Research the Theranos organization (www.theranos.com), its management, and the challenges it now faces. (Possible sources include Entrepreneur, Forbes, Fortune, The Wall Street Journal, Wired, Vanity Fair, NY Times.) Write a three page paper in which you

Entrepreneurs must contend with a wide variety of issues when seeking funding as well as bringing their product or services to market. Failure to address these issues have often resulted in legal actions over patent ownership, regulatory issues, marketing defective, dangerous or ineffective products and even false performance claims.The company Theranos, was founded in 2003 by then 19 year old Elizabeth Holmes, a Stanford University dropout. It sells blood testing equipment and in 2013 valued at $9 billion. In recent years Theranos and its CEO have faced numerous regulatory, legal and ethical challenges.

Research the Theranos organization (www.theranos.com), its management, and the challenges it now faces. (Possible sources include Entrepreneur, Forbes, Fortune, The Wall Street Journal, Wired, Vanity Fair, NY Times.)

Write a three page paper in which you analyze the following areas:How does the leadership style of CEO Elizabeth Holmes align with the characteristics of successful entrepreneurs? Where would she fall in the typology of entrepreneurial styles discussed in Chapter 2 of your text and why? What affect has her style had on the company? What critical factors in the development process contributed to the current situation faced by the company? What key questions should have been asked by venture capitalists who provided the start-up funding? What recommendations would you have made to Elizabeth Holmes when she started the company at age 19, and why?

Format your paper.

Include a minimum of three sources

Welcome to Strategic Management
Week 3

Chapter 2 Review

Evaluating a Firm’s External Environment

What is External Environment Analysis?

The Structure-Conduct-Performance Model

Types of Competition

Type

(Firms) Product Type Barriers

Perfect
Competition ↑∑Firms

Homogenous
Products

↓Entry/Exit
Cost Parity

Monopolistic
Competition ↑∑Firms

Heterogenious
Products

↓Entry/Exit
Cost CA

Oligopoly ↓∑Fims
Homogenous
Products

↑Entry/Exit
Cost CA

Monopoly One Firm
↑Entry/Exit
Cost CA

Ethics & Strategy

• Which of these types of competition is most
beneficial to society (social welfare)?
• What do we want? (low cost, high quality)
• What about innovation

• SCP
– ID whether competitiveness and intervene
– Flipped to learn how to gain competitive advantage
– Is that good for society
– How do firms create CA/EV (address consumer needs)

General Environment

Demographics & Culture

• What do each of these mean?
• How predictable are they?
• How can they be measured?
• How are they relevant to strategic

management?

Legal/Political & Economic Climate

• What do each of these mean?
• How predictable are they?
• How can they be measured?
• How are they relevant to strategic
management?

Technological Change

• How predictable is this?
• How can it be measured?
• How is it relevant to strategic management?

Major International Events

• How predictable is this?
• How can it be measured?
• How is it relevant to strategic management?

There are two parts of the Environment:
General (PEST/PESTLE/DPest) & Competitive

Source: Ireland, Hitt & Hoskisson 2006 – Copyright Thompson Business & Professional Publishing

BUYERS

Threat of
new entrants

MARKET
COMPETITORS

Bargaining power
of customers

SUPPLIERS

SUBSTITUTES
Rivalry among
existing firms

Bargaining power
of suppliers

Threat of substitute
products or services

Source: Porter (1980)

POTENTIAL
ENTRANTS

The Competitive Environment of the
Firm and the 5-Forces Framework

P, Q

What do we look for to determine
whether rivalry is high?

Rivalry is high when:

• Industry concentration is low
• Competitors are very homogeneous
• Little product differentiation exists
• Excess capacity and exit barriers are present
• Scale economies are high and the ratio of fixed

to variable costs is high

What do we look for to determine how high
the threat of substitutability is?

The threat of

substitutes is high

when:

• Buyers have a high propensity to substitute
• The relative price and performance of

substitutes is high

What do we look for to determine whether
buyers have a high or low power?

When is buyer power high? I

• When price sensitivity of focal industry is
high:
– Cost of supplier product relative to total costs of

focal industry products high
– Product differentiation of supplies low
– Competition between focal industry players is high

When is buyer power high? II

• Relative bargaining power of focal firms is high:
– Size and concentration of focal industry firms relatives to

suppliers is high
– Focal industry firms face little if no switching

costs

– Focal industry firms know and understand well the cost

structure of suppliers
– Focal industry firms can easily integrate backward

What do we look for to determine whether
suppliers have a high or low power?

When is supplier power low? I

• When price sensitivity of focal industry is
high:
– Cost of supplier product relative to total costs of
focal industry products high
– Product differentiation of supplies low
– Competition between focal industry players is high

When is supplier power low? II

• Relative bargaining power of focal firms is high:
– Size and concentration of focal industry firms relatives to
suppliers is high
– Focal industry firms face little if no switching costs
– Focal industry firms know and understand well the cost
structure of suppliers
– Focal industry firms can easily integrate backward

What do we look for to determine how
low the threat of entry is?

The threat of entry is low when:

• Economies of scale are present
• Incumbents have an absolute cost advantage
• High capital is needed to start
• Existing products are highly differentiated
• Channels of distribution are preempted or difficult to

access
• Government and legal barriers exist
• Retaliation by established competitors is likely

THREAT OF ENTRY
• economies of scale
• absolute cost

advantages
• capital requirements
• product differentiation
• access to distribution

channels
• governmental and legal

barriers
• retaliation by

established producers

THREAT OF
SUBSTITUTES

• buyer propensity to substitute
• relative price performance of

substitutes

INDUSTRY
COMPETITIVENESS

• concentration
• product differentiation
• excess capacity
• ratio of fixed to

variable costs
• demand growth
• cyclical fluctuations of

demand
• exit barriers

BUYER POWER

Price sensitivity
• cost of purchases
• profitability of buyers
• importance of the product

to quality of buyers’
product

Bargaining power
• size and concentration of buyers

relative to suppliers
• buyers’ switching costs
• buyers’ information
• buyers’ ability to backward

integrate

SUPPLIER POWER

Factors determining power of
suppliers relative to producers
same as those determining
power of producers relative to
buyers–see “Buyer Power” box.

Generic
Drivers of

Industry
Forces

THREAT OF ENTRY
• Erect barriers to entry

by building:
– economies of scale
– absolute cost

advantages
• Influence govt. policy

requirements . . .
• Overcome barriers to

entry through:
– product

differentiation
– . . .

THREAT OF
SUBSTITUTES

Improve product’s
attractiveness relative to
substitutes:
• Lower Prices
• Product differentiation
• Move into new businesses

INDUSTRY
COMPETITIVENESS

• Compete on
dimensions besides
price

• Consolidate ownership
• Build a first-mover

advantage . . .

BUYER POWER

Reduce Buyers’ Uniqueness
• Forward Vertical Integration
• Product Differentiation
• Target New Market Segments

SUPPLIER POWER

Reduce Suppliers’ Uniqueness
• Backward Vertical Integration
• Use Multiple Suppliers

Source: Barney (1997)

Generic
Responses to

Industry
Forces

Industry Structure

• Fragmented
– No dominant firm
– Opportunity for consolidation

• Emerging
– New created (or re-created industries)
– Opportunity to seize 1st mover advtg?

Industry Structure (Cont’d)

• Emerging
– New created industries
– Re-created industries

• Tech innovation
• ∆ in customer needs

• Mature
– Opportunities for:

• 1st mover advtg?
• Tech leadership
• Control strategic assets
• Avoid customer-switching

costs

– Threat of:
• 1st mover disadvtg?
• Loss of flexibility
• 2nd mover advtg

Seizing 1st Mover Advantage

-Suarez & Lanzolla, 2005 (HBR)

• Mature
– Slowing ↑Qd
– Slowing ↑Qs (via

stagnant production
capacity)

– ↑Customer Expertise
– ↓New products/services
– ↑Int’l competition
– ↓∑Profitability

• Mature
– Opportunities for:

• Product refinement
• Investment in service

quality
• Process innovation

• Declining
– ↓∑Sales
– ↑Rivalry

• ↑Buys
• ↑Suppliers
• ↑Substitutes

• Declining
• Leadership
• Niche
• Harvest
• Divestment

Step 1 – Define the industry the firm is in
Step 2 – Identify the players:

Competitors, substitutes, suppliers, buyers,
and potential entrants

Industry Analysis

Step 3 – Evaluate the 5-forces:
Their intensity, the underlying conditions

that drive this intensity, and the
implication for the performance of

companies in this industry

Industry Analysis

Step 4 – What would it take for any
company to be successful in this industry;

or how can we change the industry
forces in our favor; aka industry key

success factors

Industry Analysis

What is this External Environment
Analysis?

• Part 1: Describe the External Environment of
the Firm

• Part 2: Evaluate this Environment
• Part 3: Draw Clear Conclusions: What are the

opportunities and threats in this environment?
What are the drivers of these? What are
potential strategies to capitalize on the
opportunities and neutralize the threats?

External Analysis

– External Analysis
• What is the current industry structure/level of competition (perfect

competitionàmonopoly) and what are the consequences (See
Table 2.7)

• Describe the General and Competitive Environment – Use at
least one of tools described in our textbook (6 category
description of the general environment in Figure 2.1, Porter’s 5
Forces, PEST, GDPest, etc.)

• What are the opportunities and threats related to the external
environment?

• How does the external environment influence the company’s
strategy?

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