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Theoretical models and concepts for business game



1.Environment of the Company

When the company creates the value for its customers, we should keep in mind that it doesn't works in a business-vacuum, but there is a global dynamic environment that influences on firms and consumers. It calls environment of the company. There are 3 levels in it, pic. 1.

Picture 1.Three levels of organizations' environment

The internal environment includes your own department and other groups, resources and equipment of your company. It is believed that the internal environment can be managed and controlled by the managers.

The nearest environment (microenvironment) refers to the forces that are close to the company and affect its ability to serve its customers. It includes company's suppliers, marketing intermediaries, customer markets, competitors, and publics. Managers have no capacity to manage them directly, but they can significantly influence them. This level is also called the competitive environment or operating environment.

The distant environment (macroenvironment) refers to all forces that are part of the larger society and affect the microenvironment. It includes concepts such as demography, economy, natural forces, technology, politics, and culture.

2.The Macroenvironment

Changes in the macroenvironment may act as a threat and as a source of new opportunities for the company. Consequently, the managers who monitor and analyze their macroenvironment have a chance to be more effective. To achieve this goal, you need to know what are the elements of macroenvironment, constantly updating this knowledge and measuring the influence of macroenvironment factors on your company.

STEP (PEST) analysis stands for "Political, Economic, Social, and Technological analysis" and describes a framework of macro-environmental factors. Some analysts added Legal and rearranged the mnemonic to SLEPT, inserting Environmental factors expanded it to PESTEL or PESTLE, which is popular in the United Kingdom.

· Social factors include the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in social factors affect the demand for a company's products and how that company operates. For example, an aging population may imply a smaller and less-willing workforce (thus increasing the cost of labor). Furthermore, companies may change various management strategies to adapt to these social trends (such as recruiting older workers).

· Technological factors include technological aspects such as R&D activity, automation, technology incentives and the rate of technological change. They can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead to innovation.

· Economic factors include economic growth, interest rates, exchange rates and the inflation rate. These factors have major impacts on how businesses operate and make decisions. For example, interest rates affect a firm's cost of capital and therefore to what extent a business grows and expands. Exchange rates affect the costs of exporting goods and the supply and price of imported goods in an economy.

· Political factors are how and to what degree a government intervenes in the economy. Specifically, political factors include areas such as tax policy, labour law, environmental law, trade restrictions, tariffs, and political stability. Political factors may also include goods and services which the government wants to provide or be provided (merit goods) and those that the government does not want to be provided (demerit goods or merit bads). Furthermore, governments have great influence on the health, education, and infrastructure of a nation.

3.Optionaly

It should be noted that the external environment is a system in which all factors are interrelated and interdependent. This demonstrates by the macro-environment model, suggested by Fahey and Narayanan (Fahey and Narayanan, 1986, pp.28-34) pic. 2.

4.Branch of industry structure analysis

Continue to analyze the external environment, going down to the level of the branch of industry. The branch of industry (or simply - industry) is a group of companies whose products have common consumer characteristics and are competing for the same consumer market as well as related companies, partners and suppliers.



5.Industry driving forces

Porter's Five Forces is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979. It draws upon Industrial Organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven down to zero.

Picture. 2. The macroenvironment model (Fahey and Narayanan, 1986)

Three of Porter's five forces refer to competition from external sources. The remainder are internal threats.

Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally, requires a business unit to re-assess the marketplace given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models, have been able to make a return in excess of the industry average.

Porter's five forces include - three forces from 'horizontal' competition: threat of substitute products, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: the bargaining power of suppliers and the bargaining power of customers.

Picture 3. A graphical representation of Porter's Five Forces

6.Let's examine each of the five forces. The threat of the entry of new competitors

Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate will tend towards zero (perfect competition).

· The existence of barriers to entry (patents, rights, etc.) The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily.

· Economies of product differences

· Brand equity

· Switching costs or sunk costs

· Capital requirements

· Access to distribution

· Customer loyalty to established brands

· Absolute cost

· Industry profitability; the more profitable the industry the more attractive it will be to new competitors.

7.The threat of substitute products or services

The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives:

· Buyer propensity to substitute

· Relative price performance of substitute

· Buyer switching costs

· Perceived level of product differentiation

· Number of substitute products available in the market

· Ease of substitution. Information-based products are more prone to substitution, as online product can easily replace material product.

· Substandard product

· Quality depreciation



8.The bargaining power of customers (buyers)

The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes.

· Buyer concentration to firm concentration ratio

· Degree of dependency upon existing channels of distribution

· Bargaining leverage, particularly in industries with high fixed costs

· Buyer volume

· Buyer switching costs relative to firm switching costs

· Buyer information availability

· Ability to backward integrate

· Availability of existing substitute products

· Buyer price sensitivity

· Differential advantage (uniqueness) of industry products

9.The bargaining power of suppliers

The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm, when there are few substitutes. Suppliers may refuse to work with the firm, or, e.g., charge excessively high prices for unique resources.

· Supplier switching costs relative to firm switching costs

· Degree of differentiation of inputs

· Impact of inputs on cost or differentiation

· Presence of substitute inputs

· Strength of distribution channel

· Supplier concentration to firm concentration ratio

· Employee solidarity (e.g. labor unions)

· Supplier competition - ability to forward vertically integrate and cut out the BUYER

For example: If you are making biscuits and there is only one person who sells flour, you have no alternative but to buy it from him.

10.The intensity of competitive rivalry

macroenvironment business strategy

For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry.

· Sustainable competitive advantage through innovation

· Competition between online and offline companies

· Level of advertising expense

· Powerful competitive strategy

· The visibility of proprietary items on the Web used by a company which can intensify competitive pressures on their rivals.

How will competition react to a certain behavior by another firm? Competitive rivalry is likely to be based on dimensions such as price, quality, and innovation. Technological advances protect companies from competition. This applies to products and services. Companies that are successful with introducing new technology, are able to charge higher prices and achieve higher profits, until competitors imitate them. Examples of recent technology advantage in have been mp3 players and mobile telephones. Vertical integration is a strategy to reduce a business' own cost and thereby intensify pressure on its rival...

11.As we have already said, the degree of the new competitors entry is depends on the height of barriers to entry

The concept of barriers to entry was developed at 1956 by Bill Bain. Bayn identified them as the advantage of the longtime players of the industry over the potential players. According to the structure-conduct-performance approach, the barriers to entry are one of the most important factors affecting the structure of the industry. The industry's profit is typically canceled due to the invasion new entrants invasion. However, in the industry with high barriers to entry this occasion doesn't happens, thus, firms-veterans share all the profits among themselves.

Therefore, it is important to analyze the height of its barriers to entry when entering the market.

Barriers to entry into markets for firms include:

Advertising - Incumbent firms can seek to make it difficult for new competitors by spending heavily on advertising that new firms would find more difficult to afford. This is known as the market power theory of advertising.[5] Here, established firms' use of advertising creates a consumer perceived difference in its brand from other brands to a degree that consumers see its brand as a slightly different product.[5] Since the brand is seen as a slightly different product, products from existing or potential competitors cannot be perfectly substituted in place of the established firm's brand.[5] This makes it hard for new competitors to gain consumer acceptance.[5]

Capital - need the capital to start up such as equipment, building, and raw materials

Control of resources - If a single firm has control of a resource essential for a certain industry, then other firms are unable to compete in the industry.

Cost advantages independent of scale - Proprietary technology, know-how, favorable access to raw materials, favorable geographic locations, learning curve cost advantages.

Customer loyalty - Large incumbent firms may have existing customers loyal to established products. The presence of established strong brands within a market can be a barrier to entry in this case.

Distributor agreements - Exclusive agreements with key distributors or retailers can make it difficult for other manufacturers to enter the industry.

Economy of scale - Large, experienced firms can generally produce goods at lower costs than small, inexperienced firms. Cost advantages can sometimes be quickly reversed by advances in technology. For example, the development of personal computers has allowed small companies to make use of database and communications technology which was once extremely expensive and only available to large corporations.

Government regulations - It may make entry more difficult or impossible. In the extreme case, a government may make competition illegal and establish a statutory monopoly. Requirements for licenses and permits may raise the investment needed to enter a market, creating an effective barrier to entry.

Inelastic demand - One strategy to penetrate a market is to sell at a lower price than the incumbents. This is ineffective with price-insensitive consumers.

Intellectual property - Potential entrant requires access to equally efficient production technology as the combatant monopolist in order to freely enter a market. Patents give a firm the legal right to stop other firms producing a product for a given period of time, and so restrict entry into a market. Patents are intended to encourage invention and technological progress by offering this financial incentive. Similarly, trademarks and servicemarks may represent a kind of entry barrier for a particular product or service if the market is dominated by one or a few well-known names.

Investment - That is especially in industries with economies of scale and/or natural monopolies.

Network effect - When a good or service has a value that depends on the number of existing customers, then competing players may have difficulties in entering a market where an established company has already captured a significant user base.

Predatory pricing - The practice of a dominant firm selling at a loss to make competition more difficult for new firms that cannot suffer such losses, as a large dominant firm with large lines of credit or cash reserves can. It is illegal in most places; however, it is difficult to prove. See antitrust. In the context of international trade, such practices are often called dumping.

Restrictive practices, such as air transport agreements that make it difficult for new airlines to obtain landing slots at some airports.

Research and development - Some products, such as microprocessors, require a large upfront investment in technology which will deter potential entrants.

Supplier agreements - Exclusive agreements with key links in the supply chain can make it difficult for other manufacturers to enter an industry.

Sunk costs - Sunk costs cannot be recovered if a firm decides to leave a market. Sunk costs therefore increase the risk and deter entry.

Switching barriers - At times, it may be difficult or expensive for customers to switch providers

Vertical integration - A firm's coverage of more than one level of production, while pursuing practices which favor its own operations at each level, is often cited as an entry barrier.

12.The Case Study

«Attractiveness of the industry for the company IT-Cube»

«IT-Cube» in the market of electronic payment systems

«IT-Cube» - a young company working in the IT and telecommunications branch, who receive payments for various providers of mobile communication and Internet through self-service terminals.

IT-Cube has entered the market of the Ural region of Russia in 2009, shortly ahead of its main competitor - «Goldfish», whose market share in the region was 32%, and hitting the top three of the payment systems industry.

However, as Ural market was already divided and saturated by early 2010, that is significant increase in demand thank to new consumers was not expected, the company's leaders decided to exit the markets of other regions.

The specifics of this business (payment processing) is that companies engaged in it working on different consumer segments, if not in different markets at the same time! At first, the direct consumers of company's services are owners of self-payment terminals, who choose to connect to a particular payment system depending on the set of its services, the number of submitted providers, the size of the commission earned by the owner of the terminal with each payment, and other factors, ranked by importance in Table 1.

Table 1. Attributes of the payment system which presents the value for consumers

Attribute	Weight	Value for the customer	Choice
		IT-Cube	ORMM	Goldfish
Amount of commission	40	5	3	3	IT-Cube
Reward	8	4	5	4
Overdraft	19	4	5	4
Credit to the terminals	18	4	5	4
The cost of maintenance	5	4	4	5
Brand awareness	10	3	5	4
	100	430	415	365

Picture 4. Chart of payment systems in the aspect of customer value



Second, the indirect consumers of payment systems are the taxpayers themselves engaged in payments to recharge their phone or, for example, satellite television. The important factors for them are the availability of territorial available terminal, charged commission, the reliability of payment processing and guaranteed incoming of money to their account. An important factor influencing the choice of the terminal is also a familiar interface, a recognizable logo that can also be seen among the parameters that make up the customer value in Table 1.

Thus, IT-Cube has to balance the interests of different stakeholders.

The next one is the a service provider. In fact, the services of the payment system for processing and delivery of payment from a person - to the provider, pays for it was he, the provider. In fact, it was he who pays the services of the payment system for processing and delivery of payment from a person to the provider. Consequently, everything that goes on account of the payment system - a reward from the providers for each processed payment. Terminal owner makes no payments to the benefit of the payment system.

It turns out that in order to make a payment, pay-systems must have in its list the largest possible number and variety of mobile operators. In its turn this dictates the need to monitor the appearance of new providers and timely response: conclusion of the new contracts with new providers.

In 2010 the company began to develop the strategy of the national market expansion. The information about competitors was gathered. It turned out that Goldfish is dominant in whole Russian market, while ORMM company has more attractive characteristics for consumers and the second place in top-three.

As they study the market in Central, North-West and South regions it has become increasingly clear for IT-Cube marketers, that the rapid growth of the industry is already over. It reached a stage of stability. That means that the expansion in the regions, divided by other players, can now occur mainly due to redistribution of the market and win back market share from competitors. So the company became interested in the situation on foreign markets.



13.Global market of mobile operators

It's known that the lion's share of payments through self-service terminals is payments to mobile operators.

So, in 2010, the number of users in the world of mobile communications close to 5 billion marks. During the year the global subscriber base increased by more than 200 million sim-card, similar growth rates observed in the database industry for the past 8 years. In 2010 the average world level of mobile penetration was 70%, but the degree of penetration in different countries and macro regions varied considerably.

In Europe, the penetration of 128.4% (of registered more than 1 billion sim-cards), while in the Asia-Pacific region reached a penetration of 70% only. However, there is the largest number of users are in this region - 2.443 billion. in the European countries, mobile market is saturated and developed, and therefore conservative in quantitative development. In European countries, mobile market is saturated and developed, and therefore it's conservative in quantitative development.

Here is dominated the majority of users, who has more than 1-2 sim-card, a culture of long-term fix of individual numbers and loyalty to a particular operator. In Africa and the Middle East, penetration is 62.5%. But this may be the high result, considering the low development of ground infrastructure for mobile services in some developing countries (Lebanon, Iraq, Iran, Yemen, Jordan, Syria, etc.).

Markets of China and India are developing most rapidly, as in the growth of users and in building of revenue and profit centers, offering new mobile services, applications and platforms. In China the subscriber base has doubled since 2005 and now is approaching 1 billion users. In India the number of subscribers increased by 10 times and has reached 600 million subscribers. China and India account for 30% of global subscriber base, providing the half of all new subscribers a year on a global scale. Nevertheless, in 2010 the penetration rate in China and India accounted for 65% and 63% respectively.

In the global telecom revenue of mobile communications and mobile services took 56%. In Europe and North America, low revenue growth rate - 2-3% per year. This is due to a high level of market development in these macro regions, as well as changes in state regulation of communication services (roaming), consumer behavior, new forms of communication such as Skype and social networks Facebook and Twitter. However, it is in Europe, there is an active transition from GSM to 3G, and in some areas - already on the LTE.

Revenue growth of the largest mobile operators in 2010 was 11.5%, the rate of profit growth has exceeded 14.2%. Practically all the operators in one way or another achieved revenue growth and profits. Only American operator Sprint has shown a marked decline in revenues, -12.4%, due to the outflow of users because of changing the type of the payment of mobile services (postpaid to prepaid).

In the ranking there are 5 companies from the U.S.A. (Verizon Wireless, AT & T Mobility, Nextel, Sprint and MetroPCS), 4 Chinese companies (China Mobile, China Telecom, China Unicom and Taiwan Mobile), and 3 companies from Canada (Rogers Communications, Telus Mobility and Bell Mobility), India (Bharti Airtel, Reliance Communications and Idea Cellular), Japan (NTT DoCoMo, au (KDDI) and Softbank Mobile) and Russia (MTS, "VimpelCom" and "Megaphone"). Most of European operators (with headquarters in Europe) are pan-continental and cover every country in Europe, North Africa, the Middle East, most countries in South America, the Caribbean, as well as some Asia-Pacific region, the U.S. and Canada: Vodafone, Orange, T-Mobile, Telefonica, Telenor, TeliaSonera and others.

Key factors in the growth of mobile companies in 2010 was the expansion of corporate networks of communication, sales and service of integrated devices for mobile communications and increasing of the voice calls duration. Thus, the network China Mobile committed more than 3.4 trillion minutes of voice calls, 18% more than in 2009; on average, the China Mobile subscribers spent 521 minute per month on communications; in the European Vodafone - 686,6 billion minutes (+25.2%), and subscribers spend 191minutes per month. The growing use of mobile Internet significantly affects the amount of revenue: there are 40% of subscribers in developed countries are already enjoying not actually mobile phones, but mobile multimedia platforms. It requires from the operators the active investment in technologies such as HSPA + + and LTE.

Another important factor is the specific of payments of the European citizens: All kinds of bank cards used to pay for more often, replacing the cash payments.

Thus, the European Society is practically doesn't needs the points to refill mobile accounts, placed in malls, convenience stores or somewhere else. All payments can be made without leaving home through the Internet.

The situation in the Asia-Pacific region is different. Calculations of cash had not lost its relevance there, and people make a lot of cash payments. Cash payments had not lost its relevance there, and people make a lot of cash payments.

The market of mobile phone users in China is 900 million SIM cards. Most of them belong to the cellular network of China Mobile. Payments are made through scratch cards. Depending on the operator and the chosen tariff plan you can buy them in stores, airports, etc.

14.The strategic choice of IT-Cube

Using the proposed theoretical models and concepts, analyze the situation and help IT-Cube to make the strategic choice. What region they should choose for market targeting and why? You could use the external resources with reference to the author.



References

1. http://www.rosbalt.ru/main/2010/03/18/721106.html

2. Shin Hyun Hvak South Korea: the difficult path to prosperity. / / The Problems of Far East. -- 1990. -- № 5.

3. Evans, Ambrose. Thanks to the Bank it's a crisis; in the eurozone it's a total catastrophe, Telegraph.co.uk, 08.03.2009

4. http://tasstelecom.ru/

5. http://sinocom.ru/

6. http://chinadata.ru/

7. Mobile operators' site: Сhina Mobile http://www.chinamobile.com/en/

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