Agenda

• H.W. – Industry analysis

• Reminder:
• Individual assignment due on March 8th (16 days)
• Group projects – begin to consider team formation
• Mid-term on March 24th
• Homework graded today
• Industry Attractiveness (in reference to your group project)
and completing political risk (micro)
Political Risk
• Definition:

“Governmental or societal actions and policies originating either

inside or outside the host country, and negatively affecting
either a select group, or a majority of, foreign business
operations.”
- Alon and Herbert, Business Horizons, 2009(52): 129.
 The Dimensions of Political
Risk
Macro Micro

Internal External

Positive Negative

Adapted from Alon and Herbert. 2009. A Stranger in a Strange Land: Micro-political
Risk and the Multinational Firm, Business Horizons, 52: 127-137.
In 2006, Dubai Ports World
Attempted to Buy U.S. Ports
Macro X Micro

Internal X External

Positive X Negative
In 2020, the Trump
Administration Imposed Fresh
Sanctions on Iranian Oil (Total)
Macro X Micro

Internal X External

Positive X Negative
Example: The Case of
Argentina and Repsol (2012)
• Argentina is a democratic republic and has a legal system that is
based on civil law (established precedent)
• Spanish (home country) oil company, Repsol, set up business
operations in Argentina (host country) to exploit oil and gas
discoveries through its YPF subsidiary (note: Repsol had a controlling
interest – 51%)
• In 2012, the Argentinian Senate voted to make Argentina fuel self-
sufficient by expropriating YPF, which was confiscated (ownership
risk) without compensation by way of a bureaucratic decree by
Argentinian President, Cristina Kirschner (not civil law).
• The move was intended to wean Argentina off the dependence of
foreign oil production and to return the country’s natural resources
to the control of the Argentinian people by way of nationalizing the
company.
• Spain threatened Argentina with trade sanctions and sued Argentina
in the EU and U.S.’ Court of International Trade (forum shopping) in
pursuit of a resolution.
The Case of Argentina and
Repsol
• Watch
• Argentina Senate Approves Oil Nationalization

• Who are the parties involved?

• Host country - Argentina; Home country - Spain; Company – Repsol

(parent - Spain)/YPF (subsidiary - Argentina)

• In your own words, describe what has happened in this scenario.

Why do you think this happened?

• What type of political risk was Repsol subjected to?

• Was the decision of the Argentinian government representative of

macro or micro, internal or external, positive or negative political
risk?
Discussion Answers: The Case
of Argentina and Repsol
• Who are the parties involved?
• Host country - Argentina; Home country - Spain; Company – Repsol (parent -
Spain)/YPF (subsidiary - Argentina)
• In your own words, describe what has happened in this scenario. Why
do you think this happened?
• Argentinian President, Ms. Cristina Kirschner, issued a decree to take over
YPF; no notice; people of the country supported the move; foreign executives
had to leave!
• What type(s) of political risk was Repsol subjected to?
• Confiscation of the YPF subsidiary; Forced repatriation of Repsol executives;
campaign against foreign companies?
• Was the decision of the Argentinian government representative of
macro or micro, internal or external, positive or negative political risk?
• Micro – targeted at oil companies (YPF)
• Internal – from within the host country (Argentina)
• Negative – losing control of YPF operations; executives were forced home
The Case of Argentina and
Repsol
• What could Repsol have done after this event happened?
• Law suits; WTO; retaliation; lobbying broader political entities (EU) –
coalition to retaliate; media blitz
• Watch
• Repsol files international complaint over YPF
• Repsol-YPF Nationalization

• In your opinion, what would have been the long-term implications

for Argentina as a result of this decision?
• Shrinking of foreign investment; retaliation; domestic economic
activity would have to replace exiting foreign business; less
resources; trade barriers (tariffs); embargoes; lower levels of
availability of products made abroad; inflation
• Watch Argentina and Repsol Reach YPF Deal
Types of Political Risk
• Confiscation (political/legal)
• Campaigns against foreign goods (Indian Hindus against
McDonald’s) – (sociocultural)
• Legislation to mandate labor benefits (e.g. mandatory
minimum wage and health benefits) - (political/legal)
• Kidnappings and terrorist threats (Latin America in the 1980s)
– (sociocultural)
• Civil war – (political/legal)
• Inflation (Venezuela inflation at 2,665%) – (economic)
• Forced repatriation – (political/legal)
• Increased taxation – (political/legal)
• Currency devaluations - (political/legal)
 A Model for Assessing Political
Risk
Home
Economic- Country
related

Contribution
Society- Macro Political Micro Political
related Risk Risk

Barg. Power

Gov’t.-
related
Host Country Home Country Governance
(e.g. Argentina) (e.g. Spain)

Adapted from Alon and Herbert. 2009. A Stranger in a Strange Land: Micro-political
Risk and the Multinational Firm, Business Horizons, 52: 127-137.
 Macro: Economic

Internal External
Labor conditions Host country economic
independence
Convergence with national Adverse home country economic
economic interests (e.g. strategic policies (e.g. currency
industries) manipulation) => retaliation
Availability of alternative
suppliers (e.g. state intervention)

Adapted from Alon and Herbert. 2009. A Stranger in a Strange Land: Micro-political
Risk and the Multinational Firm, Business Horizons, 52: 127-137.
 Macro: Social (Sociocultural)

Internal External
Power distance (high = more Public opinion (host) about home
authoritarian) country
Uncertainty avoidance (high = Cultural distance may diminish
nationalistic and less likely to trust
accept foreign ideas)
Collectivism (high = nationalistic
and group interests)

Adapted from Alon and Herbert. 2009. A Stranger in a Strange Land: Micro-political
Risk and the Multinational Firm, Business Horizons, 52: 127-137.
 Macro: Government
(Political/Legal)
Internal External
Emergence of nationalism (high = Diplomatic relations (goodwill or
expropriation) hostility)
Gov’t. control and intervention Membership in trade agreements
(decisions motivated by politics) or currency unions
Congruence with gov’t. goals Currency stability

Adapted from Alon and Herbert. 2009. A Stranger in a Strange Land: Micro-political
Risk and the Multinational Firm, Business Horizons, 52: 127-137.
 Micro: Contribution to the
Economy
• Level of technology
• Size of operations
• Level of exports

Adapted from Alon and Herbert. 2009. A Stranger in a Strange Land: Micro-political
Risk and the Multinational Firm, Business Horizons, 52: 127-137.
 Micro: Bargaining Power of the
Firm Relative to Government
• Dependence on local market
• Extent of natural resource-seeking
• Level of firm diversification

Adapted from Alon and Herbert. 2009. A Stranger in a Strange Land: Micro-political
Risk and the Multinational Firm, Business Horizons, 52: 127-137.
 Micro: Governance Structure
• Extent of local ownership
• Financial policies in line with BoP
• Intra-corporate transfers

Adapted from Alon and Herbert. 2009. A Stranger in a Strange Land: Micro-political
Risk and the Multinational Firm, Business Horizons, 52: 127-137.
A Departure: Industry Analysis
(Is the Industry Attractive?)
• Who does what in the industry (Industry Value Chain)?
• Where on the industry lifecycle is the industry located?
• What is the structure of the industry?
• Does the industry’s structure allow for profitability? Will it
going forward?
 Conceptualizing the External
Environment
Economic

T.N.E. Political/
Ecological
Legal
Buyers Suppliers
Company
/Institution

Rivalry Substitutes

Sociocultural Technological
 Industry Value Chain: Smartphone
Example
Upstream Downstream
Activities Activities

U U D D D CUSTOMER

Sourcing Mktg. Retail

Mfg. Distribution
• Raw materials • Identify and target
(aluminum, etc.) market • Own (physical and
• Components (e.g. • Set pricing strategy online) stores (e.g.
batteries, Gorilla • Advertise Apple)
Glass, etc.) • Ship phones in bulk
• Competitors: • 3rd-party stores (e.g.
• Competitors: to stores
Samsung, Huawei, Sharaf D.G.)
Panasonic, Corning, • • Ship individual
Assembly Apple, etc. • Competitors:
etc. purchases to
• Quality Control Samsung, Huawei,
consumer
• Competitors: Apple, etc.
• Competitors:
Samsung, Huawei, Samsung, Huawei,
Apple, etc. Apple, etc.
 Industry Value Chain: Commercial
Aircraft Mfg.
Upstream Downstream
Activities Activities

U U D CUSTOMER

Suppliers Buyers
Rivals
• Jet engines (e.g.
Rolls-Royce, Pratt & • Commercial airlines!
Whitney, and G.E.)

• Boeing and Airbus

Industry Lifecycle: The
Example of Smartphones
Industry Lifecycle
Unit Sales

Profits

Stage/Factor Introduction Growth Maturity Decline

Demand Limited to early Demand increases Knowledgeable Obsolescence
adopters; high with market /price sensitive
income consumer; penetration customers; more
few segments segments
Products Poor quality; Design and quality Standardization & Commodities;
product diversity improve commoditization differentiation
difficult
Intensity of Few companies Entry, mergers, and Price competition Price wars and
Competition exits and shakeout exit
Porter’s 5 Forces Model
Threat of New
Entrants

Intensity of
Bargaining Bargaining
Competitive
Power of Power of
Rivalry
Suppliers Buyers
(Existing Firms)

Threat of Substitute
Products or Services
Classifying Industry Actors
• Who are the buyers and what do they want?
• End users want good quality, reliable, efficient devices that convey
some degree of status
• Competitive price
• Who are suppliers and what do they want?
• Makers of components including Gorilla Glass (e.g. Corning),
batteries (e.g. Panasonic), and providers of commodities like
aluminum
• Fair price for their outputs
• What substitutes are arriving?
• Tablets, game consoles, etc.
• What is the likelihood that new entrants will arrive?
• The industry is in late-stage maturity/decline
• What is the nature of rivalry? On what dimensions? How intense is it?
• Smartphone as commodity with price being a major factor and
minimal performance differences across brands
 Bargaining Power of Buyers
Buyer power increases when:
• Number of buyers is few (relative to suppliers)
– monopoly
• Buyers pose a credible threat of backward
integration Industry
Bargaining Power
of Buyers (Profitability)
• Buyers are sensitive to cost and service
differences
• Buyers switching costs are relatively low
• Substitute products are readily available
• Suppliers product/service is seen as relatively
undifferentiated
• Buyers are knowledgeable about product/costs
 Bargaining Power of Buyers
5-Forces Trends Threat Level
(1-5)
Buyers have a variety of options in the marketplace including 5
multiple from Samsung, Huawei, and Apple among others)
Buyers increasingly sensitive to cost due to economic 5
conditions
Relatively easy to switch from one manufacturer to another 4
Buyers have very rich information network and can use 5
information to know true cost and to compare features
Buyers have access to substitutes for some processes (e.g. 2
tablets)
…

Average 4
Dr. Patrick L. McClelland
 Bargaining Power of Suppliers
Supplier power increases when:
• Number of suppliers is few relative to the
number of buyers – monopsony
• Suppliers pose a credible threat of forward
integration
• Substitute products (of suppliers outputs) are Bargaining Power Industry
not readily available of Suppliers (Profitability)
• Importance of the buyers to the supplier is
relatively low
• Suppliers product/service is seen as relatively
differentiated
• Buyers switching costs are high
• Amount of products that the buyers’ industry
purchases from the supplier is high
 Bargaining Power of Suppliers
5-Forces Trends Threat Level
(1-5)
Access to raw materials (lithium, potash, aluminum) is 4
increasingly constrained
Very few manufacturers for high performance components 4
(e.g. only Corning makes Gorilla Glass, Taiwan Semiconductor,
Intel, and AMD – an oligopoly dominate microprocessor mfg. )
Component manufactures experience diversity in their output 5
markets (microprocessors may be made for servers; Gorilla
Glass may be made for tablets)
Phone manufacturers buy large quantities of supplier output 1
…

Dr.Average
Patrick L. McClelland 3.5
 Threat of Potential New Entrants
New entry is likely when entry barriers are
low (NPV >0?):
• Industry growth rate is high
• Incumbents’ economies of scale are low
• Capital requirements are low Threat of Industry
New Entrants (Profitability)
• Distribution channels are accessible
• Buyer switching costs are low
• Expenditures in R&D are low
(entrepreneurial risk)
• Expected retaliation is low (predatory
pricing)
• Availability of profit is high
Threat of New Entrants
5-Forces Trends Threat Level
(1-5)
Industry in late-stage maturity/decline 1
Market is dominated by top-3 manufacturers – CR(3) = 90 1
Large scale factories required in order to ramp up production 1
Profit margins on the decline 1
Buyer switching costs are low 5
Expected retaliation is high (e.g. lawsuits based on 1
accusations of IP infringement; price wars, etc.)
…

Average 2.33
 Threat of Substitutes
Threat of substitutes increases when:
• Buyer switching costs are low
• Availability of substitute products is high
• Quality and performance are perceived as
Threat of Industry
equal or better (Profitability)
Substitutes
• Price level of substitutes is lower/value is
perceived to be higher
Threat of Substitutes
5-Forces Trends Threat Level
(1-5)
Tablets can be used for much of what a smartphone is used for 4
(who makes calls, anyway?)
Game consoles better for gaming 4
…
.

Average 4
 Intensity of Competitive Rivalry
Intensity of Rivalry is high when :
• Competition is “perfect”
• Products/services are perceived as
commodities
Intensity of Industry
• Excess capacity is high (Profitability)
Rivalry
• Competition is driven by cost advantages
• The rate of industry growth is low
• Fixed costs are high relative to total costs
• Strategic stakes are high
• Level of asset specificity is high
 Intensity of Rivalry
5-Forces Trends Threat Level
(1-5)
Saturated market with 3 major competitors 5
Mature/declining industry with slowing growth in sales 5
Buyers who know the true value proposition of a commodity 5
product
Substitutes that can be used for specialized purposes 5
…

Average 5

Dr. Patrick L. McClelland

 Interpreting Industry Analysis
Characteristics Attractive Unattractive
(Profitable) (Unprofitable)
• Buyer Power Low (1) High (5)
• Supplier Power Low (1) High
(5)
• Threat of Substitutes Low (1) High
(5)
• Threat of New Entrants Low (1) High
(5)
• Competitive Rivalry Low (1) High
(5)
Dr. Patrick L. McClelland
Interpreting Industry Analysis
Characteristics Threat Level

• Buyer Power 4
• Supplier Power 3.5
• Threat of Substitutes 3
• Threat of New Entrants 1.33
• Competitive Rivalry 5
• Industry Growth 5
Is the Smartphone Business
Attractive?
• Bad news!
• Highly competitive industry
• Slowing growth in volumes with narrow profit
margins
• Substitutes have arrived and will continue to do so
• Consumers who are increasingly price-sensitive
• Commodity products with limited performance
differences to separate
•…
Commercial Aircraft Manufacturing
Characteristics Threat Level

• Buyer Power 4
• Supplier Power 3.5
• Threat of Substitutes 3
• Threat of New Entrants 1.33
• Competitive Rivalry 5
• Industry Growth 5
Is the Commercial Aircraft
Manufacturing Industry Attractive?
• Bad news!
• Highly competitive industry
• Slowing growth in volumes with narrow profit
margins
• Substitutes have arrived and will continue to do so
• Consumers who are increasingly price-sensitive
• Commodity products with limited performance
differences to separate
•…
Where to Find Data About the
External Environment
• Macro: General Business Press
• Gulf News, Arabian Business, Zawya, MEED, The Economist, Wall
Street Journal, The Financial Times, New York Times, etc….)
• Industry definition – Standard Industrial Classification Code:
https://siccode.com
• Micro: Industry Reports
• Analysts
• IBIS World and Standard and Poors (available via Library ILL; act quickly!)
• Government agencies (e.g. U.S. Department of Commerce)
• Industry reports – Oil and Gas
• Trade Associations (e.g. IATA)
• IATA Annual Review
• Consulting companies (e.g. Bain & Company)
• Bain Publications
• Frontline Healthcare Report
• Bloomberg terminals in the ITF