SlidesSession1 Blackboard (2)
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1
What strategy is not (1)
� Strategic positioning is not operational
effectiveness
� The key to distinguishing between the two is to
think about competitive advantage and its
sustainability (i.e. the time dimension)
� What is competitive advantage? What is
operational effectiveness?
What strategy is not (2)
� Competitive advantage
� The various activities that go into creating, producing,
selling and delivering a product or service
� Operational effectiveness
� Refers to performing the above activities better than
rivals (e.g., faster, fewer inputs, etc.)
� Key insight: operational effectiveness might offer
competitive advantage, but this is not sustainable
� Easily emulated
� Eventually – competitive convergence
Strategic positioning
� Strategic positioning
� Attempts to achieve sustainable competitive
advantage by preserving what is distinct about a
company
� Three key principles
1. Strategy is the creation of a unique and valuable
position, involving a unique set of activities
2. Strategy requires making trade-offs (what not to do)
3. Strategy involves creating fit among company’s
activities
� Fit: How company’s activities interact and reinforce one another
Industry Analysis: Porter Five Forces
Threat of New
Entrants
Threat of
Substitute
Products or
Services
Bargaining Power
of Suppliers
Bargaining Power
of Buyers
Rivalry
Among
Existing
Entrants
2
Rivalry Among Existing Entrants (1)
� Refers to competition within an industry
� First need to define the industry, then analyze
factors influencing competition
The model is sensitive to defining the industry
and its boundaries
Tip: It can help find a unique and valuable position
Rivalry Among Existing Entrants (2)
� Why do we care about rivalry/competition?
� Potential for industry profitability goes down as
competition goes up
� How to estimate the threat of competition?
� Intensity and basis of competition
� Number of firms
� Exit barriers
� Similarity in: Goals, Operations efficiency, Products
or services
Note the importance of defining industry boundaries
Threat of new entrants (1)
� Why do we care about potential entrants?
� Entrants can affect industry profitability in a similar way
with incumbents
� How to assess the risk posed by potential
entrants? Barriers to entry
� Examples: patents, exclusive license agreements,
government policy, economies of scale, brand image,
access to efficient distribution channels, etc.
Threat of substitution
� Substitutes refer to product or services in other
industries
� Why do we care about substitutes?
� Offer options to customers. Customers’ choices impact
industry profitability
� Factors influencing the threat of substitution
� Price differentials
� Switching costs
3
Power of suppliers
� Note that the focal firm plays the role of customer
� Threat of entry and Threat of substitution applied to
suppliers’ industry
� Factors influencing power of suppliers
� Competition in the suppliers’ industry (less
competition, more power)
� The number of industry customers the supplier serves
(more industry customers, more power)
� Switching costs in changing suppliers (high costs,
more power)
� Substitutes for suppliers (low substitution, more power)
� Threat of forward integration i.e. absorb the focal firm
Power of buyers
� Note that the focal firm plays the role of supplier
� Power of suppliers applied to the focal firm
� Factors influencing power of buyers
� Number of buyers (many buyers, less power)
� Switching costs of buyers to another firm in the same
industry (low costs, more power)
� Purchasing power
� Threat of backward integration i.e. absorb the focal
firm
Strategy: Big Picture Map
Environment
(Industry Analysis)
Firm
(Internal Analysis)
Core problem(s)
Recommendations
What are
the industry
issues?
Value Chain
CSDs Concentrate
ProducersRetailersBottlers Consumers
Porter Five
Forces
Buyer
4
Industry life cycle
Fragmentation Shake-out Maturity Decline
Valu
e C
reation
Time
Fragmentation
� Companies experiment with different approaches to a
market
� Many firms offer a variety of products, and each
operates at low volumes
� Companies tend to be entrepreneurial and privately
owned; focus on serving narrow geographic areas
� Product lines are limited
� Benchmarking is uncommon
Shake-out
� A dominant model emerges for generating value on a
large scale
� The dominant model:
� More efficient than other approaches
� Gains legitimacy as influential early adopters promote it
through their networks
� Volumes grow quickly
� Unprecedented value is generated for buyers and for
the industry’s suppliers
Maturity
� Growth in volume slows
� Industry structure becomes remarkably stable
� Little change in the ranks of leading firms
5
Decline
� Volumes begin to drop
� Competition can take on a new intensity
� Companies often search for incremental efficiencies
� Leading firms may compete in wars of attrition
Industry life cycle
Valu
e C
reation
Time
Why do successful companies fail to stay atop in the presence of disruptive technologies?
� It happens to the best
� Xerox, Seagate, Kodak
� Why?
� Bureaucracy, arrogance, myopia, tired executive blood,
poor planning, short-term investment horizon……
� Bower & Christensen, “Disruptive Technologies”: Risk of
staying too close to the existing customers
A clarification
� “Disruptive technologies“ are not necessarily entirely
new technologies
� E.g., Desktop PC to Laptop to Tablet
� Architectural changes
� Changes affecting relationships along the value chain
� Changes in technology
6
Value Creation and Value Capture
Buyer Willingness
to Pay (WTP)
Supplier Opportunity
Costs (SOC)
Firm’s
Economic Contribution
Input Price
(= Firm’s Cost)
Product Price
Consumer
Surplus
Supplier
Profits
Firm
Profits
Total value
a firm CREATES
Value a firm
CAPTURES as profits
Sharing Economy
� Sharing Economy also referred to as:
� Peer-to-peer, Mesh, Collaborative (Economy)
� Sharing of excess capacity human and physical
resources
� Relies on leveraging information technology to connect
excess capacity with demand
� Value creation
� When excess-capacity is utilized, the value of those
good increases creating economic value
� Examples: eBay, Airbnb, Uber, Craigslist, etc.
To prevent threat of disruptive technologies
1. Determine whether the technology has the potential to be disruptive
� Ask the technical team, not the marketing or finance groups
2. Identify the strategic significance of the disruptive technology
� Don’t ask your best customers
3. Locate a market for the disruptive technology
� If it doesn’t exist, create it by experimenting rapidly, iteratively and inexpensively
4. House the disruptive technology in an independent entity
Strategy: Big Picture Map
Environment
(Industry Analysis)
Firm
(Internal Analysis)
Core problem(s)
Recommendations
Goal: Search for sustainable competitive advantage
1. Porter Five Forces
� Value Chain
� Industry
boundaries
2. Industry life cycle
� Disruptive
technologies
1. Management
ability (to engage
with potential threats
of disruptive
technologies)
7
Moving away from industry averages
� So far, industry averages
� Average attractiveness, one slice in time: Porter Five
Forces, Value Chain, Industry Boundaries
� Average attractiveness, over time: Industry life-cycle,
disruptive technologies
� However, profitability differences within an
industry
� Within industry variation in attractiveness
� Note: Another reason I told you to ‘play’ with industry
boundaries
Competitive advantage and sustainability
� Important subtle point:
� Competitive advantage and operational effectiveness
� Short-lived
� Competitive advantage and sustainability
� Looking for an advantage that endures over time
� The two are related
� Analyze the first and ideas for the second might
emerge
Definition: Competitive advantage
A firm that achieved a wider wedge between customer
willingness to pay (WTP) and supplier opportunity cost
(SOC) when compared with its rivals is said to have a
competitive advantage within its industry.
Value Creation and Value Capture
Buyer Willingness
to Pay (WTP)
Supplier Opportunity
Costs (SOC)
Firm’s
Economic Contribution
Input Price
(= Firm’s Cost)
Product Price
Consumer
Surplus
Supplier
Profits
Firm
Profits
Total value
a firm CREATES
Value a firm
CAPTURES as profits
Low-cost
strategy
Differentiation
strategy
8
Added value
� Important subtle point:
� The firm can capture higher profits along the wider
wage between customer willingness to pay and
supplier opportunity costs only if the firm can not be
perfectly replaced by another
� This implies the competitive advantage created can be
sustainable if the firm brings something unique (adds
value)
Searching for sources of competitive advantage
� Step 1: Catalog activities
� Map what the firm does
� Step 2: Use activities to analyze costs
� Look for opportunities to lower costs in a way that is not
easily imitated by competitors
� Step 3: Use activities to analyze willingness to pay
� Look for opportunities to raise willingness to pay in a way
that is not easily imitated by competitors
� Step 4: Explore options
� Take a holistic view of the firm
Features of Resources for Competitive
Advantage
� Durable
� Scarce
� Difficult for others to obtain
� Inimitable
� Hard to copy
� Unsubstitutable
� Difficult to replace
� Appropriable
� Resource you can tap
Searching for sources of competitive advantage
Inbound
Logistics
(e.g. Incoming
Material Storage,
Data Collection,
Service, Customer
Access)
Operations
(e.g. Assembly,
Component
Fabrication,
Branch
Operations)
Outbound
Logistics
(e.g. Order
Processing,
Warehousing,
Report
Preparation)
Marketing
& Sales
(e.g. Sales Force,
Promotion,
Advertising,
Trade Shows,
Proposal Writing)
After-Sales
Service
(e.g. Installation,
Customer
Support,
Complaint
Resolution,
Repair)
Firm Infrastructure
(e.g. Financing, Planning, Investor Relations)
Human Resource Management(e.g. Recruiting, Training, Compensation System)
Technology Development(e.g. Product Design, Testing, Process Design, Material Research, Market Research)
Procurement(e.g. Components, Machinery, Advertising, Services)
M
a
r
g
i
n
Primary Activities
Support
Activities
Value Chain
9
Sources of competitive advantage
Value Chain
FIRM
INFRASTRUCTURE
*flat org
*prime locations
HUMAN
RESOURCES
*employees: similar age as customers
*creative team
TECHNOLOGY
DEVELOPMENT
IT IT IT IT IT Support A
ctivitiesPROCUREMENT
OF INPUT
*outsourcing basic
items, in-house
fashion items
*give large run to
small workshops
*quality
*in-house dye
Design:
* 300,000 SKUs, as
compared with
2,000-4,000 SKUs
for the industry
* fast: sketch 9
months ahead
* 4-5 weeks to do
the design
* quick modify
*avoid fashion miss
(wait and see; two
approaches)
*Frequent shipment
(e.g., 24-36 h
delivery to Europe,
24-48 h delivery to
U.S.)
* order from stores:
tailored to local
market demand
* redirect across
countries
* frequent shipping
* standardized price
tags
*Store place an
order; 2 times/week
*managerial
autonomy: order;
store layout
*no ad (reputation;
frequent shoppers;
store display; prime
locations)
*sense of scarcity
(buy fast, avoid
over ordering)
*less marked down:
15-20% items in
Zara were marked
down (30%+ in
industry); price
15% down in Zara
(30% for industry)
(why: predict
fashion, small
batches, respond to
local demand, sense
of scarcity, major
outlet in Spain)
Prim
ary
Activ
ities
INBOUND
LOGISTICSOPERATIONS
OUTBOUND
LOGISTICS
MARKETING &
SALESSERVICE
Sources of competitive advantage
Value Chain
FIRM
INFRASTRUCTURE
* Love of change at the top
* close cross-function relations
*Separate racing division
→racing division is responsible fore contribute to technology development and maintain Ducati’s sport image in
the eyes of its core customers, the “extreme” riders
→given space and budge; independent company
HUMAN
RESOURCES
* Key selection criterion (especially at the top): share passion for Ducati
* Employees at center of advertising campaign
TECHNOLOGY
DEVELOPMENT
* R&D up 4x
Support A
ctivities
PROCUREMENT OF
INPUT
[INBOUND LOGISTICS]
* Reduced suppliers from 200 to 130.
→ increase the average quality of Ducati’s
suppliers (dropped the least efficient ones)
→ increase bargaining power vis-à-vis major
suppliers
*Dual sourcing
→ increase bargaining leverage
*Short Term contracts
[OPERATIONS]
*Increase in outsourcing (up to 90%)
→ Emilian mechanical district, economies of scale
→ closer in distance: Ducati is a key part of the Emilian
district which contains 2400 medium-sized manufacturer
*Little but assembly performed in-house
*Platform approach
* Internalization of design: use internal design to substitute
for external design house it once employed
→ quality control; reduce time to market
Games as Defined by the Rules
� Rules determine the number of options/ alternatives and the sequence of moves in the play of the game.
� Games can be represented in the “normal form.” The payoff matrix has a structure that is a function of the rules of the game
� Games can also be represented in the “extensive form”, where payoffs are indicated at the end of the game tree
Prisoner’s Dilemma
Prisoner A
Not Confess Confess
Prisoner B
Not Confess
(6 months,
6 months)
(10 years,
Free)
Confess
(Free,
10 years)
(2 years,
2 years)
Should confess or
not?
10
What makes a Game a Prisoner’s
Dilemma (PD)?
� We can characterize the set of choices in a PD as:
� Temptation (desire to double-cross other player)
� Reward (cooperate with other player)
� Punishment (play it safe)
� Sucker’s pay-off (for the player who is double-crossed)
� A game is a Prisoner’s Dilemma whenever:
T > R > P > S
e.g., Free > Six months > Two years > Ten years
Example:
Tragedy of the Commons
� Each cow produces 500 lbs of meat & dairy per year up
to or at carrying capacity of the pasture.
� 10 families X 10 Cows X 500 lbs = 50,000 lbs of food at
carrying capacity
…and then Farmer John’s wife has triplets…
One more cow…
� So Farmer John decides he really needs one
more cow
� And there is no one to tell him “No!” because
the commons is an unregulated public good
� Some modern commons are forests, oceans, public
roadways, air quality, etc..
Reduced Capacity
� With the overgrazing, each cow will now produce only 490 lbs of food.
� 101 Cows X 490 lbs = 49,490 lbs of food at carrying capacity
� Each family gets 4900 lbs of meat & dairy, instead of 5000
� Except Farmer John, who gets 5390 lbs
� Even with the reduced carrying capacity, it is still to his advantage toadd the extra cow
11
Looks familiar…?
Look at the situation:
� N players
� Individual solution is to not cooperate
� Joint optimal outcome is to cooperate
� This is an n-person collective Prisoner’s dilemma
In Sum: the conflict between the common interests of the group and free-riding behavior of self-interested individuals
Key Takeaways
� Game theory is a powerful tool for analyzing competitive moves
� Logics can often be changed so a new game is played - use this
to your advantage
� Never assume your opponent’s actions are fixed! Predict their
reaction to your actions
� Complement game theory with competitor profiling to work
around the restrictive assumptions on which game theory is
built – bounded rationality/behavioral theory
� E.g., overconfidence, confirmation bias, escalation of commitment
Retaliate or Accommodate?
� Quantitative reasoning
� 750,000 round-trip sea ferries passengers
� 500,000 round-trip passengers on Aer Lingus and BA
� Ryanair capacity: 4x44x365=64,240 round-trip seats of capacity per year
� Accommodate: Incumbents' annual profits drop anywhere between I£0
and I£8.8mil
� revenue-marginal cost=I£166.5-I£29=I£137.5
� 64,240xI£137.5=I£8.8mil
� Retaliate: Incumbents’ annual profits drop anywhere between I£17mil and
I£34.4mil
� (I£166.5-I£98)x500,000=I£34.4mil
� New customers from price drop: (I£98-I£29)x250,000=I£17.3 and
I£34.4mil-I£17.3mil=I£17mil
Ryanair: Next…
� Aer Lingus and British Airways retaliated
� Ryanair expend its routes drastically
� 1991: Real threat of bankruptcy
� What happened?
� Nothing unique
� Grew too fast
� Operational effectiveness doesn’t offer a sustainable
competitive advantage
12
Ryanair: Low Cost Airline
BA
High-end
services
No-frills
Ryanair
Early Days
BA BA
Ryanair
Today
Agenda
� Corporate strategy: competitive
advantage across multiple markets
� Adding value through
diversification (horizontal
diversification)
� Across product market
� Across geographical markets
� Adding value through vertical
integration
Corporation
Marine protein
business
Oil drilling
business
Internet portal
business
Product-market Diversification
Corporation
Canada Madagascar Singapore
Wool spinning factory
Sheep farm
Garment factory
Retail store
Vertical Integration
Multinational Operations/Geographic Diversification
Corporate Strategy
� Competition occurs at the business-unit level
� Being part of a diversified company involves inevitable costs for
business units
� Often underestimated
� Corporate strategy must produce a clear and offsetting gain in the
competitive advantage of business units which exceeds that available
through alternative governance structures – e.g. alliances; long-term
contracts; spot markets
� Achieved through horizontal diversification and/or vertical
integration
� Be aware of both costs and benefits
Costs - Examples
� Coordination costs
� Integration issues
� Conflicts of interest
� The interest of individual divisions can be misaligned with the interest
of the entire firm (e.g., Ducati)
� Negative spillover between divisions
� Some divisions constrain the development of other divisions (e.g., Ebay
and PayPal)
� Incentive costs (e.g., Facebook and Instagram)
� Capital misallocation
� Internal fight over resource allocation
� Power game
� Division managers fight over power
13
Benefits - Examples
� Economies of scope
� Synergies e.g., Facebook and Instagram
� Diseconomy of scope e.g., Bristol Farms sold by Supervalu
� Cross-selling
� Complementary products e.g., Blockbuster DVD rental and food
sales; Walmart providing financial services
� Relationship-specific investments
� Holdup concerns
� Double marginalization
Ownership?
� Benefits without costs?
� Contracting
� But contracts cannot solve all problems
� Intangible assets e.g., ideas
� Contracts are as good as the ability to enforce them
How to evaluate?
� Better-off test
� Does the presence of the corporation in a given market
improve the competitive advantage of other business units
over and above what they could achieve on their own?
� Ownership test
� Does ownership of the business unit produce a greater
competitive advantage than an alternative arrangement
would produce?
Traditional Disney
� How does this affect which business Disney goes into?
TouchstoneTheme
Parks
Hotels
Film
Cruise
TV
Cable
Channel
Stores
Toys
Books
14
Traditional Disney
� What is good about having animated cartoon characters at the
center of the company?
� Asset doesn’t age or depreciate; it is very durable
� Appropriability
�Warren Buffet: “The Mouse has no agent!”
�All funds retained by Disney
� Hard to imitate
Roger Rabbit
Donald Duck
Why hard to imitate?
� E.g., Warner Bros.
Mighty Mouse
Daffy Duck
Why hard to imitate?
� Can’t substitute for Disney childhood experiences
� Lesson? Disney’s advantage could erode over time if the
company fails to capture the hearts of the next generations
� The complexity and scope of Disney is hard to imitate
� Lesson? Complexity and scope need to be well managed
� Corporate strategy: three dimensions
� Vertical
�Geographic
� Product (horizontal)
Disney after 1995
� What went wrong?
� E.g., Importance of well managed horizontal diversification
and ABC acquisition
� End of Eisner era (2005) and beginning of Iger era (present)
� Geographic
� China expansion e.g., Shanghai Disney Resort
� Product
� Acquisition of Pixar, Marvel Entertainment and
Lucasfilm
� Focus on maintaining the relevance of old characters and
building new characters: Back to the initial successful business
model
15
Industry definition
� A corporate strategy approach
Classic Equipment
� Football
� Soccer Ball
� Golf clubs
� Sports bag
� Etc.
Apparel
� T-shirts
� Shorts
Technology Equipment
� Apps
� Wearables
� Training programs (e.g.,
Xbox Kinect game)
Athletic
footwear
Industry Analysis
� Industry definition: Athletic footwear
� Present time
� Value chain
� Porter Five Forces
Threat of substitution
� Substitutes refer to product or services in other
industries
� Why do we care about substitutes?
� Offer options to customers. Customers’ choices impact
industry profitability
� Factors influencing the threat of substitution
� Price differentials
� Switching costs
Power of suppliers
� Factors influencing power of suppliers
� Competition in the suppliers’ industry (less
competition, more power)
� The number of industry customers the supplier serves
(more industry customers, more power)
� Switching costs in changing suppliers (high costs,
more power)
� Substitutes for suppliers (low substitution, more power)
� Threat of forward integration i.e. absorb the focal firm
16
Power of buyers
� Factors influencing power of buyers
� Number of buyers (many buyers, less power)
� Switching costs of buyers to another firm in the same
industry (low costs, more power)
� Purchasing power
� Threat of backward integration i.e. absorb the focal
firm
Threat of new entrants
� Barriers to entry
� Supply-side economies of scale e.g., Automotive
� From fixed costs
� From variable costs
� Demand-side economies of scale e.g., Cell phones
� Network effects
� Switching costs e.g., ERP software packages
� Government policy that regulates entry e.g., Liquor
retailing
� Other incumbency advantages e.g., IP, access to
distribution channels
Rivalry Among Existing Entrants
� Why do we care about rivalry/competition?
� Potential for industry profitability goes down as
competition goes up
� How to estimate the threat of competition?
� Intensity and basis of competition
� Number of firms
� Exit barriers
� Similarity in: Goals, Operations efficiency, Products
or services
Industry Analysis
� Industry definition: Athletic footwear
� Present
� Value chain
� Porter Five Forces
�Highly competitive industry
� Industry life-cycle
�Maturity
� Within industry sources of competitive advantage?
�Differentiation strategy
�Drive a wider wage in a way that is not easily imitable
by competitors