Review: Classes 1 - 3

1
Review Classes 1 - 3

• Objective of Business. Intro. Prisoners
  Dilemma (Game Theory intro)
• What is Strategy? IBP Cost strategy, KSF
  changed, Constraints on options.
• Resources Capabilities. Starbucks Customer
  Buying? Value Chain - internal view, Growth
  Perils. A-B Power of consistent, unique
  strategy power of leader potential
  environmental change?
• Tonight External view

2
From Environmental Analysis to Industry Analysis
Context PEST
The natural environment
The national/ international economy

• THE INDUSTRY
• ENVIRONMENT
• Company TJB
• Suppliers X TJB
• Competitors
• Customers

Demographic structure
Technology
Government Politics
Social structure
Social structure

• The Industry Environment lies at the core of the
  Macro Environment.
• The Macro Environment impacts the firm through
  its effect on the Industry
• Environment.

3
The Spectrum of Industry Structures
Perfect Competition
Oligopoly
Duopoly
Monopoly
Concentration
Many firms
A few firms
Two firms
One firm
Entry and Exit Barriers
No barriers
Significant barriers
High barriers
Product Differentiation
Homogeneous Product
Potential for product differentiation
Information
Perfect Information flow
Imperfect availability of information
4
Porters Five Forces of Competition Framework
SUPPLIERS
Bargaining power of suppliers
INDUSTRY COMPETITORS
Threat of substitutes
Threat of new entrants
POTENTIAL ENTRANTS
SUBSTITUTES
Rivalry among existing firms
Bargaining power of buyers
Book
BUYERS
5
Threat of Substitutes

• Extent of competitive pressure from producers of
• substitutes depends upon
• Buyers propensity to substitute
• The price-performance characteristics of
  substitutes.

My worksheet
6
The Threat of Entry

• Entrants threat to industry profitability
  depends upon the height of barriers to entry. The
  principal sources of barriers to entry are
• Capital requirements
• Economies of scale
• Absolute cost advantage
• Product differentiation
• Access to channels of distribution
• Legal and regulatory barriers
• Retaliation

7
Bargaining Power of Buyers
Buyers price sensitivity
Relative bargaining power

• Cost of purchases as
• of buyers total costs.
• How differentiated is the
• purchased item?
• How intense is
• competition between
• buyers?
• How important is the
• item to quality of the
• buyers own output?

• Size and concentration of
• buyers relative to
• sellers.
• Buyers information .
• Ability to backward
• integrate.
  

Note analysis of supplier power is symmetric
8
Rivalry Between Established Competitors

• The extent to which industry profitability is
  depressed by aggressive price competition depends
  upon
• Concentration (number and size distribution of
  firms)
• Diversity of competitors (differences in goals,
  cost structure, etc.)
• Product differentiation
• Excess capacity and exit barriers
• Cost conditions
• Extent of scale economies
• Ratio of fixed to variable costs

9
Figure 3.5. The Impact of Growth on Profitability
Market Growth Less than -5 -5 to 0
0 to 5 5 to 10 Over 10
Surprised?
10
Applying Five - Forces Analysis

• Forecasting Industry Profitability
• Past profitability a poor indicator of future
  profitability. TJB - ?? PharmDrugs v Steel,
  Airlines
• If we can forecast changes in industry structure
  we can predict likely impact on competition and
  profitability.

• Strategies to Improve Industry Profitability
• What structural variables are depressing
  profitability
• Which can be changed by individual or collective
  strategies? POA

11
Profitability of US Industries, 1985-97
12
US Industrial Profitability, 1986-97 EVA, Market
Value Added, and ROA
13
X Plant is first entry into the Y
Industry Market Attractiveness Competitive
Strength for various ZZZ markets
High
Med.
Market Attractiveness How much Profit is there to
be made?
Low
Strong
Average
Weak
Competitive Strength What of profit can WE
make?
Sector
14
Drawing Industry Boundaries Identifying the
Relevant Market

• What industry is BMW in
• World Auto industry
• European Auto industry
• World luxury car industry?
• Key criterion SUBSTITUTABILITY
• On the demand side are buyers willing to
  substitute between types of cars and across
  countries
• On the supply side are manufacturers able to
  switch production between types of cars and
  across countries
• May need to analyze industry at different levels
  for different types of decision

15
The Value Net
CUSTOMERS
COMPANY
COMPLEMENTORS
COMPETITORS
SUPPLIERS
Book. Complexity Tools
16
Five Forces or Six? Introducing Complements
The suppliers of complements create value for
the industry and can exercise bargaining power
SUPPLIERS
Bargaining power of suppliers
INDUSTRY COMPETITORS
COMPLEMENTS
Threat of new entrants
POTENTIAL ENTRANTS
Threat of substitutes
SUBSTITUTES
Rivalry among existing firms
Bargaining power of buyers
BUYERS
17
Dynamic Competition

• Porter framework assumes
• industry structure drives competitive behavior
• Industry structure is stable.
• But---competition also changes industry structure
• Schumpeterian Competition A perennial
• gale of creative destruction where innovation
  overthrows established market leaders
• Hypercompetition intense and rapid
  competitive moves.creating disequilibrium
  through continuously creating new competitive
  advantages and destroying, obsoleting or
  neutralizing opponents competitive advantages

18
Applying Five Forces to Emerging E-commerce
Markets

• The more unstable is industry structurethe less
  
• helpful is analysis based upon industry
  structure.
• Taking account of timewillingness to endure
  losses
• today in order to reap profit tomorrow
• General structural features of digital,
  networked
• industries
• Low entry barriers Extreme scale economies
• Network externalities Winner-take-all markets
• Intense competition

19
Identifying Key Success Factors

• Pre-requisites for
  success

Pre-requisites for success
What do customers want?
How does the firm survive competition

• Analysis of competition
• What drives competition?
• What are the main dimensions of
  competition?
• How intense is competition?
• How can we obtain a superior competitive position?

• Analysis of demand
• Who are our
• customers?
• What do they want?

• What drives competition?
• What are the main
• dimensions of competition?
• How intense is competition?
• How can we obtain a
• superior competitive position?

KEY SUCCESS FACTORS
20
Identifying Key Success Factors Through Modeling
Profitability The Airline Industry
Profitability Yield x Load
factor - Unit Cost Income
Revenue RPMs
Expenses ASMs RPMs
ASMs ASMs


x
-

• Strength of competition on
  routes.
• Responsiveness to cha- anging market
  conditions
• business travelers.
• Achieving differentia- tion advantage

• Price
• competitiveness.
• Efficiency of route
• planning.
• Flexibility and
• responsiveness.
• Customer loyalty.
• Meeting customer
• requirements.

• Wage rates.
• Fuel
• efficiency of
• planes.
• Employee
• productivity.
• Load factors.
• Administrative
• overhead.

ASM Available Seat Miles RPM Revenue
Passenger Miles
21
Identifying Key Success Factors by Analyzing
Profit Drivers Retailing
Sales mix of products
Return on Sales
Avoiding markdowns through tight inventory control
Max. buying power to minimize cost of goods
purchased
ROCE
Max. sales/sq. foot through location
product mix customer service quality control
Sales/Capital Employed
Max. inventory turnover through electronic data
interchange, close vendor relationships, fast
delivery
Minimize capital deployment through outsourcing
leasing
22
SUMMARY What Have We Learned?

• Forecasting Industry Profitability
• Past profitability a poor indicator of future
  profitability.
• If we can forecast changes in industry structure
  we can predict likely impact on competition and
  profitability.

• Strategies to Improve Industry Profitability
• What structural variables are depressing
  profitability?
• Which can be changed by individual or collective
  strategies?

• Defining Industry Boundaries
• Key criterion substitution
• Working at different levels of aggregation

23
SUMMARY (continued)

• Game Theory
• Valuable in analyzing competitive rivalry between
  small number of players
• Analysis of cooperation competition
• Offers insights into the structure of the game
  competitive interaction use of specific
  strategic plays.

• Key Success Factors
• Starting point for the analysis of competitive
  advantage

• Industry Analysis The New Economy
• Porter 5 forces analysis less useful when
  industry structure unstable
• Key to understanding digital, networked markets
  is to understand their underlying structure (esp.
  scale economies and network externalities)

24
Industry Evolution
OUTLINE

• The industry life cycle
• Industry structure, competition, and success
  factors over the life cycle.
• Anticipating and shaping the future.

25
The Industry Life Cycle
Industry Sales
Introduction Growth
Maturity Decline
Time

• Drivers of industry evolution
• demand growth
• creation and diffusion of knowledge

26
Product and Process Innovation Over Time
Product Innovation
Process Innovation
Rate of innovation
Time
27
Standardization of Product Features in Autos
FEATURE INTRODUCTION GENERAL
ADOPTION Speedometer 1901 by
Oldsmobile Circa 1915 Automatic transmission
1st installed 1904 Introduced by Packard as an
option, 1938. Standard on
Cadillacs early 1950s Electric
headlamps GM introduces, 1908 Standard
equipment by 1916 All-steel body GM adoptes
1912 Standard by early 1920s All-steel enclosed
body Dodge, 1923 Becomes standard late
1920s Radio Optional extra 1923 Standard
equipment, 1946 Four-wheel drive Appeared
1924 Only limited availability by 1994 Hydraulic
brakes Introduced 1924 Became standard
1939 Shatterproof glass 1st used
1927 Standard features in Fords 1938 Power
steering Introduced 1952 Standard equipment
by 1969 Antilock brakes Introduced
1972 Standard on GM cars in 1991 Air bags GM
introduces, 1974 By 1994 most new cars
equipped with air bags
28
How Typical is the Life Cycle Pattern?

• Technology-intensive industries (e.g.
  pharmaceuticals, semiconductors, computers) may
  retain features of emerging industries.
  Individual products do not.
• Other industries (especially those providing
  basic necessities, e.g. food processing,
  construction, apparel) reach maturity, but not
  decline.
• Industries may experience life cycle
  regeneration.
• Sales
  Sales
• 1900 50 60 90
  1930 50 60 90
• MOTORCYCLES
  TVs
• Life cycle model can help us to anticipate
  industry evolutionbut dangerous to assume any
  common, pre-determined pattern of industy
  development. Tools, Complexity

Color
Portable
BW
HDTV ?
29
Evolution of Industry Structure over the Life
Cycle

• INTRODUCTION GROWTH
  MATURITY DECLINE
• DEMAND Affluent buyers Increasing Mass market
  Knowledgeable,
• penetration replacement customers,
  resi-
• demand dual segments
• TECHNOLOGY Rapid product Product and
  Incremental Well-diffused
• innovation process innovation innovation
  technology
• PRODUCTS Wide variety,
  Standardization Commoditiz-
  Continued rapid design change ation
  commoditization
• MANUFACT- Short-runs, skill Capacity
  shortage, Deskilling Overcapacity
• URING intensive
  mass-production
• TRADE -----Production
  shifts from advanced to developing countries-----
• COMPETITION Technology- Entry exit
  Shakeout Price wars,
• consolidation exit (p.
  315)
• KSFs Product innovation
  Process techno- Cost efficiency
  Overhead red- logy. Design for
  uction, ration- alization,
  low

30
The Driving Forces of Industry Evolution
BASIC CONDITIONS INDUSTRY STRUCTURE
COMPETITION
Customers become more knowledgeable
experienced
Customers become more price conscious
Quest for new sources of differentiation
Products become more standardized
Diffusion of technology
Price competition intensifies
Production shifts to low-wage countries
Production becomes less RD skill-intensive
Excess capacity increases
Bargaining power of distributors increases
Demand growth slows as market saturation
approaches
Distribution channels consolidate
31
Preparing for the Future The Role of Scenario
Analysis in Adapting to Industry Change

• Stages in undertaking multiple Scenario Analysis
• Identify major forces driving industry change
• Predict possible impacts of each force on the
  industry environment
• Identify interactions between different external
  forces
• Among range of outcomes, identify 2-4 most
  likely/ most interesting scenarios
  configurations of changeforces and outcomes
• Consider implications of each scenario for the
  company
• Identify key signposts pointing toward the
  emergence of each scenario
• Prepare contingency plan

Tool, POA, Option Value
32
Innovation Renewal over the Industry Life
Cycle Retailing
Warehouse Clubs e.g. Price Club Sams Club
Internet Retailers e.g. Amazon Webvan
Discount Stores e.g. K-Mart Wal-Mart
Category Killers e.g. Toys-R-Us, Home Depot
Mail order, catalogue retailing e.g. Sears
Roebuck
Chain Stores e.g. AP
1880s 1920s 1960s 2000
33
Review New tools. Use Insights from to
develop POA

• 4 Cs, PEST
• 5 Forces gt Market Attractiveness, can combine w/
  Competitive Strength gt Corporate Strategy
• Key Success Factors
• Life Cycle
• Scenarios, option value
• Value Equivalence Line - next
• Strategic Groups competing w/in and between, p.
  127 - 129

34
BCGs Strategic Environments Matrix
FRAGMENTED SPECIALIZATION apparel,
housebuilding pharmaceuticals, luxury
cars jewelry retailing, sawmills chocolate
confectionery STALEMATE VOLUME basic
chemicals, volume jet engines, food
supermarkets grade paper, ship owning motorcycles,
standard (VLCCs), wholesale banking microprocess
ors
Many
SOURCES OF ADVANTAGE
Few
Big
Small
SIZE OF ADVANTAGE
35
BCGs Analysis of the Strategic Characteristics
of Specialization Businesses
CREATIVE EXPERIMENTAL fashion,
toiletries, magazines general publishing food
products PERCEPTIVE ANALYTICAL high
tech luxury cars, confectionery paper
towels
low
ABILITY TO SYSTEMATIZE
high
high low ENVIRONMENTAL VARIABILITY