IA 32 2006

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Presentation Transcript

Overview : Industry Analysis: 

Overview : Industry Analysis Wai Chamornmarn Thammasat university 2006

International Trade Theory: 

International Trade Theory Why do nations trade with each-other? How do different theories explain trade flows? How does free trade raise the economic welfare of all participating nations? Any disagreements? Can government actively influence a country’s competitive advantage? Why is an understanding of trade theory important for managers?

An Overview of Trade Theory: 

An Overview of Trade Theory Free Trade occurs when a government does not attempt to influence, through quotas or duties, what its citizens can buy from another country or what they can produce and sell to another country. The Benefits of Trade allow a country to specialize in the manufacture and export of products that can be produced most efficiently in that country. The Pattern of International Trade displays patterns that are easy to understand (Saudi Arabia/oil or China/crawfish). Others are not so easy to understand (Japan and cars). The history of Trade Theory and Government Involvement presents a mixed case for the role of government in promoting exports and limiting imports. Later theories appear to make a case for limited involvement. 4-7

Capitalism Requires: 

Capitalism Requires Consumers. Monopolies and imperfect forms of competition to facilitate the accumulation of capital. Pure competition feeds the market economy, not necessarily capitalism. Capital and credit have always been the surest way of capturing and controlling a foreign market. True in all forms of capitalism since the 15th century Florentines. 13th century - Florence. 16th century - Augsburg, Antwerp, Genoa, 18th century - Amsterdam and London 19th and 20th centuries - New York 21st century - Beijing??

Amartya Sen – The Modern Face of Capitalism?: 

Amartya Sen – The Modern Face of Capitalism? 1998 Nobel Prize winner in Economic Science. Developed and developing nations face the persistence of poverty, hunger, violations of basic freedoms, environmental issues and concerns about sustainability of economic and social lives. Overcoming these problems is central to development. “Expansion of freedom is viewed…both as the primary end and as the principal means of development.” “Development consists of the removal of various types of unfreedoms that leave people with little choice and little opportunity of exercising their reasoned agency.”

Sen’s Prescription: 

Sen’s Prescription What people can achieve is influenced by: Economic opportunities (process vs. opportunity freedom). Political liberties. Social power. Conditions of good health. Basic education. Encouragement and cultivation of initiatives. Freedom to enter labor markets and exchange freely.

Rod’s 21st Century Synthesis: 

Rod’s 21st Century Synthesis Capitalism is becoming more accessible with the advent of globalization and technology. Knowledge and human capital are becoming the most important sources of capital (knowledge capitalism). Increase transience and fragmentation in “centers of gravity” of capitalism. Decreased periods of competitive advantage. More freedom in the world.

Free Trade : 

Free Trade Free trade refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country. USA imports most of the sneakers and jeans consumed although these can be produced at home. Why???

International Trade Theory: 

International Trade Theory What is international trade? Exchange of raw materials and manufactured goods (and services) across national borders Classical trade theories: explain national economy conditions--country advantages--that enable such exchange to happen New trade theories: explain links among natural country advantages, government action, and industry characteristics that enable such exchange to happen

Classical Country-Based Theories: 

Classical Country-Based Theories Mercantilism Emerged in England in the mid-16th century It is in a country’s best interest to maintain a trade surplus, to export more than it imports. Takes an us-versus-them view of trade; other country’s gain is our country’s loss Government intervention to achieve a surplus in the balance of trade. Neo-mercantilism views persist today

Free Trade supporting theories : 

Free Trade supporting theories Show that specialization of production and free flow of goods grow all trading partners’ economies. Absolute Advantage (Adam Smith, The Wealth of Nations, 1776) countries differ in their ability to produce goods efficiently, and that a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it. countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for the goods produced by other countries.

Absolute Advantage: 

Absolute Advantage Adam Smith: The Wealth of Nations, 1776 Mercantilism weakens a country in the long run and enriches only a few segments A country should specialize in and export products for which it has absolute advantage; import others A country has absolute advantage when it is more productive than another country in producing a particular product Rice Ghana 40 G' 15 50 S. Korea 30 Cocoa

Free Trade supporting theories, cont’d.: 

When each country has an absolute advantage in one of the products, it is clear that trade is beneficial. But what if one country has an absolute advantage in both products? Comparative Advantage (David Ricardo, Principles of Political Economy.1817) it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself. Many assumptions Free Trade supporting theories, cont’d.

Comparative Advantage: 

Comparative Advantage David Ricardo: Principals of Political Economy, 1817 Country should specialize in the production of those goods in which it is relatively more productive... even if it has absolute advantage in all goods it produces Absolute advantage is really a special case of comparative advantage Rice Cocoa 30 12 15 50 Ghana S. Korea

Classic Theory Limitations: 

Classic Theory Limitations Fundamentally: Free Trade expands the world “pie” for goods/services Theory Limitations Simple world (two countries, two products) no transportation costs no price differences in resources resources immobile across countries constant returns to scale each country has a fixed stock of resources and no efficiency gains in resource use from trade full employment

Simple Extensions of the Ricardian Model: 

Simple Extensions of the Ricardian Model Immobile resources: Resources do not always move easily from one economic activity to another. Diminishing returns: More a country produces, at some point, will require more resources (diminishing returns to specialization). Different goods use resources in different proportions. However: Free trade might increase a country’s stock of resources (as labor and capital arrives from abroad), and Increase the efficiency of resource utilization. 4-16

Ghana’s PPF under Diminishing Returns: 

Ghana’s PPF under Diminishing Returns Figure 4.3

The Influence of Free Trade on the PPF: 

The Influence of Free Trade on the PPF Figure 4.4

Heckscher (1919)-Ohlin (1933) Theory : 

Heckscher (1919)-Ohlin (1933) Theory The pattern of international trade depends on differences in factor endowments not on differences in productivity Absolute amounts of factor endowments matter Products differ according to the types of factors that they need as inputs A country has a comparative advantage in producing products that intensively use factors of production (resources) it has in abundance Factors of production: labor, capital, land, human resources, technology Leontief paradox: US has relatively more abundant capital yet imports goods more capital intensive than those it exports Explanation(?): US has special advantage on producing new products made with innovative technologies These may be less capital intensive till they reach mass-production state

International Product Life-Cycle (Vernon): 

International Product Life-Cycle (Vernon) As products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade. Most new products initially conceived and produced in the US in 20th century US firms kept production close to the market Aid decisions; minimize risk of new product introductions Demand not based on price yet; low production cost not an issue Limited initial demand in other advanced countries Exports more attractive than production there initially With demand increase in advanced countries Production follows there. With demand expansion elsewhere Product becomes standardized production moves to low production cost areas Product now imported to US and to advanced countries

The Product Life-Cycle Theory: 

The Product Life-Cycle Theory Figure 4.5 4-24 production consumption Exports 160 140 120 100 80 60 40 20 0 United States Other Advanced Countries Developing Countries Stages of Production Development New Product Standardized Product Maturing Product Imports Imports Exports Exports Imports 160 140 120 100 80 60 40 20 0 160 140 120 100 80 60 40 20 0

The New Trade Theory: 

The New Trade Theory Began to be recognized in the 1970s. Deals with the returns on specialization where substantial economies of scale are present. Specialization increases output, ability to enhance economies of scale increase. In addition to economies of scale, learning effects also exist. Learning effects are cost savings that come from “learning by doing”. 4-25

Application of the New Trade Theory: 

Application of the New Trade Theory Typically, requires industries with high, fixed costs. World demand will support few competitors. Competitors may emerge because “they got there first”. First-mover advantage. Some argue that it generates government intervention and strategic trade policy. 4-26

First-Mover Advantage: 

First-Mover Advantage Economies of scale may preclude new entrants. Role of the government. 4-27

Competitive Advantage: 

Competitive Advantage Porter’s “National Diamond” “Advantages throughout the ‘diamond’ are necessary for achieving and sustaining competitive success … [but] Advantage in every determinant is not a prerequisite…” (73)

Competitive Advantage: 

Competitive Advantage Factors matter but may enhance CA through their absence: “an abundance of factors may undermine instead of enhance competitive advantage. Selective disadvantages in factors, through influencing strategy and innovation, often contribute to sustained competitive success.” (74) Opposite of economic theory belief Gives example of Holland’s advantage in flowers “despite its cold, grey climate”… Second factor also important for Dutch flowers: Home demand Quality more important than quantity Discerning consumers drive product innovation

Competitive Advantage: 

Competitive Advantage “Nations gain competitive advantage … where the home demand gives local firms a clearer or earlier picture of buyer needs… if home buyers pressure local firms to innovate faster…” (86) “A product’s fundamental or core design nearly always reflects home market needs.” (87) “small nations can be competitive in segments which represent an important share of local demand but a smaller share of demand elsewhere, even if the absolute size of the segment is greater in other nations.” (88)

Competitive Advantage: 

Competitive Advantage Related & supporting industries Suppliers assist “process of innovation and upgrading… Suppliers help firms perceive new methods and opportunities to apply new technology.” (103) The full pattern of interlinking industries is very complex…

Competitive Advantage: 

Competitive Advantage A more disaggregated view…

Competitive Advantage: 

Competitive Advantage Competitive advantage in suppliers means spinoffs from one industry can be means to develop new ones “Italian world leadership in gold and silver jewelry has been sustained … because other Italian firms produce two-thirds of the world’s jewelry-making machinery.” (101) Related industries give strength to each other…

Competitive Advantage: 

Competitive Advantage Competitive advantage in related industries

Competitive Advantage: 

Competitive Advantage “Japan's strength in long-filament synthetic textile fibers reflects a long tradition of success in silk, as does a leading export position in silk-like continuous synthetic weaves, woven from long-filament synthetic fibers. Carbon fibers employ technology closely related to synthetic filament fibers and many of the same competitors participate in both. Also, while not overall leaders in textile machines, Japanese firms are leaders in water jet weaving machines, used to weave long-filament synthetic fibers into synthetic weaves. Such groups of linked competitive industries in a nation are common.” (105)

Competitive Advantage: 

Competitive Advantage Firm strategy structure & rivalry “No one management system is universally appropriate” But character of national management structure needs to suit needs of industry. “Nations will tend to succeed … where the management practices and modes of organization favored by the national environment are well suited to the industries’ sources of competitive advantage. Italian firms … are world leaders in a range of fragmented industries … operating in small niches… In Germany … the engineering and technical background of many senior executives produces a strong inclination towards methodical product and process improvement…” (108)

Competitive Advantage: 

Competitive Advantage National goals Short term focus of US firms—advantage in accounting Long term focus of German/Japanese—advantage in engineering… Domestic rivalry Desire to beat own national competitors often drives innovation Italian supercars; Japanese electronics; US software, computers… “With little domestic rivalry, firms are more content to rely on the home market.” (119)

Competitive Advantage: 

Competitive Advantage Japan in particular has large number of internationally competitive firms in different industries:

Competitive Advantage: 

Competitive Advantage National competitive advantage therefore tends to occur in clusters Geographic clusters: “Many of the Italian jewelry firms, for example, are located around two towns, Arezzo and Valenca Po…” (120) Industry clusters Related industries and supplier-buyer chains

Competitive Advantage: 

Competitive Advantage “The individual determinants that define the national environment are mutually dependent because the effect of one often depends on the state of the others…” (129) Example of clustering: Denmark

Competitive Advantage: 

Competitive Advantage

Competitive Advantage: 

Competitive Advantage Geographic clustering also strikingly obvious: Clustering of internationally competitive industries in Italy:

Competitive Advantage: 

Competitive Advantage Interactions in the “Diamond” for Italian Ski Boot industry:

Implications for Business: 

Implications for Business Location implications:makes sense to disperse production activities to countries where they can be performed most efficiently. First-mover implications:It pays to invest substantial financial resources in building a first-mover, or early-mover, advantage. Policy implications:promoting free trade is generally in the best interests of the home-country, although not always in the best interests of the firm. Even though, many firms promote open markets.

Export orientation: 

Export orientation Specialization on comparative advantage Requires successive stages of comparative advantage (flying geese model) Supported by export subsidies which are only given temporarily

Characteristics of developmental state (Gerschenkron, 1962): 

Characteristics of developmental state (Gerschenkron, 1962) Vertically integrated enterprises Development of investment banking Major role for government in investment decision making Resolve problems on asymmetric information by finance for industrialization, mobilize savings and develop infant industries  Hence: a large role for government and a strong orientation towards industrialization

Rethinking the East Asian Miracle (Stiglitz and Yusuf, 2001): 

Rethinking the East Asian Miracle (Stiglitz and Yusuf, 2001) Optimal macroeconomic management depends on range of country-specific factors Slower accumulation of human & physical capital gives greater role for TFP & technology assimilation Exports as engine of productivity growth is questionable, whereas imports and investment are more often seen as driving forces Interventionist policies are increasingly difficult with global capital markets and free trade With increased complexity of economic relationships, market-based rules for contracting, property and other rights emerge

“So What” for business?: 

“So What” for business? There are at least three main implications of the material discussed in this chapter for international businesses: First mover implications invest to be first, particularly in global industries or in markets which can support a few firms Location Implication if countries have comparative advantages MNEs want to locate appropriate activities in those countries… Government Policy implications companies generate imports and exports. Thus can influence government decisions on trade policy... Foreign Investment Decisions

Which factors influence a host country’s national competitiveness? : 

Published in: S. O’Donnel, T.Blumentritt/Journal of International Management 5 (1999) Which factors influence a host country’s national competitiveness?

Cluster Analysis: What Is It?: 

Cluster Analysis: What Is It? “Clusters are geographically close groups of interconnected companies and associated institutions in a particular field, linked by common technologies and skills.” Michael Porter, Clusters of Innovation, 2002 “Binding the cluster together are ‘buyer-supplier relationships, or common technologies, common buyers or distribution channels, or common labor pools.’ Competitive firms make a competitive cluster … and economic self-interest is ultimately the glue that binds the cluster together.” Edward M. Bergman and Edward J. Feser, Industrial and Regional Clusters: Concepts and Comparative Applications, 1999

Case Study: 

Case Study Diamond-Framework contents additional factors

Cluster Characteristics: 

Cluster Characteristics Critical Factors for Cluster Emergence Strong, diverse and tech-savvy talent pool Florida’s three ‘T’s Presence of established pillar companies with global reach Strong knowledge infrastructure research university, government labs etc. Risk tolerant venture capital and angel investors Sustained development strategies by civic entrepreneurs and local governments (civic capital)

Flying Geese model of trade structures in East Asia: 

Flying Geese model of trade structures in East Asia

Behind the shifting structure: 

Behind the shifting structure Stress on industrialization through protectionism; financed by foreign loans Period of liberalization; Importance of OFWs

Successive stages of comparative advantage in East-Asian trade structure: 

Successive stages of comparative advantage in East-Asian trade structure 1) Primary import-substitution: replace labour intensive manufacturing imports with domestically produced goods 2) Primary export-“substitution”: replace agricultural exports by labour-intensive manufacturing exports 3) Secondary import-substitution: production of intermediate and capital goods for domestic market 4) Secondary export-“substitution”: shift from labour-intensive to capital- and knowledge intensive production

Conclusions on industrialization: 

Conclusions on industrialization Industrial development requires productivity growth beyond exploitation of capital Export orientation is more supportive growth, but requires strong developmental state Careful balance between transferring resources from agriculture and supporting development within agriculture Support of “informal” sector can be potential source of growth

Macro Environment: 

Macro Environment Interest Rates Inflation Rates Employment Levels Regulatory Climate Tax Policy Consumer Spending Duties & Tariffs Currency Exchange Rates International Cultural Differences Government Spending Rate of Innovation Consumer Characteristics Societal Norms Social Values Research Funding Levels

Competitive Analysis: 

Competitive Analysis Digitalization A Changing Competitive Landscape Globalization Deregulation Communication is faster, information availability is vastly extended, coordination cost are reduced, integration of work tasks is eased, customer reach is extended. Travel, transportation and exchange of media content (news and cultural events) extends the globe. Some tastes and consumer behaviors emerge toward a global standard. National markets are being deregulated (privatized), e.g. financial services, transportation, telecommunication, energy, etc., and cross-border business transactions are liberalized.

Internet Industry: 

Web Browsers Media Companies Content Providers Internet Industry Internet Portals ASPs ISPs What is an Industry?

Slide61: 

Industry & Competitive Analysis 5 Forces Model of Competition Key Success Factors Driving Forces Strategic Group Maps Identify Strategic Options for the Company Select the Best Strategy for the Company Macro-Environment Micro-Environment Company Analysis SWOT Analysis Value Chain Analysis Competitive Strength Assessment

FUNDAMENTAL ANALYSIS QUESTIONS: 

FUNDAMENTAL ANALYSIS QUESTIONS 1. What are the characteristics of my industry? 2. Who are/will be my competitors? 3. What are the current/likely positions of my competitors? 4. What moves are/will my competitors make? 5. What moves can/should I take to achieve a competitive advantage?

Natural and Strategic Competition: 

Natural and Strategic Competition Natural Competition Strategic Competition

Sources of Competition: 

Sources of Competition Customer need Industry competition Product-line competition Organizational competition

Competitive Advantage: 

Competitive Advantage Outperform competitors Grow despite competitors Develop own distinctive competencies that hold potential for competitive advantages

Competitive Advantage: Two Analytical Tools: 

Competitive Advantage: Two Analytical Tools Industry analysis: market attractiveness based on economic structure Comparative analysis: likely future performance of an individual firm in a particular market given the structure of the industry

Factors Contributing to Competitive Rivalry: 

Factors Contributing to Competitive Rivalry Opportunity potential Ease of entry Nature of product Exit barriers Homogeneity of market Industry structure

Factors Contributing to Competitive Rivalry II: 

Factors Contributing to Competitive Rivalry II Industry structure Commitment to industry Technological innovations Scale economies Economic climate Diversity of firms

Existing Rivalry: 

Existing Rivalry Involves jockeying for position. Intensity of rivalry a function of - Number of competitors Industry growth rate Level of fixed costs Diversity of competitors Lack of product differentiation Height of “Exit Barriers”

Entry/Exit Barrier Interaction: 

Entry/Exit Barrier Interaction Porter, Competitive Strategy, 1980

Competitive Intelligence: 

Competitive Intelligence Strategies, objectives, goals Importance of specific markets Level of commitment Strengths Limitations Weaknesses Future changes in strategy Effects on industry, market, our strategies

Forces Influencing Industry: 

Forces Influencing Industry Technological Change Government Policy Global Economic Factors

การวิเคราะห์โครงสร้างอุตสาหกรรม Michael Porter : 

การวิเคราะห์โครงสร้างอุตสาหกรรม Michael Porter Bargaining power of buyers Bargaining power of suppliers Threat of substitute products or services Threat of new entrants Rivalry among existing competitors Entry barriers economies of scale product differentiation capital requirements brand identity access to distribution channels improve price performance trade-off produced by industries earning high profits bargaining leverage price sensitivity high concentration threat of forward integration switching costs - slow industry growth lack of differentiation numerous competitors high exit barriers

Porter’s “5 Forces”: Thinking about the balance of power: 

Porter’s “5 Forces”: Thinking about the balance of power Political, regulatory and institutional context “Complementors”

Assets/Uniqueness speak to Rivalry and the Threat of Entry.: 

Assets/Uniqueness speak to Rivalry and the Threat of Entry.

Porter reminds us to think about the structure of the value chain:: 

Porter reminds us to think about the structure of the value chain:

Powerful suppliers and buyers may constrain profitability: 

Powerful suppliers and buyers may constrain profitability

Role of Competitive Strategy: 

Role of Competitive Strategy Create a defendable position against the 5 forces. Positioning Shifting the balance of forces. Exploit change resulting from shifts in the factors underlying the forces.

Business Level Strategies: 

Business Level Strategies What do we need to understand? Key Success Factors Generic Business Level Strategies Where to find business level advantages “Core” and “Distinctive” Competencies

Key Success Factors: 

Key Success Factors Each industry has certain areas that firms competing in that industry must do well in in order to survive Can be thought of as the bare minimum that must be done in order to compete in that industry

Generic Business Level Strategies: 

Generic Business Level Strategies Generic Strategies are general ways to classify strategies Examples: Miles & Snow (prospectors, defenders, analyzers, reactors) Ansoff & Stewart (1st mover, 2nd mover, low cost producers, niche)

Why is Michael Porter important?: 

Why is Michael Porter important? First strategy writer to analyze why information and IT can be critical to competitive advantage Competitive Strategy, 1980 Competitive Advantage, 1985 What contributions is Porter best known for? Five forces model What makes an industry “attractive” to compete in? 2 x 2 matrix of core strategies What are possible strategies for achieving advantage? The value chain How can we analyze the core activities that firms perform?

Porter’s Generic Business Level Strategies: 

Porter’s Generic Business Level Strategies Three (3) ways that a firm can compete and get above average returns Overall Cost Leadership Differentiation Focus

Porter’s Generic Business Level Strategies: 

Porter’s Generic Business Level Strategies You can still be profitable without following one of these but these profits usually will be below the industry average squeezed by the Five (5) Forces

Overall Cost Leadership: 

Overall Cost Leadership Basic idea is that if you can produce it more cheaply than anybody else, you will have the most profit at any price Cost Leadership  Price Leadership

Overall Cost Leadership: 

Overall Cost Leadership Companies need to be extremely aggressive at finding cheaper, more efficient ways of doing things efficient scale facilities pursuit of cost reductions tight cost and overhead control avoidance of marginal customers

Overall Cost Leadership and the Five (5) Forces: 

Overall Cost Leadership and the Five (5) Forces Competitors lower costs mean that it can still earn returns after its competitors have competed away their profits through rivalry

Overall Cost Leadership and the Five (5) Forces: 

Overall Cost Leadership and the Five (5) Forces Entry potential entrants have to overcome greater entry barriers in terms of scale economies or cost advantages Substitutes a better cost/benefit ratio than its competitors

Overall Cost Leadership and the Five (5) Forces: 

Overall Cost Leadership and the Five (5) Forces Buyers can exert power only to drive down prices to the level of the next most efficient competitor Suppliers more flexibility to cope with input cost increases

The Risks Associated with Overall Cost Leadership: 

The Risks Associated with Overall Cost Leadership Technological change nullifies basis for cost advantage Low cost learning by new entrants

Differentiation: 

Differentiation Rests on the creation of some product or service that is perceived industry-wide as being unique Perception is more important than substantive differences The firm still has to be cost conscious but this is not its primary focus

Differentiation and The Discipline of Market Leaders: 

Differentiation and The Discipline of Market Leaders Three (3) types of differentiation Price Product Service

Differentiation and the Five (5) Forces: 

Differentiation and the Five (5) Forces Competitors brand loyalty by customers and lower sensitivity to price prevents buyer switching

Differentiation and the Five (5) Forces: 

Differentiation and the Five (5) Forces Entry potential entrants must overcome the perceived uniqueness of the firm Substitutes brand loyalty prevents buyers from switching to substitutes

Differentiation and the Five (5) Forces: 

Differentiation and the Five (5) Forces Buyers buyers lack comparable alternatives Suppliers differentiation yields higher margins to give firms more leeway in dealing with suppliers

The Risks Associated with Overall Cost Leadership: 

The Risks Associated with Overall Cost Leadership Customers may decide that the extra expense is not worth the benefit Imitation narrows perceived differentiation

Focus Strategies and the Five (5) Forces: 

Focus Strategies and the Five (5) Forces Same effects as overall cost leadership and differentiation but in a smaller segment of the market Differentiation Cost Leadership Industry-wide Market Segment Differentiation Focus Differentiation Cost Leadership Focus Cost Leadership

Stuck in the Middle: 

Stuck in the Middle Describes firms that have failed to establish themselves as following one of the above generic strategies Loses high volume sales to cost leader and high margin sales to differentiators

Where Do We Find These Competitive Advantages?: 

Where Do We Find These Competitive Advantages? The Value Chain Support Activities

Porter’s Value Chain (well suited for analyzing product/manufacturing firms): 

Porter’s Value Chain (well suited for analyzing product/manufacturing firms)

Slide102: 

Property and Casualty Industry Value Chain INBOUND LOGISTICS OPERATIONS OUTBOUND LOGISTICS MARKETING AND SALES SERVICE PROCUREMENT TECHNOLOGY DEVELOPMENT HUMAN RESOURCE MANAGEMENT FIRM INFRASTRUCTURE -Financial Policy -Regulatory Compliance - Legal - Accounting Actuary Training Agent Training Claims Training Claims Procedures Claims Settlement Loss Control Policy Sales Policy Renewal Agent Manage- ment Advertising Independent Agent Network Billing and Collections Underwriting Investment Policy Rating Actuarial Methods Investment Practices I/T Communications Product Development Market Research Figure 3-7 Included with permission of Michael E. Porter based on ideas in Competitive Advantage: Creating and Sustaining Superior Performance, copyright 1985 by Michael E. Porter.

Slide103: 

Technologies in the Value Chain INBOUND LOGISTICS OPERATIONS OUTBOUND LOGISTICS MARKETING AND SALES SERVICE PROCUREMENT TECHNOLOGY DEVELOPMENT HUMAN RESOURCE MANAGEMENT FIRM INFRASTRUCTURE Information System Technology Planning and Budgeting Technology Office Technology Training Technology Motivation Research Information Technology Product Technology Computer-Aided Design Pilot Plant Technology Diagnostic and Testing Technology Communications Technology Information Technology Transportation Technology Material Handling Technology Storage and Preservation Technology Communication System Technology Testing Technology Information Technology Information Systems Technology Communication System Technology Transportation System Technology Software Development Tools Information Systems Technology Basic Process Technology Materials Technology Machine Tools Technology Materials Handling Technology Packaging Technology Testing Technology I/nformation Tech. Transportation Technology Material Handling Technology Packaging Technology Communications Technology Information Technology Multi-Media Technology Communication Technology Information Technology Figure 3-8 Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright 1985 by Michael E. Porter., p. 167.

The Primary Activities: 

The Primary Activities The “Line” Activities of the Firm Inbound logistics Operations Outbound Logistics Marketing and Sales Service

The Support Activities: Firm Infrastructure: 

The Support Activities: Firm Infrastructure The Structure of the Organization

The Support Activities: Human Resource Management: 

The Support Activities: Human Resource Management The People Considerations of the Organization

The Support Activities: Technology Development: 

The Support Activities: Technology Development What the Firm Creates and How It Creates It

The Support Activities: Procurement: 

The Support Activities: Procurement Getting the Necessary Materials for the Primary Components From the Environment

The Underlying Idea Behind Porter’s Value Chain: 

The Underlying Idea Behind Porter’s Value Chain Break things down into components; Maximize the value of each component; Maximize the value of how they interact; Be considered brilliant.

Comprehensive MNC Strategy Model: 

Comprehensive MNC Strategy Model Industry Globalization Drivers: Market Cost Government Competitive Strategy: Multidomestic Global International Transnational Organizational Structure: Centralized Decentralized Management Processes: Coordination Configuration Performance: Market share Profits Formalization: High Low

Responsiveness/Integration Framework: 

Responsiveness/Integration Framework Global Coordination Integration High High Low Low Global International Transnational Multi-national Local responsiveness

Slide112: 

Integration/Responsiveness Framework Global Coordination, Integration High High Low Low Global International Transnational Multi-national Local responsiveness Technology Worldwide learning

… But Remember, We Said There Are Two Major Schools of Thought: 

… But Remember, We Said There Are Two Major Schools of Thought 1. The strategic “positioning” school of strategy Associated with Michael Porter Select the right “position” in an “attractive” industry 2. The Resource Based View of the Firm (RBVF) Originated with economist Edith Penrose; developed by strategy professors Jay Barney; Dietricx & Cool Recently popularized by Hamel & Prahalad, Competing for Time (1990) but re-named “core competencies” Develop and exploit your unique capabilities

What Do RBVF Strategists Say?: 

What Do RBVF Strategists Say? Innovative IT solutions are copied or imitated Most IT applications are imitable Some exceptions exist when IT can’t be imitated Unless the capabilities to create the innovative IT solution are unique and immobile, then second-movers may: copy your great ideas more cheaply learn from your mistakes Customer “lock-in” does not really work Customers are too smart and will avoid becoming over-committed to you ..

“IT and Sustained Competitive Advantage: A Resource Based Analysis,” MIS Quarterly 1995: 

“IT and Sustained Competitive Advantage: A Resource Based Analysis,” MIS Quarterly 1995 Why do the authors argue that many of these resources can’t create sustainable advantage? Customer lock-in Access to financial capital Proprietary technology (patents, copyrights, etc.) Technical IT skills (e.g., software developers) Managerial IT skills (e.g., IT managers, business unit managers, the ability to collaborate in order to identify and deploy effective IT)

What Synchronized Business Might Look Like!: 

Collaborative Supply Scheduling & Management Supplier Customer Firm Execution Scheduling What Synchronized Business Might Look Like! Dmd/Supply Planning Collaborative Strategic Plg Collaborative Supply Scheduling & Management Dmd/Supply Planning Strategic Planning Integrated Factory, Materials/Warehouse/Transportation Execution Demand and Supply Planning Integrated SN Detailed Scheduling For Factory/Materials/Warehouse/Transportation Strategic Business Planning Planning Collaborative Planning Collaborative Planning Factory Execution Factory Execution Long Range Business/Capacity Planning Long Range Planning Long Range Planning

Enterprise Level Roadmap: 

Entry/Re-entry Cycle Focus on the Value Stream Initial Lean Vision Short Term Cycle Create & Refine Transformation Plan Lean Transformation Framework Adopt Lean Paradigm Enterprise Strategic Planning Focus on Continuous Improvement Outcomes on Enterprise Metrics Implement Lean Initiatives Enterprise Level Transformation Plan Develop Lean Structure & Behavior Detailed Lean Vision Environmental Corrective Action Indicators Detailed Corrective Action Indicators Decision to Pursue Enterprise Transformation Build Vision Convey Urgency Foster Lean Learning Make the Commitment Obtain Senior Mgmt. Buy-in Map Value Stream Internalize Vision Set Goals & Metrics Identify & Involve Key Stakeholders Organize for Lean Implementation Identify & Empower Change Agents Align Incentives Adapt Structure & Systems Identify & Prioritize Activities Commit Resources Provide Education & Training Monitor Lean Progress Nurture the Process Refine the Plan Capture & Adopt New Knowledge Develop Detailed Plans Implement Lean Activities Enterprise Level Roadmap + + Long Term Cycle

One Last Important Concept: 

One Last Important Concept Core Competencies Something a firm does well relative to its competitors Distinctive Competencies Something a firm does which makes it unique relative to its competitors

Dynamic Competitor Analysis: 

While useful, the competitor table and the strategic groups are, like Porter’s Analysis, essentially static. Just as the Four-Arena Analysis is useful for using history to make guesses about the future -- especially about how trends might stop and the ground might shift -- Hamilton et al’s Core Competency Strategic Intent matrix is useful for tracing -- and predicting -- shifts in competitors’ relative power. Dynamic Competitor Analysis

Tool: CCSI Matrix: 

Tool: CCSI Matrix The CCSI matrix works like a flip-book to bring inter-firm dynamics alive. Matrices are made at regular intervals Yearly or quarterly depending on how fast things are changing The two dimensions of the matrix are: Core Competency: firms’ relative capacity -- as measured by Tobin’s Q or market/book value or defect rates or as rated by industry experts. Strategic Intent: firms’ relative aggressiveness -- as measured by R&D expenditures or capital investments or analysis of press releases.

Slide121: 

Tool: CCSI Matrix

Slide122: 

Each competitor is mapped as a circle: the size of which reflects sales or capitalization or assets and the pie slice in which reflects free cash or other available resources Tool: CCSI Matrix

Case: CCSI Analysis of the early 90s Automobile Industry : 

Case: CCSI Analysis of the early 90s Automobile Industry Flip the through the following three slides fast, noting: The decline of Honda & Toyota The ascendancy of Ford General Motors unsucessful run at leadership Chrysler’s repositioning as an up and coming star.

Slide124: 

Passive Aggressive Strategic Intent Core Capabilities Automobile Industry 1990 Honda General Motors Ford Toyota Chrysler 1.0 .5 1.5 (1.0) (1.5) (.50) Figure 1

Slide125: 

Strategic Intent Core Capabilities Automobile Industry 1991 General Motors Chrysler Ford Figure 2

Slide126: 

Core Capabilities Automobile Industry 1992 Strategic Intent Figure 3

Managing disruptions means managing the dynamics of the value chain: 

Managing disruptions means managing the dynamics of the value chain Performance Time Ferment Takeoff Maturity Disruption Can I reshape the dynamics of power in the value chain?

Making money from Innovation: Summary: 

Making money from Innovation: Summary Creating value is not enough: It is important to capture value as well Value can be captured through a variety of mechanisms, including uniqueness and complementary assets Value capture strategies change over the life cycle Technology strategy and business strategy should thus be intimately linked

Industry Equilibrium: 

Industry Equilibrium Industry structure reinforces power relationships and patterns of competition. The nature of industries is to resist change and maintain stability. Periods of instability provide both significant threats and opportunities for organizations.

Stages of Industry Transformation: 

Stages of Industry Transformation The Trigger - an event that significantly alters the way business has been done before, major impact on cost or buyer value. Change in technology Change in customer needs or wants Change in regulation

Stages of Industry Transformation: 

Stages of Industry Transformation Experimentation - a widespread “trial and error” search for a winning response to a triggering event. Period of high risk and uncertainty Imitation is a popular response Access to capital vital

Stages of Industry Transformation: 

Stages of Industry Transformation Convergence - marks the emergence of “dominant” business models as unsuccessful experiments are shaken out of the industry. Industry life cycles have gotten much shorter Convergence begins to return industry to equilibrium

Slide133: 

Why don’t the 5 competitive forces affect businesses equally? Strategic Groups Industry Differences

Competitor Analysis: 

Competitor Analysis (-) After sales services (+) (+) Speed to market (-) “Strategic Groups” Competitor Analysis “Mapping” By identifying important competitive factors you may effectively map your competitive position

Example: Strategic Group Map of the Video Game Industry: 

Example: Strategic Group Map of the Video Game Industry Types of Video Game Suppliers/Distribution Channels Overall Cost to Players of Video Games Low (Coin-operated equipment) Medium (Console players cost $100-$300) High (Use PC) Arcades Home PCs Video game consoles Online/Internet Sony, Sega, Nintendo, several others Arcade operators Publishers of games on CD-ROMs MSN Gaming Zone, Pogo.com, America Online, HEAT, Engage, Oceanline, TEN

Strategic Groups: 

Strategic Groups A group of firms in an industry following the same or a similar strategy. Present a more detailed analysis of the structure of an industry and help explain differences in performance of individual companies within the same industry. Companies within groups are limited in their ability to adopt the strategies of companies in other groups due to “mobility barriers”.

Industry Differences: 

Industry Differences Industry Life Cycle Model Embryonic Growth Shakeout Mature Declining

ขั้นตอนพัฒนาการของอุตสาหกรรม : 

ขั้นตอนพัฒนาการของอุตสาหกรรม การเปลี่ยนแปลงการแข่งขันในช่วงการเปลี่ยนแปลงอุตสาหกรรม

Slide140: 

An Action-Based Model of the Industry Life Cycle Firm Resource & Market Strength

A Key Framework: The industry life cycle: 

A Key Framework: The industry life cycle Era of Ferment/ Disruption “Dominant design” emerges Maturity Incremental Innovation

The S-curve Maps Major Transitions: 

The S-curve Maps Major Transitions Performance Time Ferment Takeoff Maturity Disruption

S curve: 

S curve Can the S curve be predicted? The product/process transition Technological “exhaustion” How do markets evolve as technologies change? Basic segmentation Crossing the chasm New technologies, new needs

Can the Life Cycle be Predicted? The product/process transition: 

Can the Life Cycle be Predicted? The product/process transition Focus of attention Time Product innovation Process Innovation

Can the life cycle be predicted? Technological exhaustion (1): 

Can the life cycle be predicted? Technological exhaustion (1) Performance Time Physical limit? Performance is ultimately constrained by physical limits Eg: Sailing ships & the power of the wind Copper wire & transmission capability Semiconductors & the speed of the electron

Can the life cycle be predicted? Technological exhaustion (2): 

Can the life cycle be predicted? Technological exhaustion (2) Performance Effort Performance is a non linear function of effort expended: in mature industries more and more effort may lead to less and less progress, while progress in emerging industries may be “surprisingly” fast Established technology Emerging technology

Market Evolution over the Life Cycle: 

Market Evolution over the Life Cycle Market segmentation Crossing the chasm New markets, new needs: The Innovator’s Dilemma

Who buys a technology as it evolves?: 

Who buys a technology as it evolves? Performance Time

Understanding market dynamics: Basic segmentation (Rogers): 

Understanding market dynamics: Basic segmentation (Rogers) Units Bought Time Innovators Early Adopters Early Majority Late Majority Laggards Adopters differ by, for example, social, economic status -- particularly resources, affinity for risk, knowledge, complementary assets, interest in the product

Understanding market dynamics: Crossing the chasm: (Moore): 

Understanding market dynamics: Crossing the chasm: (Moore) Time Innovators Early Adopters Early Majority Late Majority Laggards Making the transition from “early adopters” to “early majority” users often requires the development of quite different competencies: e.g. service, support capabilities, much more extensive training. Crossing the chasm? Units Bought

New Customers, New Needs: 

New Customers, New Needs Performance Time Who buys a technology when it is first introduced? New technologies sell to: - New customers - With new needs - Often at lower margins

New markets can be harder to manage than new technologies: 

New markets can be harder to manage than new technologies Old technology Competencies New technology Competencies New customer Needs Old customer Needs

Managing the change in customer groups may be the hardest task!: 

Managing the change in customer groups may be the hardest task! Performance Effort Leading edge customer focused research may be a critical capability

Exercise: Market Evolution: 

Exercise: Market Evolution Consider the three industries: Ready to eat frozen dinners Publishing (Books or music) Handheld cameras for consumers For each industry: What was the dominant performance metric under the “old regime”? What is the dominant metric under the new? Is the discontinuity a new market, or does it represent a threat to the core business? Choose one industry and be prepared to present your results to the group

Hypercompetition: 

Hypercompetition Hypercompetition A condition of rapidly escalating competition based on Price-quality positioning Competition to create new know-how and establish first-mover advantage Competition to protect or invade established product or geographic markets

Hypercompetition: 

Hypercompetition First mover advantage eroded through: rapid response and innovation; enhancement of product features; niche attacks Advantage by building barriers eroded by: technological advances; building on home-based economies of scale; buying share; different distribution channels (e.g. e-business); niche attacks

Slide159: 

The PLC Phase Focus on the firm and its strategies at different stages of the PLC SWOT framework Hypercompetition Phase Focus on the competitive interactions w.r.t. the four competitive arenas C-Q/T-K/S/D framework ValueNet Phase Focus on all the players relevant to your operations PARTS framework Number of Players Complexity of Analysis

Slide161: 

Price-Quality Maneuvers Price War Full line Producers Niching & Outflanking Move to Ultimate Value Attempt to redefine Quality Commodity like Market Return to Price Wars Move to the next Arena The Cycle of Price-Quality Competition - Moving Up the Escalation Ladder

Slide162: 

Firm builds a Tech. Resource Base to create advantage Then moves into a new market first: Pioneer Followers imitate products & overcome switching costs and brand loyalties Pioneer throws up impediments to imitation Followers overcome impediments and replicate pioneer’s resource base First mover uses a Transformation Strategy & abandons product design/ technology based approach Builds resources to match followers manufacturing skills Price War First mover uses a Leapfrog Strategy to a new resource base First mover moves downstream into higher value added products Escalating costs & risks each cycle Cycle of Timing / Know-How Competition

Slide163: 

Build entry barrier around market A to exclude competition Build entry barrier around market B to exclude competition Circumvent barriers and attack niche in market B Short Run: Withdraw from niche or fail to respond Delayed Response: Barriers to contain entrant to a segment of B Entrant breaches barriers or triggers price war in B Incumbent’s stronghold in B weak- ens as it grows more competitive Long Run:Incumbent attacks entrant’s market A to punish Entrant responds in market A or in market B Standoff until one party gains the upper hand in market A or B Both strongholds erode or merge into one market Price War Other firm divests One firm builds new stronghold Cycle restarts with entry into a new market If one firm dominates STRONG- HOLDS ARENA

Slide164: 

Deep pocket develops Launches attack to drive out small firms Antitrust laws invoked - work occasionally Small firms forced to outmaneuver deep pocket Hostile takeover of large firm Small firm escalates own resource base Cooperative strategy develops Avoidance strategy niching, etc. Large scale alliances form with equally deep pockets Deep pocket advantage is eliminated or neutralized Buyers or suppliers develop a countervailing force New attempt to escalate resources Cycle of Deep Pockets Competition

Slide165: 

Kroger becomes large & powerful Drops prices Antitrust suits filed by rivals Kroger wins suits Many takeover attempts from outside industry lead to high leverage Mergers Acquisitions Small chains seek niches. Kroger also niches geographically to avoid competition Industry consolidation Deep pocket advantage is eliminated or neutralized Large wholesalers provide economies to smaller stores Continued M&A in industry Cycle of Deep Pockets Competition

Slide166: 

Vision for Disruption Identifying and creating opportunities for temporary advantage via understanding Stakeholder satisfaction Strategic soothsaying to ID new ways to serve current customers better or serve those not being served Capability for Disruption Sustaining the momentum by developing abilities for: Speed Surprise that can be applied across many actions to build a series of temporary advantages Tactics for Disruption Seizing the initiative to gain advantage by Shifting the rules Signaling Strategic thrusts with actions that shape, mould or influence the direction or nature of competitors’ responses Market Disruption

A 4 Arena Analysis: 

A 4 Arena Analysis

Limitations of the Hypercompetition Perspective: 

Limitations of the Hypercompetition Perspective Ignores the point that competition and co-operation can co-exist. may be in the best interests of players not to jump to the next level of dynamic competitive interaction but into co-operative competition - coopetition requires looking at the firm’s valuenet

Slide169: 

The ValueNet Customers Company Suppliers Complementors Substitutors

Intel - A Partial ValueNet: 

Intel - A Partial ValueNet HP; Compaq; IBM INTEL Suppliers Microsoft HP (Merced) Sun (Solaris + Merced) Compaq (Digital TV standards with M’Soft) NatSem / Cyrix AMD / IBM Microsoft IBM manufactures AMD Digital CableTV Standards NetPC Standards Solaris Compatibility of NetPC design & Merced Limits Microsoft power in ValueNet Limit customer power & competitor response via Mother- board manufacture Customers limit dependence - alternative suppliers

Slide171: 

How can the game be changed? The game can be changed by changing Players Added value Rules of the game Tactics employed Scope of the game

Changing the players: 

Changing the players Bring in customers - Increase industry demand. This helps competitors, but may be worthwhile for you. To do this… Educate consumers about your product (Diapers in Japan;Whitening t’paste) Pay customers (esp. early adopters) to play (Samples, Netscape) Subsidize some customers, other full paying customers will follow (Initial discount to lower risk) Become your own customer (Soaps and cottonseed oil / Cyrix PC) Be Inc. & the WWW Bring in suppliers Holland Sweetener Co. and Coca-Cola Compaq / AMD / Intel Bring in complementors Do it yourself. Nintendo - both h/w & s/w. Intel Pay complementors to play (at least initially) Be Inc. & IBM / Motorola / PowerComputing Bring in competitors License technology to make money, avoid complacency Create a second source to encourage buyers to adopt technology

Changing the added value: 

Changing the added value Your value added = Size of the pie when you are in the game - Size of the pie when you are not in the game. How to increase added value? Limit your supply DeBeers and diamonds; Nintendo & video games; Beanie babies Downside: Shrinks the pie today; Leaves entry opportunity open Raise amount consumers are willing to pay Policies that build loyalty (frequent flier miles) increase willingness to pay - GM / Ford credit cards; Intuit Lower competitors’ value Softsoap - by cornering the supply of pumps Questions to ask: What is your added value? How can you increase value by changing supply, buyers, suppliers, complementors, or substitutors in your value net? What is the value added by other players? Should you be increasing or decreasing their added values?

Changing the rules: 

Changing the rules Questions to ask are: Which rules are helping you? Which ones are hurting you? Rules can be for pricing, advertising, product variety, satisfaction, etc. What kinds of contracts are you willing to write with your buyers and suppliers? Do you want Match Competition Clauses? What does this do for you? Do you have the power to change the rules? Does someone else have the power to overturn them? Can you signal your commitment credibly (Kiwi Air)

Changing tactics: 

Changing tactics Questions to ask are: How do other players perceive the game? How do these perceptions affect the play of the game? (NY Post vs. Daily News) Which perception do you want to keep, which to change? Do you want the game to be transparent or opaque (fee negotiation between investment banker and firm - guarantee / % fee)? When do you want to send signals that benefit you? When do you want to preserve the fog? To establish credibility (clear the fog) Accept a pay-for-performance contract Offer guarantees or advertise Ask others to demonstrate their credibility to you To preserve the fog Create complexity (long distance calling rates) Bluff: Ask yourself whether you will be believed and under what circumstances Ask what others stand to gain by preserving the fog, and what they could be bluffing about

Changing the scope: 

Changing the scope Questions to ask are: What is the current scope of the game? Do you want to change it? Games are linked over time and across markets (geographic and product markets) Do you want to link the current game to other games? When multi-market contact could be beneficial Do you want to delink the current game from other games?

Co-opetition: 

Co-opetition More about forming alliances to better compete. Companies, competitors, customers and suppliers are participate in (and compete in) “the value net”. Key concept is “complementors”, companies that sell complementary products and services. These can often gain advantage by forming an alliance to provide a more competitive

การแข่งขันคือการต่อสู้ที่เคลื่อนไหวอยู่ตลอดเวลา: 

การแข่งขันคือการต่อสู้ที่เคลื่อนไหวอยู่ตลอดเวลา

Building sustainable advantages: 

Building sustainable advantages Understand your own uniqueness Scan the environment for Technological changes Variations in input supply Demand shifts Invest in opportunities that fit Source: Ghemawat, 1999

Building sustainable advantages (II): 

Building sustainable advantages (II) The best defense is a good offense, i.e., defend your advantage by continually upgrading it Seek out ways to increase willingness to pay without incurring commensurate supplier opportunity costs Seek out ways to reduce supplier opportunity costs without sacrificing commensurate willingness to pay Make yourself a moving target Remember that the landscape can shift under your feet Source: Ghemawat, 1999

In many situations anticipating competitors moves can critical to building and sustaining competitive advantage: 

In many situations anticipating competitors moves can critical to building and sustaining competitive advantage Where in the course do we see the importance of interactive incentives? HSC vs. Nutrasweet Barnesandnoble vs. Amazon.com War of Attrition Intel vs. OEMs Interactive incentives tool kit Game theory Competitor analysis

A solution concept: the Nash Equilibrium: 

A solution concept: the Nash Equilibrium Fundamental tool for examining non-cooperative games Idea: Every player does the best that he/she can, given that the other players are also doing the best that they can Definition a Nash equilibrium is a set of strategies for each player in which no player can improve his/her situation by choosing a different strategy, given the choices of the other players Testing for a Nash equilibrium Does any player have a profitable deviation? I.e., could any player improve his / her payoffs by choosing a different strategy? If there is a profitable deviation from a set of strategies, then this is not a Nash equilibrium

A famous example: The Prisoner’s Dilemma: 

A famous example: The Prisoner’s Dilemma Prisoner A Prisoner B 1 year 10 year No prison 9 years 1 year No prison 10 years 9 years

An example of Game Theoretic Analysis: Anticipating NutraSweet’s response in Europe: 

An example of Game Theoretic Analysis: Anticipating NutraSweet’s response in Europe In the A case, we asked the question, how will NutraSweet respond in Europe Two scenarios: Accommodate (Price = $50); HSC sells 500 tons, NS sells 800 tons Fight / Price war (Price = $25); HSC sells 0, NS sells 1300 (estimated Europe / Canada demand in 1989) (0, $20 M) ($27 M, $56 M) (0, $149 M) Fight Enter* Don’t Enter Accommodate HSC NS *Assumes Entry with 500 Tons of Capacity But the real game was broader – it involved multiple players and markets

A Framework for Competitor Analysis : 

A Framework for Competitor Analysis Source: Michael E. Porter, Competitive Strategy, p. 49 What the Competitor Is Doing and Can Do What Drives the Competitor Future Goals At all levels of management and in multiple dimensions Current Strategy How the business is currently competing Competitor’s Response Profile Is the competitor satisfied with its current position? What likely moves or strategy shifts will the competitor make? Where is the competitor vulnerable? What will provoke the greatest and most effective retaliation by the competitor?

Classic Good Moves ...: 

Classic Good Moves ... Hard to match; cost them more than it costs you -- builds on strategic asymmetries Have commitment value; costly to reverse, so intentions will be believed Help\improve industry structure Lower costs and\or create value for customers Aim at competitor’s blind spots Anticipate the competition (it is easier to keep them out than kick them out)

Classic Bad Moves ...: 

Classic Bad Moves ... Can be easily copied (when you think it’s unique) Show a lack of commitment Raise costs without creating value; lower prices without expanding volume Undermine industry structure Ignore a firm’s capabilities Needlessly provoke or mindlessly hurt competitors

So what can we say about making these strategic choices and how they should fit together?: 

Strategy Capabilities & Resources Industry / Business Environment Internal consistency Fit among strategic choices and policies External consistency Fit between the strategy and the outside world Dynamic consistency Fit between the strategy and the firm’s capabilities and resources over time So what can we say about making these strategic choices and how they should fit together?

Internal, external, and dynamic consistency at Coors: 

Internal, external, and dynamic consistency at Coors Backward Integration · Cans · Other inputs Plant Scale Procurement Manufacturing One Product Intermediate Price Limited Advertising Product • Attributes • Rocky Mount. Image Marketing One Location Unique Process • Asset-Intensive • Long • Unpasteurized High Capacity Utilization Distribution Controls Regional Distribution Distribution Pre-1980s Post-1980s Regional / Local Advertising Capacity Shortfall in the West Internal External National Advertising Incursion of competitors in the West Dynamic

Internal consistency: 

Internal consistency Activity maps can be helpful in assessing internal consistency of a strategy Question: Are activities chosen in such a way that they reinforce one another, or do they work at cross purposes? which are the key choices are they consistent with one another which are the links between choices? if there aren’t a lot of links, or if the links are very tenuous, this raises questions about the internal consistency of the firm’s strategy

Southwest Airlines’ Activity Map: 

Source: Michael E. Porter “What is Strategy” Harvard Business Review, Nov-Dec 1966 Southwest Airlines’ Activity Map © 1999 Pankaj Ghemawat

External consistency: The manager’s problem: 

External consistency: The manager’s problem To craft an effective strategy, you must take account of the external environment To decide whether to put your firm in an environment (entry) To decide whether to extricate your firm from an environment (exit) To position your firm to succeed in a given environment To assess the effect of a major change (e.g., deregulation) To shape the environment But the environment is enormously complex

Industry Analysis: Factors to Consider: 

Industry Analysis: Factors to Consider Source: Michael E. Porter, Competitive Advantage (New York: Free Press, 1985)

Crown’s strategy explicitly addressed a number of the factors that made the metal container industry unattractive: 

Crown’s strategy explicitly addressed a number of the factors that made the metal container industry unattractive Responses of Crown Cork

Each of the five forces is subject to major shifts over time: 

Source: Jan W. Rivkin Each of the five forces is subject to major shifts over time Some Common Long Run Dynamics

The value net provides a complementary perspective on industry analysis: 

Customers Firm Suppliers Competitors Complementors A player is your complementor with respect to customers if customers value your product more when they have the other player’s product as well A player is your competitor with respect to customers if customers value your product less when they have the other player’s product as well A player is your complementor with respect to suppliers if it is more attractive for a supplier to provide resources to you when it is also supplying the other player A player is your competitor with respect to suppliers if it is less attractive for a supplier to provide resources to you when it is also supplying the other player The value net provides a complementary perspective on industry analysis Source: Adam Brandenburger and Barry Nalebuff, Co-opetition (New York: Currency Doubleday, 1996)

Nintendo, Microsoft, and Intel’s strategies display keen awareness of the value net: 

Nintendo, Microsoft, and Intel’s strategies display keen awareness of the value net Complements with respect to customers Nintendo’s licensing strategy prevented complements from gaining power Microsoft’s support of ISVs to produce software for Windows Microsoft’s development of its own applications for Windows Intel’s support of the development of processing-intensive applications Complements with respect to suppliers Intel’s participation in R&D consortia funding technology supply

The Value Net perspective highlights a sixth force, which also changes over time : 

Source: Jan W. Rivkin The Value Net perspective highlights a sixth force, which also changes over time

From the Value Net to Competitive Advantage: 

From the Value Net to Competitive Advantage Low Cost Different- iation Increase customers’ WTP through product quality enhancements, product positioning, after-market service, advertising, etc. + ability to capture this increase in WTP Decrease cost to serve a given set of customer needs Two Major Routes to Competitive Advantage Addressing the concept of competitive advantage through the lens of value added is quite useful

Value Creation: 

Value Creation Opportunity Cost Willingness to Pay Added Value Customer Firm Supplier

Value Division: 

Value Division Supplier’s Opportunity Cost Customer’s Willingness to Pay Price to customer Price to supplier Company’s WTP for Supply Company’s Opportunity Cost for Production Value Appropriated by Firm Customer Firm Supplier Value Appropriated by Customer Value Appropriated by Supplier

Competitive advantage is achieved through increasing overall value added (and capturing more value than competitors): 

Competitive advantage is achieved through increasing overall value added (and capturing more value than competitors) Opportunity Cost Willingness to Pay Value Appropriated by Firm Customer Firm Supplier Value Appropriated by Customer Value Appropriated by Supplier

Value Creation and Appropriation by Nintendo: 

Value Creation and Appropriation by Nintendo Value Appropriated by Nintendo Retailers Nintendo Chip Suppliers Scarcity Software quality certification Resale price maintenance

Value Appropriation in the PC Industry: 

Value Appropriation in the PC Industry Source: Orit Gadiesh and James L. Gilbert, “Profit Pools: A Fresh Look at Strategy,” Harvard Business Review, May-June 1998, p.145

Activities and resources: complementary views about the creation and sustainability of competitive advantage: 

Activities and resources: complementary views about the creation and sustainability of competitive advantage Activities view: Porter (1996), “What is Strategy?” Strategy requires tradeoffs systems of interlocking, complementary activities which are guided by these tradeoffs generate sustainable competitive advantage Resources view: Hamel and Prahalad (1990), “Core Competence of the Corp.” difficult-to-imitate core competences should be built Collis and Montgomery (1995), “Competing on Resources” possessing unique, valuable resources, which cannot be procured in efficient factor markets, is the key to sustainable out-performance Source: Ghemawat, 1999

Global Issues: How Far Can a Competitive Advantage Travel?: 

Global Issues: How Far Can a Competitive Advantage Travel? Is the destination market structurally attractive? After considering the effects of entry Does the advantage apply in the destination market? A formula for success in one market can be a recipe for disaster in another Strategy is highly dependent on context Can the advantage be transferred? The very factors that block imitation at home may prevent transfer to the destination (e.g., resources or capabilities build up over a long period) Transfer may take a long time Do the benefits of transfer outweigh the costs? Including benefits and costs to home business

Dynamic fit / sustainability of competitive advantage is difficult to achieve: 

Dynamic fit / sustainability of competitive advantage is difficult to achieve Source: Pankaj Ghemawat, Commitment (New York: The Free Press, 1991) Bottom Half Top Half 3% 39% ROI in Year 0

Four types of threats to the sustainability of competitive advantage: 

Four types of threats to the sustainability of competitive advantage Imitation Substitution Slack Hold-up Wal-Mart, K-mart & Target Nutrasweet vs HSC BSB vs. Sky Barnes & Noble v Amazon Netscape vs. Microsoft (The Browser) Sun vs. Microsoft (Platform-independent SW) Linux vs. Microsoft (Open source SW) Corporate overhead at CCS after Connelly Talent at Microsoft Unions at Wal-Mart Players in MLB Intel (if you are one of their suppliers) Source: Ghemawat, 1999

Responding to Threats to Sustainability: 

Responding to Threats to Sustainability © 1999 Pankaj Ghemawat

In many situations anticipating competitors moves can critical to building and sustaining competitive advantage: 

In many situations anticipating competitors moves can critical to building and sustaining competitive advantage Where in the course do we see the importance of interactive incentives? HSC vs. Nutrasweet Barnesandnoble vs. Amazon.com War of Attrition Intel vs. OEMs Interactive incentives tool kit Game theory Competitor analysis

A solution concept: the Nash Equilibrium: 

A solution concept: the Nash Equilibrium Fundamental tool for examining non-cooperative games Idea: Every player does the best that he/she can, given that the other players are also doing the best that they can Definition a Nash equilibrium is a set of strategies for each player in which no player can improve his/her situation by choosing a different strategy, given the choices of the other players Testing for a Nash equilibrium Does any player have a profitable deviation? I.e., could any player improve his / her payoffs by choosing a different strategy? If there is a profitable deviation from a set of strategies, then this is not a Nash equilibrium

A famous example: The Prisoner’s Dilemma: 

A famous example: The Prisoner’s Dilemma Prisoner A Prisoner B 1 year 10 year No prison 9 years 1 year No prison 10 years 9 years

An example of Game Theoretic Analysis: Anticipating NutraSweet’s response in Europe: 

An example of Game Theoretic Analysis: Anticipating NutraSweet’s response in Europe In the A case, we asked the question, how will NutraSweet respond in Europe Two scenarios: Accommodate (Price = $50); HSC sells 500 tons, NS sells 800 tons Fight / Price war (Price = $25); HSC sells 0, NS sells 1300 (estimated Europe / Canada demand in 1989) (0, $20 M) ($27 M, $56 M) (0, $149 M) Fight Enter* Don’t Enter Accommodate HSC NS *Assumes Entry with 500 Tons of Capacity But the real game was broader – it involved multiple players and markets

Questions?: 

Questions?