Management and Markets C

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Management and Markets (CD)

• Module 1 (Yao) Strategy and Organization
  Economics (1/30 3/17)
• Module 2 (Villalonga) Finance (4/2 4/30)
• Cross-registrants Get registration instructions
  and key to gain access to class platform

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Contact Information

• Dennis Yao
• Morgan 217
• 5-6423
• dyao_at_hbs.edu
• Office hours by appointment
• Assistant Sharilyn Steketee ssteketee_at_hbs.edu

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Course Requirements I

• Class meetings
• Come prepared
• Participate with questions, comments, etc.
• Interactive lecture style, some cases/caselets
• The readings are essential!
• We will only be able to discuss a subset of the
  issues in these seminal articles.
• You will want to know them better than we can
  adequately cover in class.
• Assignment
• One or two key questions you would like to
  discuss raised by assigned papers
• Send to me by email by 9PM on night before class

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Course Requirements II

• Short paper
• On either the first or second half of the course
• 10-15 pages.
• Empirical test, research proposal, etc.
• Final exam
• General exam for DBA and ITM
• Four questions, one on each module
• Final exam for MM (CD)
• The 3rd and 4th questions

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Grading

• Class participation 25
• Paper 35
• Exam 40

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Course Content (Strategy and Org Econ.)

• Overview Introduction to Strategy
• Market Competition (sessions 2-6)
• Theory of the Firm (sessions 7-8)
• Internal Organization Incentives and
  Performance Management (sessions 9-11)
• Summary and Application to Innovation
• This module based on economics perspective
• Some papers technicalstick to main ideas

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What is Strategy?

• Strategy is an integrated set of choices about
• Battlefields products, customers, geographies
• Weapons sources of competitive advantage
• Strategy is a set of policies designed to achieve
  a sustainable competitive advantage

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Introduction to Strategy Formulation

• Industry Attractiveness
• Structure and Performance / Industrial
  Organization (Bain)
• Five Forces (Porter) and Complementors
  (Brandenberger and Nalebuff)
• Competitive Position
• Generic Strategies (low cost / differentiation)
• Value Chain and Activity Analysis (Porter)
• Competitive Dynamics and Sustainable Advantage
• Resource-based View
• Dynamic Capabilities
• Game Theory
• Commitment
• Scope of the Firm
• Corporate Strategy (Diversification and Vertical
  Integration)
• Global Strategy (Geographic)

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Differences in Profitability Across Selected
Industries
Why are some industries more profitable?
Source Pankaj Ghemawat and Jan W. Rivkin,
Creating Competitive Advantage
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Industry Attractiveness

• Why are some industries more profitable than
  others? What are the implications for strategic
  choice?
• Industry Economics and Structure
• Five Forces (Plus Complementors)
• Emphasis on external consistency of strategy

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Industry Analysis Five Forces PlusDeterminants
of Industry Profitability
Threat of New Entrants
Bargaining Power of Buyers
Bargaining Power of Suppliers
Rivalry Among Existing Competitors
Threat of Substitute Products or Services
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Differences in Profitability Within Selected
Industries
Airline Industry
How does a firm position itself to achieve
competitive advantage?
Operating income / assets, 1988-95 ()
Source Pankaj Ghemawat and Jan W. Rivkin,
Creating Competitive Advantage
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Competitive Position

• How does a firm position itself to achieve, then
  sustain, above average returns?
• Competitive positioning
• supported by a set of consistent and reinforcing
  activities
• Activity Analysis of Cost and Differentiation
• Emphasis on internal consistency of strategy

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Creating Competitive Advantage

• What is your value proposition?
• Chart your attributes in comparison to those of
  your rivals
• What activities make your organization
  distinctive?
• Catalogue your distinctive activities
• What is your competitive advantage?
• Evaluate your relative costs and your buyers
  willingness to pay for your product or service
• What is your system of activities? How
  interdependent are they?
• Plot how your activities relate to each other
• What alternative strategies could you pursue?
  How could your reconfigure your organization to
  create a greater advantage?
• Consider alternative configurations. Do they
  generate a wider gap between cost and buyers
  willingness to pay?
• From HBS Strategy Building and Sustaining
  Competitive Advantage

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Example Ryanair 1986

• In 1986 Ryanair began air service between Ireland
  and the U.K. using secondary airports.
• Dramatically cut unrestricted fares to I98
• Cross-utilize employees same employees ticket,
  board, and serve passengers
• Customer service focus e.g., took care of
  passengers at gate if flight delays
• Began with turboprop airplanes with jets on order
• Took advantage of the bloated costs of incumbents
  Aer Lingus and British Airways
• Assess Ryanairs strategy. What is RAs
  competitive advantage?

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Ryanair Routes Served in 1986
Waterford
Luton
Gatwick
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Ryanair 1986 to 1991

• After Ryanair announced its Dublin-London
  service, AL BA reduced their lowest, restricted
  round-trip fares to the same levels
• For ALs 50th anniversary, Ryanair ran a large ad
  wishing AL well with a picture of a birthday cake
  -- with a slice taken out
• By 1987, Ryanair was running a 104-seat jet on
  the Dublin-London route Ryanair made a small
  profit
• Expanded routes, including between Dublin and
  Manchester, Liverpool, and Glasgow -- routes
  served by AL
• Ryanair maintained customer service focus with
  simple (10 lower) fare structure
• Assess Ryanairs actions. Do you anticipate
  continued success?

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Ryanair Routes Served in 1991
Glasgow
Manchester
Galway
Liverpool
Waterford
Shannon
Luton
Gatwick
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Ryanairalmost bankrupt!

• On Dublin and Manchester, Liverpool, and Glasgow
  routes AL dropped fares by half and tripled
  capacity on these routes
• On Dublin-London route fares often as low as I70
• Significant losses in 1988, 1989, and 1990
• Bankruptcy avoided in 1991 only by infusion of
  family cash
• Should Ryanair change its strategy?

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Ryanair 2.0 No-Frills Way to Success

• Near-death experience led Ryanair to refocus on
  no frills, low-cost, low-fare Southwest
  Airlines strategy
• a reinforcing set of activities that lower costs
• Ryanair marginal cost?
• Oh about negative two pounds! (Ryanair CFO)
• Typically entered markets with fares 50 below
  previous fares. In 1999 Dublin-London Stansted
  I35 restricted fare
• By 1999, Ryanair is one of the most profitable
  airlines in the world with 150 flights per day to
  UK, Ireland, and continental Europe.

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Ryanair Primary Routes in 1999
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Ryanair 2008

• Europes leading low-fare airline and has an
  industry-leading profit aftertax margin of 18
• Current value proposition
• Low-fare, no-frills, frequent and on-time flights
  between European cities
• No emphasis on on-board service
• No extensive network.

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1) Ryanair Value Proposition
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2) Competitive Advantage and Activities
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)
M
Value What buyers are willing to pay
a
Procurement (e.g. Components, Machinery,
Advertising, Services)
r
g
i
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)
n
Primary Activities

• Companies are collections of discrete activities,
  in which competitive advantage resides

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Ryanair Value Chain
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3) Evaluate Costs versus Willingness to Pay of
your Activities
For use only by Section E of HBS class of 2007
Buyer value generated (willingness to pay)
Costs incurred (including opportunity cost of
capital)
Industry average competitor
Focused differentiator (Edward Jones)
Low-cost competitor (Ryanair)
Competitor with dual advantage (Samsung?)
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Activity Analysis

• Catalog activities in the value chain
• Use activities to analyze costs relative to
  competitors
• Focus on differences in individual activities
• Determine critical cost drivers for each activity
• Use activities to analyze WTP relative to
  competitors
• Determine buyers and size of buyer group
• Determine critical WTP drivers for each
  activity/buyer

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4) Virtuous cycles -- reinforcing activities
For use only by Section E of HBS class of 2007

• Learning/Experience Effects

Customers buy product
Produce a lot (cumulatively)
Achieve low cost per unit
Customers value product more
Sell a lot
Customers learn to use product better
Set low price

• Network Effects

Product has big installed base
Product has big installed base
Complements for product appear
New customers buy product
New customers buy product
Customers value product more
Customers value product more
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Ryanair Interrelated Activities
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5) Consider alternative configurations

• Can your new configuration offer something
  valuable to customers without exceeding costs to
  deliver this value?
• Does your new configuration result in the
  production of something that is difficult to
  imitate?

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Tradeoffs and Activities

• Tradeoffs in activities means there is no one
  best way to perform functions
• Without tradeoffs, all firms should perform
  activities the same way
• Without tradeoffs, competition is about
  operational effectiveness not strategy (Ryanair
  1.0)
• With tradeoffs, optimal activity depends on other
  choices
• Best marketing activity depends on scope choice,
  production activity, etc.
• Presence of tradeoffs highlights importance of
  internal consistency
• (Ryanair 2.0)
• Without tradeoffs, firms is vulnerable to
  imitation
• Rivals who have made different choices can
  imitate firm without facing negative
  repercussions
• With tradeoffs hard to imitate (BA tried via
  separate division Go-Fly in 1998 but sells in
  2001 because cannibalizing BA)

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Questions for Discussion

• What are the major sources of ideas to the field
  of strategy?
• Why do you think management consultants played a
  major role in the development of strategy ideas?
  Do you think they will continue to be a major
  source of strategy ideas?