SS Lecture 3

0:01hi welcome again to our third lecture

0:03here today we're going to be covering

0:05external analysis and this is one of my

0:08favorite topics really you know

0:12strategy it's a really fun and intuitive

0:15section that I find students

0:18often really gravitate toward and and

0:21have a good time grasping some of the

0:24concepts here and some of the tools like

0:27Porters 5 forces you'll find are things

0:29that are are very helpful throughout

0:32your career so anyway this is always a

0:35section that I find sticks with people

0:38and an enjoyable section for me to teach

0:40so I hope my interest in the topic

0:43carries over throughout this

0:45lecture so the learning objectives

0:48here is that I want you to be able to

0:51recognize the factors and the company's

0:54sort of macro broad environment that

0:57have strategic significance okay you

1:00know what to look at as far as industry

1:03characteristics that's going to affect

1:05firm performance I'll give you a number

1:08of different tools and analyses and you

1:10will use these again in your cases so

1:12we'll cover these fairly extensively and

1:14by the end of this you should have a

1:17good picture as far as what you should

1:19be doing in your

1:21case we'll discuss the group map that's

1:23something that often people struggle

1:25with in terms of putting cases together

1:28and we'll cover that very well well and

1:30closely um and you'll have a idea as far

1:33as how to put one of those together by

1:35the end and we'll discuss how you can

1:38sort of take all of these tools and look

1:40at it at the end and decide well is this

1:43an attractive industry or unattractive

1:45does this industry present growth

1:47opportunities or is it something that's

1:49likely to fall apart in the future here

1:52we are once again looking at the

1:54strategy making executing

1:57process in our last lecture we discussed

2:01developing the vision mission setting

2:03objectives all of that stuff now we're

2:06on to task number two which is taking

2:09stock of all the relevant

2:11variables in this lecture we're going to

2:13cover external analysis so this is where

2:18we are in the strategy making executing

2:22process and later lectures we'll cover

2:25the other

2:27topics okay so the first analysis to

2:29we'll be discussing is What's called the

2:32pestl and the pestl is a way for

2:35analyzing a company's macro environment

2:38and pestal is an acronym that stands for

2:41political economic

2:43sociocultural technological

2:46environmental and legal and Regulatory

2:50conditions how it works

2:53is these are all aspects of a company's

2:57sort of General environment all right

2:59all right the general

3:02environment is the environment that

3:04affects all firms in a given

3:08region when we go on to discuss the

3:10industry environment that's the

3:12environment that affects firms in a

3:14specific industry or it's things that

3:16are related to a specific industry when

3:19we discuss you know the sort of General

3:21environment these are and the pesle

3:24analysis these are things that affect

3:26everybody in the region maybe it affects

3:28some Industries more more than others

3:31but they're forces at large that aren't

3:33specific to an

3:35industry okay so for

3:38example

3:40um like political factors refer to like

3:45you know the politics of a given Nation

3:48how they work with other nations that

3:50kind of thing so like uh if we have a

3:53trade in Bargo with a certain other

3:56country or something like that that

3:58affects everybody

4:00okay that doesn't just affect the Auto

4:03industry or the beer industry or farming

4:08all right maybe it affects some of those

4:11more than others but essentially you

4:14know this is a rule that everybody has

4:16to play by regardless of your

4:19industry now an example of the industry

4:22environment would be things

4:24like

4:27oh in the diamond

4:30industry the suppliers of who own the

4:33mines and everything if you're talking

4:34about like the jewelry industry is De

4:36Beers okay and they have sort of a

4:37corner on the market all right and those

4:41suppliers who have that corner on the

4:43market and is essentially a

4:46monopoly uh control that industry and

4:50that doesn't really affect the Auto

4:52industry or agriculture or beer anybody

4:56else I mean maybe if they want to

4:57purchase diamonds for whatever reason it

5:00could but you know it's situated within

5:04a specific industry okay the pesle

5:07discusses forces that are just broad

5:09forces that are at large in the

5:11environment all right so that's the

5:13difference between you know the

5:15company's General environment versus the

5:18industry environment so first one as I

5:21I've discussed already is political

5:23factors all right

5:25so these are forces at large driven by

5:29the government all right the politics of

5:33a particular Nation okay uh what the

5:37current party um how

5:41they interact with other nations

5:44different policies they might have in

5:46place okay those are all factors of the

5:49political environment so you know

5:52what other nations we have trade

5:55embargos with could be part of that all

5:58right the next one is economic

6:01conditions so economic conditions refer

6:05to things like well what are interest

6:08rates is the economy growing or

6:11shrinking um what's unemployment look

6:14like okay all of those types of impacts

6:18are economic conditions and they're very

6:22general now you can think about economic

6:24conditions as far as how they affect

6:27different Industries and you could

6:29probably come up with some different

6:30ideas you know um you know when the

6:34economy is growing all right then

6:38maybe people are more likely to spend

6:40their money on luxury goods okay they

6:44have a little bit of extra money to go

6:46around and they're going to buy the

6:47things that they've always wanted to

6:49treat themselves with if

6:53the economy is shrinking then you start

6:57to get the idea that people will start

6:59shift their in their buying habits to

7:01more necessity based items all right um

7:06maybe they'll start buying things that

7:07they never did before to save money okay

7:10things like Ramen noodles or whatever

7:13okay so you could think about like the

7:16beer industry all right and how would

7:18economic conditions affect the beer

7:20industry in particular all right well if

7:23the econom is growing and it's a good

7:25time then maybe people are going to be

7:26more likely to

7:28buy you know craft beers that type

7:31of Beverage whereas if the economy is

7:35shrinking then maybe they're going to be

7:37more likely to buy things like paps Blue

7:39Ribbon or Bush beer Keystone or whatever

7:44else is out there all right the next one

7:48is sociocultural forces okay

7:51sociocultural forces deal

7:55with values at large okay that are sort

7:59of

8:00it just exists within Society all right

8:03so there's different things that change

8:06over time okay so you can think about

8:08people's attitude toward the environment

8:10and how that's changed over time okay

8:13you know there was a time when people

8:15really didn't think that much of it all

8:18right they saw like you know the more we

8:21can kind of conquer nature and build

8:24streets and cover up the environment the

8:27better off we are for whatever reason

8:29thought that you know can we rationalize

8:31everything uh that's sort of a changing

8:34perspective and isn't in Vogue as much

8:37today we should say um so you know

8:41attitudes toward environment and saying

8:43this is okay well maybe these are some

8:45of the really cool things that exist in

8:47America and that we should be protecting

8:49all right um other shifting things would

8:54be like

8:55uh if you want to talk about the beer

8:58industry we can go back back to that is

9:00like shifting uh norms for drinking okay

9:05so like at one point beer for whatever

9:08reason was like a man's drink okay is

9:10the husband would always drink beer and

9:13the wife would drink whatever else I

9:16don't know um but that's sort of a

9:19changing belief in society okay now beer

9:23everybody drinks beer all right it's not

9:25a gendered beverage which is kind of

9:28weird to think of a bever is being

9:29gendered but at one point it was okay um

9:35attitudes toward like cars all right

9:38that's another sort of social cultural

9:40Force um one point uh people wanted

9:44sedans now sedans are kind of a hard

9:47cell everybody wants SUVs and crossovers

9:50that kind of stuff all right so

9:52sociocultural forces just attitudes at

9:55large within the nation that are

9:57changing technological forces deal with

10:00changing

10:01technology all right so things like new

10:06inventions technologies that people are

10:08using innovations that kind of stuff so

10:11you could think about like the internet

10:13as maybe like a really big one okay at

10:16one point stores were all brick and

10:19mortar there were some catalog stores

10:21where you would just get a catalog and

10:24you would look through and find things

10:25and call them and or mail something in

10:29saying you want some of their products

10:31and it would take forever and you'd get

10:32really frustrated waiting but now with

10:36the internet

10:38um there's a lot of stores that are

10:40online exclusively and most stores that

10:43are brick and mortar also have a website

10:45where you can order stuff from and

10:47everything okay um and it really changes

10:51how we do business you know if you want

10:53to get help there's like email services

10:55and different things all right so again

10:57that's like an example of a tech

10:59technological force that affects

11:01everybody and you can think about how it

11:03affects some Industries more than others

11:06maybe I mean like with hotels um I was

11:10just looking for hotels to go on a

11:12vacation and you start realizing okay

11:14well there's websites out there that

11:16compare all of the hotel prices okay um

11:20and is this something that the that is

11:22good for the hotel industry probably not

11:25they probably wish it was like the old

11:27days where you had to call each one of

11:29them and ask what their rate was because

11:31then you weren't as likely to search and

11:33find the very best deal and compare them

11:35all based on price um which sort of

11:38commodifies them and makes them all get

11:40into a price War so that's like an

11:43example as far as how the how the

11:46technological factors might affect

11:48something like the hotel industry tends

11:50to drive prices

11:54down other examples of the pestl moving

11:58on is like envir enironmental Factor so

12:00the natural environment is it a dry

12:03place is it cold is it warm you know

12:06what's the natural environment like in a

12:09given region okay so um if it's

12:15somewhere that's prone

12:17toward I don't

12:20know being warm all year you can imagine

12:23that things like coat sails winter skis

12:28that kind of stuff is going to sell so

12:29well in

12:31that region okay um you can also think

12:35about like uh agricultural products they

12:40might be affected more by the natural

12:42environment than others you know you get

12:44rainstorms and it sort of washes all the

12:48soil away from around your corn and

12:50causes big problems uh if you get hail

12:53storms that beats up the crops too

12:56there's different things different ways

12:58that that can affect you more so you get

13:00a drought obviously you're going to have

13:02to be watering more and that drives up

13:03your cost so the natural environment's

13:06another piece and then last is legal and

13:09Regulatory conditions okay so things

13:12like minimum wage that's going to

13:15affects some Industries more than others

13:17but it affects everybody within a given

13:19region okay um things like minimum wage

13:23is going to affect you more if you're

13:24running like

13:26uh maybe like a fast food chain or

13:28something something like that where you

13:31have a large amount of your employees

13:33are making minimum wage whereas if

13:36you're running something like a law

13:38office where everybody's going to be

13:40salaried for the most part um maybe you

13:44have a couple minimum wage employees uh

13:47doing something it doesn't affect you

13:50nearly as much all right but again it

13:53does affect everybody okay everybody has

13:56to play by these rules

13:59um Beyond things like minimum wage like

14:02workers rights okay any of those types

14:04of

14:05regulations all right are all part of

14:09the uh legal and Regulatory conditions

14:11that you would be discussing in your

14:16pestl so here's sort of a picture of all

14:20the components of a company's macro

14:22environment you can see you have the

14:24pestl listed all around it in the macro

14:27environment or the general environment

14:30and then within this Inner Circle here

14:32that's yellow we have the immediate

14:35industry environment or competitive

14:37environment and we're going to spend

14:39more time discussing the industry or

14:42competitive environment

14:45now okay so to discuss the industry

14:48environment we have a number of

14:49different tools that we can use that

14:51we'll discuss throughout the rest of

14:53this lecture uh the most important one

14:56is the five forces framework we'll also

14:58discuss drive forces strategic groups

15:01and key success

15:04factors moving on to the five

15:07forces Porter's five forces or the five

15:10forces is going to be the most important

15:13framework we'll discuss in this external

15:15analysis

15:17section

15:19now this comes from the work again of

15:21Michael Porter and Michael

15:24Porter uh his work is foundational for

15:28business straty what he does is he comes

15:32from a background in industrial

15:33organization economics and what he

15:36realized was in IO

15:39economics what people were always

15:41looking for is they were looking at

15:43Industries and figuring out which

15:45industries were efficient and which were

15:51inefficient so you know which Industries

15:55followed sort of a model of perfect

15:58competition

15:59where buyers and sellers were matched

16:01and prices were reaching these

16:04equilibriums that were efficient and you

16:07know maximizing consumer and producer

16:10Surplus and all these things versus

16:12industries that were

16:14inefficient inefficient Industries are

16:17things like a monopoly where it

16:20maximizes producer Surplus at the

16:23expense of the consumer okay and how a

16:25monopoly works is it produces an

16:29artificially uh smaller amount of goods

16:33okay so not all the consumers are

16:36supplied but by producing that

16:38artificially small amount of goods it's

16:41able to charge higher prices and capture

16:45more uh Surplus for the

16:47producer all right Regulators don't like

16:51this because it's inefficient you know

16:54there's consumers out there who weren't

16:56supplied with Goods okay

16:59um and there isn't the proper amount of

17:02goods produced and it favors the

17:04producer over the

17:06consumer in a perfectly competitive

17:10industry prices reach this equilibrium

17:13where producer and consumer surplus is

17:16maximized

17:18and there's the full volume of products

17:23produced now what IO economists do is

17:27they look at different IND Industries

17:29and say okay well this industry is

17:31vulnerable to becoming a monopoly and

17:34because it is we need to Institute these

17:36regulations to make sure that it stays

17:38competitive or this industry is

17:41vulnerable to becoming uh calized okay

17:45cartel could you know the producers

17:47might form a cartel

17:50and um work together to produce an

17:53artificially small amount of

17:55goods all right and form essentially a

17:58monopoly

18:00so Regulators use this their sort of

18:03framework to figure out which Industries

18:05are efficient and which are likely to

18:08become inefficient or are inefficient

18:10and how to regulate them what Michael

18:13Porter did is he took all of that

18:15knowledge and realized okay well how

18:18about instead of us using it to regulate

18:20Industries I use it to give people

18:24advice on well here's some Industries

18:27out here that are vulnerable to mon

18:28onization or

18:30calization and why should you care about

18:32that as a manager well in those

18:34Industries if you're running a monopoly

18:36or a cartel you're more likely to

18:40capture a greater amount of producer

18:42Surplus all right those Industries favor

18:45the producer at the expense of the

18:47consumer so you should seek out those

18:49types of Industries all right so from a

18:52managerial standpoint you want a

18:54monopoly all right it favors you as a

18:57producer um

19:01it might be inefficient but you know you

19:04have you're in a situation where you can

19:06make profits over the long

19:08run so Michael Porter put together this

19:11sort of framework that looks at

19:14different Industries okay and it's a way

19:17to characterize Industries and what he

19:19did is he said okay well what are all of

19:23the different forces that could change a

19:25monopoly from

19:28being a monopoly where you're likely to

19:31get these super normal returns as a

19:33producer to something more like perfect

19:36competition where you uh essentially

19:41break even over the long run and by

19:43breaking even uh he means in economic

19:45terms which is you grow a little bit you

19:49make profits you pay yourself you pay

19:51all of your employees you cover your

19:53cost of goods and everything but you

19:55aren't growing any faster than the

19:57economy okay

19:59um it doesn't mean you just break even

20:02and don't make any money that's that's

20:03called running that's called losing

20:05money really is what that is or a waste

20:07of your time that's not what they

20:10mean

20:12so he looked at all of these different

20:15forces that could change a

20:17monopoly from being a situation where

20:20you're likely to make profits in the

20:21long run to a situation where you're

20:24likely to break even okay and he came up

20:28with these five things all

20:31right Rivals new entrance

20:36substitutes supplier bargaining Power

20:39customer bargaining

20:41power

20:43so what you should be doing in your case

20:46studies is uh first make sure you

20:50organize your case studies with bullet

20:51points all right I want to see bullet

20:54points to organize each of your ca all

20:56of the points within your cas case and

21:00you'll have one bullet point dedicated

21:03to discussing rivalry among

21:06sellers in this section you'll discuss

21:09okay well here's what I know about

21:12rivalry given what I read in the

21:15case about rivalry between sellers um

21:20this appears to be a strong force in the

21:22environment or a weak Force given the

21:24information of what I have all right so

21:28that's how you'll format each of it but

21:30I'll discuss now each of how these

21:34forces tend to impact the industry all

21:40right all right to use the model of the

21:43five forces what you do is you go one by

21:48one force by force and you

21:53analyze all of the information you have

21:57to write a description of that force in

22:01the given industry so you have one for

22:03rivalry

22:05entrance substitutes buyers

22:09suppliers get all the information you

22:11have and discuss it in a paragraph or

22:14two or however long it takes to discuss

22:18what you know about each of those

22:20forces then you state you know given

22:25what I know this force is strong

22:28moderate or weak at the beginning or end

22:32of each of those sort of summaries of

22:36the industry

22:38forces after that you sit back and look

22:41at you know the whole set and think to

22:44yourself as Michael Porter would say is

22:46this a five-star industry onear industry

22:50a two star

22:51industry so what I mean by that is or

22:54what Michael Porter means by that also

22:56is a five-star industry would be an

22:58industry where all of the forces are

23:02weak a zero star industry would be an

23:05industry where all of the forces are

23:07strong so for example five-star industry

23:10might be something like

23:12Pharmaceuticals you look at the

23:13pharmaceutical

23:15industry and it's like everything's

23:18working for

23:19you one

23:21rivalry it's not really on price

23:26um the consumer isn't really paying for

23:31the drugs themselves usually it's their

23:34insurance

23:35so they're not that price sensitive so

23:39the companies don't really compete on

23:40price they compete on treating different

23:43illnesses for the most

23:46part two the threat of new entrance

23:50hardly any really really really

23:52difficult to set up a pharmaceutical

23:54industry tons of red tape regulations um

23:58and a lot of human capital involved in

24:01terms of just building that organization

24:03and

24:04knowledge intellectual Capital

24:06everything big learning curve not

24:08something somebody's just going to do

24:11overnight suppliers well you're buying

24:14chemical inputs sort of

24:17Commodities these are generally

24:20um just commodity type ingredients

24:23available from many suppliers so you can

24:25get them at a decent price all right

24:28the buyer well they're usually

24:33um somewhat backed into a corner I mean

24:37when it's medicine that they might need

24:40uh they're typically not going to say

24:43well I'm going to hold out for a better

24:44deal um and also they're generally not

24:47paying for the stuff out of their

24:49pockets coming from their insurance so

24:51they're not that price sensitive or

24:53motivated to you know shop

24:56around and then last ly substitutes well

25:01you know often there's not really that

25:02many good substitutes out there okay if

25:05you're if you're prescribed you know

25:08statins because you have a heart

25:11condition

25:13uh you might not want to look for other

25:16substitutes and think well you know this

25:18is kind of my life and I don't want to

25:21risk it so I'm going to do what I'm told

25:24and take and buy the medicine that I was

25:26prescribed all right so you know in that

25:30situation all the forces are fairly weak

25:33now zero Star Industries might be like

25:35the airlines in the airlines there's a

25:38lot of competition and it's basically

25:41just on

25:42price uh those companies go head-to-head

25:47with each other all right often trying

25:49to undercut each

25:51other and the the product they're

25:54offering you is almost indistinguishable

25:56I mean it's a seat in an airplane and

26:00you know

26:02Delta United American they're all pretty

26:07much the same really at the end of the

26:10day so rivalry is really

26:14intense there's substitutes out there

26:17too you can drive a car if you want to

26:19get to place to place you could take a

26:21train there's other things you can do to

26:23get from point A to point B Beyond

26:26substitutes and rivalry

26:29um the suppliers are very powerful

26:32you're dealing with monopolies or

26:35duopolies I guess in a way where uh if

26:38you're trying to buy a plane you really

26:40can only buy it from Boeing or Airbus so

26:42they can overcharge because they know

26:44you don't have any other

26:46options um you have strong suppliers of

26:49Labor because you're dealing with Pilots

26:52that you absolutely need to fly the

26:53planes so if they go on strike you're in

26:56trouble you also

26:59have very strong suppliers in terms of

27:01like the airports you know if an airport

27:04says your airline can't land there

27:06anymore you can't land those planes

27:08anywhere else really to get

27:11passengers um so you're in a lot of

27:13trouble uh you know the the gate renting

27:17out Gates and Landing strips and

27:19everything uh you have to play ball with

27:22them if if you want to operate an

27:26airline and then the buyer isn't very

27:30loyal in general the buyer's happy to

27:32switch to whoever has a set the cheapest

27:34price if you're anything like me when

27:35you buy plane tickets you're basically

27:39looking for the very cheapest flight you

27:41can get between point a and point B I

27:44mean maybe there's some options you rule

27:46out like some of the ones that charge

27:48for bringing a carryon even but

27:50generally um you're not that loyal to

27:54any

27:55Airline because the product's so

27:56indistinguishable and it's essentially

27:58just a commodity to

28:00you now there is some arguments that

28:04it's easy to start an airline because

28:06you could rent a plane and rent a gate

28:08and just fly one route but something

28:12about that does seem like it would deter

28:14your average

28:15entrepreneur um from getting into that

28:18line of business but so maybe it's

28:21somewhat hard to enter

28:24into but otherwise you know it's maybe

28:26it's a one to zero start star industry

28:29and you can see

28:31Pharmaceuticals that's typically a very

28:33profitable industry those companies on

28:35average do very well and Airlines on

28:39average do very

28:42poorly okay so let's talk about rivalry

28:45and some of these other forces in a

28:47little greater detail

28:49here there are certain things that make

28:52rivalry more intense all right and

28:54rivalry is sort of at the center of

28:57perfect competition

28:59as rivalry

29:00increases firms really start going at it

29:03they get in a price War what happens is

29:06the prices start to drop the firms

29:08destroy each other and the consumer wins

29:11so there's certain

29:13scenarios that uh or aspects that tend

29:18to favor rivalry one is like if buyer

29:22demand is growing slowly or declining

29:26okay so you can think about demand as

29:28sort of like um an analogy for it is

29:30maybe it's like a plot of land all right

29:32a little island out in the sea okay and

29:35on this island there's these Gladiators

29:37battling each other all right these

29:39Gladiators are

29:40companies okay

29:43now if this island is getting bigger and

29:46bigger

29:47okay then you would think that those

29:49Gladiators wouldn't be all that

29:51motivated to battle each other all right

29:53the Island's getting bigger and bigger

29:55there's more you know space to go around

29:58for everyone they don't really need to

30:00fight each other to stake their claim to

30:02any particular piece of the land now if

30:06the island starts to shrink okay you get

30:10ocean level rising or whatever um and

30:13that Island gets smaller and smaller and

30:16smaller then what's going to happen is

30:19they're going to have to they're going

30:20to have to start fighting with each

30:22other to you know stake out their little

30:24claim all right their piece of dry land

30:28okay and that's what happens when demand

30:31starts to shrink okay it's that same

30:33sort of force on companies all right in

30:37Industries where demand is growing

30:40usually everybody's really Cooperative

30:42so I knew somebody was doing interviews

30:44in the beer industry when it was craft

30:46beer was really taken off and what he

30:49found is everybody he interviewed would

30:51tell him man I can't make enough product

30:54whatever I make it just sells out right

30:56away okay we're I'm just doing so good

30:59um and you know it's like a license to

31:04print money and his demand was really

31:07growing fast there wasn't all that many

31:09other breweries out there it hadn't been

31:11saturated and what he said is also if

31:14people came to those Brewers and told

31:16them we're looking to start up our own

31:19Craft brewery do you have any advice

31:21those Brewers would go oh do I let me

31:25tell you about all kinds of Kinks I

31:27worked out and how how you can how you

31:29too can start printing money and explain

31:33everything to them okay really really

31:36Cooperative but you know as you start

31:39seeing the industry the growth start to

31:43slow that sort of

31:46cooperation uh became increasingly less

31:53prevalent now another force that affects

31:57the competitive rivalry is you know is

31:59there a cost for switching Brands all

32:02right if there's low switching costs

32:05then this encourages

32:08rivalry because then consumers can just

32:12switch to your your rival whenever the

32:16uh prices of your rival is is better

32:19than yours okay so essentially you can

32:21think about like one really good example

32:23is well you know what type of phone do

32:27you have all right do you have an iPhone

32:29or a Droid or whatever

32:32um now I have an iPhone okay

32:38and there was a time in my life before

32:41iPhones and droids when I used to buy

32:44all sorts of different kinds of phones

32:45that have a Motorola or whatever you

32:47know and all sorts of different types of

32:49phones and it was um before smartphones

32:53and you know I wasn't loyal to any brand

32:56but once I got an iPhone phone and

32:58started getting apps and everything and

33:01using the cloud or whatever else uh it

33:07kind of locked me into keeping that

33:08brand forever because now even if I

33:11wanted to switch to a Droid it's such a

33:13pain in the neck to convert all my apps

33:15and what do I do with my iCloud and

33:18everything that there's this switching

33:20cost that has been imposed on

33:22me um and even if I at some point

33:26thought well a is a better phone I'm

33:29probably kind of committed to using the

33:31Apple just because I don't want to go

33:33through the headache of you know the

33:35making the

33:37switch so when there's that kind of a

33:39switching cost it makes rivalry um a lot

33:45less prevalent because Rivals you know

33:49you have your customers you have your

33:51customers I have my customers we're not

33:53going to be switching there's no reason

33:55to compete for each other's customers

33:57there stuck um when switching cost is

34:02very easy or or low there's no cost to

34:05switch you get things like

34:08um like with Airlines you know you can

34:11fly Delta one day and you fly United the

34:14next and there's no cost to

34:15you that's when companies start

34:18targeting other each other's customers

34:21you know and trying to to steal them

34:23away from each other but when there's a

34:24big switching cost you know it's just

34:26wasting your money to try to steal them

34:28away um you're going to have to really

34:31provide some real incentive for them to

34:34go through that big headache if the

34:36products aren't differentiated very well

34:39there's a sort of a commodity of course

34:42people are only going to look at the

34:43price okay um to compare them if there's

34:48ever a situation where there's a lot of

34:50excess indust inventory or

34:54capacity um this facilitates rivalry why

34:58does it facilitate

35:00rivalry well it facilitates rivalry

35:03because you want to be using all of your

35:06capacity at once okay to get to run your

35:10plant as efficiently as possible you

35:14will always want to be operating at

35:16capacity if you're not operating at

35:19capacity then essentially you're paying

35:24to have this extra capacity but it's not

35:26being used to its full

35:28extent all right when you run something

35:31at full capacity then those fixed

35:35assets uh are being divided by the full

35:38capacity of what it

35:40produces and that gives you like an

35:42economy of scale it drives down your

35:46costs now if you have excess capacity

35:50you always have this sort

35:53of uh you're always kind of pressured to

35:57use it

35:58all right the thing is in using it

36:01you're increasing the market supply and

36:04driving down the price and creating a

36:06price War so when companies have a lot

36:09of excess

36:10capacity um sitting

36:13idle they're all tempted to start

36:16operating at full capacity and driving

36:19prices

36:20down um which of course uh favors the

36:24consumer increases rivalry leads to

36:27price Wars those kinds of

36:30things um

36:33whenever the number of competitors is

36:35increasing or they're becoming more

36:37equal in size those kinds of things tend

36:40to favor rivalry now they can start

36:43going head to head all right

36:47uh all of these different forces here

36:51are what lead to more rivalry in an

36:56industry all right right so next is new

36:58entrance and how new entrance affect

37:02industry profitability is new entrance

37:05are essentially new competition right so

37:08you have new entrance that means you

37:10have new Rivals that increases rivalry

37:13now the thing about an industry is if

37:15it's a profitable industry profits

37:18attract

37:19competition so when industry is

37:22profitable that's going to attract new

37:25competition and if there's no no

37:28barriers to

37:29entry the industry is going to get

37:31flooded with a new competition they're

37:34going to increase the supply of products

37:37drive down prices reduce your

37:39profitability

37:41okay perhaps some firms uh incumbents

37:45might have some defensive reactions okay

37:49so perhaps they could all cut

37:54prices anytime a new entrant comes in

37:58um so that the new entrance also has to

38:01sell their products for a really low

38:03price and perhaps being a new entrant

38:06they don't have the cash stores to

38:09survive the price War all right so that

38:12could be possible um but anyway new

38:16entrance bring in new competition the

38:19new competition brings in new Supply

38:22this drives prices down this makes you

38:25less profitable so like for example

38:29post financial crisis there was a lot of

38:32uh foreclosures on homes things like

38:34that right and there was this sort of

38:38craze for flipping houses it's like what

38:40everyone wanted to do everyone wanted to

38:42flip houses they thought this is like a

38:44a gold rush or whatever um so people

38:48would buy these junk

38:50houses and fix a handful of things make

38:54them look nice and sell them on for a

38:56profit it started out as just a few

38:59people people who had skills in doing

39:01this kind of stuff

39:03already um we easily able to find these

39:07junk houses buy them on the cheap fix

39:10them up turn them around and sell them

39:13but as the sort of rumors began to

39:16spread of this being some sort of a gold

39:18mine there was all these shows unlike

39:21HGTV and everywhere else and people

39:24started seeing individuals doing this

39:26and looking at some of the potential

39:28profits to be had suddenly everybody

39:32wants to flip houses people who have no

39:34business in doing this one too um you

39:38know you you you couldn't throw a rock

39:39without hitting someone who's saying

39:41well yeah I'm looking to buy houses and

39:43and fix them up and and turn them around

39:45so what used to be junk houses that you

39:48know a handful of buyers would buy up

39:50and fix and sell suddenly these junk

39:52houses have hundreds of people looking

39:55at them um when there's hundreds of

39:58people looking at these junk houses they

40:01start going for more and more

40:03money and you just can't get the deals

40:06you used to uh and the whole Endeavor

40:09just becomes less and less and less

40:12profitable to the point where eventually

40:15there's not a whole lot of people doing

40:17it

40:18anymore but anyway it's an example of

40:20how new entrance work they bring new

40:24competition now what's going to help you

40:26prevent getting being overrun with new

40:29entrance is barriers to entry okay so

40:32barriers to entry those on the surface

40:36it sounds like a word that's not very

40:38conducive to business is actually um

40:41your friend in a lot of cases barriers

40:44to entry prevent those new entrance

40:48coming in with their supply and

40:50everything and driving profits down for

40:53everyone in the

40:55industry so there's different types of

40:58barriers to entry but they're all things

41:00that make it harder for new entrance

41:02okay so one of them is like economies of

41:05scale so there's some Industries out

41:07there where you won't be efficient

41:10unless you're operating at a very large

41:12scale okay things like producing

41:14aluminum

41:16cans

41:18um making car

41:21tires uh disposable lighters stuff like

41:24that to do that you need a really large

41:27facility that churns out tons and tons

41:30and tons of those

41:32products well to have the really large

41:35facility that churns out lots of

41:37products that's an expensive Endeavor

41:40okay that's not something your average

41:43uh inspired entrepreneur out of college

41:46has the money to do all right

41:49so those industries that require

41:53economies of scale in production or

41:55whatever uh usually

41:58have high barriers to entry there's also

42:01sometimes there's industries that have a

42:03a learning curve that favor incumbents

42:06and put New Comers at a disadvantage so

42:08for example like

42:11um oh if you're in an industry that's

42:14building like uh that's into space

42:16travel or whatever if you remember when

42:18there was uh private industries were

42:21first experimenting with space travel

42:23all of them were having their rockets

42:25explode you know their very inefficient

42:28at first but as they went through the

42:30process more and more and more they got

42:32better and better and better at it and

42:33they learned and now they can do it

42:36fairly reliably they can send Rockets up

42:38to space and things like that but if

42:41you're a new entrant into that industry

42:43you have to go through that long failure

42:45phase and while you're going through

42:47that long failure phase all of the

42:50incumbent Rivals have already worked

42:52that out and they're a lot more

42:53efficient than you and they'll probably

42:55Outlast you

42:57something else is um Customer Loyalty

43:01okay so

43:02like uh one industry that's hard to

43:06break into is soft drinks

43:10for um a lot of companies okay why is it

43:13hard to break into the soft drink

43:16industry well it's

43:18because the people who drink soft drinks

43:21are already loyal to either Pepsi or

43:23Coke and it's really hard to sell them

43:25something new all right um um so if you

43:29ever go to grocery stores you'll find

43:31that you know it's all either Pepsi or

43:33Coke um people who are going to buy

43:36those drinks have already decided they

43:37either want Pepsi or Coke and the sort

43:41of smaller Brands um even though there's

43:44been some high-end stuff timens and what

43:48have you those Brands really struggle

43:51all right to gain any traction because

43:54the customers are already loyal to the

43:56incumbent Brands and then there's also

43:58the small noname brands that you can't

44:01even really give that stuff away like

44:02Shasta and what have you um that's like

44:06the store

44:09brands there's other Industries where

44:11there's Network effects a network effect

44:15is when there's a product or service

44:19that is a lot more

44:21valuable as it has more and more people

44:24using it so like for

44:28example um my dad and I play with radios

44:33at times uh and one thing we found was

44:36there was this really cool uh thing you

44:40could attach to your phone to turn your

44:42phone into sort of like a uh radio that

44:45you could send text between each other

44:47with and I forgot what the gadget was

44:50called but you could connect your phone

44:52with it with Bluetooth and then you

44:53could use it to send uh text to somebody

44:57else who had the same attachment to

45:00their phone and me and my dad thought it

45:02was really cool but what we quickly

45:04found out was we were the only people

45:06we'd ever heard of who had this thing

45:09and uh we there was no one else using it

45:13so it was kind of like pointless it's

45:14not like we could use it to communicate

45:16with our friends or anyone else we could

45:18just use it to communicate with each

45:19other and to communicate with each other

45:22it would be cool if we could just always

45:24head them on but we didn't so it's like

45:25you had to call them or send a normal

45:28text to tell the other person to turn

45:29the other thing on and it just didn't

45:32work out now if everybody had that same

45:35device maybe it would take off but

45:39because only two people had it that we

45:41know of just me and him no one used it

45:45right so there are some industries that

45:48are protected by Network effects okay so

45:50like even if you were able to build a

45:53better social network than whatever

45:56Facebook or Twitter what have you it's

45:59really hard to enter into that industry

46:02because everybody's already in those

46:04established sites um and even if you can

46:08show them hey my network is or my

46:12service is so much better than theirs

46:14because I have all these different

46:15features well people are going to join

46:18in and at one point there's just going

46:19to be one or two people in it and it's

46:21really hard to convince someone of the

46:23value of that the real value of those

46:25incumbent companies is that every

46:26everybody's already a member of

46:30them in other cases it's just hard to

46:33find uh Distributors and dealers so

46:36again going back to soda it's hard to

46:39break into that industry not only

46:41because of Customer Loyalty but also the

46:43places where you sell the soda is

46:45already taken by either Coke or Pepsi so

46:48you buy it at universities well they

46:49have contracts with Coke or Pepsi

46:51stadiums they have contracts fast food

46:55places store shelf

46:58all already taken by the incumbent firms

47:01and then lastly you can have restrictive

47:04regulatory process policies so like if

47:08you wanted to start up like a trash

47:10service well there's already in a lot of

47:12places there's sort of a uh government

47:16regulated Monopoly of trash service or

47:21um neighborhood sewage or all of these

47:24different things or power lines it might

47:26be a private company but there's some

47:30regulations that give them a regulated

47:32Monopoly over uh that line of business

47:37moving on to substitutes all right so

47:41substitutes uh are products that fill

47:46the same need as the focal product but

47:49they come from a different industry now

47:52this is a fine point that a lot of

47:54people get wrong whenever they're

47:56discussing

47:57substitutes often if I ask somebody well

48:01what's a substitute for buying a Porsche

48:04they will say well it's buying a bmwm

48:07car or a Mercedes AMG or an Aston

48:11Martin none of those are substitutes all

48:14of those are Rivals okay those are

48:16Rivals of Porsche a substitute for

48:20buying a Porsche is buying something

48:23that fills the same need as the Porsche

48:27but comes from a different

48:29industry okay so what might that be well

48:33why do you buy a

48:34Porsche um generally it's a second car

48:38it's usually not just for basic

48:41Transportation maybe you're buying it

48:43for fun and excitement if you're buying

48:45it for fun and excitement then a

48:47substitute might be a

48:49Harley-Davidson a boat all right maybe

48:53you're buying it because you want to

48:55look cool again

48:57all right well maybe the substitute

49:01would be spending money on an expensive

49:04wardrobe or something all right or maybe

49:09you're buying it because you're going

49:10through a midlife crisis or whatever all

49:14right in that case a substitute would be

49:16maybe to go to counseling all right

49:18there's other re there's different

49:21reasons why you might buy that and the

49:23substitutes are the things that fulfill

49:27those same needs but come from a

49:29different industry okay so when we talk

49:33about craft beer the substitute for

49:36craft beer isn't other beer companies

49:38those are the rivals the substitute for

49:41craft beer depends on why you're

49:42drinking the craft beer are you drinking

49:45it because you want to craft a unique

49:47experience well then the The Substitute

49:49could be something along the lines of

49:52Kombucha all right or

49:57it could be if you're drinking it

49:59because you're thirsty it could just be

50:00water all right if you're drinking it

50:02because you think it tastes really good

50:04then maybe it's you know cold pressed

50:06juice all right there's other things out

50:09there that uh come from different

50:12industries that feel the same need all

50:15right if you're drinking it because you

50:17want to you know have a beverage with

50:21friends then maybe it's whiskey or it's

50:23wine all right things from other

50:25Industries

50:28now how do substitutes uh affect you as

50:32a competitive pressure well they do so

50:35because they sort of set the ceiling on

50:37how much you can charge that is if craft

50:40beer gets to be you

50:42know it can only be so expensive until

50:45eventually it gets more expensive than

50:47it substitutes all right eventually it

50:50gets more expensive you know Leaps and

50:53Bounds more expensive than kombucha and

50:55you know fine wines and things like that

50:58then people are just going to switch to

51:00those other Goods all

51:02right so you can think about different

51:05sorts of situations that might uh favor

51:09substitutes here and they're listed in

51:11this slide here and I won't go through

51:13all of

51:15these so suppliers affect you um as a

51:20competitive pressure in the market

51:22because what they can do is they can eat

51:25into your profit okay they can raise

51:28your cost by charging more and more for

51:31your supplies of raw materials all

51:34right there's certain situations where

51:37suppliers can do this more effectively

51:39than others all

51:42right one situation is if you really

51:45really need those suppliers and they

51:47don't necessarily need you okay so

51:51that's sort of the theme of all of these

51:53situations here that Foster supplier

51:56bargaining power for example when I was

52:00in college I really liked art and I

52:04still do really like art I really like

52:06sculpture I wanted to be an art major um

52:10and I kind of got stymied and into

52:13business so I was taking some drawing

52:15classes that just annihilated me but

52:20anyways working on sculptures uh I used

52:23to like to weld and work with metal and

52:25stuff and I thought that was so cool

52:28um and so to buy my materials I would go

52:33these like metal supply companies okay

52:36where they would sell tons of steel and

52:39stuff like that and a lot of it was

52:41meant for people who were creating like

52:45actual buildings and stuff okay big big

52:49projects that where they were selling

52:51the metal

52:52to and you know I was a really small

52:56buyer so I would come in and I'd spend

52:58maybe at very most a few hundred bucks

53:01every few months all right and they

53:02would always charge me retail and the

53:04reason they would always charge me

53:06retail was they didn't really need my

53:07business okay if they lost my business

53:11um of some guy who spends a at most a

53:14few hundred bucks every couple of months

53:18whatever however if somebody was to come

53:20into them and say uh hey you know what I

53:25got a uh

53:27contract out at the uh to build the new

53:30parking garage downtown and I'm going to

53:33need some astronomical amount of rebar

53:36and you know all of this other

53:39metal then that Supply Company I'm sure

53:42would say okay

53:44well we'll work with you you know we'll

53:46give you however much percent off given

53:49that you're buying such a large order

53:50and they're really motivated to keep

53:52those types of orders okay in those

53:55types of situations your supplier is

53:57willing to work with you if there's ever

54:00something where you know you're not just

54:02you're just not a significant player to

54:04them they're going to charge your retail

54:06who cares if they lose your business

54:08because they don't really need it in the

54:10first

54:11place um so that can happen when um

54:18again if you're just a insignificant

54:20buyer from the supplier that Fosters

54:22their power other situations are like if

54:25they're selling a really unique good and

54:28you just need to purchase it from them

54:30all right it's super differentiated they

54:32have sort of a monopoly on this item

54:36then you know that favors their power so

54:39for

54:40example uh you know we can go back to

54:43the planes example all right the planes

54:46Boeing and Airbus are basically the only

54:48two companies that make

54:51uh planes for Airlines all right so if

54:54you want to buy a plane you have to work

54:57with one of those two companies and they

55:00understand this that you don't really

55:02have that many options and they can

55:03charge pretty high prices and make take

55:05it or leave it offers because they see

55:09that you don't have you know any other

55:12choice but to work with them one of them

55:14at

55:15least other situations is just you know

55:18the number of suppliers relative to

55:22Industry buyers okay so uh there was a

55:26Professor Adam brandenberger who used to

55:29do this really cool thing where what he

55:31would do is he

55:34would get a deck of cards all right get

55:37all of the red cards out okay so 52

55:42cards gets all the red the 26 red cards

55:44out distributes it to everybody to his

55:4726 students in his class okay he would

55:50have all of the black cards and he would

55:52say you know I have

55:56$2,600 here all right to buy those red

56:02cards back from you all right but we

56:05have to decide how each of us are going

56:07to split the money okay so that's $100

56:11each if we want to split it evenly um

56:14between each interaction with you guys

56:17so he would go from student to student

56:20he was teaching at Yale so they had a

56:22big budget to do this kind of really fun

56:24cool stuff um

56:27so he would go between each student and

56:29he would start talking to them and some

56:31students would say you know let's split

56:34the let's split it 5050 and Adam

56:36brandenburger would usually say okay

56:38yeah sure I'll keep 50 bucks here's your

56:41$50 give me your red card and he has a

56:44pair all

56:45right he would go down um go through his

56:49whole class and you know he found when

56:52he kept all 26 black cards distributed

56:55all 26 red

56:57cards that you know even when there was

57:00hold outs they kind of knew that okay

57:02well we're going to have to work with

57:04this guy at some point and the average

57:07would be about a 5050 split

57:10okay now he found that in later he would

57:15do the same experiment but what he would

57:17do in the later experiment

57:21is he would

57:23distribute the 26 red cards out

57:27and he would

57:29keep 20 or so black cards for himself

57:34all right and with the 20 black cards

57:37those students knew okay six of us

57:41aren't going to get a deal all right so

57:45when Adam brandenburger came up to you

57:47and discussed making a deal you would

57:49almost say yeah sure just because you

57:51didn't want to be the the the one of the

57:53six who didn't get the deal he had all

57:55of the Power because he had less cards

57:58and some of those students were really

58:00worried that they were going to be the

58:01person who didn't get the deal

58:04um that's how it works with buyers and

58:08suppliers when there's more buyers than

58:10there are

58:12suppliers uh you can't just shop around

58:15continuously you're worried you might be

58:17the person who just doesn't get the deal

58:19or you run out you run the gamut going

58:21through all the suppliers and then

58:23you're out of options okay so you get

58:26more motivated to work with them and

58:28given to whatever their demands

58:36are so we can move on now to discussing

58:40buyer power and price

58:42sensitivity this is essentially just the

58:45inverse of the uh supplier situation

58:50where

58:51here what you have is there's times that

58:55buyers are more powerful than the

58:57suppliers well in what cases well okay

59:00if there's fewer buyers than there are

59:03suppliers and the suppliers are going to

59:04compete for those buyers you know just

59:06like the example with the cards

59:09previously um

59:13if the buyers are

59:17uh really price sensitive okay that

59:21makes them more likely to uh

59:26give these really hard driving Bargains

59:28and try to you know eat away money from

59:32the the producer so for example like uh

59:36Campbell Soup okay what's the most

59:39expensive part of a can of Campbell Soup

59:41well the soup inside the can isn't

59:44actually that expensive to produce it's

59:46just the can of the soup is very

59:49expensive so Campbell Soup is supposedly

59:53like a really really hard on their their

59:56can suppliers

59:58okay they drive really really hard

1:00:01Bargains with them all right because

1:00:03they know well that cans a really

1:00:05substantial portion of our ultimate

1:00:09cost so um you know people trying to

1:00:12sell us cans we're going to beat them up

1:00:14on the price all day long

1:00:17and you know that favors the power of

1:00:21the buyer because they're going to be

1:00:22motivated to getting those prices down

1:00:25all right

1:00:28um if the buyer has discretion in terms

1:00:31of delaying the purchase okay it's

1:00:33something that they can hold off for a

1:00:35while then again that gives them power

1:00:38they don't have to buy it right away all

1:00:41right you can think about just different

1:00:43situations that would favor the buyer

1:00:46over the seller all right um you know

1:00:50when they're price sensitive when they

1:00:51have a lot of information and can

1:00:53compare between rivals then they

1:00:57can become a you know a lot more

1:01:01uh fickle and choose whoever is the

1:01:04cheapest all right so there's situations

1:01:08where the buyer can have power over the

1:01:10supplier too or the

1:01:15seller so when you go through your

1:01:17Porters 5 forces exercise what you do is

1:01:20you look at all of these

1:01:22different aspects okay and and then you

1:01:27know you look and say okay well is the

1:01:29state of the industry competition

1:01:32stronger than normal if you see a lot of

1:01:35those forces and you're giving them

1:01:37strong then that's probably a really

1:01:39competitive industry and you're not

1:01:41likely to have the super normal profits

1:01:44all

1:01:45right um so this kind of gives you the

1:01:49answer to the next question well can

1:01:51industry firms expect to earn decent

1:01:53profits given the competitive forces if

1:01:56they're all high probably not if they're

1:01:57all low most likely um there's certain

1:02:02situations where just one powerful force

1:02:05can make the whole industry unattractive

1:02:08all right just one really powerful force

1:02:10so for example like you know that soda

1:02:14stream company that produces like uh

1:02:17soda makers where you can make

1:02:20carbonated water at home and Coke and

1:02:22stuff like

1:02:24that um

1:02:26you look at that industry and if you

1:02:27were to go through all of these what you

1:02:29would come to the conclusion of is well

1:02:32uh for the the substitute for making

1:02:37soda at

1:02:38home is buying soda at the store okay

1:02:43making soda at home has a huge fixed

1:02:46cost and everything to buy that

1:02:48apparatus buying soda at the store is

1:02:51immediate all right the substitute

1:02:54strength is so much more is just really

1:02:58really powerful The Substitute uh

1:03:01pressure that is that it makes sort of

1:03:04the whole industry seem unattractive and

1:03:07that's why soda stream is kind of

1:03:09languished and gets a little bit of a

1:03:12Resurgence every now and then but it's

1:03:14really hard to convince people well

1:03:16here's this apparatus you can buy for a

1:03:20few hundred to make something that you

1:03:23buy at the store for a few bucks and

1:03:26maybe you'll save money in the long run

1:03:28but you're going to have to pay a lot up

1:03:29front and it's just it's just a

1:03:31proposition that a lot of people aren't

1:03:33interested

1:03:37in okay so moving on here we can now

1:03:41talk about matching the company strategy

1:03:44to competitive

1:03:45conditions so what you do with the five

1:03:48forces is you analyze them you figure

1:03:52out which are strong which are weak

1:03:56and then you can start strategizing on

1:03:58okay well what can you do about these

1:04:00all right if you realize that suppliers

1:04:03are very powerful then you know you can

1:04:06start thinking all right maybe we could

1:04:08vertically integrate start producing

1:04:10some of this stuff in house okay or at

1:04:13least produce a small quantity in house

1:04:15and then we can sort of tell our

1:04:17supplier well we're going to produce

1:04:19more in house if you don't bring your

1:04:22prices down we have another option

1:04:24actually um

1:04:26um if you realize that the buyer is

1:04:29really fickle then you can start

1:04:30offering like rewards programs try to

1:04:33differentiate your product somehow you

1:04:36know try to do something to get buyer

1:04:39loyalty all right and get off of just

1:04:41comparing you on exclusively on price

1:04:45okay so that's how you use the five

1:04:48forces you go through it you find which

1:04:50are strong which are weak and then you

1:04:53start strategizing okay well how can we

1:04:56deal with these strong ones and how can

1:04:58we uh exploit some of the weak

1:05:02forces so now we're going to talk about

1:05:05uh industry Dynamics and the driving

1:05:09forces so the driving forces refer to

1:05:12things that are like big sweeping

1:05:15changes in the industry okay really big

1:05:19changes that

1:05:22are sort of

1:05:25producing these that are are like the

1:05:28type of things where you're going to

1:05:29measure the time before this happened

1:05:32and after okay important things all

1:05:35right that are changing in the industry

1:05:38and sort of shaking up the game for

1:05:40everybody okay so for example like in

1:05:42the Auto industry in the Auto industry

1:05:46main driving force right now you'd say

1:05:48would be uh electrification of cars all

1:05:52right we're switching from gas engines

1:05:54to Electric engines

1:05:56all right this is something that

1:05:59everybody's scrambling to do it's you

1:06:02know clearly a big change that's going

1:06:05to happen I mean I think

1:06:08in in Europe there's like the EU I think

1:06:12is said that they they would are going

1:06:15to end there's a a specific time now

1:06:18that they would like the end of all

1:06:20internal combustions engines to happen

1:06:23by where car makers won't produce

1:06:25anymore internal combustion engines any

1:06:27longer after this date

1:06:30um

1:06:32so that's something that I would

1:06:35consider a driving force all

1:06:38right big sweeping changes all

1:06:41right so in this section what I want you

1:06:44to do is read through the case and see

1:06:48is there anything in the case that's

1:06:49discussing big sweeping changes in the

1:06:52industry all right driving forces aren't

1:06:55things that are like you know kind of

1:06:58mundane changes that have always been

1:07:00around okay so it can't be like uh well

1:07:04managers are looking to

1:07:06cut costs through further

1:07:11leveraging economies of scale all right

1:07:14that's something that in every industry

1:07:16everybody's always been trying to mess

1:07:18with and and perform okay those aren't

1:07:22driving forces that's just sort of the

1:07:25slow low evolution of business all right

1:07:28driving forces refers to like sort of

1:07:31forces that are producing these big

1:07:34changes so what you do read through your

1:07:37cases read through any information on

1:07:39this industry or whatever you're working

1:07:41on and try to identify you know what are

1:07:43the driving forces in the industry right

1:07:45now and there shouldn't be really all

1:07:47that many of them maybe three or four

1:07:50all right then you want to ask okay how

1:07:54are these driving forces

1:07:56affecting the five forces all

1:07:59right um is electrifying cars which of

1:08:04the five forces is that affecting and

1:08:07how is it making its impact on the

1:08:09automobile industry is it making it more

1:08:11attractive or less attractive okay um so

1:08:17you can think about it in that in that

1:08:19regard I mean there's different

1:08:22arguments you could make for both I mean

1:08:24it depends on you know what's the

1:08:26suppliers like for getting lithium

1:08:28batteries is that an easier supplier to

1:08:31to work with than the suppliers that you

1:08:34had to work with to build traditional

1:08:36combustion engines or not all right

1:08:38those are the kind of questions you

1:08:39should be asking

1:08:42yourself then you need to determine okay

1:08:46well given these driving forces are

1:08:49there any changes that need to be made

1:08:52uh to cope with their impact all right

1:08:55how should the firm adjust itself is

1:08:58there anything they should keep doing

1:08:59stop doing so on and so

1:09:02forth so here's some examples of

1:09:05different types of driving forces you

1:09:07know is the industry suddenly slowing

1:09:10down in terms of its growth rate all

1:09:12right are you facing new Global

1:09:15competition you know competition's

1:09:17coming from overseas now uh all around

1:09:20the world it's not just your local or

1:09:22Regional

1:09:24competitors any big firms you know die

1:09:27off something like that is there big

1:09:29firms going out and acquiring everybody

1:09:31up all right the industries

1:09:34consolidating okay those are the kind of

1:09:37questions is there like Quantum changes

1:09:39in cost and efficiencies okay you know

1:09:42some

1:09:43[Music]

1:09:44new like when Henry

1:09:47Ford uh you know first use the the uh

1:09:52assembly line all right that's like a

1:09:54Quantum chain in cost and efficiency

1:09:57where now okay cars can be built in this

1:10:00way that's a lot more uh cost effective

1:10:05than the old way they used to be built

1:10:07by hand all right those are the kind of

1:10:09changes we're looking for or

1:10:12discussions those are all GL all

1:10:15examples of driving

1:10:18forces so then you go on to discuss the

1:10:22driving forces all right and you can

1:10:24look at this set of three or four things

1:10:27you know somewhere we'll say between two

1:10:29and four all right and ask okay well how

1:10:33are the driving forces affecting the

1:10:35industry how are they impacting the five

1:10:38forces and how is that impact of the

1:10:41five forces affecting you know

1:10:44profitability of the industry as a whole

1:10:47all right so you know if you're notice

1:10:51that there's a big change

1:10:53in demand

1:10:55all right you know if it's for if it's a

1:10:59big growth in demand then

1:11:01obviously making the industry less

1:11:04rivalis more attractive it's a big drop

1:11:08in demand more rivalis

1:11:12right um if there's you know this new

1:11:16Quantum change in terms of efficiency

1:11:20okay this is like what Farms always deal

1:11:21with all right so Farms are always being

1:11:24sold you know

1:11:25here's these new machines that's going

1:11:27to you know

1:11:30really increase your efficiency you're

1:11:32going to be able to plow or plant you

1:11:35know so many more plants than you were

1:11:37able to yet before and you know these

1:11:40new Innovations are always coming out

1:11:43and what they do is they have the effect

1:11:46of actually increasing rivalry because

1:11:48what happens one farmer gets one they

1:11:52start growing a whole bunch more plants

1:11:53a lot quicker and everything it's more

1:11:55efficient well that what happens then

1:11:59everybody buys one and now what's

1:12:01happened is that they've had the net

1:12:04effect of increasing Supply dropping

1:12:07prices and you know the that you get

1:12:10into some price competition and what

1:12:12you've actually done is just cut the

1:12:15price of your product okay didn't really

1:12:18help you or the industry at

1:12:21all so in any event that's how you think

1:12:25about driving forces here's this Force

1:12:27how does it affect the five forces does

1:12:29it make it more rivalrous uh does it

1:12:32facilitate price competition does it

1:12:34drop prices like a lot of that farm

1:12:36equipment often has the unintended

1:12:38effect of doing you know think about it

1:12:41through that

1:12:43lens so then finally there's the

1:12:45question of well what do we need to do

1:12:47to address these driving forces what

1:12:49adjustments need to be

1:12:51made so for example if you look at

1:12:54certain industry like craft beer we can

1:12:56go back to that one um you see that

1:13:00there's been a uh shift away from Craft

1:13:03Beer more toward selsers right so uh

1:13:09what adjustments need to be made well if

1:13:10you're one of those companies you can

1:13:12start seeing these trends of them

1:13:13starting to pick up craft beer starting

1:13:16to lose market share and things like

1:13:18Seltzer and all those other types of

1:13:22products that are growing in popularity

1:13:26and you might try to repurpose some of

1:13:29your uh equipment to producing some of

1:13:32those products all right so you know

1:13:35what actions can be taken what should be

1:13:38halted or abandoned you might pair down

1:13:41some of the

1:13:44purely beer focused Endeavors and start

1:13:47focusing on Brewing some of these other

1:13:50types of beverages all

1:13:52right um but that's another piece of

1:13:56this driving forces

1:13:57analysis so another tool is the

1:14:00Strategic group analysis and strategic

1:14:04group analysis is a tool for looking at

1:14:06an

1:14:07industry and trying to figure out which

1:14:10companies are competing with one another

1:14:12and which aren't okay so for example um

1:14:17in the video game console industry

1:14:22right there's a number of different

1:14:25companies that produce consoles or ways

1:14:27to play video games but they're not all

1:14:30directly competing with each other

1:14:32head-to-head necessarily so for example

1:14:36like PlayStation and Xbox

1:14:39occupy one particular Niche that's

1:14:42focused on horsepower and everything and

1:14:46compete head-to-head pretty well and

1:14:48then there's also Nintendo who's in the

1:14:50same industry but they occupy a distinct

1:14:55position okay um they're usually not

1:15:00competing head-to-head with PlayStation

1:15:02and Xbox but they offer different types

1:15:06of games and a different type of

1:15:07experience you know like there's a lot

1:15:10of people who own a Nintendo and one of

1:15:13the other two

1:15:15but the types of people who own both a

1:15:19PlayStation and an Xbox is becoming

1:15:22rarer and rarer as those two two

1:15:25companies start to produce products that

1:15:28are more and more and more

1:15:30similar um and less distinct from each

1:15:34other so we'll discuss this type of

1:15:36group analysis here in these next few

1:15:40slides all right so to construct a

1:15:43strategic group map and see who's

1:15:45competing with who in a given

1:15:48industry what you want to First do is

1:15:51you want to figure out different

1:15:54characteristics of how companies compete

1:15:56in a given industry

1:16:00okay and what you're going to make is

1:16:03you're going to make this plot that

1:16:05plots all of the firms in the

1:16:09industry on a

1:16:14uh on a map and shows how they compete

1:16:19against each other based on these

1:16:21particular

1:16:23characteristics now I'll show you an

1:16:25example of this that will make a lot

1:16:26more sense but these Maps let me just

1:16:29explain this part really quick also

1:16:32these Maps aren't meant to be like hard

1:16:34and fast tools that give you exact

1:16:38proportions and show you exactly where

1:16:42the companies line up to each

1:16:44other on these uh different

1:16:48characteristics it's more or less

1:16:51something similar to like when you were

1:16:53in elementary school made a model of the

1:16:55solar system okay you put together a

1:16:58model of the solar system and you show

1:17:00that the sun is bigger

1:17:02than Mercury and Mercury is the first

1:17:06planet out and so on and so forth and

1:17:08somebody can look at that thing and get

1:17:10an idea of how everything's arranged in

1:17:12the solar system is it to scale

1:17:15absolutely not for it to be to scale

1:17:17you'd have to have some you know the sun

1:17:20would be gigantic and other pieces would

1:17:23be like the size of a grain of sand and

1:17:25they'd be spaced out really really far

1:17:28and you know it just isn't all that

1:17:30feasible to put together a model that's

1:17:33actually to scale that you can show

1:17:35people that's kind of what you're doing

1:17:37with your strategic root map you're

1:17:39putting together a model that's not

1:17:41exact but gives you a rough idea of the

1:17:45industry and how businesses compete

1:17:47against each other or who's competing

1:17:50with who most

1:17:51closely so keep that in mind I'm not

1:17:55going to go through all the nuts and

1:17:56bolts for how to do it in these

1:17:58particular slides here this is roughly

1:18:00the process I'm going to show you the

1:18:02example and I'll walk you through it

1:18:04when I show you the

1:18:05example so these are some of the

1:18:08different characteristics that you might

1:18:11use

1:18:12as variables to plot along each axis of

1:18:16your strategic group

1:18:18map and you'll see how these are used in

1:18:20the

1:18:22example now in choosing different axes

1:18:25for your group

1:18:27map you shouldn't pick variables that

1:18:29are highly correlated for example price

1:18:32and

1:18:33performance usually go hand inand all

1:18:36right usually if something's expensive

1:18:39it's because it offers a high level of

1:18:41performance it's not always the case

1:18:44sometimes there's uh other reasons for

1:18:47something to be expensive but generally

1:18:50those two things go hand in hand okay so

1:18:52you don't want to use two very variables

1:18:55that are highly correlated okay other

1:18:59things you don't want to use as a

1:19:01particular variable is like sales volume

1:19:05or market share because that's going to

1:19:08be represented somewhere else on your

1:19:10map and I'll talk about that when I give

1:19:12you the

1:19:14example but you can use all sorts of

1:19:16different variables um for each access

1:19:20and basically just pick two variables

1:19:23that you think are important

1:19:26characteristics of how companies compete

1:19:29within the

1:19:31industry so here's the sample group map

1:19:33and I'd like to spend a little while

1:19:35talking about

1:19:36this so what you can see here this is my

1:19:40sort of map of the video game

1:19:42industry is it perfect and is it to

1:19:45scale no it's not um it's just like how

1:19:48I was telling you about when you put

1:19:51together your model of the solar system

1:19:53it's not going to be perfectly to scale

1:19:56um but it should give you a rough idea

1:20:00as to how everything fits together so

1:20:04I'll explain

1:20:06this down along the

1:20:08xaxis we have system power okay so

1:20:13that's one AIS on the Y AIS I have

1:20:16inclusivity all right how user friendly

1:20:18is the system and I think system power

1:20:22and user friendliness

1:20:25are roughly what delineate the different

1:20:28strategies used by companies in the

1:20:31modern video game industry okay I think

1:20:34it it's those are the two most relevant

1:20:36variables for console manufacturers all

1:20:42right now what I've done here is I went

1:20:46ahead and I plotted each

1:20:48company that I know maybe a little bit

1:20:52about as to where I think they would fit

1:20:55on those two continuums okay so I put

1:20:58PlayStation and

1:21:01Xbox pretty far out on the side of

1:21:04system power because those are clearly

1:21:06the two most powerful systems right

1:21:09now and then you can see also I put

1:21:12Nintendo pretty high up on inclusivity

1:21:15everybody has one it appeals to all

1:21:18different types of people it's very

1:21:21inclusive individuals like it it's a

1:21:23userfriendly experience so on so forth

1:21:27right and then I have some other

1:21:30companies that kind of are some smaller

1:21:32players that are in some different

1:21:34places here okay so like valve with

1:21:36their steam deck that's a a fairly

1:21:38popular

1:21:39system

1:21:42it's not as inclusive as Nintendo switch

1:21:47but a lot of people have it it app

1:21:49appeals to a number of different

1:21:51individuals it's not nearly as powerful

1:21:54as you know PlayStation and Xbox are

1:21:58right now but I mean I I think it's

1:22:02probably more powerful than the switch

1:22:05not not exactly sure on that one but in

1:22:07my mind and that's another piece of this

1:22:10here you know these aren't hard and fast

1:22:12you know plotting points it's not like I

1:22:15plotted these based on what I

1:22:19objectively know about the system

1:22:22processor speeds and different things

1:22:24like that I'm just using my judgment to

1:22:27plot where each of these go and that's

1:22:29what you're going to do too you just use

1:22:31your judgment okay so from what you know

1:22:33about the company where would you put

1:22:34them on this map all

1:22:38right so then I have Atari here it's

1:22:42pretty far back I mean they're making

1:22:44new consoles their console the VCS is

1:22:46kind of Nintendo switch like but not as

1:22:51powerful or as powerful as the steam

1:22:53deck um it's not all that inclusive

1:22:56either it appeals to a particular type

1:22:59of person and there's also retro games

1:23:02limited you might not be as familiar

1:23:04with this it's a company out the UK that

1:23:06produces like Recreations of classic

1:23:10game systems and computers like the ZX

1:23:12spectrum and Commodore 64 and Amiga and

1:23:16stuff like that and anyway that appeals

1:23:18to a very Niche group and that those

1:23:21systems aren't particularly powerful

1:23:24they're em I mean they're sort of like

1:23:26emulator boxes for classic computers and

1:23:32game consoles from 80s and

1:23:3590s anyway so I plotted all of these

1:23:38different players here on the industry

1:23:40where I think they would fall along

1:23:42those two dimensions then what I did is

1:23:46you notice the circles are different

1:23:48sizes well the circles correspond to the

1:23:50market share of each of those companies

1:23:53Okay so Nintendo's big they there's way

1:23:57more switches have been sold than

1:24:00PlayStation 5S or

1:24:03Xboxes um PlayStation has sold more uh

1:24:08ps5s than Xbox has of their console so

1:24:11the PlayStation bubble is going to be

1:24:14the next largest the Xbox is the next

1:24:16largest valve steam

1:24:19deck I don't know exactly how many they

1:24:21sold I was able to estimate it by doing

1:24:23some es things like that I drew that as

1:24:27about the fourth

1:24:29largest Atari and retro games limited

1:24:33it's hard to find exact numbers on

1:24:35either of those two companies too but

1:24:37they've sold you know a handful of

1:24:40products they're they're certainly

1:24:42smaller the smallest players in the

1:24:45market that I'm aware of um so they

1:24:49occupy small bubbles too all right so

1:24:53again you can tell there's

1:24:55nothing too exact you're using your

1:24:57judgment and everything to pick the

1:24:59positions you plot them you're using

1:25:01your judgment to sort of draw the

1:25:02circles but the circles should still

1:25:04communicate something you know Nintendo

1:25:08is bigger than PlayStation because they

1:25:10sold more switches than

1:25:12ps5s PlayStation's bigger than Xbox

1:25:15because theyve sold they've outsold them

1:25:17so on and so forth okay uh and also

1:25:21where these are located on the map you

1:25:23know I didn't do something like you know

1:25:25really get into the nitty-gritty of how

1:25:28you would rank all of these it's roughly

1:25:32this is by and large how I would

1:25:34estimate they all fit together and I've

1:25:37plotted them

1:25:38accordingly but this does tell you a lot

1:25:41still tells you PlayStation's closest

1:25:44com competitor is Xbox their next

1:25:47closest competitor is probably that

1:25:49steam deck I mean that's sort of like

1:25:51the handheld equivalent of one of those

1:25:53two I mean that'd be like the handheld

1:25:55you pair with them Nintendo well they

1:26:00probably are looking at competition from

1:26:02two small players well Atari

1:26:06and the steam deck retro games limited

1:26:10here well they don't have a lot of

1:26:11competition their closest competitor is

1:26:13going to be Atari um but they actually

1:26:17work together in a lot of cases so they

1:26:19have a fairly good

1:26:20relationship um but they're avoiding

1:26:23competition for the most most part they

1:26:24might be in a pretty good spot on this

1:26:28map so anyways that's how you construct

1:26:31and use one of these maps all right

1:26:34often I find people are trying to get

1:26:37really really exact with it and precise

1:26:39that's not what it's used for this is a

1:26:41model of the industry in the same way

1:26:44you could draw a model of the solar

1:26:45system that tells you a lot but at the

1:26:47same time is wildly

1:26:52inaccurate now that you've constru

1:26:54constructed this group map you can kind

1:26:55of look through all of it and say okay

1:26:58well which of those game console makers

1:27:00is in the most favorable Market position

1:27:03which isn't the least

1:27:04favorable all right who are the winners

1:27:06and losers here

1:27:09okay perhaps inclusivity is the most

1:27:12important thing Nintendo sells the

1:27:14largest amount of

1:27:18consoles um so you might say well maybe

1:27:22that's what matters most in terms of

1:27:23this industry here but then you look at

1:27:26other fairly inclusive companies and

1:27:29they're not doing particularly well so

1:27:32you know you start to think well what

1:27:33exactly is driving this performance but

1:27:36it's a good place to look and start

1:27:39thinking about okay what are the

1:27:40difference of these companies and are

1:27:43any of these characteristics of strategy

1:27:46likely

1:27:48um the uh culprits for their performance

1:27:52okay and then you can also look at the

1:27:54and figure out well who's your closest

1:27:56competitor who should you be looking out

1:27:58for uh to perhaps try to steal market

1:28:01share from you or customers down the

1:28:04road and again not all of these

1:28:07positions on the map are equally

1:28:09attractive okay just like we were

1:28:10talking about in the previous

1:28:12slide so well what's driving the

1:28:16attractiveness of some of these versus

1:28:17others it's going to be related somewhat

1:28:20to Porters 5 forces Porters 5 forces

1:28:23might not affect all players in the

1:28:27industry the same okay depending which

1:28:31segment or position you take in the

1:28:34industry Porters five forces might be

1:28:37stronger or lighter for that particular

1:28:41segment so that's something you need to

1:28:44consider also the driving forces might

1:28:46favor some of these strategic groups and

1:28:48hurt others well as we were just

1:28:51discussing the driving forces operate or

1:28:54exert their influence through Porter 5

1:28:56forces so it all goes back to Porters 5

1:28:58forces but that's the next step to

1:29:04consider so something else another tool

1:29:07that we discuss is What's called the key

1:29:09success factors are

1:29:11ksfs and key success factors you can

1:29:14think of these is you know what are the

1:29:16things that you need to be successful in

1:29:19this industry okay they're going to vary

1:29:21from industry to Industry and from time

1:29:23to time

1:29:24but it's kind of like um I remember when

1:29:27I was in college we used to still get

1:29:29phone books okay these big thick phone

1:29:31books and like a popular strong man uh

1:29:35demonstration was can you tear a phone

1:29:37book in half all right now tearing a

1:29:40phone book in half might sound like it's

1:29:41something that's really difficult but

1:29:44it's actually really not that hard

1:29:45there's a technique to it and I remember

1:29:47my cousin showing me the technique for

1:29:49well here's how you tear a phone book in

1:29:51half and once I learned how I could tear

1:29:52phone books in half too

1:29:54um and I remember watching the video for

1:29:57it and the guy showing me you know you

1:30:00bend the phone book in this particular

1:30:02way so you're only really tearing one

1:30:03page at a time and he says to tear a

1:30:06phone book in half it's 70% skill 30%

1:30:12strength all right um so those are the

1:30:15key success factors for tearing a phone

1:30:17book skill is important strength is

1:30:20important and it's also when you talk

1:30:23about the key success factors they're

1:30:24sort of a recipe you know what are the

1:30:26ratios that they're important for

1:30:28tearing the phone book 70% skill 30%

1:30:33strength all right now when we talk

1:30:36about key success factors in an industry

1:30:38it's going to be well we the key success

1:30:40factors for being successful in this

1:30:42particular industry and what's the ratio

1:30:46you mix them

1:30:47together so let's move

1:30:50on how do you identify the key success

1:30:53factors well you think about okay well

1:30:56what are some crucial product attributes

1:30:58and characteristics that buyers really

1:31:00are looking for in this industry and

1:31:03they're choosing between competing bands

1:31:05um you know is there anything that you

1:31:08absolutely need to have

1:31:11or is there anything that's you know

1:31:13really like uh super super important

1:31:16that people make all of their buying

1:31:18just buying decisions based on so let's

1:31:22do another example here all right

1:31:24right so here's an example of key

1:31:27success factors and if I was to think

1:31:29about you know what are the ex the key

1:31:32success factors in the exotic car

1:31:34industry all right so buying something

1:31:36like a Ferrari or McLaren or Lamborghini

1:31:40or Aston Martin all right you know if I

1:31:43was to put these together here's the

1:31:46handful I would probably that I would

1:31:49come to the conclusion of um you want to

1:31:52limit your key success factors to again

1:31:56you

1:31:57know two to five okay probably more than

1:32:01two but you really don't want to have a

1:32:04laundry list if you say everything's

1:32:06important you're kind of saying

1:32:08nothing's important okay you need to be

1:32:10concise all right so if you can boil it

1:32:13down to just a few things that's a lot

1:32:15more powerful all right when it starts

1:32:17getting too big you're going to have

1:32:19things that are redundant with each

1:32:20other and it starts to really not matter

1:32:22all that much um so you can be concise

1:32:26be

1:32:27concise exotic car industry I would say

1:32:31you know what does a company need to

1:32:33have to succeed in that industry

1:32:36probably 50% of its brand history and

1:32:39notoriety all right you think about you

1:32:42know why do people buy a Ferrari or

1:32:44Porsche or whatever well because it's a

1:32:47well-known name and it's a well-known

1:32:49name because of you know these stories

1:32:51you hear about them at lont or in F1 or

1:32:56that you know particular celebrities

1:32:59used to drive them or all of these

1:33:02different things these storied histories

1:33:05um is a lot of really what drives sales

1:33:09for those cars okay I mean there's a lot

1:33:12of companies that pop up in Italy and

1:33:15all over Europe and different places

1:33:17America too that produce cars that are

1:33:20every bit as good as a Ferrari if not

1:33:22faster but

1:33:24you know no one wants to buy him because

1:33:26you have to explain to all your friends

1:33:28what exactly this vehicle is I remember

1:33:30there was a company called Gumpert all

1:33:32right that came out of Germany and

1:33:34Gumpert was really really fast sports

1:33:37cars they looked theart and everything

1:33:39well they're kind of ugly but it's super

1:33:42exotic really aggressive and they would

1:33:44beat Ferraris and everything around a

1:33:46track but they had nearly an impossible

1:33:49time selling those cars because they had

1:33:51no history behind it all right when

1:33:54people buy that type of car they want to

1:33:56tell their friends hey you want to get

1:33:57in my Ferrari um and their friends go oh

1:34:00wow that's really cool a Ferrari man you

1:34:02made it whereas if you say hey you want

1:34:04to get in my Gumpert they go well what

1:34:06is the Gumpert I never heard of that is

1:34:07that is that like a budget car is no no

1:34:10no it's actually really really expensive

1:34:12they'll beat your Ferrari around uh a

1:34:15racetrack and they start oh is it a kit

1:34:17car I've never seen this before and you

1:34:19know it's just you have an impossible

1:34:21time explaining it to people so no one

1:34:23buys those is buy things with the brand

1:34:26history another piece of that brand

1:34:28history and another thing is sort of the

1:34:30racing success that the company's had

1:34:33all right or experiencing right now so

1:34:36you know Mercedes can point at F1 and

1:34:39say look how good our cars do an F1

1:34:41nowadays um and we're taking some of

1:34:43that technology from the track and we're

1:34:45putting it in some of our cars all right

1:34:47there's this tie here and people like to

1:34:49see that same thing with like uh McLaren

1:34:53or

1:34:54or Ferrari is just you know how good are

1:34:57you actually at racing um I remember

1:35:00Porsche's thing was you know if we can

1:35:03win races on the weekends we'll sell

1:35:05cars during the week all right so

1:35:07Porsche wins a whole bunch of these

1:35:09races uh every weekend people see those

1:35:13cars to the track and think oh man I

1:35:15want that for the street now next piece

1:35:18is probably the styling capabilities of

1:35:20the of the uh auto manufacturer okay so

1:35:24that they build cars that look the part

1:35:25or consider beautiful um something that

1:35:29you think you'd impress your friends

1:35:31with and whatever else and then the 15%

1:35:34would probably just be the street

1:35:37performance um you know a lot of those

1:35:40cars get parked in garages they don't

1:35:42get driven all that often um you know

1:35:45big thing with exotic cars is to have a

1:35:47battery cut off and charge points

1:35:49because it's just going to be sitting in

1:35:50your garage getting charged for a lot of

1:35:52time

1:35:54so you know I think the the the actual

1:35:57Street performance is is something that

1:35:59gets underutilized quite

1:36:04often okay so now we're sort of starting

1:36:08to wind down

1:36:10here and what I'd like to see you all do

1:36:14in your uh case studies and everything

1:36:18is after you've conducted all of these

1:36:22different analyses is to end with some

1:36:24sort of Industry outlook for

1:36:27profitability okay um and in this end

1:36:32sort of summary of everything what you

1:36:34should do

1:36:37is reflect on all of those different

1:36:40analyses you've you've performed and

1:36:44back up your claims as well this is a

1:36:46likely profitable industry because all

1:36:50of these different things I found or

1:36:52this industry seems to be plugged by

1:36:54Gremlins and these Gremlins are made

1:36:56evident in the pestal porters 5 forces

1:36:59the Strategic group map shows that

1:37:01everybody's clustered together in one

1:37:02area fighting for the same customers you

1:37:05know that kind of stuff okay that's what

1:37:08I want to see you do um to where your

1:37:11summary isn't just an opinion that you

1:37:15form you know divorc from all of the

1:37:18previous analyses you just ran through

1:37:21if you do it that way then you just kind

1:37:22of wasted your time time with all of

1:37:24that stuff you went through in the past

1:37:27your outlook should be based on what you

1:37:30found in each of those other analyses

1:37:32and all of those different steps that

1:37:34should build off of

1:37:37that so things you should be considering

1:37:39of course are all of those different

1:37:41analyses you know what's the macro

1:37:44environment look like how's that

1:37:46affecting that particular industry

1:37:48Porters five forces how does Porters

1:37:50five forces affect the industry are they

1:37:52mainly strong are they mainly weak is

1:37:54there one force that's kind of

1:37:57dominating the industry making it

1:37:59impossible all

1:38:01right um you know if you're talking

1:38:03about a particular firm ever then you

1:38:06should be talking about where it stands

1:38:08in its strategic group okay

1:38:12um these are all important pieces all

1:38:17right you've went through all of these

1:38:18steps and you want to make sure you

1:38:20leverage them

1:38:22for disc discing the ultimate industry

1:38:25attractiveness okay you know discuss

1:38:28what are the driving forces in this

1:38:30industry doing is it slowly becoming

1:38:32less attractive or more

1:38:37attractive now the industry

1:38:40isn't attractive you know equally to all

1:38:43participants all right if you're an

1:38:46outsider then you might see barriers to

1:38:48entry as well you know that's just not

1:38:50an attractive industry for me because

1:38:53how am I ever going to clear those

1:38:55barriers okay so for example like the

1:38:58pharmaceutical industry if any of you

1:39:01are thinking well once I graduate from

1:39:03college I'm going to start up a company

1:39:05probably none of you are thinking I'm

1:39:08going to start up a pharmaceutical

1:39:09company okay uh

1:39:12that's just out of grasp of most people

1:39:16all right um you know you might think

1:39:19about starting up a pharmaceutical

1:39:21company if you've already been in the

1:39:23industry for a long time you've launched

1:39:26several Ventures and now you have $100

1:39:29million or more all right

1:39:34and you have this hundred million dollar

1:39:37to spend on launching some final Venture

1:39:41okay or another thing all right those

1:39:44are the type of people who are looking

1:39:45to start those and you know it's not

1:39:48really attra an attractive industry for

1:39:51entering firms is the barriers entry are

1:39:53too high now if you are a um incumbent

1:39:58in the pharmaceutical industry it's

1:40:00great those varrier dentry help you out

1:40:02you know they make sure you don't get

1:40:04overrun by new

1:40:06competition um often what you want to do

1:40:09as an outsider is clear an industry that

1:40:12has the highest barrier steny that you

1:40:15possibly can where you know you still

1:40:18have the capabilities and resources to

1:40:20clear the barriers because if you're

1:40:22just barely able to clear those barriers

1:40:25then you know it's going to be hard for

1:40:28all of the uh followers to do the same

1:40:31exact thing all right you know that's a

1:40:33fairly defensible position so you want

1:40:35to enter into an industry that has the

1:40:38highest barriers to entry is possible

1:40:40that you yourself know you can clear

1:40:44but again you know there's a point where

1:40:46you're not going to be able to clear

1:40:50them so what do you do with all of this

1:40:52information

1:40:54well if you decide that your industry is

1:40:57attractive then of course invest do what

1:40:59you can to exploit all the opportunities

1:41:02and grow your Venture if you're a strong

1:41:06competitor and you conclude that the

1:41:08industry is relatively

1:41:11unattractive then you might try to see

1:41:13if there's some ways that you can

1:41:15protect yourself okay

1:41:17um you know perhaps look

1:41:21into uh cop writing some of your

1:41:25activities you're doing or getting

1:41:27property rights doing something you can

1:41:30to try to protect yourself invest

1:41:33cautiously um look at different ways

1:41:37that perhaps new entrance might be

1:41:39coming in and see if you can block them

1:41:41through creating switching cost or

1:41:43whatever types of strategies you might

1:41:45think of to deter new competition or

1:41:48offset any of those other aspects of the

1:41:51industry that make it unattractive

1:41:54and if you're a competitively

1:41:56weak player in a bad industry then

1:42:00perhaps your best option is just selling

1:42:02out or harvesting your business um doing

1:42:06whatever you can just to get out of that

1:42:08particular

1:42:10industry so anyway that's what I have to

1:42:12say for this lecture thank you so much

1:42:14for your time and I will see you next

1:42:16time