chair, management of network industries techniques to assess the macro-economic environment march 18...

CHAIR, MANAGEMENT OF NETWORK INDUSTRiES

Techniques to assess the macro-economic environment

March 18th 2005

Techniques to assess the macro-economic environment

March 18th 2005

College of Management of TechnologyMaster/Minor ProgramChair MIR – Management of Network IndustriesProf. Matthias FingerSpring semester 2005ODY 16

CHAIR MANAGEMENT OF NETWORK INDUSTRIES

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Structure of the sessionStructure of the session

Part I : Seminar and course presentation- degree of competition- macro-environmental analysis

Part II: Guest speaker: M. J.-M. Revaz, Directeur CREM et Sinergy SA – the case of the electricity industry

Previous course presentations available online on the MIR website: PASSWORD: springind05

http://www2.epfl.ch/Jahia/site/mir/op/preview/pid/26026?matrix=1110889639328


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Identification of an “industry”Identification of an “industry”

Similar “modesof production”:similar ways ofproducing thegoods orservices

Similar waysof “firm organi-zation”: firmsstructure insimilar ways so as to producegoods or services

A certainamount offirms com-peting for the customersof thesegoods orservices

Industry analysis does not start out with the customer, but with production Industry analysis focuses on firms (and related actors)


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Participants’ workParticipants’ work• L’industrie du tabac (Swati)• Telemedicine (e-health?) (Jonathan)• Les PPPs (Nicolas)• The diamond industry (Farouk)What is the dominant “mode of production”?Which are the dominant firms in this industry?

Others: - can you pls provide a few lines on your industry by

tomorrow?- Can you try to answer the same two questions?


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Firms competingFirms competing




Classification ofindustries dependingon the degree ofcompetition


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Structure Number of producers Control over price

Perfect competition Many producers

Identical products

None

Oligopoly Few producers

Some differentiation

Some

Natural monopoly Single producer

Unique product

Considerable but regulated

Level of competitionLevel of competition

Source: Adapted from Samuelson and Nordhaus


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Perfect competition Perfect competition «In economic theory, perfect competition is a market form in which no

producer or consumer has the power to influence prices in the market. The analysis of perfectly competitive markets provides the foundation of the theory of supply and demand.

A market is said to be one with perfect competition if:• There are a large number of producers and consumers on a given

market • None of the producers or consumers can influence the price on their

own -- they are price takers • Goods and services are perfect substitutes -- they are

homogeneous • All resources (including information) are perfectly mobile • Transaction costs are zero • The price is determined at the level that equates supply and

demand, and moves instantaneously to equilibrium»

Source: Wikipedia


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Imperfect competitionImperfect competition

«In economic theory, imperfect competition, is the competitive situation in any market where the conditions necessary for perfect competition are not satisfied.

• Forms of imperfect competition include:• Monopoly, in which there is only one seller of a good. • Oligopoly, in which there is a small number of sellers. • Monopolistic competition, in which there are many sellers producing

highly differentiated goods. • Monopsony, in which there is only one buyer of a good. • Oligopsony, in which there is a small number of buyers. • There may also be imperfect competition in markets due to buyers or

sellers lacking information about prices and the goods being traded.»

Source: Wikipedia


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OligopolyOligopoly

«An oligopoly is a market form in which a market is dominated by a small number of sellers (oligopolists).

There are few participants in this type of market, each oligopolist is aware of the actions of the others. Oligopolistic markets are characterised by interactivity. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants.»

Source: Wikipedia


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Natural monopolyNatural monopoly

«In economics, a natural monopoly is a persistent situation where a single company is the only supplier of a particular kind of product or service due to the fundamental cost structure of the industry.

Natural monopolies arise where the largest supplier in an industry, or the first supplier in a local area, has an overwhelming cost advantage over other actual or potential competitors. This tends to be the case in industries where capital costs predominate, creating economies of scale which are large in relation to the size of the market, and hence high barriers to entry; examples include water services and electricity. It may also depend on control of a particular natural resource. Companies that grow to take advantage of economies of scale often run into problems of bureaucracy; these factors interact to produce an "ideal" size for a company, at which the company's average cost of production is minimised. If that ideal size is large enough to supply the whole market, then that market is a natural monopoly».

Source: Wikipedia


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Competition industry structureCompetition industry structure

Monopoly (one firm) Monopolistic industry= regulated industry

Oligopoly (few firms) Highly concentrated industry

Imperfect competition Typical industry (somewhatconcentrated)

Perfect competition Ideal industry

Tendency towards concentration

Regulate or not regulate?


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Influences of the environmentInfluences of the environment




Macro environmental forces are external to the industry and the firm

Industry

“Various types of environmental changes occurring in isolation or combination help define and drive industry”

[Fleischer & Bensoussan, 2002: 270]


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Different ways to look at an industry’s environment

Different ways to look at an industry’s environment

Industry structure model (Porter): will be discussed during session 4

= an organizational/institutional analysis of an industry

Cognitive model: an analysis of the perception the managers have of their

environment strategy formulation

Organization field model: a systematic analysis of the forces affecting and shaping an industry (hirarchical approach vs non-hierarchical approach); relatively a-theoretical (STEEP, PEST); this session

Ecological and resource dependence model: resource dependency theory (inspired by ecology) resources availability and mobilization

Era model: a cyclical view (stability, change) inspired by long-term economic cycles


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STEEP variablesSTEEP variables

Social Technological Ecological Economic Political/legal

Ideological characteristics

Types of union organizations

Income gaps among social groups

Percentage of population in economic and social segments

Value systems for social classes

Cultural background of citizens

Birth and death rates

Patents held

R%D budgets

Number of colleges and universities in region

Pace of technological change

Presence of technology clusters

Pace of process or product improvements

Bandwith capacity

Air and water quality

Recycling capacity

Sources of power

Stage of evolution in product life cycle

Pollution levels

Susbtitutability of raw materials

Levels of environmental regulation

GDP growth rates

Exchange reserves

Rate of inflation

Income distribution levels and bands

Interest rates

Small business lending levels

Balance of payment

Policies of political parties

Activism of regulatory agencies

Presence of property protection laws

Ability to influence political decision making

Voting rates and trends

Nature of power and decision-making structures

Public opinion

Fleischer and Bensoussan, 2002: 274


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PEST frameworkPEST framework

Political & Legal• Monopolies legislation

• Taxation laws

• Regulation

• Foreign trade regulations

• Employment law

• Government stability

Economic factors• Business cycles

• Gross domestic product

• Disposable income

• Inflation rates

• Interest rates

• Saving rates

Socio cultural factors• Population demographics

• Age structure

• Lifestyle changes

• Social mobility

• Levels of education

Technological • Government spending on research

• Government and industry focus on technological effort

• New discoveries/ Development

• Speed of technology transfer

Source: Johnson & Scholes ( 1999: p.105)


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ParticipantsParticipants

• In the industry you have selected, which are the major influencing factors?- political, legal- economic- technological- ecological- social/cultural

• Inside each of these factors, which are the main influencing variables?


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ScenariosScenarios




Industry

1. How is the industry evolving over time? What are the major trends?2. Which possible scenarios? Which are the major factors influencing the

scenarios?


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Scenarios IIScenarios II

Trends inthe variousfactors, i.e.,environmentallyrelevantdimenions(STEEP/PEST)

Interrelation-ships amongthese trends

Impact onindustryactors

Impact onindustrystructure

Possiblescenariosof industryevolution


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Application of STEEP/PEST analysesApplication of STEEP/PEST analyses

1. Understand the segment (factors and time horizon) of the environment being analyzed identify the major trends in each of the environmental factors over a certain time

2. Understand the interrelationships between trends

3. Impact of these trends on the main actors in the industry

4. Impact of actor behavior (change) on the industry structure (cf. Porter)

5. Possible scenarios for industry evolution


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Example: drinking water industryExample: drinking water industry

Trends:• Environmental pressure:

- scarcity- pollution

• Economic pressure: - competing usages- rising water pricing (water as an economic good)

• Political/social pressure: - increasing cost of water- accessibility

• Other forces:- financial problems of the public sector- TNC lobbying (~ World Bank/IMF)- State failure


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International water fora (i.e., Rio & Dublin):environmental preoccupations call to treat water as an economic good

World Bank’s particular role:- Structural adjustment programs- Water resources management concept paper (1993)- World Development Report on Infrastructure (1994) Competition for the market

Water sector dynamics

European Union (DG Internal Market, DG Competition, DG Environment)

?

Special historical situation of France (PPP)

Full privatization in the UK

TNC pressure/lobbying to enter the market


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Characteristics of the water sectorCharacteristics of the water sector

• natural monopoly• local nature ( natural monopoly of place)

Competition for the market (not in the market)• water as a public good • health and sustainability externalities: water as a vital

element

Heavy politization of the sector


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The European study: scenario buildingThe European study: scenario building• Identification of possible end-states (in 2020) derived from currently existing management

models:- delegated (regulated and unregulated) management contracts (France)- direct public management (Switzerland, Germany)- community management (Wales)

• Drivers of change:- TNC lobbying; TNC growth (thanks to new member states)- role of the European Commission (for & against)- bureaucratization- modernization (technological, management)- social pressure against liberalization- technological developments

• Critical events:- social protest- corruption scandals- environmental/health crises- financial crises (of the public authorities


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Lobbying for more liberalizationEU pressure for liberalization

Free market (tender)

EU Directive “tender”

CrisisSocial protest

“Market” regulation

AdministrativereglementationBureaucratization

Statusquo

Managerialism and fragmentationOutsourcing

2010 2020

Social protestEU pressure for servicesof general interest

Direct Public Management

Publicfinances

Publicfinances

Trust in public authorities

Community Management

New technologies


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An example: Scenario analysis: ShellAn example: Scenario analysis: ShellAn example: Scenario analysis: ShellAn example: Scenario analysis: Shell

‘Energy sector, choices and possibilities scenarios to 2050’

http://shell.com/static/royalen/downloads/scenarios.pdf


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Context and key questions Context and key questions

Source: Shell, p.7


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Different technology discontinuities in the energy sector

Different technology discontinuities in the energy sector

Source: Shell, p.33


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Energy Branching pointsEnergy Branching points

Source: Shell, p.27


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Source: Shell, p.27


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Questions from the two scenarios Questions from the two scenarios

Source: Shell, p.27


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ParticipantsParticipants

Which possible scenarios in your industry?• Which trends in each of the dimensions?• Which interrelationships among these trends?• Which impact on which actors?• Which impact on industry structure?

chair, management of network industries techniques to assess the macro-economic environment march 18...

Documents

services industry analysis

college of management

firms structure

degree of competition

production industry

dominant firms

price takers goods

nordhaus slide