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25 tayangan54 halamanEnvironmental uncertainty literature review and related objectification of Porter's industry forces.

Oct 18, 2014

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Environmental uncertainty literature review and related objectification of Porter's industry forces.

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25 tayangan

Environmental uncertainty literature review and related objectification of Porter's industry forces.

© All Rights Reserved

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Managerial Decision-Making

Bounded rationality

Information required vs. information available

Cost of obtaining missing information

Temporal window for making the decision

Limitations of human cognition

Environmental uncertainty

Dimensions of the environment

Vectors and rates of change

Definition

An inability to assign probabilities as to the likelihood of

future events (Duncan, 1972; Pennings & Tripathi, 1978;

Pfeffer & Salancik, 1978)

A lack of information about cause-effect relationships

(Duncan, 1972; Lorsch & Lawrence, 1965)

An inability to predict accurately what the outcomes of a

decision might be (Downey, Hellriegel, & Slocum Jr, 1975;

Hickson, Hinings, Lee, Schneck, & Pennings, 1971;

Schmidt & Cumming, 1976)

(Milliken, 1987)

Financial Times 45 Citation Examination

Management Field

Sample Population

141 journal articles

Divided into three timeframes

1966 1980 (early development)

1981 1995 (refinement of measures)

1996 present (construct frozen)

Article count by fields of management

General = 69

Strategy = 47

Operations = 14

Information = 7

Entrepreneurship = 4

Two Types

Objective (OEU)

Economic in origin (Simon, 1957)

Supply uncertainty

Demand uncertainty

Cost uncertainty

Perceptual (PEU)

Market, scientific, and plant sectors of the environment along with

certainty of information, rate of change of the environment, and

time range of task as the vectors impacting bounded rationality

(Lorsch and Lawrence, 1965)

Construct Research

Construct Research

PEU OEU Test

Tosi, Aldag, and Storey (1973) investigated Lorsch and

Lawrences perceived measures and scales, and checked

their results against objective measures of the

environment.

They found little correlation between perceived and

objective data

The debate continued for seven years

PEU-OEU Resolution

Bourgeois (1985) recognized that each type of measure

had a place in management studies.

Objective measures of environmental uncertainty were well suited

for the initial stage of strategic planning that is domain identification

and selection.

Perceptual measures of environmental uncertainty were a better

indicator when studying managerial decision making involved with

domain navigation as the firm attempted to fit the environment.

PEU-OEU Measures and Scales Integration

Miller and Friesen (1982) recognized three dimensions

Environmental dynamism

Environmental heterogeneity

Environmental hostility

Dess and Beard (1984) recognized three dimensions

Dynamism

Munificence

Complexity

Miller & Friesen (1982)

Miller & Friesen (1982)

Miller & Friesen (1982)

OEU Measures and Scales

Keats and Hitt (1988) refined the Dess and Beard

measures with regression equations:

Growth and volatility in industry sales

Growth and volatility in industry operating income

Three-part calculation of industry concentration

Grossacks (1965) dynamic measure

Four-firm concentration ratio

HerfindahlHirschman Index (Hirschman, 1964)

EU Research

Environmental

Uncertainty

Objective Perceived

Economy

Industry sales

Industry growth

Concentration

Costs of inputs

Technology (R&D cost

& patents)

Capital markets

Economy

Customers

Competitors

Suppliers

Technology (pace)

Capital markets

Regulators

Unions

Range of

unpredictability

Dynamism

Municence

Complexity

Strategic Classification

Following Bourgeois (1985), use OEU as means of

identifying and selection strategic domains.

Porters Five Forces

Threat of

New

Entrants

Customer

Power

Supplier

Power

Threat of

Substitutes

Threat of

Competitive

Rivalry

Porters Five Forces as OEU

Bargaining power of suppliers

Impact of inputs on cost or differentiation

Importance of volume to the supplier

Differentiation of inputs

Competition between producers

Size and concentration of suppliers relative to industry

Switching costs

Asymmetry of suppliers information

Suppliers ability to forward integrate

Bargaining power of suppliers

Impact of inputs on cost or differentiation

Calculate the suppliers contribution to margin, take the natural logarithm of

that figure and regress over at least five years against an index such as

the S&P 500. The antilog of the regression coefficient will represent

munificence (growth) while the antilog of the standard error indicates the

dynamism (volatility).

Y

i

^

= b

0

+ b

1

X

i

+

i

e

b

1

= munificence measure

e

= dynamism measure

where Y = ln(supplier's contribution to margin)

and X = index/year measure

Bargaining power of suppliers

Importance of volume to the supplier

Determined using the measures of supplier industry concentration: Grossacks

(1965) dynamic measure of industry concentration, the four-firm concentration

ratio, and the HerfindahlHirschman Index (Hirschman, 1964).

Grossack is a regression of current-year market shares of all firms in a given industry

upon their shares 5 years ago. The reciprocal of the regression coefficient indicates

the decrease or increase of monopoly power in the industry and is used as one

measure of complexity.

HerfindahlHirschman measures the smallness among the number of firm and the

variation among the sizes of firms

Bargaining power of suppliers

Supplier industry concentration

Grossacks Measure

Herfindahl-Hirschman Index

b =1+ w

i

i

y

i

x

i

x

i

w

i

=

x

i

2

x

i

2

i

b = r

x

=

y

i

2

x

i

2

C(HI ) =

HI

y

HI

x

=

y

i

2

+

1

n

y

x

i

2

+

1

n

x

HI

x

= X

i

2

i

+

1

n

where X is the market share of the i

ith

firm expressed

as a ratio and n is the number of firms in the industry

Bargaining power of suppliers

Differentiation of inputs

Differentiation is linked to above-average profits

Regress the natural log of the operating profit margin for the supplier

industry against an index variable of years

Antilog of the regression coefficient represents supplier OPM growth

Antilog of the standard error represents supplier OPM volatility

Y

i

= b

0

+ b

1

X

i

+

i

where Y = ln(supplier OPM)

and X = index/years

e

b

1

= supplier OPM munificence

e

Bargaining power of suppliers

Competition between producers

Determined by regressing unit prices against an index variable of

years.

Regression coefficient represents price growth (complexity)

Standard error represents price volatility

Y

i

= b

0

+ b

1

X

i

+

i

where Y = unit prices

and X = index/years

b

1

= unit price complexity

= unit price dynamism

Bargaining power of suppliers

Size and concentration of suppliers relative to industry

Calculate Grossacks concentration index for producer and supplier

industries and regress this ratio against an index variable of years.

Regression coefficient represents producer/supplier complexity

Standard error of regression indicates producer/supplier volatility

b =1+ w

i

i

y

i

x

i

x

i

w

i

=

x

i

2

x

i

2

i

Y = b

0

+ b

1

X

i

+

i

b

p

b

s

= Y = producer/supplier concentration ratio

X = index variable of years

Bargaining power of suppliers

Switching costs

Static measure using ranked scale

1 = low impact

2 = moderate impact

3 = high impact

Determined using NPV of switching costs

Measure of complexity

Bargaining power of suppliers

Asymmetry of suppliers information

Static measure using ranked scale

1 = Supplier provides financial data, producer does not

2 = Both producer and supplier share financial data

3 = Neither producer nor supplier share financial data

4 = Producer provides financial data, supplier does not

Bargaining power of suppliers

Suppliers ability to forward integrate

Determined by computing the number and strength of related

acquisitions by suppliers and regressed over an index variable of

years.

Using logistic regression over an index variable of years, determine the

probability of supplier-sourced related acquisition

Multiply this number by the natural log of the value of the acquisitions

ln

p

1 p

= b

0

+ b

1

X

i

e

ln

p

1 p

= odds ratio

Probability =

OR

1+OR

Bargaining power of suppliers

Suppliers ability to forward integrate

Determined by multiplying the number and value of related

acquisitions by suppliers in each year of the period; take the natural

log of these figures and regress over an index variable of years.

Antilog of regression coefficient represents complexity

Antilog of standard error indicates volatility

Y = b

0

+b

1

X

i

+

i

where Y = ln(number i value of acquisitions)

X = index variable of years

Bargaining power of suppliers

OEU Summary

Bargaining power of customers

Cost of product relative to total customer purchases

Differentiation of outputs (product differentiation)

Importance of volume to customers

Competition between customers

Customer profitability

Size and concentration of customers relative to industry

Customers switching costs

Asymmetry of customers information

Customers ability to backward integrate

Threat of New Entrants

Economies of scale

Absolute cost advantages

Capital requirements

Product differentiation

Access to distribution channels

Government and legal barriers

Retaliation by established producers

Market share shifts

Threat of New Entrants

Economies of scale

Perform industry concentration computation for producer industry:

Grossacks measure

Four-firm concentration ratio

Herfindahl-Hirschman index

Higher concentration indices represent greater economies of scale

as a complexity measure

Threat of New Entrants

Absolute cost advantages

Dependent upon unique contingencies

However, proxy measure could be implemented as:

Tobins q

Measure of value of technological assets; brand equity; intangible value

Number of patents awarded to the industry and regressed over an index

variable of years

f

2

R

q

i

r

m

i

Y

qK +

M

p

qK +

M

p

( )

=

M

p

Threat of New Entrants

Capital requirements

Specific capital requirements are contingent by entrant.

Better understanding may come from access to and cost of capital

Take the natural logarithm of the total liquidity of the credit market and

regressing against an index variable of years provides the foundation

from which the antilog of the regression coefficient is used as a

measure for capital market growth. Further, the antilog of the standard

error of the regression coefficient represents the measure of credit

market volatility.

Additional measure could be added in the form of a regression equation

computing the coefficient and standard error of capital rates over an

index variable of years.

Threat of New Entrants

Product differentiation

Take the natural logarithm of the total operating profit margin of the

producer industry cataloged by four-digit NAICS code and regress

against an index variable of years; the antilog of the regression

coefficient is used as a measure for operating profit margin growth.

Further, the antilog of the standard error of the regression coefficient

represents the measure of operating profit margin volatility.

Threat of New Entrants

Access to distribution channels

A suitable proxy is the four or eight-firm concentration ratio; higher

levels of industry concentration will inhibit access to distribution.

Capturing several years of data could then be regressed and

examined as complexity and dynamism measures.

Threat of New Entrants

Government and legal barriers

The uncertainty of government and legal barriers might be captured

as the number of regulatory actions taken at the national, provincial,

and local levels against the industry and ranked by severity:

3 = strategic impact

2 = operational impact

1 = paperwork impact

Means could be calculated by year for an index variable of years.

The Friedman Two-Way ANOVA by Ranks could be applied to

ensure a significant differentiation between ranked categories.

Capturing this data by year would allow a regression equation

where the regression coefficient is a measure of complexity while

the standard error is volatility.

Threat of New Entrants

Retaliation by established producers

Dependent upon the market entry strategy employed by new

entrants (Kotler and Keller, 2009):

Frontal attack

Flanking attack

Encirclement

Guerilla warfare

Threat of New Entrants

Market share shifts

Use Grossacks expanded measure of the producer industry to

discover if new entrants are affecting industry concentration.

b = r

x

=

y

i

2

x

i

2

C(HI ) =

HI

y

HI

x

=

y

i

2

+

1

n

y

x

i

2

+

1

n

x

Threat of New Entrants

OEU Summary

Threat of Competitive Rivalry

Cost conditions (fixed and storage)

Unique to producers dependent on their strategy

Cost-based

Differentiation

Niche

Contingencies include

Organizational structure

Supply chain

Intellectual and human capital

Threat of Competitive Rivalry

Concentration of producers

Grossacks dynamic measure of industry concentration, the four-firm

concentration ratio, and the HerfindahlHirschman Index.

However, we caution researchers about the use of producer

concentration as the sole measure of complexity because of the

competitive stratification generated as a result of niche strategies.

Threat of Competitive Rivalry

Diversity of competitors

Regress the number of producers against the number of strategic

business units over an index variable of years.

Regression coefficient represents producer diversity complexity

Standard error indicates diversity volatility

Y

i

= b

0

+b

1

X

i

+

where Y = number of producers

X

i

= number of SBUs

Threat of Competitive Rivalry

Product differentiation

Take the natural logarithm of the total operating profit margin of the

producer industry cataloged by four-digit NAICS code and regress

against an index variable of years

The antilog of the regression coefficient is used as a measure for

operating profit margin growth.

The antilog of the standard error of the regression coefficient

represents the measure of operating profit margin volatility.

Threat of Competitive Rivalry

Excess capacity

Regress the natural logarithm of the industry capital investment

against the natural logarithm of the industry sales to uncover

capacity breakpoints and estimate excess capacity.

Threat of Competitive Rivalry

Exit barriers

Detect growth in the number of producers as determined by the

measures for industry concentration ratio and map against

moderate to high sales growth; this indicates lower exit barriers

because a market exists to dispose of structural elements.

Detect a decline or stasis in the number of producers as determined

by the measures for industry concentration ratio and map against

slow sales; lack of growth indicates higher exit barriers because a

market does not exist to dispose of structural elements.

These measures represent complexity components

Threat of Competitive Rivalry

OEU Summary

Threat of Substitutes

Switching costs

Buyer inclination to substitute

Price-performance trade-off of substitutes

The Dess and Beard OEU Classification Framework

The Porter

Four Forces

as OEU

Dynami sm Muni f i cence Compl exi t y

Suppl i er Mar gi n

Cont r i but i on,

Suppl i er

Concent r at i on,

Oper at i ng Mar gi n,

Uni t Pr i ce,

Pr oducer Revenue/

Cust omer Cost Rat i o,

Cust omer

Concent r at i on,

Cust omer OPM,

Capi t al Li qui di t y Si ze,

Capi t al Rat es,

Di st r i but i on

Channel s,

# of Pr oducer s,

Suppl i er Mar gi n

Cont r i but i on,

Oper at i ng Mar gi n,

Uni t Pr i ce,

Cust omer OPM,

Capi t al Li qui di t y

Si ze,

Capi t al Rat es,

Di st r i but i on

Channel s,

# of Pr oducer s,

Excess Capaci t y

Cal cul at i on,

Obj ect i ve Envi r onment al Uncer t ai nt y

Pr oducer /Suppl i er

Revenue Rat i o,

Suppl i er

Concent r at i on,

Pr oducer Swi t chi ng

Cost s (r anked),

Inf or mat i on Asymmet r y

(P/S r anked),

Suppl i er Rel at ed

Acqui si t i on Pr obabi l i t y

& Power ,

Pr oducer Revenue/

Cust omer Cost Rat i o,

Cust omer Pur chase/

Pr oducer Revenue

Rat i o,

Cust omer

Concent r at i on,

Cust omer Swi t chi ng

Cost s (r anked),

Inf or mat i on Asymmet r y

(P/C r anked),

Cust omer Rel at ed

Acqui si t i on Pr obabi l i t y

& Power ,

Four -f i r m

Concent r at i on Rat i o,

Pr oducer Tobi n's q

Gover nment Act i ons

(r anked),

Pr oducer

Concent r at i on,

Pr oducer Rel at ed

Acqui si t i ons,

Exi t Bar r i er

Cal cul at i on

Limitations

Access to financial and regulatory information

Public vs. Private

U.S. vs. ROW

Lack of empirical evidence as of yet

Future Research

Instrument development process

(Chen and Paulraj, 2004)

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