Finish this case in 2days

Class Plan 2
“If you are not part of the solution, you’re part of the precipitate” Henry Tillman
Housekeeping (groups, cards…)
Questions for the Apollo case
Ethics and Strategy (video)
Intro to External Analysis
Macroenvironmental Analysis
Accounting practice
Video and exercises on External Analysis

Guiding questions for the Apollo Group Case
Using Porter’s 5-forces model, evaluate the attractiveness of the online-education industry.
What internal factors and macroenvironmental factors will impact the industry in general and Apollo specifically ?
What recommendation (s) have you to make to Apollo to sustain or improve their current position?

Planned, Deliberate, Emergent and Realized Strategies
Source: Adapted from H. Mintzberg and A. McGugh, Administrative Science Quarterly, Vol. 30. No. 2, June 1985.
Figure 1.7
p. 24

Governance Mechanisms
The Board of Directors
Elected by stockholders
Legally accountable
Monitors corporate strategy decisions
Authority to hire, fire, and compensate
Ensures accuracy of audited financial statements
Inside directors
Outside directors
Stock-Based Compensation
Pay-for-performance
Stock options:
The right to buy company shares at a predetermined price at some point in the future
Financial Statements
Auditors, GAAP
The Takeover Constraint
Limits strategies that ignore shareholder interests
Corporate raiders

Ethics and Strategy
Business ethics are the accepted principles of right or wrong governing the conduct of businesspeople.
Ethical dilemmas occur when:
There is no agreement over what the accepted principles are
None of the available alternatives seem ethically acceptable
Many accepted principles are codified into laws:
Tort laws – governing product liability
Contract law – contracts and breaches of contracts
Intellectual property law – protection of intellectual property
Antitrust law – governing competitive behavior
Securities law – issuing and selling securities
Behaving ethically goes beyond staying within the law

Ethical Issues in Strategy
Self-dealing
Managers feather their nest with corporate monies through stock trades
Information manipulation
Distort or hide information to enhance competitive or personal situation
Anticompetitive behavior
Actions aimed at harming actual or potential competitors
Opportunistic exploitation
Of other players in the value chain in which the firm is embedded
Substandard working conditions
Underinvest in working conditions or pay below market wages
Environmental degradation
Directly or indirectly take actions that result in environmental harm
Corruption
Companies pay bribes to gain access to lucrative business contracts.

The Roots of Unethical Behavior
Why do some managers behave unethically?
Personal ethics code: will have a profound influence on behavior as a businessperson
Do not realize they are behaving unethically: by failing to ask the right questions
Organization’s culture: de-emphasizes ethics and considers primarily economic consequences
Unrealistic performance goals: encouraging and legitimizing unethical behavior
Unethical leadership: that encourages and tolerates behavior that is ethically suspect

Managers should:
Favor hiring and promoting people with a well-grounded sense of personal ethics.
Build an organizational culture that places a high value on ethical behavior.
Make sure that leaders not only articulate but also act in an ethical manner.
Put decision-making processes in place that require people to consider the ethical dimension of business decisions.
Use ethics officers.
Put strong corporate governance processes in place.
Act with moral courage and encourage others to do the same.
Behaving Ethically

*

Industry Analysis
The Structure – Conduct – Performance Model
• originally developed to spot anti-competitive conditions
for anti-trust purposes
• came to be used to assess the possibilities for
above normal profits for firms within an industry
• Porter’s Five Forces Model was developed from
this economic tradition

The Structure-Conduct- Performance Model
Industry Structure
Number of competing firms
Homogeneity of products
Cost of entry and exit
Firm Conduct
Price taking
Product differentiation
Tacit collusion
Exploiting market power
Performance
Firm level performance: Normal, below normal, above normal
Society: efficiency, level of employment, progress

Industry Analysis
Industry
A group of companies offering products or services that are close substitutes for each other and that satisfy the same basic customer needs
Industry boundaries may change as customer needs evolve and technology changes
Sector
A group of closely related industries
Market Segments
Distinct groups of customers within an industry
Can be differentiated from each other with distinct attributes and specific demands

Porter’s Five Forces Model (Fig 2.2 p50 adapted)
Rivalry among established firms
Risk of entry by potential competitors
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitute products

Special role of complements

Rivalry
Rivalry among established companies is a function of :
industry’s competitive structure – fragmented vs consolidated
demand conditions – growth and rate of growth
exit barriers – emotional, economic, strategic

Product Lifecycle

Time
Demand
Embryonic
Growth
Shakeout
Mature
Declining

New Entrants
Potential Competitors: not currently competing in an industry but capable of doing so.
incumbent companies (those already in an industry) are at an advantage when barriers to entry are high.
Main barriers to entry are: (plus examples?)
1) brand loyalty
2) absolute cost advantage based on production superiority & control of inputs
3) economies of scale due to mass production, increased purchasing power, spreading of fixed costs, advertising economies
4) consumer switching costs
5) government regulation

Power of Buyers
Bargaining power of buyers is high when:
– many sellers and few buyers (at extreme, a monopsony)
– purchases are made in large $ amounts or quantities
– purchases represent a large percentage of total orders
– buyers have low switching costs
– each buyers can have multiple suppliers
possibility of vertical integration

Power of Suppliers
Bargaining power of suppliers is high when:
few substitutes for input they supply
industry is not an important customer
high switching costs (sometimes due to differentiation)
possibility of vertical integration (supplier)
no possibility of vertical integration (buyer)

Subtitutes and Complements
Threat of substitute products
Are there other industries that serve the similar consumer needs?
Are there strong competitive forces in those other industries?
The “Sixth Force” : Complementors
Complementors sell or supply complementary products to an enterprises existing product offerings.
If an industry’s complementors are weak or supply unattractive products they can be a threat to the industry

Macro-environmental Forces [Environmental Scanning]
Macroeconomics: growth rate of the economy, interest rates, currency exchange rates, inflation rates
Technological: “creative destruction”, shifting barriers to entry
Social: lifestyles, trends and attitudes
Demographics: composition of the population, factors such as income distribution, education, labour mobility, gender
Political & Legal : deregulation and free trade
Global: falling barriers to trade, new economic development
Environmental Scanning should:
be a continuous formal & informal process
explore beyond the boundaries of the business environment
identify the potential impacts of events in a timely fashion
be a context & a trigger for industry and business analysis
can be carried too far

More on 5-forces model
Strategic Groups Def.: subsections of industry with the same basic strategy in-group
Implications:
closest competitors are in the same group
groups, to some extent, face different 5+-forces
exit & entry barriers exist between groups

Limitations of 5+-Forces & Strategic Groups models
Static picture with limited attention to innovation. Industries evolve “unfrozen and reshaped” by technology : punctuated equilibrium hyper-competitive industries with no equilibrium
downplays individual company differences
studies show that industry only accounts for 10%-20% of variance in firms’ profit rates