Lecture 7 to 11

1. Determining Mission & Goals: Defining the business by identifying customers needs to satisfy

2. Strategy Formulation: Analyzing the current situation and developing strategies to achieve the mission.

3. Strategy Implementation: Allocating resources and responsibilities

Fnancial measures alone are insufficient because they are “lagging indicators” (they tell you what happened in the past, not what will happen). The Balanced Scorecard translates strategy into four perspectives to give a comprehensive view of performance:

1. Financial: “How do we look to shareholders?” (e.g., ROI, Cash Flow)

2. Customer: “How do customers see us?” (e.g., Satisfaction, Loyalty)

3. Internal Business Process: “What must we excel at?” (e.g., Cycle time, Quality control)

4. Learning & Growth: “Can we continue to improve?” (e.g., Employee Skills, Innovation Culture).

• Example: Starbucks

  • Instead of just measuring coffee sales (Financial), they measure Barista Training Hours (Learning & Growth) and Service Speed (Internal Process). They know that if employees are trained and service is fast, Customer Satisfaction will go up, which eventually leads to higher Financial profit.

• Shareholder Approach (Friedman): The frim’s primary duty is to maximize profits for owners. Proponents argue this creates the most efficient allocation of resources and that governments, not companies, should address social issues.

• Stakeholder Approach (Freeman): The firm is a coalition of intrest groups (employees, customers, suppliers, community). The manager`s job is to balance these interests.

• The Synthesis (Enlighted Shareholder Value): In the long run, these views usually converge. A firm cannot remain profitable for shareholders if it exploits employees or ignores customers. Therefore, maximizing long-term shareholder value requires satisfying stakeholders.

1. Participation: Engages all managers in setting goals

2. Direction & Purpose: Sets a clear path for everyone.

3. Coordination: Helps different parts of the firm fit together.

4. Control: Specifies who is responsible for what

• Short: Keep it simple (KISS). Example: Morgan Stanley’s “One Firm Firm”

• Unique: Specific to the company, not generic. Example: Alkloid’s focus on “health above all”

• Realistic: Grounded in what the company actually does now, not just a dream. Example: Apple focusing on “best user experience… through innovative hardware, software, and services.”

• Memorable & Actionable: Easy to recall and act upon. Example: GE’s “#1 or #2 worldwide (Fix, Sell, or Close)

The Five Forces framework determines the long-term profit potential (attractiveness) of an industry by analyzing the struggle for value capture among key players. A “strong” force drives profitability down.

1. Threat of Entry: High barriers (capital requirements, patents, scale economies) protect incumbent profits. If barriers are low, new entrants flood in and compete away profits.

2. Supplier Power: Powerful suppilers (concentrated, unique inputs) can squeeze industry profits by raising input costs.

3. Buyer Power: Powerful buyers (concentrated, low switching costs) can force prices down or demand higher quality, reducing industry margins.

4. Threat of Substitute: Products from other industries that meet the same need place a ceiling on prices. If the industry raises prices, customers switch to the substitute

5. Rivarly: Intense competition (price wars) destroy value. It is driven by many competitors, slow growth, high fixed costs, and high exit barriers.

• Example: Soft Drink Industry

  1. Threat of Entry (Low)

  • Barriers: Extremely High, The “Cola Wars” created massive brand loyalty and advertising barriers. New entrants cannot match the marketing spend of incumbents.

  • Distribution: Coke and Pepsi have exclusive contracts with bottlers and huge sway over supermarket shelf space, making it nearly impossible for a new soda brand to get distributed globally

  1. Supplier Power (Low)

  • Inputs: The main ingredients are commodities: sugar, water, and corn syrup.

  • Power: Suppliers of these commodities have zero bargaining power against giant buyers like Coca-Cola. If one sugar supplier raises prices, Coke can easily switch to another.

  1. Buyer Power (Medium)

  • The Bottlers: The immediate buyers are the Bottlers (who buy the concentrate). They have little power because they are often locked into long-term franchise agreements or are partially owned by the parent company (e.g., Coca-Cola Enterprises)

  • Retailers (Supermarkets): They have some power but need to stock "must-have" brands like Coke and Pepsi to get customers in the door.

  • Consumers: Individual buyers have high brand loyalty (recall the "New Coke" backlash), which reduces their sensitivity to small price increases.

  1. Threat of substitutes (High)

  • The Threat: This is the biggest headache for the industry today. Substitutes include water, juice, tea, coffee, and energy drinks.

  • Health Trends: As consumers become health-conscious, they switch away from sugary sodas. Coke is fighting this by diversifying into "still drinks" (water, juice) to capture the substitute market itself.

  1. Rivarly (High but “Gentlemany”)

  • Tructure: A Duopoly (Coke vs. Pepsi).

    Nature of Fight: They compete intensely on Advertising and Differentiation (e.g., The Pepsi Challenge, Super Bowl ads), but they rarely compete on Price.

  • Why? Price wars destroy profits for both. Branding wars expand the total market. This "disciplined rivalry" allows both firms to remain highly profitable.

  1. Complements

  • Exclusive Partnerships: Coca-Cola has a legendary exclusive partnership with McDonald's, ensuring that every Big Mac sold creates a sale for Coke. Pepsi owns the rights to Yum! Brands (Taco Bell, KFC, Pizza Hut).

  • Forward Integration (Hardware): Coke and Pepsi often give vending machines and coolers to small retailers for free (or heavily subsidized). Why? Because the Cooler is a complement that makes the product "cold and ready," drastically increasing its value to the consumer compared to a warm can on a shelf.

  1. Government

  • Regulation (Sugar Taxes): Governments worldwide (e.g., Mexico, UK, parts of USA) have implemented "Soda Taxes" to combat obesity. This artificially raises prices, which increases the Threat of Substitutes (making water/juice relatively cheaper) and creates price sensitivity among Buyers.

  • Environmental Policy (Packaging): Strict regulations on single-use plastics (e.g., EU Directives) force companies to redesign packaging or pay for recycling schemes. This increases Supplier Power (demand for specialized recycled PET) and raises fixed costs, creating a higher Barrier to Entry for small firms that can't afford the transition.

  • Health & Labeling Laws: Mandatory warning labels or bans on sales in schools (e.g., "Smart Snacks in School" standards in the US) restrict access to distribution channels. This reduces the total addressable market and forces reformulation of products (R&D costs).

Porter's original model focused on who steals value (Substitutes/Rivals). It missed who adds value. Complements are products or services that increase the value of the industry's product.

• Relationship: While Substitutes reduce the value of a product (negative cross-elasticity), Complements increase it (positive cross-elasticity).

• Strategy: Firms should actively encourage the supply of cheap, high-quality complements to boost demand for their own product.

• Example: Video Game Consoles.

  • Complement: Video Games. A PlayStation 5 is useless without games. Sony sells the console at a low margin (or loss) to build the user base, because

  • the Complements (games) drive the value. Sony actively supports game developers to ensure a rich supply of complements.

1. The Core Concept: According to Michael Porter, Government should not be analyzed as a standalone "Sixth Force" (like Suppliers or Buyers). Instead, it is a Factor—a variable that influences the other five forces.

   • The Logic: Government involvement is neither inherently good nor bad for industry profitability. Its impact depends entirely on how it affects the specific industry structure at a specific time.

   • The Analogy: Porter compares the Five Forces to Gravity (fundamental, permanent laws of industry structure) and Government Policy to Prevailing Winds (transitory conditions that can change direction and intensity). You cannot ignore the wind, but it doesn't change the laws of physics.

2. How Government Influences the 5 Forces: Government policy is an input that alters the strength of the forces.

   • Raising Barriers to Entry:

     • Patents: Government-granted monopolies (IP rights) legally block new entrants, boosting profit potential for incumbents (e.g., Pharmaceuticals).

     • Licensing: Strict licensing requirements (e.g., in Banking) prevent new banks from opening easily, protecting the profits of existing banks.

   • Increasing Rivalry (Negative Impact):

     • Over-Licensing: If the government issues too many licenses, it creates excess supply and destroys industry profits.

     • Example: Nation TV Licensing. Granting too many broadcasting licenses fragmented the market and destroyed profitability for everyone.

3. Specific Examples of Intervention:

   • Higher Education in MK (North Macedonia): Government accreditation policies determine who can enter the education market (Barrier to Entry).

   • Privatization of Medicine: Shifting General Practices from state to private ownership alters the Rivalry and Buyer Power dynamics in healthcare.

   • Legalizing Marijuana: A regulatory change that instantly creates a new industry, lowers Barriers to Entry(previously illegal), and creates massive Threat of Substitutes for alcohol/painkillers.

An industry is rarely homogenous. Strategic Groups are clusters of firms within an industry that follow similar strategies (e.g., similar product range, geographic scope, or distribution channels).

• Relevance: Competition is fiercest within the group (e.g., Mercedes vs. BMW) rather than between groups (e.g., Mercedes vs. Hyundai).

• Mobility Barriers: Barriers that prevent firms in one group from moving to another (e.g., brand reputation prevents Hyundai from easily entering the Luxury Group).

• Example: The Automobile Industry.

  • Group A (Broad-Line Global): Toyota, VW, GM. They compete on scale and full range.

  • Group B (Luxury Performance): Ferrari, Porsche. They compete on exclusivity and engineering.

  • Analysis: Ferrari does not worry about Toyota's prices. Toyota cannot easily enter Ferrari's group because of the Mobility Barrier (Brand Heritage).

Game Theory analyzes competitive interaction where the outcome depends on the choices of all players. A key concept is Signaling—communicating intentions to influence a competitor's behavior.

• Credible Threat: A signal is only effective if the rival believes you will carry it out.

• Example: A "Price Match Guarantee." This signals to rivals: "Don't bother cutting your price to steal my customers, because I will automatically match it." This paradoxically prevents price wars and keeps prices high.

• Example: Airbus & Boeing.

  • Before launching the A380 (Superjumbo), Airbus signaled its commitment to the project. This was a deterrence signal to Boeing, effectively saying, "The market is only big enough for one of us. We are going in, so you stay out." Boeing heeded the signal and did not build a direct rival to the A380 (updating the 747 instead).