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Strategic Management: Theory: An Integrated Approach, 11th Edition solutions manual Charles W. L. Hill | Gareth R. Jones | Melissa A. Schilling
Strategic Management: Theory: An Integrated Approach, 11th Edition solutions manual Charles W. L. Hill | Gareth R. Jones | Melissa A. Schilling
External Analysis: The Identification of Opportunities and Threats
Synopsis of Chapter
The purpose of this chapter is to familiarize students with the forces that shape competition in a company’s external environment and to discuss techniques for identifying strategic opportunities and threats. The central theme is that if a company is to survive and prosper, its management must understand the implications environmental forces have for strategic opportunities and threats.
This chapter first defines industry, sector, market segments, and changes in industry boundaries. The next section offers a detailed look at the forces that shape competition in a company’s industry environment, using Porter’s Five Forces Model as an overall framework. In addition, a sixth force—complementors—is introduced and discussed.
The chapter continues, exploring the concepts of strategic groups and mobility barriers. The competitive changes that take place during the evolution of an industry are examined.
Next the chapter considers some of the limitations inherent in the five forces, strategic group, and industry life-cycle models. These limitations do not render the models useless, but managers need to be aware of them as they employ these models.
Finally, the chapter provides a review of the significance that changes in the macroenvironment have for strategic opportunities and threats.
1. Review the primary technique used to analyze competition in an industry environment: the Five Forces model.
2. Explore the concept of strategic groups and illustrate the implications for industry analysis.
3. Discuss how industries evolve over time, with reference to the industry life-cycle model.
4. Show how trends in the macroenvironment can shape the nature of competition in an industry.
The Market for Large Commercial Jet Aircraft
Just two companies, Boeing and Airbus, have long dominated the market for large commercial jet air- craft. In early 2012, Boeing planes accounted for 50% of the world’s fleet of commercial jet aircraft, and Airbus planes accounted for 31%. The reminder of the global market was split between several smaller players, including Embraer of Brazil and Bombardier of Canada, both of which had a 7% share. The overall market is large and growing. Demand for new aircraft is driven primarily by demand for air travel, which has grown at 5% per annum compounded since 1980. Looking forward, Boeing predicts that between 2011 and 2031 the world economy will grow at 3.2% per annum, and airline traffic will continue to grow at 5% per annum as more and more people from the world’s emerging economies take to the air for business and pleasure trips. Clearly, the scale of future demand creates an enormous profit opportunity for the two main incumbents, Boeing and Airbus. with five producers rather than two in the market, it seems likely that competition will become more intense in the narrow-bodied segment of the industry, which could well drive prices and profits down for the big two incumbent producers.
This case illustrates how two companies, Boeing and Airbus, have dominated the market, the new entrants, and their future in the market. The case also talks about the scale of future demands and the profit opportunities. A class discussion could include the following questions:
· Are the two main incumbents, Boeing and Airbus, set to dominate the market?
· What are the opportunities for the new entrants?
· Suggest more ways in which the new entrants could compete with Boeing and Airbus.
Strategy formulation begins with an analysis of the forces that shape competition within the industry in which a company is based. The goal is to understand the opportunities and threats confronting the firm, and to use this understanding to identify strategies that will enable the company to outperform its rivals. Opportunities arise when a company can take advantage of conditions in its industry environment to formulate and implement strategies that enable it to become more profitable. Threats arise when conditions in the external environment endanger the integrity and profitability of the company’s business.
II. Defining an Industry
An industry can be defined as a group of companies offering products or services that are close substitutes for each other—that is, products or services that satisfy the same basic customer needs. A competitor’s closest competitor’s—its rivals—are those that serve the same basic consumer needs. External analysis begins by identifying the industry within which a company competes. To do this, managers must start by looking at the basic customer needs their company is serving—that is, they must take a customer-oriented view of their business rather than a product-oriented view.
A. Industry and Sector
A distinction can be made between an industry and a sector. A sector is a group of closely related industries. For example, the computer sector comprises several related industries—the computer component industries, the computer hardware industries, and the computer software industry (Figure 2.1).
Figure 2.1: The Computer Sector: Industries and Segments
B. Industry and Market Segments
It is also important to recognize the difference between an industry and the market segments within that industry. Market segments are distinct groups of customers within a market than can be differentiated from each other on the basis of their individual attributes and specific demands.
C. Changing Industry Boundaries
Industry boundaries may change over time as customer needs evolve, or as emerging new technologies enable companies in unrelated industries to satisfy established customer needs in new ways. Industry competitive analysis begins by focusing upon the overall industry in which a firm competes before market segments or sector-level issues are considered.
III. Competitive Forces Model
Once boundaries of an industry have been identified, managers face the task of analyzing competitive forces within the industry environment in order to identify opportunities and threats. Michael E. Porter’s well-known framework, the Five Forces model, helps managers with this analysis. An extension of his model, shown in Figure 2.2, focuses on six forces that shape competition within an industry:
· The risk of entry by potential competitors
· The intensity of rivalry among established companies within an industry
· The bargaining power of buyers
· The bargaining power of suppliers
· The closeness of substitutes to an industry’s products
· The power of complement providers (Porter did not recognize this sixth force)
Figure 2.2: Competitive Forces
As each of these forces grows stronger, it limits the ability of established companies to raise prices and earn greater profits. Within this framework, a strong competitive force can be regarded as a threat because it depresses profits.
A. Risk of Entry by Potential Competitors
Potential competitors are companies that are not currently competing in an industry, but have the capability to do so if they choose. Established companies already operating in an industry often attempt to discourage potential competitors from entering the industry because as more companies enter, it becomes more difficult for established companies to protect their share of the market and generate profits. A high risk of entry by potential competitors represents a threat to the profitability of established companies. If the risk of new entry is low, established companies can take advantage of this opportunity, raise prices, and earn greater returns.
The risk of entry by potential competitors is a function of the height of the barriers to entry, that is, factors that make it costly for companies to enter an industry. The greater the costs potential competitors must bear to enter an industry, the greater the barriers to entry, and the weaker this competitive force. High entry barriers may keep potential competitors out of an industry even when industry profits are high. Important barriers to entry include economies of scale, brand loyalty, absolute cost advantages, customer switching costs, and government regulation.
1. Economies of scale
Economies of scale arise when unit costs fall as a firm expands its output. Sources of economies include:
· Cost reductions gained through mass-producing a standardized output
· Discounts on bulk purchases of raw material inputs and component parts
· The advantages gained by spreading fixed production costs over a large production volume
· The cost savings associated with distributing marketing and advertising costs over a large volume of output
2. Brand Loyalty
Brand loyalty exists when consumers have a preference for the products of established companies. A company can create brand loyalty by continuously advertising its brand-name products and company name, patent protection of its products, product innovation achieved through company research and development programs, an emphasis on high quality products, and exceptional after-sales service. Significant brand loyalty makes it difficult for new entrants to take market share away from established companies.
3. Absolute Cost Advantages
Sometimes established companies have an absolute cost advantage relative to potential entrants, meaning that entrants cannot expect to match the established companies’ lower cost structure. Absolute cost advantages arise from three main sources:
· Superior production operations and processes due to accumulated experience, patents, or trade secrets
· Control of particular inputs required for production, such as labor, materials, equipment, or management skills that are limited in their supply
· Access to cheaper funds because existing companies represent lower risks than new entrants
4. Customer Switching Costs
Switching Costs arise when a customer invests time, energy, and money switching from the products offered by one established company to the products offered by a new entrant. When switching costs are high, customers can be locked in to the product offerings of established companies, even if new entrants offer better products.
5. Government Regulations
Historically, government regulation has constituted a major entry barrier for many industries. The competitive forces model predicts that falling entry barriers due to government deregulation will result in significant new entry, an increase in the intensity of industry competition, and lower industry profit rates.
If established companies have built brand loyalty for their products, have an absolute cost advantage over potential competitors, have significant scale economies, are the beneficiaries of high switching costs, or enjoy regulatory protection, the risk of entry by potential competitors is greatly diminished; it is a weak competitive force. Consequently, established companies can charge higher prices, and industry profits are therefore higher.
2.1 Strategy in Action: Circumventing Entry Barriers into the Soft Drink Industry
The soft drink industry has long been dominated by two companies, Coca-Cola and PepsiCo. Both companies have historically spent large sums of money on advertising and promotion, which has created significant brand loyalty and made it very difficult for prospective new competitors to enter the industry and take market share away from these two giants. When new competitors do try and enter, both companies have shown themselves capable of responding by cutting prices, forcing the new entrant to curtail expansion plans.
However, in the early 1990s the Cott Corporation, then a small Canadian bottling company, worked out a strategy for entering the soft drink market. The company used a deal with RC Cola to enter the cola segment of the soft drink market. Cott next introduced a private label brand for a Canadian retailer. Both of these offerings took share from Coke and Pepsi. Cott then decided to try and convince other retailers to carry private label cola. Cott spent almost nothing on advertising and promotion. These cost savings were passed onto retailers in the form of lower prices. For their part, the retailers found that they could significantly undercut the price of Coke and Pepsi colas, and still make better profit margins on private label brands than on branded colas.
Despite the savings, many retailers were leery of offending Coke and Pepsi and declined to offer a private label. Cott was able to establish a relationship with Walmart as it was entering the grocery market. The “President’s Label” became very popular. Cott soon added other flavors to its offering, such as a lemon lime soda that would compete with Seven Up and Sprite. Moreover, pressured by Walmart, by the late 1990s other U.S. grocers also started to introduce private label sodas, often turning to Cott to supply their needs.
By 2010, Cott had grown to become a $1.8 billion company, capturing over 6% of the U.S. soda market up from almost nothing a decade earlier, and held onto a 15% share of sodas in grocery stores, its core channel. The losers in this process were Coca-Cola and Pepsi Cola, who were now facing the steady erosion of their brand loyalty and market share as consumers increasingly came to recognize the high quality and low price of private label sodas.
As this case illustrates, entry barriers can be effective in discouraging new entrants; however, they can be circumvented. Cott was able to enter a much closed industry through a combination of its own efforts and the changes brought to the industry environment by the advent of Walmart. You can use this case in a classroom discussion to identify entry barriers in other industries. Another approach is to ask students to consider the lessons that other industries might learn from Cott. What did Cott do to lower entry barriers, and how could those tactics be used in another context?
B. Rivalry Among Established Companies
The second competitive force is the intensity of rivalry among established companies within an industry. Rivalry refers to the competitive struggle between companies within an industry to gain market share from each other. Four factors have a major impact on the intensity of rivalry among established companies within an industry:
· Industry competitive structure
· Demand conditions
· Cost conditions
· The height of exit barriers in the industry
1. Industry Competitive Structure
The competitive structure of an industry refers to the number and size distribution of companies in it, something that strategic managers determine at the beginning of an industry analysis. Industry structures vary, and different structures have different implications for the intensity of rivalry. A fragmented industry consists of a large number of small or medium-sized companies. A consolidated industry is dominated by a small number of large companies (an oligopoly) or, in extreme cases, by just one company (a monopoly), and companies often are in a position to determine industry prices.
Low-entry barriers and commodity-type products that are difficult to differentiate characterize many fragmented industries. This combination tends to result in boom-and-bust cycles as industry profits rapidly raise and fall. Low-entry barriers imply that new entrants will flood the market, hoping to profit from the boom that occurs when demand is strong and profits are high. Often the flood of new entrants into a booming, fragmented industry creates excess capacity, and companies start to cut prices in order to use their spare capacity. The difficulty companies face when trying to differentiate their products from those of competitors can exacerbate this tendency. The result is a price war, which depresses industry profits, forces some companies out of business, and deters potential new entrants.
A fragmented industry structure, then, constitutes a threat rather than an opportunity. Economic boom times in fragmented industries are often relatively short-lived because the ease of new entry can soon result in excess capacity, which in turn leads to intense price competition and the failure of less efficient enterprises.
In consolidated industries, companies are interdependent because one company’s competitive actions (changes in price, quality, etc.) directly affect the market share of its rivals, and thus their profitability. When one company makes a move, this generally “forces” a response from its rivals, and the consequence of such competitive interdependence can be a dangerous competitive spiral.
Companies in consolidated industries sometimes seek to reduce this threat by following the prices set by the dominant company in the industry. However, companies must be careful, for explicit face-to-face price-fixing agreements are illegal.
2.2 Strategy in Action: Price Wars in the Breakfast Cereal Industry
The breakfast cereal industry in the U.S. was one of the most profitable and desirable competitive environments, with steadily rising demand, brand loyalty, and close relationships with buyers (grocery retailers). Best of all, the industry was dominated by just three competitors, Kellogg’s, General Mills, and Kraft Foods. Kellogg’s, controlled 40% of the market share and was a price leader. It raised prices a bit each year, and the smaller companies followed suit. Then the industry structure changed. Huge discounters began to promote cheaper private brands and bagels or muffins replaced cereal as the preferred breakfast food. Under pressure, the big manufacturers began a price war, ending the tacit price collusion that had kept the industry stable and profitable. Although profit margins were slashed in half, the big three continued to lose market share to private brands. What was once a desirable industry is now exactly like most others—competitive, unstable, and far less profitable.
This case illustrates the sad outcomes that result when industry competitors react to increased pressure by breaking off tacit price collusion. You should be sure to emphasize to students the difference between tacit price collusion, which is indirect and therefore legal, and price fixing, which is overt and therefore illegal. The message here is that a well-run industry, with sustained high profitability and stability for all competitors, fell victim to powerful external forces. An interesting discussion question would be to ask students, “Is there any action the big three competitors can take now to undo the damage and recover their profitability?” If students suggest any action that they believe will restore the situation, ask them how the other competitors would be likely to react. For example, if students suggest a one-sided price increase, ask them if competitors would be likely to follow suit. Students may be surprised to realize how difficult it is to “put the genie back in the bottle”; once trust is destroyed, an industry may never be able to recreate stability and prosperity.
2. Industry Demand
The level of industry demand is another determinant of the intensity of rivalry among established companies. Growing demand tends to reduce rivalry because all companies can sell more without taking market share away from other companies. Demand declines when customers exit the marketplace, or when each customer purchases less.
3. Cost Conditions
The cost structure of firms in an industry is a third determinant of rivalry. In industries where fixed costs are high, profitability tends to be highly leveraged to sales volume, and the desire to grow volume can spark intense rivalry. In situations where demand is not growing fast enough and too many companies are simultaneously engaged in the same actions, the result can be intense rivalry and lower profits.
4. Exit Barriers
Exit Barriers are economic, strategic, and emotional factors that prevent companies from leaving an industry. If exit barriers are high, companies become locked into an unprofitable industry where overall demand is static or declining. The result is often excess productive capacity, leading to even more intense rivalry and price competition as companies cut prices attempting to obtain the customer orders needed to use their idle capacity and cover their fixed costs. Common exit barriers include the following:
· Investments in assets such as specific machines, equipment, or operating facilities that are of little or no value in alternative uses, or cannot be later sold.
· High fixed costs of exit, such as severance pay, health benefits, or pensions that must be paid to workers who are being made laid off when a company ceases to operate.
· Emotional attachments to an industry, such as when a company’s owners or employees are unwilling to exit from an industry for sentimental reasons or because of pride.
· Economic dependence on the industry because a company relies on a single industry for its entire revenue and all profits.
· The need to maintain an expensive collection of assets at or above a minimum level in order to participate effectively in the industry.
· Bankruptcy regulations, particularly in the United States, where bankruptcy provisions allow insolvent enterprises to continue operating and to reorganize under this protection. These regulations can keep unprofitable assets in the industry, result in persistent excess capacity, and lengthen the time required to bring industry supply in line with demand.
C. The Bargaining Power of Buyers
The third competitive force is the bargaining power of buyers. An industry’s buyers may be the individual customers who consume its products (end-users) or the companies that distribute an industry’s products to end-users, such as retailers and wholesalers. The bargaining power of buyers refers to the ability of buyers to bargain down prices charged by companies in the industry, or to raise the costs of companies in the industry by demanding better product quality and service. Powerful buyers, therefore, should be viewed as a threat. Buyers are most powerful in the following circumstances:
· When the buyers have choice of who to buy from.
· When the buyers purchase in large quantities. In such circumstances, buyers can use their purchasing power as leverage to bargain for price reductions.
· When the supply industry depends upon buyers for a large percentage of its total orders.
· When switching costs are low and buyers can pit the supplying companies against each other to force down prices.
· When it is economically feasible for buyers to purchase an input from several companies at once so that buyers can pit one company in the industry against another.
· When buyers can threaten to enter the industry and independently produce the product, thus supplying their own needs, also a tactic for forcing down industry prices.
D. The Bargaining Power of Suppliers
The fourth competitive force is the bargaining power of suppliers—the organizations that provide inputs into the industry, such as materials, services, and labor (which may be individuals, organizations such as labor unions, or companies that supply contract labor). The bargaining power of suppliers refers to the ability of suppliers to raise input prices, or to raise the costs of the industry in other ways—for example, by providing poor-quality inputs or poor service. Powerful suppliers squeeze profits out of an industry by raising the costs of companies in the industry. Thus, powerful suppliers are a threat. As with buyers, the ability of suppliers to make demands on a company depends on their power relative to that of the company. Suppliers are most powerful in these situations:
· The product that suppliers sell has few substitutes and is vital to the companies in an industry.
· The profitability of suppliers is not significantly affected by the purchases of companies in a particular industry, in other words, when the industry is not an important customer to the supplier.
· Companies in an industry would experience significant switching costs if they moved to the product of a different supplier because a particular supplier’s products are unique or different.
· Suppliers can threaten to enter their customers’ industry and use their inputs to produce products that would compete directly with those of companies already in the industry.
· Companies in the industry cannot threaten to enter their suppliers’ industry and make their own inputs as a tactic for lowering the price of inputs.
Focus On: Wal-Mart
Wal-Mart’s Bargaining Power over Suppliers
When Wal-Mart and other discount retailers began in the 1960s, they were small operations with little purchasing power. The cost savings generated by not having to pay profits to wholesalers were passed on to consumers in the form of lower prices, which helped Wal-Mart continue growing. Because 8% of all retail sales in the United States are made in a Wal-Mart store, the company has enormous bargaining power over its suppliers. Suppliers of nationally branded products, such as P&G, are no longer in a position to demand high prices. Instead, Wal-Mart is now so important to P&G that it is able to demand deep discounts from P&G. Since the early 1990s, Wal-Mart has provided suppliers with real-time information on store sales through the use of individual stock-keeping units (SKUs). These have allowed suppliers to optimize their own production processes, matching output to Wal-Mart’s demands and avoiding under- or overproduction and the need to store inventory. The efficiencies that manufacturers gain from such information are passed on to Wal-Mart in the form of lower prices, which then passes on those cost savings to consumers.
This case describes the bargaining power of Wal-Mart over its suppliers. It provides a good opportunity to quiz the students on the pros and cons of having a bargaining power over an organization’s suppliers.
E. Substitute Products
The final force in Porter’s model is the threat of substitute products—the products of different businesses or industries that can satisfy similar customer needs. The existence of close substitutes is a strong competitive threat because this limits the price that companies in one industry can charge for their product, which also limits industry profitability.
Complementors are companies that sell products that add value to (complement) the products of companies in an industry because, when used together, the use of the combined products better satisfies customer demands When the number of complementors is increasing and producing attractive complementary products, demand increases and profits in the industry can broaden opportunities for creating value. Conversely, if complementors are weak, and are not producing attractive complementary products, they can become a threat, slowing industry growth and limiting profitability. It’s also possible for complementors to gain so much power that they are able to extract profit out of the industry they are providing complements to. Complementors this strong can be a competitive threat.
G. Summary: Why Industry Analysis Matters
The analysis of forces in the industry environment using the competitive forces framework is a powerful tool that helps managers to think strategically. It is important to recognize that one competitive force often affects others, and all forces need to be considered when performing industry analysis. Industry analysis inevitably leads managers to think systematically about strategic choices. An analysis of industry opportunities and threats leads directly to a change in strategy by companies within the industry. This is the crucial point—analyzing the industry environment in order to identify opportunities and threats leads logically to a discussion of what strategies should be adopted to exploit opportunities and counter threats.
IV. Strategic Groups within Industries
Companies in an industry often differ significantly from one another with regard to the way they strategically position their products in the market. Factors such as the distribution channels they use, the market segments they serve, the quality of their products, technological leadership, customer service, pricing policy, advertising policy, and promotions affect product position.
Figure 2.3: Strategic Groups in the Commercial Aerospace Industry
Normally, the basic differences between the strategies that companies in different strategic groups use can be captured by a relatively small number of factors.
A. Implications of Strategic Groups
The concept of strategic groups has a number of implications for the identification of opportunities and threats within an industry:
· Because all companies in a strategic group are pursuing a similar strategy, customers tend to view the products of such enterprises as direct substitutes for each other. Thus, a company’s closest competitors are those in its strategic group.
· Different strategic groups can have different relationships to each of the competitive forces; thus, each strategic group may face a difference set of opportunities and threats.
B. The Role of Mobility Barriers
Some strategic groups are more desirable than others because competitive forces open up greater opportunities and present fewer threats for those groups. Managers, after analyzing their industry, might identify a strategic group where competitive forces are weaker and higher profits can be made. Sensing an opportunity, they might contemplate changing their strategy and move to compete in that strategic group. However, taking advantage of this opportunity may be difficult because of mobility barriers between strategic groups.
Mobility barriers are within-industry factors that inhibit movement of companies between strategic groups. They include the barriers to entry into a group and the barriers to exit from a company’s existing group. Managers should be aware that companies based in another strategic group within their industry might ultimately become their direct competitors if they can overcome mobility barriers.
V. Industry Life-Cycle Analysis
Changes that take place in an industry over time are an important determinant of the strength of the competitive forces in the industry( and of the nature of opportunities and threats). The similarities and differences between companies in an industry often become more pronounced over time, and its strategic group structure frequently changes. The strength and nature of each of the competitive forces also change as an industry evolves, particularly the two forces of risk of entry by potential competitors and rivalry among existing firms.
A useful tool for analyzing the effects that industry evolution has on competitive forces is the industry life-cycle model. This model identifies five sequential stages in the evolution of an industry that lead to five distinct kinds of industry environment—embryonic, growth, shakeout, mature, and decline (Figure 2.4).
Figure 2.4: Stages in the Industry Life Cycle
A. Embryonic Industries
An embryonic industry refers to an industry just beginning to develop. Growth at this stage is slow because of factors such as buyers’ unfamiliarity with the industry’s product, high prices due to the inability of companies to reap any significant scale economies, and poorly developed distribution channels. Barriers to entry tend to be based on access to key technological knowhow, rather than cost economies or brand loyalty. Rivalry in embryonic industries is based not so much on price as on educating customers, opening up distribution channels, and perfecting the design of the product.
B. Growth Industries
Once demand for the industry’s product begins to increase, the industry develops the characteristics of a growth industry. In a growth industry, first-time demand is expanding rapidly as many new customers enter the market. Typically, an industry grows when customers become familiar with the product, prices fall because scale economies have been attained, and distribution channels develop.
High growth usually means that new entrants can be absorbed into an industry without a marked increase in the intensity of rivalry. Thus, rivalry tends to be relatively low. Rapid growth in demand enables companies to expand their revenues and profits without taking market share away from competitors.
C. Industry Shakeout
Explosive growth cannot be maintained indefinitely. Sooner or later, the rate of growth slows, and the industry enters the shakeout stage. In the shakeout stage, demand approaches saturation levels—more and more of the demand is limited to replacement because fewer potential first-time buyers remain.
As an industry enters the shakeout stage, rivalry between companies can become intense. Typically, companies that have become accustomed to rapid growth continue to add capacity at rates consistent with past growth. However, demand is no longer growing at historic rates, and the consequence is the emergence of excess productive capacity. This condition is illustrated in Figure 2.5, where the solid curve indicates the growth in demand over time and the broken curve indicates the growth in productive capacity over time.
Figure 2.5: Growth in Demand and Capacity
D. Mature Industries
The shakeout stage ends when the industry enters its mature stage—the market is totally saturated, demand is limited to replacement demand, growth is low or zero. Typically, the growth that remains comes from population expansion, bringing new customers into the market or increasing replacement demand. As an industry enters maturity, barriers to entry increase, and the threat of entry from potential competitors decreases. As growth slows during the shakeout, companies can no longer maintain historic growth rates merely by holding on to their market share. As a result of the shakeout, most industries in the maturity stage consolidate and become oligopolies. In mature industries, companies tend to recognize their interdependence and try to avoid price wars.
E. Declining Industries
Eventually, most industries enter a stage of decline—growth becomes negative for a variety of reasons, including technological substitution, social changes, demographics, and international competition. Within a declining industry, the degree of rivalry among established companies usually increases. Depending on the speed of the decline and the height of exit barriers, competitive pressures can become as fierce as in the shakeout stage.
A third task of industry analysis is to identify the opportunities and threats that are characteristic of different kinds of industry environments in order to develop effective strategies. Managers have to tailor their strategies to changing industry conditions.
VI. Limitations of Models for Industry Analysis
The competitive forces, strategic groups, and life-cycle models provide useful ways of thinking about and analyzing the nature of competition within an industry to identify opportunities and threats. However, each has its limitations, and managers must be aware of their shortcomings.
A. Life-Cycle Issues
It is important to remember that the industry life-cycle model is a generalization. In practice, industry life-cycles do not always follow the pattern illustrated in Figure 2.4. In some cases, growth is so rapid that the embryonic stage is skipped altogether. In others, industries fail to get past the embryonic stage. Industry growth can be revitalized after long periods of decline through innovation or social change.
The time span of these stages can also vary significantly from industry to industry. Some industries can stay in maturity almost indefinitely if their products are viewed as basic necessities, as is the case for the car industry. Other industries skip the mature stage and go straight into decline, as in the case of the vacuum tube industry.
B. Innovation and Change
Over any reasonable length of time, in many industries competition can be viewed as a process driven by innovation. Innovation is frequently the major factor in industry evolution and causes a company’s movement through the industry life-cycle. Innovation is attractive because companies that pioneer new products, processes, or strategies can often earn enormous profits.
Successful innovation can transform the nature of industry competition. In recent decades, one frequent consequence of innovation has been to lower the fixed costs of production, thereby reducing barriers to entry and allowing new, and smaller, enterprises to compete with large established organizations.
Michael Porter, talks of innovations as “unfreezing” and “reshaping” industry structure. He argues that after a period of turbulence triggered by innovation, the structure of an industry once more settles down into a fairly stable pattern, and the five forces and strategic group concepts can once more be applied. This view of the evolution of industry structure is often referred to as “punctuated equilibrium.” The punctuated equilibrium view holds that long periods of equilibrium (refreezing), when an industry’s structure is stable, are punctuated by periods of rapid change (unfreezing), when industry structure is revolutionized by innovation.
Figure 2.6 shows what punctuated equilibrium might look like for one key dimension of industry structure: competitive structure. During a period of rapid change when industry structure is being revolutionized by innovation, value typically migrates to business models based on new positioning strategies.
Figure 2.6: Punctuated Equilibrium and Competitive Structure
C. Company Differences
Another criticism of industry models is that they overemphasize the importance of industry structure as a determinant of company performance, and underemphasize the importance of variations or differences among companies within an industry or a strategic group. Research by Richard Rumelt and his associates, for example, suggests that industry structure explains only about 10% of the variance in profit rates across companies. This implies that individual company differences explain much of the remainder. Other studies have estimated the explained variance at about 20%, which is still not a large figure. These studies suggest that a company’s individual resources and capabilities may be more important determinants of its profitability than the industry or strategic group of which the company is a member.
Although the findings do not invalidate the competitive forces and strategic group models, they do imply that the models are imperfect predictors of enterprise profitability. A company will not be profitable just because it is based in an attractive industry or strategic group.
VII. The Macroenvironment
Just as the decisions and actions of strategic managers can often change an industry’s competitive structure, so too can changing conditions or forces in the wider macroenvironment , that is, the broader economic, technological, demographic, social, and political context in which companies and industries is embedded (Figure 2.7). Changes in the forces within the macroenvironment can have a direct impact on any or all of the forces in Porter’s model, thereby altering the relative strength of these forces as well as the attractiveness of an industry.
Figure 2.7: The Role of the Macroenvironment
A. Macroeconomic Forces
The four most important macroeconomic forces are the growth rate of the economy, interest rates, currency exchange rates, and inflation (or deflation) rates.
· Economic growth, because it leads to an expansion in customer expenditures, tends to ease competitive pressures within an industry. This gives companies the opportunity to expand their operations and earn higher profits.
· Interest rates can determine the demand for a company’s products. Interest rates are important whenever customers routinely borrow money to finance their purchase of these products.
· Currency exchange rates define the comparative value of different national currencies. Movement in currency exchange rates has a direct impact on the competitiveness of a company’s products in the global marketplace.
· Price inflation can destabilize the economy, producing slower economic growth, higher interest rates, and volatile currency movements. If inflation continues to increase, investment planning will become hazardous.
o Price deflation also has a destabilizing effect on economic activity. If prices fall, the real price of fixed payments goes up. This is damaging for companies and individuals with a high level of debt who must make regular fixed payments on that debt. In a deflationary environment, the increase in the real value of debt consumes more household and corporate cash flows, leaving less for other purchases and depressing the overall level of economic activity.
B. Global Forces
Over the last half-century there have been enormous changes in the world’s economic system. The important points to note are that barriers to international trade and investment have tumbled, and more and more countries have enjoyed sustained economic growth. Falling barriers to international trade and investment have made it much easier to enter foreign nations. By the same token, however, falling barriers to international trade and investment have made it easier for foreign enterprises to enter the domestic markets of many companies (by lowering barriers to entry), thereby increasing the intensity of competition and lowering profitability. Because of these changes, many formerly isolated domestic markets have now become part of a much larger, more competitive global marketplace, creating both threats and opportunities for companies.
C. Technological Forces
Over the last few decades the pace of technological change has accelerated.. This has unleashed a process that has been called a “perennial gale of creative destruction.” Technological change can make established products obsolete overnight, and simultaneously create a host of new product possibilities. Thus technological change is both creative and destructive—both an opportunity and a threat. The impacts of technological change can affect the height of barriers to entry and therefore radically reshape industry structure.
D. Demographic Forces
Demographic forces are outcomes of changes in the characteristics of a population, such as age, gender, ethnic origin, race, sexual orientation, and social class. Like the other forces in the general environment, demographic forces present managers with opportunities and threats and can have major implications for organizations.
E. Social Forces
Social forces refer to the way in which changing social mores and values affect an industry. Like the other macroenvironmental factors, social change creates opportunities and threats.
F. Political and Legal Forces
Political and legal forces are outcomes of changes in laws and regulations, and significantly affect managers and companies. Political processes shape a society’s laws, which constrain the operations of organizations and managers and thus create both opportunities and threats.
Teaching Note: Ethical Dilemma
While discussion could enter into whether or not moral objections should influence analysis and recommendations, the real question should focus on whether or not casinos will be a complement to the industry. Will casinos bring value to the customers? Will casinos generate demand for the hotel industry?
Answers to Discussion Questions
1. Under what environmental conditions are price wars most likely to occur in an industry? What are the implications of price wars for a company? How should a company try to deal with the threat of a price war?
Price wars are most likely to occur when the following conditions are present in an industry:
· The product is a commodity
· Exit barriers are substantial
· Excess capacity exists
· The industry is consolidated
· Demand is declining
A price war constitutes a strong threat. It is difficult for companies that market commodity-type products to build brand loyalty; therefore, competition tends to focus on price. High exit barriers make it hard for companies to eliminate excess capacity through plant closings. In turn, the persistence of excess capacity leads to price cuts, as companies strive to generate enough demand to utilize their ideal capacity and cover fixed costs. In a consolidated industry, interdependence implies that one company’s price cuts will elicit a response from its rivals, producing a downward spiral of prices. And it is declining demand that produces excess capacity and sparks off a price war in the first place. If all these conditions are present a severe price war is likely.
Survival depends on a company’s ability to reduce operating costs and build brand loyalty so that it can retain its customers and still make profits when those of its competitors have dried up. Furthermore, the risk of a damaging price war can be reduced if the company can successfully enter into tacit price agreements with its competitors and if it can stress nonprice factors when competing. As demand declines, however, tacit price agreements can be difficult to maintain. Finally, if excess capacity is the major reason for a price war, capacity reduction agreements between competitors, or mergers between competitors followed by the elimination of excess capacity, may be suitable strategies for attacking this problem.
2. Discuss the competitive forces model with reference to what you know about the global market for commercial jet aircraft (see the Opening Case). What does the model tell you about the level of competition in this industry?
Recent high profitability and an enormous surge in demand for new aircraft is driven primarily by demand for air travel worldwide and there is room for new entrants. Barriers to entry is that Embraer and Bombardier are focused primarily on regional market, and the market for aircraft with more than 100 seats has been totally dominated by Boeing and Airbus.
Rivalry among established companies:
Rivalry between Boeing, Airbus and the three new entrants is minimal. All three are building narrow-bodied jets with a seat capacity between 100 and 190. Boeing’s 737 and the Airbus A320 currently dominate the narrow-bodied segment. The Commercial Aircraft Corporation of China (Comac) is building a 170- to 190-seat narrow-bodied jet, scheduled for introduction in 2016.
Bargaining power of buyers:
Consumers have little power in the large commercial jet aircraft industry. However, when substitutes are available they are able bargain down prices as was done historically in the industry.
Bargaining power of suppliers:
Suppliers in the large commercial jet aircraft have little power. Suppliers are also threatened by potential and existing substitutes.
3. Identify a growth industry, a mature industry, and a declining industry. For each industry, identify the following: (a) the number and size distribution of companies; (b) the nature of barriers to entry; (c) the height of barriers to entry; and (d) the extent of product differentiation. What do these factors tell you about the nature of competition in each industry? What are the implications for the company in terms of opportunities and threats?
Students’ answers will vary depending on the companies they select. For example, growth industries might include the personal computer industry, the computer software industry, and the nursing home industry. Mature industries include the auto industry, the airline industry, and the beer industry. Declining industries include the tobacco industry, the sugar industry, and the steel industry.
Growth industries tend to have many firms and are relatively fragmented. Barriers to entry may center on access to technological know-how, but overall, are low. Product differentiation also tends to be relatively low. Mature and declining industries have fewer firms and are more consolidated than growth industries. In addition, they have much higher barriers to entry, in the form of cost economies and brand loyalties. Product differentiation in mature and declining industries becomes much greater as an industry approaches maturity.
These changes reveal that the nature of competition in an industry also changes as the industry moves from growth through maturity and into decline. Specifically, a growth industry is characterized by relatively benign competitive pressures. Mature industries are characterized by an emphasis on nonprice competition as a means of avoiding damaging price wars, although price wars may break out from time to time. Competition in a declining industry depends on the speed of decline and the height of exit barriers. The faster the decline and the higher the exit barriers, the more intense is the competition within a declining industry.
4. Assess the impact of macroenvironmental factors on the likely level of enrollment at your university over the next decade. What are the implications of these factors for the job security and salary level of your professors?
The most significant macroenvironmental factor on the likely level of enrollment at an university is to be found in the demographic environment. In the 1980s and early 1990s, many universities experienced a decline in enrollments due to the declining birthrate in the 1960s and 1970s. Starting in the late 1990s, however, enrollments had risen as a result of the “baby boomlet” that occurred when the children of the Baby Boomers entered their late teen years. Rising enrollments led to increased demand for higher education. Universities are now able to increase their admission standards and smaller, regional schools are absorbing some of the excess demand. In addition, the economic downturn has led to an increase in older students returning to school for degrees, especially in business and other professions. On the negative side, legislative spending is lower, because state tax revenues are less. Universities are thus stuck in the position of trying to increase offerings while also reducing costs. Many colleges are responding by hiring more faculty but paying less, which they can accomplish by increasing the number of temporary, adjunct, or graduate student faculty members.
Practicing Strategic Management
Small-Group Exercise: Competing With Microsoft
The students are asked to break into groups of three to five people, and discuss the following scenario. They are asked to appoint one group member as a spokesperson who will communicate their findings to the class.
You are a group of managers and software engineers at a small start-up. You have developed a revolutionary new operating system for personal computers that offers distinct advantages over Microsoft’s Windows operating system: it takes up less memory space on the hard drive of a personal computer; it takes full advantage of the power of the personal computer’s microprocessor, and in theory can run software applications much faster than Windows; it is much easier to install and use than Windows; and it responds to voice instructions with an accuracy of 99.9%, in addition to input from a keyboard or mouse. The operating system is the only product offering that your company has produced.
They are then asked to complete the following exercise:
1. Analyze the competitive structure of the market for personal computer operating systems. On the basis of this analysis, identify what factors might inhibit adoption of your operating system by customers.
2. Can you think of a strategy that your company might pursue, either alone or in conjunction with other enterprises, in order to “beat Microsoft”? What will it take to execute that strategy successfully?
This case will serve as a powerful illustration to students that even the best product will not succeed in a severely hostile environment. Although some of the five forces are favorable in this case—low power of buyers and lack of substitutes—others are extremely negative, such as the very high barriers to entry and the intense rivalry. However, the most important factor is the lack of complementors. Students will discover that, even though the innovative operating system is superior to Microsoft’s Windows, without complementing software (e.g. word processing, spreadsheet, etc.), the new operating system will have no chance to succeed. Software developers will have no incentive to write for this new operating system, and without sufficient software, the product will fail to gain a foothold in the industry.
Thus, the strategic goal of the start-up should be to create an as large as possible installed base of computers using its operating system. The start-up can either decide to give the operating system away for free or sell it for a nominal fee to original equipment manufacturers like Compaq in the hope that software developers will start writing software for this new operating system. On the other hand, given that Microsoft has all the necessary complementary assets in house, it might be wiser for the start-up to cooperate with Microsoft.
Strategy Sign On
Article File 2
Students should find an example of an industry that has become more competitive in recent years. They should identify the reasons for the increase in competitive pressure.
Completion of this exercise will help students to see that the intensity of competition is increasing in most industries. They should have no trouble identifying industries with increasing competition.
Reasons for the increased competition are many. First, many of the factors mentioned in Porter’s model are changing across many industries in ways that will increase competition. For example, the U.S. and many other national governments are reducing industry regulation, lowering barriers to entry and opening up industries that were formerly monopolistic to competition. International regulation is also decreasing, raising competitive intensity for multinational firms. Another change is the consolidation that resulted from the merger-and-acquisition fever of the 1980s and 1990s. Higher consolidation has led to increased competition. Higher consolidation in the buyer and supplier industries, such as the increased power of giant discount retailers, has also put competitive pressure on many firms. Second, industries, especially in developing countries, are starting to mature, which tends to increase competitive intensity.
Strategic Management Project: Module 2
This module requires students to analyze the industry environment in which their companies are based using the information they have already gathered.
Because this is the first module of the strategic management project that requires the gathering of a great deal of information, you should ensure that students are able to access sufficient data to perform a detailed analysis of their firm’s external opportunities and threats.
Students may tend to rush through this section of the strategic management project because it appears to be a fairly mechanical exercise in information gathering. However, students should be encouraged to do a thorough and careful job in this section for three reasons. First, this analysis, along with the analysis of strengths and weaknesses that will be performed in Chapter 3, serves as the foundation for all of the remaining sections of the project. A poor job in this section will make it very difficult to do well in future assignments. Second, a hurried project may not aid students in understanding the concepts of the chapter in detail. For example, there are five major components to Porter’s model, and each consists of several sub-components, each of which must be analyzed individually in order to provide an accurate overall assessment. Third, you can point out to students that this section is not merely a mechanical exercise, but also involves higher-level analytical skills. The students must gather data, and they must interpret that data. In particular, deciding whether a specific fact conveys more of a threat or more of an opportunity can be challenging and requires some careful thought. What threatens one industry may benefit another. For example, the aging population has constituted a threat for baby food manufacturers, but it has proven to be a boon for the home nursing care industry.
It is also important in this section that students use as many different analytical tools as possible, including Porter’s five forces and complementors, strategic groups, and macroenvironmental analysis. You should emphasize to students that each of these tools provides a different type of insight such as the dynamics of the industry, stage of the life cycle in the industry, global expansion initiatives, and national context to a firm’s managers, and that use of every available tool will provide the most well-rounded and realistic picture of the industry.
The United States Airline Industry
The U.S. airline industry has long struggled to make a profit. Analysts point to a number of factors that have made the industry a difficult place in which to do business. Over the years, larger carriers such as United, Delta, and American have been hurt by low-cost budget carriers entering the industry, including Southwest Airlines, Jet Blue, AirTran Airways, and Virgin America. These new entrants have used nonunion labor, often fly just one type of aircraft (which reduces maintenance costs), have focused on the most lucrative routes, typically fly point-to-point (unlike the incumbents, which have historically routed passengers through hubs), and compete by offering very low fares. New entrants have helped to create a situation of excess capacity in the industry, and have taken share from the incumbent air- lines, which often have a much higher cost structure (primarily due to higher labor costs). The incumbents have had little choice but to respond to fare cuts, and the result has been a protracted industry price war. To complicate matters, the rise of Internet travel sites such as Expedia, Travelocity, and Orbitz has made it much easier for consumers to comparison shop, and has helped to keep fares low.
Beginning in 2001, higher oil prices also complicated matters. Fuel costs accounted for 32% of total revenues in 2011 (labor costs accounted for 26%; together they are the two biggest variable expense items). Many airlines went bankrupt in the 2000s, including Delta, Northwest, United, and US Airways. The larger airlines continued to fly, however, as they reorganized under Chapter 11 bankruptcy laws, and excess capacity persisted in the industry.
The late 2000s and early 2010s were characterized by a wave of mergers in the industry. In 2008, Delta and Northwest merged. In 2010, United and Continental merged, and Southwest Airlines announced plans to acquire AirTran. In late 2012, American Airlines put itself under Chapter 11 bankruptcy protection. US Airways subsequently pushed for a merger agreement with American Airlines, which was under negotiation in early 2013.
This case introduces many of the themes of Chapter 2, including the impact that competitive forces have on industry behavior and profitability, concepts about market segmentation and strategic groups, and the changing nature of competition over an industry’s life cycle. One of the most important lessons of this chapter and this case, and one that may be somewhat surprising to students, is the very strong influence that external environments can have on firm performance. Much of what is discussed in the popular business literature focuses on the achievements or shortcomings of individual managers and other forces internal to the firm. But it is worthwhile to remind students that external forces can have just as much impact and can even cause the demise of industries with competent managers.
Answers to Case Discussion Questions
1. Conduct a competitive forces analysis of the U.S. airline industry. What does this analysis tell you about the causes of low profitability in this industry?
Students’ answers may vary. However, some of them may include the following points:
· Potential competitors:
Recent high profitability and an enormous surge in demand for new aircraft is driven primarily by demand for air travel.
· Rivalry among established companies:
The rivalry in U.S airline industry is heavy. Over the years, larger carriers such as United, Delta, and American have been hurt by low-cost budget carriers entering the industry, including Southwest Air- lines, Jet Blue, AirTran Airways, and Virgin America. These new entrants have used nonunion labor, often fly just one type of aircraft (which reduces maintenance costs), have focused on the most lucrative routes, typically fly point-to-point (unlike the incumbents, which have historically routed passengers through hubs), and compete by offering very low fares. The incumbents have had little choice but to respond to fare cuts, and the result has been a protracted industry price war.
· Bargaining power of buyers:
Consumers have little power in the U.S airline industry. However, when substitutes are available they are able to bargain down prices as was done historically in the industry.
· Bargaining power of suppliers:
Suppliers in the U.S airline industry have little power. Suppliers are also threatened by potential and existing competitors.
2. Do you think there are any strategic groups in the U.S. airline industry? If so, what might they be? How might the nature of competition vary from group to group?
Students answer will vary. While answering this question, they should keep in mind that within most industries, it is possible to observe groups of companies in which each company follows a strategy that is similar to that pursued by other companies in the group, but different from the strategy pursued by companies in other groups. These different groups of companies are known as strategic groups.
3. The economic performance of the airline industry seems to be very cyclical. Why do you think this is the case?
Students’ answers may vary. Some of them may point out the fact that the 2000s have not been kinder to the industry. The airline industry lost $35 billion between 2001 and 2006. It managed to earn meager profits in 2006 and 2007, but lost $24 billion in 2008 as oil and jet fuel prices surged throughout the year. In 2009, the industry lost $4.7 billion as a sharp drop in business travelers—a consequence of the deep recession that followed the global financial crisis—more than offset the beneficial effects of falling oil prices. The industry returned to profitability in 2010–2012, and in 2012 it managed to make $13 billion in net profit on revenues of $140.5 billion. The reason behind this cyclical economic performance is associated with the deep recession in the late 2000s followed by the global financial crisis.
4. Given your analysis, what strategies do you think an airline should adopt in order to improve its chances of being persistently profitable?
Students’ answer will vary. Some of them may say that an airline should try to keep its prices reasonable for all its customers. When the airline is anticipating a price hike, it should give at least 30 days prior notice to the customers. This way, the customers will be prepared for it. The airline could introduce programs, such as frequent flier miles, gift coupons, etc., that reward customer loyalty.
Basic Marketing Research, 8th Edition solutions manual and test bank by Tom J. Brown | Tracy A. Suter | Gilbert A. Churchill
Basic Marketing Research, 8th Edition solutions manual and test bank by Tom J. Brown | Tracy A. Suter | Gilbert A. Churchill
Chapter 2 – The Research Process and Ethical Concerns
I. Learning Objectives:
Upon completing this chapter, the student should be able to:
1. Outline the marketing research process.
There are four general stages in the marketing research process:
a. Problem definition
b. Data collection
Data sources include:
1. Existing data from internal sources
2. Existing data from external sources
3. Primary (i.e., new) data from individuals
c. Data analysis
d. Information reporting
2. Describe the general approaches to marketing research.
There are two general approaches to marketing research:
a. The collection of data to address specific problems (e.g., the flashlight analogy, a great deal of light is directed at a specific point)
b. The development of decision support systems that provide marketing intelligence on an ongoing basis (e.g., the candle analogy, a steady glow of light that illuminates broadly, not at any particular point)
3. Cite the most critical error in marketing research.
Total error is more critical than any error, regardless of size, that might occur at any given stage.
4. Highlight the main difference between the utility, justice, and rights approaches to ethical reasoning.
§ Utility approach – focuses on society as the unit of analysis and stresses the consequences of an act on all those directly or indirectly affects. If benefits > costs, the act is ethical; if benefits < costs, the act is unethical.
§ Justice approach – focuses on the equitably distributed costs and benefits. If societal consensus is fair distribution, the act is ethical.
§ Rights approach – focuses on the individual as the unit of analysis and stresses the consequences of an act on a person’s basic rights. An act is unethical if an individual’s basic rights are violated.
5. Describe types of research that should be avoided.
§ Unethical research – examples include sugging and advocacy research
§ Research to support a decision that has already been made
§ Research for which adequate resources are unavailable
§ Research in which costs > benefits
II. Chapter Outline:
A. The Marketing Research Process
Exhibit 2.1: The Marketing Research Process
Exhibit 2.2: Questions Typically Addressed at the Various Stages of the Research Process
1. Problem Definition (Chapters 3 and 4)
2. Data Collection: Existing Data (Chapters 5 through 7)
3. Data Collection: Primary Data (Chapters 8 through 15)
4. Data Analysis (Chapters 16 through 18)
5. Information Reporting (Chapters 19 and 20)
6. The Goal: Minimize Total Error
B. Marketing Research Ethics
Exhibit 2.3: Questionable Ethical Decision Making in Marketing Research
Research Window 2.1: The Code of Marketing Research Standards (Marketing Research Association, Inc.)
C. Three Methods of Ethical Reasoning
Exhibit 2.4: Applying the Ethical Frameworks in Practice
Exhibit 2.5: An Analytical Approach to Ethical Problems
Exhibit 2.6: Practical Guidelines for Ethical Analysis
D. Research to Avoid
F. Key Terms
G. Review Questions
H. Discussion Questions, Problems, and Projects
III. Answers to Discussion Questions, Problems and Projects:
1. The primary advantage of using the research process lies in the structure that it imposes on research projects. Consideration of each step in the process at the beginning of the project focuses attention on the project as a whole and eliminates the "scatter‑shot" approach to designing and completing a project.
Use of the process model will tend to eliminate unnecessary work (e.g., the collection of primary data when adequate secondary sources exist) and illuminate necessary considerations such as tailoring the data‑collection instrument and sampling procedure to the anticipated method of statistical analysis.
The structured process provides a valuable framework for evaluating the effect of each phase of the project on the total error associated with the completed project.
2. In this situation we find that data are being gathered unsystematically and inaccurately. The following points should be raised.
· The questionnaires were distributed on short flights when in fact the company's target market consisted of passengers on long flights since business people are more likely to work on longer flights than shorter ones.
· The survey was done prior to the Christmas vacation. As a result, this sample would include a number of vacationers and fewer business people, which is undesirable when the latter comprise the target segment.
· Placing the flight attendants in charge of 'x' number of questionnaires could lead to inadequate performance at their normal jobs. More important to the research is the possibility that employees might fill in the questionnaires themselves or force the questionnaires on the passengers in order to meet their quotas. In sum, the plan provides little in the way of sampling control as to which respondents receive questionnaires.
· Including information apart from the major issue of the seating arrangement detracts from the main issue. This could lead to respondent fatigue and inaccurate responses.
· Spending 20 minutes filling in a questionnaire on a flight lasting less than an hour may lead to incomplete and careless responses.
· The research was a one‑shot study and was not repeated.
All the above issues would result in the data being inaccurate and inadequate. A major decision of whether to renovate or not would be made on the basis of data that is inaccurately and unsystematically collected.
3. In this situation we find that data are being gathered unsystematically with significant concerns. The following points should be raised:
· July flights, vacation season, include business and pleasure/vacation travelers. As with the questionnaire example, this is undesirable when the business travelers comprise the target segment.
· On full flights it would be challenging for flight attendants to differentiate working passengers from non-working passengers
· All the activities being documented could be taking place during on flight but the observation form only allows for documenting one action at one point in time
· It would be helpful to create a systematic approach to collecting this observational data instead of limiting it to two weeks. The research was a one-shot study and was not repeated.
· Placing the flight attendants in change could lead to inadequate performance at their normal jobs.
All the above issues would result in the data being inaccurate and inadequate. A major decision of whether to renovate or not would be made on the basis of data that is inaccurately and unsystematically collected.
4. It is hard to anticipate the direction these interviews will take and what the students will report. A key purpose of the exercise is to help them realize that the firm's program strategy for marketing research addresses the issue of the types of studies that are to be done and for what purposes. The project strategy, on the other hand, addresses the issue of the design of the individual studies themselves. Thus, the description of the two selected studies should appear under the project strategy section of the report.
5. 1. Problem Definition (Should low income households be targeted by state lotteries?)
2. Data collection (Obvious or subtle coercion to insure participation.)
3. Data analysis (Misrepresent open-ended responses.)
4. Information reporting (Overstate conclusions.)
6. Making ethical decisions is a sometimes difficult, often subjective, process. As a result, the “correct” answer to this question may differ across students. For each scenario, we highlight some key issues that students should consider in applying the three methods of ethical reasoning.
a. Utility Approach: The cost of a wrong decision that might result from a too-small sample potentially would result in strong negative consequences for the firm, its employees, shareholders, customers, and so on, although the researcher doesn’t believe that the issue being studied is all that important. On the other hand, if the director of research is interpreting the situation correctly, the decision might save the jobs of one or more research staff members. On balance, we see this is an unethical decision under the utility approach.
Justice Approach: If the director proceeds to cut sample size in half and “hide” it from other managers, are the benefits and costs distributed fairly? Based on the previous discussion, this certainly doesn’t seem to be the case, so the action most likely would be judged unethical under the justice approach.
Rights Approach: It certainly seems as though decision makers’ right to be informed is being violated if the researchers hide the fact that sample size has been cut in half, which would make the decision unethical under the rights approach.
b. The action taken by the worker in this situation seems to be unethical under any model applied, unless saving his job or those of others in the department is of such critical importance to society that it outweighs any potential negative consequences, and we don’t see how that could be the case. Instead, it most likely would be grounds for termination.
c. Utility Approach: The cost to society of this action concerns removing respondents’ ability to know to whom they are responding. For most researchers, this cost pales in comparison with the benefits of getting closer to the “truth” by offsetting a tendency toward overly positive responses. Getting accurate responses allows managers to make better-informed decisions that should help both the firm and its customers. Overall, we believe that this is an ethical decision under the utility approach.
Justice Approach: Although the respondents appear to bear all of the costs (i.e., incomplete information about who is seeking information from them), they also stand to gain if the company acts upon the information provided, perhaps by taking steps to increase customer satisfaction, for example. The company clearly gains, without much cost, but we don’t see a great deal of unfairness in the distribution of costs and benefits, at least on the surface, likely making this an ethical decision under the justice model.
Rights Approach: The respondents’ right to be informed has been violated in this scenario, which makes the action unethical under the rights approach.
d. Utility Approach: This scenario is a bit trickier than the others in some ways. Key benefits include the development of a better version of a toy that potentially could provide enjoyment to millions of children and greater revenues for the firm. In addition, this approach to research should provide better information about how kids really play with (or don’t play with) the new toy. The day care center also gains by getting new toys given to them by the researchers. On the negative side, however, it appears that the researcher is gathering information from children (and their caregivers) without knowledge or consent of parents and without full information (the toy is new and not available elsewhere and perhaps may not have been fully tested for safety). On balance, we are concerned about working with children without parental approval and see this action as unethical. Prior consent from parents, however, might change our opinion such that this might be considered ethical.
Justice Approach: The benefits are being shared by all participants in the situation, although the company probably has the most to gain (but is also taking the greater risk by funding research and development of products, marketing the toys, etc.). On the other hand, the children (and parents) seem to be bearing most of the societal costs (e.g., lack of knowledge, potential for product harm). To us, under the justice model this is probably unethical as the situation is presented in the scenario. Once again, parental consent might be enough to swing our judgment of the situation.
Rights Approach: As the right to be informed has been violated from the parents’ perspective, this action is unethical under the rights approach.
IV. Instruction Suggestions:
1. Emphasize the difference between existing data and new, primary data and point out that both have important roles in the modern marketplace.
2. Next turn to a discussion of the research process. Briefly review the process to:
a. Illustrate the structure of the course. Each instructor can point out the relative emphasis to be placed on each section.
b. Highlight the areas of additional study, which those students seeking to become marketing research specialists might pursue. This discussion can be tied directly to related courses in the curriculum.
c. Emphasize the key error in research‑‑total error. It is helpful here to point out that sampling error is one part of total error and that increasing sample size to reduce sampling error might actually increase total error. This helps to allay somewhat the tendency demonstrated by beginning researchers to argue that the key to most research problems is to increase sample size.
3. Illustrate the interrelationships of the stages. It is particularly helpful here to demonstrate how slight changes in research questions can lead to substantial changes in the research process. This can be accomplished by alternate phrasings of a research question such as, "Who buys condominiums?" versus "Why do people buy condominiums?" and tracing through the research that would be needed to answer each question. The differences in data collection, sampling, and field force procedures soon become obvious with class discussion.
2. Turn next to a discussion of marketing research ethics. While the issue of ethics in marketing research is best addressed over the course of the term rather than in a single period, it is useful to sensitize students early to the facts that the use of most marketing research techniques involves ethical issues and the decision as to what is morally right in a given situation is not always clear. One useful way to begin is to review the essential differences between the utility, justice, and rights perspectives. The ethical dilemmas (provided below) are useful in throwing the differences into bold relief.
The utilitarian perspective, with its focus on the greatest good for the greatest number, would suggest that both the sheriff and the CEO acted correctly. By acting the way they did, they saved the most people. The rights view, with its emphasis on fairness to the individual, would suggest that both men acted unethically. The dilemmas illustrate one of the fundamental problems with the utilitarian view—namely, that individuals or small groups can suffer major harm because their “large costs” are averaged with small gains to a large number of other people, with the result that the net benefit for the act is positive.
This is also a good time to point out that although the frameworks emphasize different perspectives by which the ethicality of some contemplated act can be evaluated, neither approach provides precise answers to ethical decisions. In a utilitarian analysis, for example, one still needs to quantify costs and benefits; in deontological reasoning, one needs to evaluate the seriousness of a right’s infringement.
Once students have a better understanding of the nature of the arguments under each framework, it is useful to challenge them further with a few moral research dilemmas they might encounter. Since the students will only have limited understanding of the techniques of marketing research and their advantages and disadvantages early in the term, it is useful to pick from the large set the ethical dilemmas students can most easily understand.
While the discussion of ethics now should alert students to the possibility that there are often moral issues when doing marketing research, they seem to develop a higher appreciation for ethical concerns in research if the topic is returned to periodically throughout the term. Consequently, it is recommended that instructors use at least some of the chapter ethical dilemmas when discussing the contents of a given chapter. Many of them generate some lively class discussion.
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Chapter 2 Test Bank
- Which of the following is NOT one of the four general sources from which people acquire social knowledge?
- Personal experiences
- Empirical data
- Other social groups and institutions
- The media
- Krista is a high school biology teacher who comes home from a science convention to find that she has been robbed—an example of personal victimization. Which of the following types of reality BEST describes her experience?
- Experienced Reality
- Symbolic Reality
- Socially Constructed Reality
- Both A and B
- Which of the following types of reality constitutes most of our knowledge about the world?
- Experienced Reality
- Symbolic Reality
- Socially Constructed Reality
- None of the above
- At which stage of social constructionism does the media act as a filter?
- Stage 1
- Stage 2
- Stage 3
- Stage 4
- The repetitive showing of several anti-littering commercials in a small-town community results in the passing of stricter punishments for those who choose to litter. Which stage of social constructionism is BEST exemplified in this scenario?
- Stage 1
- Stage 2
- Stage 3
- Stage 4
- Matthew, a well-respected claims maker, claims that building a new bar near his neighborhood will result in an increase in alcohol sales in his community which will inevitably lead to an increase in crime. Matthew is employing which of the following techniques to defend his position?
- He is linking one issue to another.
- He is using a frame to express his opinion.
- He is making a factual claim.
- He is making an interpretative claim.
- Crime-and-justice issues are often linked to the endangerment of the following issues, EXCEPT ____________.
- Rose, a 75-year-old great-grandmother, blames her great-grandson’s recent incarceration at a juvenile detention center on the fact that his parents recently finalized their divorce. Rose believes in which of the following frames?
- Faulty Criminal Justice System Frame
- Blocked Opportunities Frame
- Social Breakdown Frame
- Racist System Frame
- Josh, an adolescent male who enjoys watching wrestling and mixed martial arts, is arrested at school for fighting. Which of the following frames would BEST describe his actions?
- Faulty Criminal Justice System Frame
- Blocked Opportunities Frame
- Social Breakdown Frame
- Violent Media Frame
- Which of the following is NOT true about how frames influence crime-and-justice policy?
- All frames are supported by some portion of the public
- Frames remain mutually exclusive
- People often support more than one frame
- None of the above
- Which of the following is NOT an example of a narrative commonly found in crime-and-justice media?
- the “naïve innocent”
- the “unappreciated brainiac”
- the “masculine, heroic crime-fighter”
- the “innately evil predatory criminal”
- Which of the following is NOT an example of a symbolic crime?
- The release of harmful chemicals into the Severn Trent Water sewer system
- the beating of Rodney King
- the kidnapping and murder of Polly Klaas
- the September 11th World Trade Center bombings
- Which of the following crimes was reconstructed by the media in the 1980s?
- Driving without insurance
- Driving under the influence
- Driving while not wearing a seat belt
- Driving while texting
- Which engine of social construction reality is the most influential?
- Conversational reality
- Various institutions and organizations
- Both A and B
- What is the most important insight to be gained from studying the social constructionism perspective?
- Social constructionism is rarely important to crime-and-justice
- Social constructionism is only important in crime-and-justice media
- Social constructionism competition is an ever-present issue in crime-and-justice
- Social constructionism needs to be studied further before its impact on crime-and-justice can be determined
- Socially constructed realities are always objective.
- People acquire most of their knowledge through experienced reality.
- The most important element in defining crime and justice reality for most people is the media.
- Crime can only be constructed as a social problem or a criminal justice problem.
- The Faulty Criminal Justice System Frame contends that crime results from a lack of “law and order.”
- Events, such as the O.J. Simpson murder trial, can only be constructed through a single frame.
- One consequence of narratives is that the use of narratives reduces the need to explain the cause and effect of a crime.
- The first step in the formula for using a symbolic crime in crime-and-justice social construction is “Find the worst crime you can.”
- Law enforcement agencies struggle to have ownership of crime.
- Winning one social construction contest has no impact on winning future contests.
After reading Chapter 2, students should be able to:
- have a theoretical foundation for exploring media, crime, and justice
- understand the primary concepts of social constructionism
- know how to use social constructionism to follow developments in criminal justice policy
I. The Social Construction of Crime and Justice
a. Social Constructionism: people create reality through shared ideas, interpretations, and knowledge
i. Socially constructed reality may or may not objectively measure conditions in the world
ii. Social constructionism can result in negative consequences
1. Example: Amadou Diallo
a. Unarmed man shot 41 times by police
b. Police socially constructed him (after applying stereotypes and cultural narratives) as a gun-wielding threat
2. Walter Lippmann remarked in Public Opinion (1922): “For the most part we do not first see, and then define. We define first and then see…”
iii. Understanding the social construction of reality process and the concepts of social constructionism helps to understand the impact of media on crime and justice
1. Social constructionism is strongly influenced by shifting cultural trends and social forces
a. Changes in opinion may be independent of changes in physical situations
b. Regarding crime, for example, social behaviors can be criminalized or decriminalized independent of changes in victimization or offense rates
II. The Sources of Social Knowledge
a. Social constructionists seek to understand:
i. the process through which agreement is constructed
ii. the forces and conditions that influence when an accepted construction changes
b. People acquire social knowledge from four sources
i. Personal experiences
ii. Significant others (peers, family, friends)
iii. Other social groups and institutions (schools, unions, churches, government agencies)
iv. The media
c. Three Kinds of Reality
i. Experienced Reality: one’s directly experienced world--all the events that have happened to you
1. Relatively limited
2. Has a powerful influence on an individual’s constructed reality
a. Nearly twice as many citizens in LA credited direct and conversational reality sources as more important than media sources in forming their views of police
b. Personal victimization is the most powerful source for defining one’s view of how serious a particular crime is
i. Personal victimization is:
1. comparatively rare
2. concentrated in high-risk groups of citizens (lower income and minority persons)
ii. Symbolic Reality: all the events you did not witness but believe occurred; all the facts about the world you did not personally collect but believe to be true; all the things you believe to exist but have not seen
1. Comprised from the remaining three sources of knowledge—other people, institutions, and the media
2. Constitutes most of our knowledge
a. In the U.S., media, in particular, dominates our formation of symbolic reality
i. Creates a cause for concern
ii. What we see as crime and justice is largely defined, described, and delimited by media content
iii. Socially Constructed Reality: what we individually believe the world to be
1. The combined knowledge of personal experience and symbolic reality mixes to construct our own “world”
2. Subjective reality differs between individuals or groups
3. Individuals with access to similar knowledge and who frequently interact with one another tend to negotiate and construct similar social realities
4. The media comprise the most important element in defining crime and justice reality for most people
iv. The Social Construction Process and the Media (See Figure 2.1)
1. Four Stages of Social Constructionism
a. Stage 1: the physical world without interpretation
i. Provides the boundaries that the other stages must work within
ii. Competing constructions cannot maintain credibility if they run counter to the physical reality of the world
b. Stage 2: competing constructions emerge
i. Descriptions are frequently of social conditions
ii. Offer different explanations of why the physical world is as purported to be
iii. Competing constructions often argue for a set of public and individual policies that should be supported and pursued
1. Example: “In order to get crime under control, we must impose longer prison sentences.”
c. Stage 3: media act as filters
i. Persons forwarding constructions compete for media attention
ii. Media favor positions that are:
2. sponsored by powerful groups
3. related to preestablished cultural themes
iii. It is difficult for those outside the mainstream to access the media and promote their constructions
1. Some constructions never get on the playing field
d. Stage 4: the emergence of a dominant social construction
i. Media play an important role in the construction that eventually prevails
ii. The winning dominant construction directs public policy
1. For crime and justice, this socially constructed reality will define:
a. the conditions, trends, and factors accepted as causes of crime
b. the behaviors that are seen as criminal
c. the criminal justice policies accepted as reasonable and likely to be successful
III. The Concepts of Social Constructionism
a. Claims Makers and Claims
i. Claims makers: the promoters, activists, professional experts, and spokespersons involved in forwarding specific claims about a social condition
1. Social problems can be constructed in many different ways
a. Example: Crime can be constructed as a:
i. social problem
ii. individual problem
iii. racial problem
iv. sexual problem
v. economic problem
vi. criminal justice problem
vii. technological problem
2. Each construction implies different policy courses and solutions
1. Factual claims: statements that purport to describe the world
a. Promoted as objective “facts”
b. Made to categorize or type an event
2. Interpretative claims: statements that focus on the meaning of events
a. Do one of two things:
i. offer an explanation of why a set of factual claims is as described
ii. offer a course action—a public policy—that needs to be followed to address the conditions or events described in the factual claims
3. Linkage: involves the association of the subject of the social construction effort with other previously constructed issues
a. Strategy used to get a social construction accepted by the public
b. Example: drugs are linked to crime
i. Leads to the argument that certain drugs should be criminalized or other types of crime will increase
ii. The social importance of drug abuse is heightened
c. Crime-and-justice issues are often linked to the endangerment of:
iii. Frames: prepackaged constructions; a fully developed social construction template that allows its users to categorize, label, and deal with a wide range of world events
1. Used by claims makers to further enhance the likelihood that their claim will advance
a. For a construction to be successful, its claims must be accepted
2. Include factual and interpretative claims and associated policies
3. Regarding crime and justice, preexisting frames make the processing, labeling, and understanding of crimes easier for the person holding that frame’s view of reality
a. Crimes can be cognitively dealt with and quickly tied to a policy position
4. Five frames by criminologist Theodore Sasson (See Table 2.1)
a. All five compete today in the U.S.
b. All five frames accomplish the following:
i. offer explanations of crime
ii. point to specific causes
iii. come with accompanying policies
c. Faulty Criminal Justice System Frame
i. Crime results from a lack of “law and order”
ii. The only way to ensure public safety is to increase the swiftness, certainty, an severity of punishment
iii. Symbolically represented by the convicted, repeat rapist or by the image of inmates passing through a revolving door or prison
d. Blocked Opportunities Frame
i. Crime is depicted as a consequence of inequality and discrimination, especially in the following areas:
ii. To reduce crime, government must ameliorate the social conditions that cause it
iii. Symbolically portrayed through references to dead-end jobs held by inner-city youth, such as flipping burgers at McDonald’s
e. Social Breakdown Frame
i. Depicts crime as a consequence of:
1. family and community disintegration
2. skyrocketing rates of divorce
3. out-of-wedlock births
ii. Conservative version: attributes family and community breakdown to “permissiveness”
iii. Liberal version: attributes family and community breakdown to:
2. racial discrimination
3. the loss of jobs and income
f. Racist System Frame
i. Focuses on the criminal justice system rather than on crime
ii. Depicts the courts and police as racist agents of oppression
1. Police resources are seen as dedicated more to the protection of white neighborhoods than to reducing crime in minority communities
2. In radical versions of this frame, the basic purpose of the criminal justice system is to suppress a potentially rebellious underclass
g. Violent Media Frame
i. Depicts crime and social violence as a consequence of violence on television, in the movies, in popular music and in video games
ii. Media violence is seen as at least a partial explanation of violent crime by nearly all Americans
iii. “By the time the average child reaches age 18, he will have witnessed some 18,000 murders and countless highly detailed incidents of robbery, arson, bombings, shootings, beatings, forgery, smuggling, and torture”
iv. To reduce violence in society, this frame directs us first to reduce it in the mass media
h. How Frames Influence Crime-and-Justice Policy
i. All frames are supported by some portion of the public
ii. Frames are not mutually exclusive
iii. People often simultaneously support more than one frame
iv. Crime-and-justice claims makers can guarantee a level of support if they can fit their social construction within one of these frames
v. Many crime-and-justice events can be differently constructed using different frames
a. O.J. Simpson murder trial
I. Guilty = Faulty Criminal Justice System Frame
II. Innocent = Racist System Frame
b. 1999 Columbine High School shootings
I. Social Breakdown Frame
II. Violent Media Frame
III. Faulty Criminal Justice System Frame
vi. The five frames jockey with one another for:
1. influence over how criminality is understood in society
2. which criminal justice policies enjoy public support
3. how new crimes and criminals are conceived
vii. The media can boost frames ahead of one another
iv. Narratives: preestablished social constructions social constructions found throughout crime-and-justice media (See Table 2.2 for examples)
1. Crime-and-justice mini-portraits that the public already recognizes
2. Outline the recurring crime-and-justice types and situations that regularly appear in the media
i. the “naïve innocent”
ii. the “masculine, heroic crime-fighter”
iii. the “innately evil predatory criminal”: longest running criminal narrative
3. Narratives can be utilized to do the following:
a. quickly establish the characteristics of a criminal, a victim, or a crime-fighter
b. as support examples for larger crime-and-justice frames
4. Consequences of narratives
a. Frequently linked to the faulty system frame because they infer a simplified single-cause explanation of crime
i. They give a sense of predictability and understanding to even the most senseless criminality
ii. Their use reduces the need to explain cause and effect
v. Symbolic Crimes: crimes and other criminal justice events that are selected and highlighted by claims makers as perfect examples of why their crime-and-justice construction should be accepted
1. Trumpeted to convince people of the existence of a pressing crime-and-justice problem and a desperately needed criminal justice policy
a. the beating of Rodney King
b. the kidnapping and murder of Polly Klaas
c. the murder trial of O.J. Simpson
d. the Columbine school shootings
e. the September 11th World Trade Center bombings
3. The formula for using symbolic crimes in crime-and-justice social construction:
a. Step 1: Find the worst crime you can
b. Step 2: Link your construction to your symbolic crime
c. Step 3: Success equals an increased importance of your issue and public acceptance of your construction
4. An effective symbolic crime can be the difference between winning and losing a social construction competition
a. Winning a social construction competition = Gaining ownership of social problems and issues
vi. Ownership: the identification of a particular social condition with a particular set of claims makers who come to dominate the social construction of that issue
1. Claims makers own an issue when they are sought out by the media and others for their opinion regarding the issue
2. Law enforcement agencies have proprietary ownership of crime
IV. The Social Construction Process in Action
a. Social Construction of Road Rage
i. An example of a media-created crime
ii. Joel Best found that the media sought not only to describe but to explain and interpret the problem
b. Reconstruction of Driving Under the Influence
i. Media can also influence the crime construction process by raising the perception of a crime’s seriousness
1. Prior to the 1980s, DUI was socially constructed primarily as an individual rehabilitation problem
a. Lawmakers wanted to lessen the penalties for DUI
b. The imposition of stiff penalties such as license revocation would interfere with the offender’s ability to work
2. Beginning in the 1980s, new claims makers such as MADD (Mothers Against Drunk Driving) attacked this dominant social construction of the drunk driver
a. The drunk driver is now characterized as a “killer drunk” and one of society’s pressing problems
b. Support has grown for much stricter DUI laws and their enforcement and prosecution
c. Competing Constructions of the Arrest of Rodney King
i. The arrest of Rodney King provides an example of the social construction competition process in which different constructed realities strove to become the dominant view
1. Three different constructions of the cause and meaning of the event competed
a. Construction A: King resisted arrest and the beating was justified
b. Construction B: the beating was unjustified but was an isolated incident of unwarranted police violence carried out by a few rogue police officers
c. Construction C: the beating is unjustified and seen as an example of an endemic problem of unwarranted and consistent police violence toward minorities
i. Fitted within the racist system
ii. Indicates the need to revamp the administration and training of the department and make extensive organizational changes
iii. In the end, this construction won the construction competition
V. Social Constructionism and Crime and Justice
a. Social constructionism encourages a particular set of social attitudes and perceptions about crime and justice and changes how serious some crimes are viewed by the public
i. Three engines of social construction of reality (See Figure 2.3)
1. Conversational reality: personal experience and information received directly from people close to us
a. The most influential social construction engine
2. Media, comprised of news, entertainment, advertisement, and increasingly infotainment, create a more pervasive, broadly distributed information engine in the social construction process
3. The third social construction engine is knowledge supplied by the various institutions, organizations, and agencies that collect and disseminate statistics, information, and claims about the world
b. The single most important insight to be gained from a social constructionism perspective is recognition of the social construction competition that is constantly being waged
i. We must recognize the process to thoughtfully evaluate the criminal justice policies that result
ii. Winning one social construction contest puts you on the inside track for winning future contests in the same manner
1. If punitive criminal justice policy and predatory criminality totally dominate media content, entire frames and alternate ideas about crime and justice will disappear from serious public consideration
Chapter Key Terms
social constructionism  interpretative claims 
experienced reality  linkage 
symbolic reality  frames 
socially constructed reality  narratives 
claims makers  ownership 
factual claims  conversational reality 
Helpful and Interesting Internet Sites
The following sites are interesting sources for this chapter. Please review them before recommending them to your students.