Makers of Parts Won’t Cut Prices,” Wall Street Journal (20 March 2007): A1, A16. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 54 Chapter 3 23. L. Meckler, “Fill up with Ethanol? One Obstable Is Big Oil,” Wall Street Journal (2 April 2007): A1, A14. 24. S. F. Slater and E. M. Olson, “A Fresh Look at Industry and Market Analysis,” Business Horizons (January–February 2002): 15–22; Hawawini et al., “Is Performance Driven by Industry- or Firm-Specific Factors?” 25. Y. Li and S. Deng, “A Methodology for Competitive Advantage Analysis and Strategy Formulation: An Example in a Transitional Economy,” European Journal of Operational Research 118 (1999): 259–270. 26. Porter, “Clusters and the New Economics of Competition”; Slater et al., “A Fresh Look at Industry Analysis.” W I L L I S , K A S S A N D R A 2 1 6 1 T S 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Industry Competition R E A D I N G 55 3 - 1 Insight from strategy+business The airline industry has undergone remarkable changes during the past two decades, particularly after the 9/11 terrorist attacks. In this chapter’s strategy+business reading, Hansson and associates challenge the wisdom of the business models employed by traditional airlines. They argue that the structure of the industry has changed and that astute airlines will tailor their approaches to the new reality. Flight for Survival A New Business Model for the W Airline Industry To pare down their colossal operating costs, giant U.S. and European carriers must restructure the I hub-and-spoke system and eliminate complexity. L Markus Franke By Tom Hansson, Jürgen Ringbeck, and S L ince the 1970s, traditional market leaders in I industry after industry, saddled with complex, high-cost business models, have S been under attack by companies with new, simpler ways to , manage their operations and contain costs. This scenario occurred in the steel industry when minimills took on traditional smelters; in automobile K manufacturing when more standardized Japanese cars Ain retailing won out over customized U.S. vehicles; and when superstores overtook conventional grocery S stores. In each instance, the established companies struggled, often in vain, to rationalize operations andSstill deliver products and services to satisfy customer desires, A defend their market positions, and reestablish profitability. N mature, The lesson is fundamental: As markets incumbent companies that have developed D sophisticated, but complex, business models face tremendous pressure to find less costly approaches thatR meet broad customer needs with minimal complexity in products and A processes. The trouble is, many companies – manufacturers and service providers alike – have increased the 2 scope and variety of their products and services over the years by 1 layering on new offerings to serve ever larger and more 6 diverse customer bases. Although each individual business decision to enhance a product line or1service can usually be justified on its own, the result often is a cost T structure that is sustainable only if the principal competitors take a similar approach. More often than not, S though, as incumbents expand the breadth and depth of their offerings, leveraging their sophisticated business infrastructure, they are undermined by smaller, nimbler competitors that supply a more focused product, usually to a specific set of customers, at a substantially lower cost. In these situations, the incumbent may know that the cost of complexity is dragging it down, but finds changing its business model easier said than done. No companies illustrate this dilemma more vividly than the large U.S. and European hub-and-spoke airlines. Their business model – essentially designed to seamlessly take anyone from anywhere to everywhere – was a great innovation. But this model is no longer competitively sustainable in its current form. Tied to massive physical infrastructure, complex fleets of aircraft, legacy information systems, and large labor pools, the major carriers in both regions now face a double whammy: some of the worst economic conditions in the industry’s history, and low-cost carriers that dictate prices in large and growing parts of the market. U.S. carriers lost more than $10 billion in 2002, according to the Air Transport Association, up from $8 billion in the disastrous year of 2001. Worldwide, losses topped $50 billion. Bankruptcies litter the industry. Sabena, Swissair, US Airways, United Air Lines, and Hawaiian Airlines have all sought protection from their creditors. Others are likely to follow. The need for a new, less complex business model among hub-and-spoke carriers is growing stronger with each boom and bust cycle. Source: Reprinted with permission from strategy + business, the award-winning management quarterly published by Booz Allen Hamilton. http://www.strategy-business.com. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 56 Chapter 3 EXHIBIT 1 Av e r ag e C o s t p e r S e a t M ile ( in 2 0 0 0 ) W I In this article, we examine the significant downL side of business complexity and provide a formula that L would allow the airlines to simplify their operations, cut expenses, and compete with their low-cost competitors. I It’s not incremental change, but a fundamental overhaul. S Complexity Costs , Source: Booz Allen Hamilton While the major carriers face a future of red ink, low-cost carriers such as Southwest Airlines, JetBlue Airways, K and Ryanair are prospering by exploiting a huge cost-ofoperations advantage. Low-cost carriers spend seven A to eight cents per seat mile to complete a 500- to 600-mile flight, according to our analysis. That’s less than half S of what it costs the typical hub-and-spoke carrier to flySa flight of the same duration and distance. (See Exhibit 1.) A It is easy to see how costs mount quickly in the huband-spoke airlines’ intricate system of operations. Their N business model is predicated on offering consumers D a larger number of destinations, significant flexibility (ranging from last-minute seat reassignments and R upgrades to complete itinerary and routing changes), A and “frills” (e.g., specialty meals, private lounges, and in-flight entertainment). It is a model burdened by the built-in cost penalties of synchronized hub operations, 2 with long aircraft turnaround times and slack built into schedules to increase connectivity by ensuring there1is time for passengers and baggage to make connections. 6 It’s a system that implicitly accepts a slower business 1 pace to accommodate continual change. In addition, the hub-and-spoke business model relies on highly T sophisticated information systems and infrastructure S to optimize its complex operations. By contrast, lowcost carriers have designed a focused, simple, highly productive business model around nonstop air travel to and from medium- to high-density markets at a significantly lower price point. We have analyzed the cost gap between large full-service airlines and low-cost carriers (LCCs) on both sides of the Atlantic, and the similarities are striking. On both continents, cost differences exist across the board; pilots, onboard services, sales and reservations, maintenance, aircraft ownership, ground handling. The low-cost carriers are not simply paying lower salaries or using cheaper airports, they are leveraging all resources much more effectively. In fact, the cost differential between the full-service and low-cost carriers is 2 to 1 for the same stage length and aircraft, even after adjustments for differences in pay scales, fuel prices, and seat density are made. Surprisingly, only about 5 percent of this cost differential can be attributed to the extra amenities the huband-spoke carriers offer. Some 65 percent of the LCCs’ cost advantage is the result of other production-model choices; another 15 percent comes from work rules and labor agreements; and 12 percent can be attributed to differences in balance-sheet structure and financial arrangements. (See Exhibit 2.) Of the costs attributable to production-model differences, the largest contributing factors are business pace, process complexity, and ticket distribution. In fact, “no frills” and “full service” are misleading labels to describe the distinction between the two types of carriers. It is the relative simplicity or complexity of their operations that truly distinguishes them. Most debilitating for the major carriers is the inability to overcome their cost burden with boom period pricing, as they did in the second half of the 1990s. As corporations tightened their belts and reduced the frequency of travel, business travelers, who have traditionally accounted for 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Industry Competition EXHIBIT 2 57 Bre a k o u t of the Cost pe r S e a t M ile Ga p Be twe e n FullS e r v ice a n d Low- Cost Ca r r ie r s ( in 2 0 0 0 ) W I L L I S , K A S as much as 60 percent of mainline airline revenues S – and well over 100 percent of their profits – were no longer willing to pay the high fares they tolerated inA the dot-com boom. Weakened by this fundamental changeN in customer choice as well as “industry leading” labor agreements and rising fuel prices, the U.S. hub-and-spoke D airlines’ cost per seat mile (CASM) rose above revenue per R seat mile (RASM) by the third quarter 2000, a full year before the A September 11 terrorist attack slashed air travel further. Source: Booz Allen Hamilton This eventually increased to an unprecedented costto-revenue gap of close to 2 cents per seat mile at the 2 beginning of 2002 in the U.S. 1 By our That revenue outlook is likely to get worse. conservative estimates, low-cost carriers could6potentially— and successfully – participate in more than 70 percent 1 typically of the U.S. domestic market. Southwest Airlines prices 50 percent lower than large carriers T in one- to two-hour nonstop markets. Even though traditional airS the lowlines have attracted a richer business mix than cost carriers, they still stand to lose 25 to 35 percent price realization in those markets. Recently, huh-and-spoke airlines have been trying to lower operating costs through new, less onerous labor agreements – American Airlines, United Air Lines, and US Airways have led the way in eking out pay concessions from their employees; negotiating better deals with intermediaries and financiers; eliminating discretionary costs; and, in some cases, smoothing out hub operations. Major carriers in the U.S. and Europe have also announced that they will add low-cost airline subsidiaries to their business portfolios to compete with the likes of Ryanair and Southwest Airlines. A New Path Many of these restructuring initiatives are clearly valuable and necessary, but they will likely not prove to be enough. Core airline operations need to become competitive with those of low-cost carriers, especially as LCC market penetration grows in the U.S. and makes inroads in Europe. The steps large carriers have taken so far do not address the fundamental productivity differences between themselves and the low-cost airlines. Traditional 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 58 Chapter 3 airlines will not achieve a competitive cost structure if they do not tackle the fundamental cost penalties associated with their business models. But they must do so without compromising the services, service quality, and coverage that distinguish them from their new rivals. Although making such fundamental changes in a longstanding business model is difficult and risky, it is not without precedent. Successful change in other industries— such as manufacturing and financial services—provides important insights into the ways the burden and cost of complexity can be reduced. Not long ago, a major U.S.based manufacturer of a highly engineered product W realized that its policy of allowing extensive customization was increasing operating cost without delivering I commensurate revenue benefits. Certain elements of this company’s products required customization, but L by a natural progression of complexity, customization had L become an unintentional—and unnecessary—centerI piece of the manufacturing process. Inventory, scheduling, delivery logistics, and the like were built around S the ability to alter specifications quickly. The company’s , operational resources directed toward the most complicated features of manufacturing, rather than the simplest. And that was introducing significantly higher costs K into its business model. The manufacturer did an exhaustive study and found, A to its surprise, that about 70 percent of the features in S its products were never customized. The company introS duced engineering controls to these less complicated aspects of the manufacturing process. By taking that A step, the manufacturer was able to strategically apply N complex systems–such as manufacturing resource planning, inventory, and expediting programs–to only the 30 D percent of the design and plant processes that required R customization. These segmented operations are called tailored business streams (TBS). Because of this action, A which did not hamper service for those customers needing customization, the company is on course to slash 15 percent from its operational expense. 2 Large carriers must seriously consider three critical 1 elements when restructuring the hub-and-spoke model and eliminating complexity from their business model.6 • Remove Scheduling Constraints. At present, hub1 and-spoke airlines generally schedule flights in a so-called T wave system, which means that departures and arrivals are concentrated in peak periods to maximize effective pasS senger connections. However, the approach causes long aircraft turnarounds (to allow passengers and baggage to connect to their next flight), traffic congestion, and aircraft downtime at the origin cities, resulting in low labor and aircraft utilization. This system, which is structured around the needs of the least profitable connecting passengers, also necessitates more complicated logistics and provides significantly lower yields–up to 45 percent less revenue per mile than for passengers traveling nonstop. Nevertheless, because of current pricing strategies and fleet structures, airlines rely on connecting passengers to fill seats that otherwise would be empty. By redesigning the airline’s network around the needs of nonstop passengers, and making connections a byproduct of the system as Southwest Airlines does, large carriers should be able to cut turnaround times by as much as half, increase aircraft utilization, reduce congestion, and significantly improve labor productivity. A large portion of manpower costs is driven by how long an aircraft is at the gate. Shorter turns would mean that pilots, flight attendants, baggage handlers, maintenance staff, and other personnel could be much more productive, and still in compliance with safety regulations. Moreover, with aircraft ready to take off more quickly, airlines could schedule more flights and provide more attractive timetables for nonstop passengers. The trade-off between efficient operations and connectivity has to be evaluated carefully, however. Most likely the solution will involve “continuous” or “rolling” hubs, which would allow for more operationally efficient, continuous flight schedules throughout the day. The approach would be particularly suited for “mega-hubs,” where the local “point-to-point” market is sufficiently large to support more frequent flights without relying as much on connecting traffic. Some airlines are already experimenting with rolling hubs. To fully realize the cost reduction opportunities created by this approach, and to justify the scheduling change, airlines will need to fundamentally alter airport operations, through such innovations as compressed turns and simplified baggage handling. • Implement Tailored Business Streams. In other industries, such as manufacturing, complexity reduction has been achieved by applying a TBS approach. The basic principle is to segment operations into distinct business streams: Separate processes are created to handle routine and complex activities; capabilities and approaches are tailored to the inherent complexity of the chosen task and based on what customers are willing to pay. That often entails standardizing or “industrializing” the routine and stable processes, while segmenting and isolating the parts of the operation that are more complicated and variable. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Industry Competition 59 By and large, the hub-and-spoke airlines have done exactly the opposite. Airlines have sophisticated, universally applicable processes for handling most, if not all, possible situations. It doesn’t matter whether the passenger is on a simple one-hour flight or is traveling from one continent to another. This has added unnecessary costs to processes, and made them hard to automate and change, requiring massive retraining of personnel when a process is altered. If the airlines embraced TBS, simplified their policies, and streamlined their core processes to address the basic needs of the majority of customers, they could drastically reduce the number of activities performed at airports. Furthermore, they could automate many more of them, W saving huge amounts of time and money. In this environment, I the reservation and passenger-handling process would be designed so that passengers wouldn’t need last-minuteLchanges or long, multiple interactions with airline staff at Lthe airport. Instead, travelers would be able to get to the gates faster. I still deal At airports, dedicated processing staff would with the small percentage of travelers who need S to change itineraries, connect to a different airline, or request other , (except special services. And customers who require extras for perhaps the most frequent flyers) would potentially pay for them in the ticket price or through a transaction fee. K Efficiency improvements would be systemwide, cascading from reservations to front-line staff Overall, theA product and experience would be better, and the organization would be S much more efficient at delivering it. approach would enable greater product distinction than there is today. The objective is twofold: Change the business model to serve all customers better by providing a more efficient and less time-consuming experience; and provide dedicated services (and flexibility) to the customer segments prepared to pay for them. These proposed restructuring elements are highly interdependent. If they’re effectively coordinated, they will increase the pace of airline operations, reduce and isolate complexity, and increase service specialization– all results that are necessary for carriers to fly beyond the industry turbulence they’re experiencing today. We estimate that by adopting these approaches, the major airlines would bring costs more in line with those of lowcost carriers, reducing their unit cost disadvantage for leisure travel by 70 to 80 percent. It won’t be easy to achieve. Any industry that undertakes such change faces the fear that not only will revenue premiums be lost, but costs will not fall commensurately. It is difficult to reduce fixed-cost structures. Existing infrastructure may be underutilized with the new business model, and the current aircraft base may not fit the new requirements. Another key challenge for airlines would be the potential drop in revenue in connecting markets. But they could make up this loss by using their lower cost base to stimulate market growth, and by offering viable new services that are not economically feasible at current cost levels. • The Horizon S Create Separate Business Systems for Distinct A business Customer Segments. In simplifying their model, large carriers have to be careful to retain the N loyalty of their most profitable and frequent customers by providing more differentiated amenities,D lounges, and services on the ground and in the air than they do today. This could mean separating both airport R and onboard services into two (or more) classes, focused A on either leisure or business passengers. Other industries’ experiences suggest that mingling complex and simple operations, each of which has distinct objectives and missions, 2 often increases costs and lowers service standards. This must be avoided: The goal is to offer a higher 1 service level where it is needed, at a low operating cost. Besides providing more amenities, this approach6would help create purer business streams that reflect1the distinct needs of different customer segments. T It will be important for large carriers to retain the S carrikey service advantages they have over low-cost ers, including destination breadth, superior loyalty programs, and select onboard amenities. At a minimum, this To survive, major airlines have no choice but to change course. With a fundamentally lower cost structure, the large airlines would be far better positioned to become profitable, grow, and launch a marketplace offensive against low-cost carriers. At this point, the outlook for the industry is highly uncertain. If the hub-and-spoke carriers stick to the current business model, and attempt to reduce costs within today’s operational framework, they risk facing continued market share loss to LCCs, a round robin of bankruptcies, and a struggle for survival. The large U.S. airlines’ early 1990s crisis was a cyclical, economy-based downturn. LCCs were not a major issue then. When the economy and their performance improved, the airlines largely ignored the threat posed by the lower-cost format. That inaction only hid the real emerging problem. This time the crisis is again cyclical, but it is exacerbated by the presence of low-cost carriers. If the economic picture brightens significantly, it’s possible that the large 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 60 Chapter 3 airlines will rebound, and that the fundamental business model problems will not be addressed. If that happens, the next cyclical crisis will be so much worse. In the U.S., the low-cost carriers could then dictate pricing in more than 70 percent of the domestic market, as opposed to the current 40 to 45 percent. At that point, a turnaround would be significantly more challenging than it is today. Alternatively, if a few large carriers adopt the new business model that we suggest, the industry could be led by a couple of thriving carriers in the U.S. and Europe, with one to two random hubs each serving intercontinental and small community markets, a more differentiW ated service offering, and a number of centers of mass similar to those operated by Southwest Airlines. I The risk of inaction is much greater than the risk of L change. The first traditional airline to apply a fundamentally new business model will reshape the industry’s comL petitive landscape. The first prize that awaits the boldest I flyers is significant, not just in terms of cost reduction, but also in considerable growth and future market leadS ership opportunities. Resources , Tom Hansson, Jürgen Ringbeck, and Markus Franke. “Flight for Survival: A New Operating Model for Airlines,” s + b enews. December 6, 2002; K A S S A N D R A w w w. s t r a t e g y - b u s i n e s s . c o m / p r e s s / e n e w a r t i c l e / ? a r t = 19050189&pg=0 David Newkirk, Brad Corrodi, and Alison James. “Catching Travels on the Fly,” s + b, Fourth Quarter 2001; www.strategy.-business. com/press/article/?art=24979&pg=0 Susan Carey and Scott McCartney; “United’s Bid to Cut Labor Costs Could Force Rivals to Follow,” Wall Street Journal, February 25, 2003; http://online.wsj.com/home/us Darin Lee, “An Assessment of Some Recent Criticisms of the U.S. Airline Industry,” The Review of Network Economics, March 2003; www.rnejournal.com/archives.html Shawn Tully, “Straighten Up and Fly Right,” Fortune, February 17, 2003; www.fortune.com Tom Hansson (hansson_tom@bah.com) is a vice president in Booz Allen Hamilton’s Los Angeles office. He focuses on strategy and operational restructuring in the airlines and travel arena. Jürgen Ringbeck (ringbeck_jurgen@bah.com) is a vice president in Booz Allen Hamilton’s Düsseldorf office. He focuses on strategy and transformation for companies in global transportation industries, such as airlines, tourism operators, postal and logistics companies, and railways. Markus Franke (franke_markus@bah.com is a principal in Booz Allen Hamilton’s Düsseldorf office. He focuses on strategy, network management, sales, and distribution in the airline, transportation, logistics, and rail industries. 2 1 6 1 T S 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning External Environment W Chapter Outline I 4-1 Analysis of the Macroenvironment L 4-2 Political-Legal Forces L4-3 Economic Forces I 4-3a Gross Domestic Product S 4-3b Inflation Rates , 4-3c Interest Rates 4-3d Exchange Rates 4-4 Social Forces K 4-4a Case 1: Eating Habits A 4-4b Case 2: Automobiles S 4-4c Global Concerns S4-5 Technological Forces A4-6 Environmental Scanning N4-7 Summary Key Terms D Review Questions and Exercises RPractice Quiz ANotes Reading 4-1 2 1 6 1 T S 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 4 62 Chapter 4 FIGURE Macroenvironment The general environment that affects all business firms in an industry and includes political-legal, economic, social, and technological forces. PEST An acronym referring to the analysis of the four macroenvironmental forces: Political-legal, Economic, Social, and Technological. 4-1 M a croe n v iron me n t a l Force s W I L After the industry hasLbeen clearly defined and its prospects for profits identified, forces outside the industry should be considered. Constant changes in these I forces present numerous opportunities and challenges to strategic managers. Hence, it is importantS to understand how these forces collectively influence the industry. , Every organization exists within a complex network of external forces. Together, these elements comprise the organization’s macroenvironment. The four categories of macroenvironmental K forces are political-legal, economic, social, and technological (see Figure 4-1). The analysis of macroenvironmental factors may be Aacronym derived from the first letter of each of the four referenced as PEST, an categories of forces. The S effects of macroenvironmental forces on a firm’s industry should be well understood before strategic options are evaluated. S A of the Macroenvironment 4-1 Analysis N Each macroenvironmental force embodies a number of key issues that vary D issues are specific to a single force whereas others are across industries. Some related to more than R one force. Automobile safety, for example, has politicallegal (e.g., legislation requiring that safety standards be met), social (e.g., conA vehicles), and technological (e.g., innovations that may sumer demands for safe improve safety) dimensions. In such situations, one needs to understand how the various macroenvironmental forces combine to influence industry behavior and 2 performance. Firms operating in 1 multiple markets may be affected in different manners by macroenvironmental forces in each market. For example, wide roads and rela6(i.e., political-legal factors), a culture that reinforces the tively modest fuel taxes automobile as a means1of personal expression (i.e., a sociocultural factor), and a high standard of living (i.e., an economic factor) suggest higher demand for T in the United States. In contrast, narrow roads, higher moderate to large vehicles fuel taxes, a view that aSvehicle is more about transportation than about personal expression, and less disposable income suggest higher demand for smaller cars in Latin American countries. Hence, the application of Porter’s model to firms operating in many different industry structures within a single nation or, most notably, many different nations can be quite cumbersome. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning External Environment Although large organizations and trade associations often attempt to influence change in the macroenvironment, these forces are usually not under the direct control of business organizations. On occasion, a large, dominant firm such as Wal-Mart may be able to exert some degree of influence over one or more aspects of the macroenvironment. For example, the giant retailer’s political action committee contributed about $1 million to candidates and parties in the United States in both 2003 and 2004.1 However, this level of influence is not common because strategic managers typically seek to enable a firm to operate effectively within largely uncontrollable environmental constraints while capitalizing on the opportunities provided by its environment. The key distinction here is strategic managers must first identify and analyze these national and global macroenvironmental forces and understand how each force affects the industries in which they operate before addressing firm-specific strategy concerns. Hence, understanding a force’s broad effects should precede W of these forces that are unique understanding its specific effects. Applications or specific to the firm are considered as Iopportunities and threats later in the strategic management process. L L 4-2 Political-Legal Forces I Political-legal forces include such factors as the outcomes of elections, legislation, and judicial court decisions, as well as the S decisions rendered by various commissions and agencies at every level of government. Some regulations affect many or , all organizations. When the Massachusetts state legislature passed a bill in 2006 to require that businesses provide health insurance for its workers, all firms operating in the state were affected.2 When the U.S.K Supreme Court ruled in 2007 that the Clean Air Act applies to car and truck carbon dioxide emissions, carmakers knew A standards were likely forthcoming.3 immediately that higher federal fuel economy Industries are often affected by legislation S and other political events specific to their line of business, however. Consider the following examples. The U.S. S Highway Traffic Safety Administration constantly tests cars and trucks sold in the United States and pressures carmakersAto improve safety performance.4 Fuel economy standards can require that producers develop new vehicles or modify N existing ones to meet average fuel economy targets, which can be a costly venD higher minimum standards for ture. When the Bush administration proposed fuel economy, analysts estimated that theRindustry would spend more than $6 billion to comply, adding $275 to the price tag of a large truck by 2011.5 Acertain industries operate, especially Military conflicts can also influence how those with tight global ties. For example, during the 2003 war in Iraq, many firms modified their promotional strategies, fearing that their television advertisements 2 might be considered insensitive if aired alongside breaking coverage of the war. At the same time, others began to plan for1meeting the anticipated future needs in Iraq for such products as cell phones, refrigerators, and automobiles. After 6 the previous Iraqi regime was ousted in mid-2003, U.S. firms began to compete 6 vigorously for lucrative reconstruction contracts. 1 It is not safe to assume that firms always seek less regulation. In some instances, T boundaries established by governfirm leaders prefer to operate within clear ments. In 2004, for example, Ford chief Bill S Ford said he would support higher fuel taxes in exchange for incentives to produce more energy-efficient vehicles.7 In another example, following the sharp declines in air travel in the United States, airlines on the verge of bankruptcy campaigned for and received $15 billion in government support in 2002 and an additional $2.9 billion in 2003.8 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 63 64 Chapter 4 In more cases than not, however, regulation can prove costly for firms in an industry. When mad-cow disease—a rare disease of the brain passed through tainted meat—began to show up in the United Kingdom in early 2001, most of Europe responded by banning the import of British beef. Financial losses for the industry were staggering.9 Beginning in 2005, U.S. packaged food manufacturers were required to disclose the amount of trans fats in the products they distribute through grocery stores.10 As health advocates renewed attempts in that same year to secure governmental regulation, the U.S. food industry continued its long struggle to cut back on the use of salt. Critics warn of the link between salt and high blood pressure. Deeply ingrained in the food production process, however, salt is all but impossible to eliminate because of its many benefits. Salt is inexpensive, enhances the taste of myriad foods, and extends the shelf life of many foods.11 While most agree that regulations are necessary in many instances, they can be cumbersome. In 2006, the U.S. Food and Drug Administration (FDA) issued guidelines concerningW when food companies can reference their products as “whole grain.” Food companies can use the label if their products are made of rye, I oats, popcorn, and wild rice, but not soybeans, chickpeas, and pearled barley. Use of terms such as “goodLsource” and “excellent source” to describe the amount of whole grains included L in a product are also subject to debate and FDA rulings.12 All societies have laws and regulations that affect business operations. A major I in the late 1970s and the 1980s in favor of deregulation, shift in U.S. policy occurred eliminating a number S of legal constraints in such industries as airlines, trucking, and banking; however, not all industries were deregulated. By 1990, a reversal of , strong governmental influence in business operations trade protectionism and began to take place. In the United States, new economic policies reduced governmental influence in business operations by deregulating certain industries, lowK ering corporate taxes, and relaxing rules against mergers and acquisitions. This trend has continued into A the twenty-first century, although not as forcefully as in the late 1990s. Table 4-1 summarizes some of the major laws in the United States. S Many broad regulations such as those listed in Table 4-1 affect multiple indusS however, are designed specifically for a single industry tries. Other regulations, or category of firms. A In 2005, for example, eighteen U.S. states implemented the Streamlined Sales Tax Project in an effort to remove obstacles preventing N sales taxes with online sales. Estimated potential taxes retailers from collecting associated with Internet Dsales was more than $15 billion across the United States in 2003 and was expected to surpass $20 billion in 2008.13 R Consider a second example. In 2006, a U.S. federal court ruled that cigarette manufacturers cannotAuse the adjectives “light” or “low tar” to describe their products. This ruling requires firms not only to rename some of their products, but also to reposition them and hope that smokers do not assume that other aspects of the cigarettes 2 have been changed as well. Hence, familiar brands such as Altria’s Marlboro Lights and Reynolds American’s Camel Lights must be 1 the ruling.14 changed to accommodate It is interesting to consider broad global trends toward regulation in recent 6 decades. At the global level, the period from World War II to the late 1980s was 1 marked by increased trade protection. Many countries protected their indusT import duties, and other restrictions. Import duties in tries by imposing tariffs, many Latin American countries ranged from less than 40 percent to more than S 100 percent,15 but this trend was not limited to developing nations. Countries in Europe and Asia—and even the United States—have imposed import fees on a variety of products, including food, steel, and cars. In the 1980s, the United States also convinced Japanese manufacturers to voluntarily restrict exports of 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning External Environment TA B L E 4-1 Se l e c t e d E x a mp le s of Gov e r n me n t Re gula tion o f B u s i n e s s in th e U n ite d S t a te s Legislation Purpose Sherman Antitrust Act (1890) Clayton Act (1914) Prohibits monopoly or conspiracy in restraint of trade Forbids contracts that tie the sale of one product to the sale of another Stops unfair methods of competition, including deceptive advertising, selling practices, and pricing Permits selected U.S. firms to form monopolies in order to compete with foreign firms Sets minimum wage rates, regulations for overtime pay, and child labor laws Makes the buying of competitors illegal when it W lessens competition Prohibits discrimination in wages on the basis of I gender when men and women are performing jobs requiring equal L skill, effort, and responsibility under similar working conditions L Directs the Environmental Protection Agency to create emission I standards for potential pollutants Requires employers to provide a hazard-free S working environment Sets standards , on selected products, requires warning labels, and orders product recalls Forbids discrimination in all areas of employer– employee K relations Requires accuracy in product warranties A Outlaws direct payoffs and bribes of foreign governments S or business officials Protects those who are physically and mentally S job discrimination disabled from Offers workers A up to twelve weeks of unpaid leave after childbirth or adoption, or to care for a seriN spouse, or parent ously ill child, Reduces the Damount of carcinogenic pesticides allowed in foods R more freedom to diversify their investGives workers ments and greater access to quality investment A advice concerning their 401(k) plans Prescribes rules and penalties for e-mail “spammers,” although enforcement is difficult Federal Trade Commission Act (1914) Webb-Pomerene Export Trade Act (1918) Fair Labor Standards Act (1938) Antimerger Act (1950) Equal Pay (1963) Clean Air Act (1970) Occupational Safety and Health Act (1970) Consumer Product Safety Act (1972) Equal Employment Opportunity Act (1972) Magnuson-Moss Act (1975) Foreign Corrupt Practices Act (1978) Americans with Disabilities Act (1992) Family and Medical Leave Act (1993) Food Quality Protection Act (1996) Pension Security Act (2002) CAN SPAM Act (2003) 2 1 cars to the United States in lieu of a tariff. 6 Interestingly, this particular tariff may be largely responsible for Japanese automobile manufacturers establishing 1 a large number of production facilities in the United States, thereby blurring T the concept of the “foreign car.” During this time, however, leaders from many nations recognized that all S countries would likely benefit if trade barriers could be reduced across the board. After the end of World War II, twenty-three countries entered into the cooperative General Agreement on Tariffs and Trade (GATT), working to relax quota and import license requirements, introduce fairer customs evaluation methods, 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 65 66 Chapter 4 TA B L E 4-2 M a jor Re gion a l Tr a de Agre e me n ts Asia-Pacific Economic Cooperation (APEC) European Union (EU) North American Free Trade Agreement (NAFTA) Asian Free Trade Area (AFTA) Mercosur Australia, Brunei, Canada, ...
Purchase answer to see full attachment
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Explanation & Answer

Attached.

Running Head: CLASS DISCUSSION

1

CLASS DISCUSSION
Name
Course
Tutor
Date

2

CLASS DISCUSSION

Cultural mistakes are you likely to commit in China that would irritate the Chinese
people
During my business tour in China, I realized that many cultural differences separate the
Chinese and American people. From the knowledge I have about the American culture, I
expected every person to own up to their success. However, this got me too on the wrong side
with many people since an individual's achievements wer...


Anonymous
I was stuck on this subject and a friend recommended Studypool. I'm so glad I checked it out!

Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4

Related Tags