Chapter 2

“Computers in the future may weigh no more than 1.5 tons”

“Computers in the future may weigh no more than 1.5 tons”

—Popular Science Magazine, forecasting the relentless march of Science - 1949

In 1968, a 100 megabyte hard drive weighed 4,500 pounds cost more than $130,000

“I think there is a world market for maybe five computers”

—Thomas Watson, Chairman of IBM, 1943

“But what….is it good for?”

—Engineer at IBM, commenting on the microchip, 1968

“The idea is interesting and well-formed, but in order to earn better than a “C” the idea must be feasible”

— Yale University Professor in response to Fred W. Smith’s paper proposing an overnight delivery service

In FY 2004, FedEx delivered over 2 billion packages

Reduces inventory/carrying costs

Bar-code pioneers/Information Technology

Open new markets, Global markets

Increased U.S. productivity

Leveling the playing field

Supply chain revolution

Lowers costs to consumer

Delivered 206,822,000,000 articles of mail in 2004

“We don’t like their music and guitar music is on the way out”

— Decca Records Company in rejecting the Beatles, 1962

“ Who the hell wants to hear actors talk”

H. M. Warner, 1927

“There is no reason why anyone would want a computer in their home”

Ken Olson, president, chairman, and founder of Digital Equipment Corporation, 1977

“This ‘telephone” has too many shortcoming to be seriously considered a means of communication. The device is inherently of no value to us.”

Internal Memo, Western Union, 1876

“This ‘telephone” has too many shortcoming to be seriously considered a means of communication. The device is inherently of no value to us.”

“Everything that can be invented has been invented”

Charles H. Duell, Commissioner of the U.S. Patents Office,

1899

“640K of RAM ought to be enough for anybody”

Bill Gates, 1981

Subway opens a new store every 3 hours

Starbucks every 11 hours

Quiznos every 16 hoursWSJ, Oct 1, 2003

“I see no scenario whatsoever where Toyota will pass us in share”

Chrysler Chief Dieter Zetsche, January 2002

“I see no scenario whatsoever where Toyota will pass us in share”

Chrysler Chief Dieter Zetsche, January 2002

September 2003, “The Big Three” became GM, Ford, and Toyota

“Nothing important happened today”

Journal entry made by King George III, July 4, 1776, the day the United States declared independence from England

“Competitive strategy must grow out of a sophisticated understanding of the rules of competition that determine an industry’s attractiveness”

“Analysis is the critical starting point of strategic thinking”

“Skate to where the puck is going, not to where it has been”

External Analysis

It’s not recognizing that change will occur that is the problem, it’s figuring out:

what will happen?

how it will affect us?

what to do about it?Therefore, forecasting is necessary to predict direction

and the effect of change

BROAD/REMOTE/MACROENVIRONMENT

Political and

Legal

Societal Values

and Lifestyles Demographics

Technology

The Economy at Large

COMPANY

Suppliers Substitutes

Buyers

NewEntrants

Rival Firms

IMMEDIATE INDUSTRY

AND COMPETITIVE ENVIRONMENT

Broad/Remote/Macroenvironment Segments

Macroeconomic

Demographic

Political/Legal

Technological

Social

Firms CAN NOT

Directly Control Them

?

Porter’s Five Forces

Competitive Rivalry

Power of Buyers

Power of Suppliers

Potential Entrants

Substitute Products

Each of these forces affect costs/prices,

therefore, profitability

SubstituteProducts(of firms in

other industries)

RivalryAmong

CompetingSellers

PotentialNew

Entrants

Suppliers of Key Inputs

Buyers

SubstituteProducts(of firms in

other industries)

RivalryAmong

CompetingSellers

PotentialNew

Entrants

Suppliers of Key Inputs

Buyers

Complementors

Price

Costs

Profits {Porter’s 5-forces is all about margins - What factors increase/decrease margins, i.e., profitability.

Prices can be kept high

Costs can be kept low

Profits can soar {

When industry structural variables are weak…...

Prices will be pushed down

Costs will rise

Profits shrink {

When industry structural variables are strong…...

If you were unable to find work and had to start making money, what kind of business would you start?

Which of these industries would be most difficult to enter? Which would be relatively more easy?

Airlines, automobile manufacturing, grocery store, pharmaceutical, beer brewing, restaurant, hair salon

Potential Entrants

Firms enter when industries are attractive, unless they find themselves at an immediate disadvantage relative to incumbents.

Firms can create “barriers to enter” Barriers of entry are desirable for

entrenched firms

Barriers to Entry

Economies of scale

Access to technology & know-how

Learning, costs, experience curves

Product differentiation & loyalty

Switching costs

Capital & resource requirement

Cost disadvantage independent of size

Distribution

Regulatory policies

Threat of retaliation

Threat of Substitutes

Product/service which fulfills similar need

Price cap

3 Questions1) Are they available?

2) Price-performance relationship?

3) Can we switch?

Power of Buyers

Who are the Buyers? - who provides our revenues?Can they force:

lower prices, higher quality and service – affect the terms and conditions of the exchange?

Based on two issues1 Price sensitivity

• significant “out of pocket” costs• no differentiation• exist in a competitive, low profit industry – every penny

counts

Power of Buyers (cont.)

2 Whether buyers can bargain down prices• few buyers

• buyers are knowledgeable

• low switching costs

• backward integration is a valid threat

Competitive Force of SuppliersWho are the suppliers?

Suppliers are a strong competitive force when:– Only a few suppliers exist– Few substitutes – Buyers not important customers– Suppliers provide a product crucial to production

process, and/or significantly affects product quality– It is costly to switch suppliers– Forward integration a credible threat– They can supply a component at a lower cost

Rivalry and Profitability

Industry profitability is a collective good.

Collective good is served by coordinationAre there industries were pricing is coordinated?

Incentive to violate

Usually the most powerful of the five forces

How actively and aggressively are rivals employing competitive weapons in jockeying for a stronger market position and increasing sales?

– Is price competition vigorous?– Active efforts to improve quality?– Are rivals racing to offer better

performance features? better customer service?

– Lots of advertising/sales promotions?– Active efforts to build a stronger

dealer network?– Active product innovation?– Active use of other weapons of rivalry?

Rivalry – What drives it?Numerous, equally balanced competitorsPerceptions of high payoff from competitive actionsSlow growth, excess capacityHigh fixed, storage, obsolescence costsHigh exit barriers Diversity of competitorsLow switching costsLack of differentiation

Porter’s..in conclusion

Determines the attractiveness of industry

Can we influence any of these structural attributes?

Static model & Hypercompetition– If the pace of transformation is rapid, if entry rapidly undermines the

market power of dominant firms, if innovation speedily transforms industry structure by changing process technology, creating new substitutes, and by shifting the basis on which firms compete, then there is little merit in using industry structure as a basis for

analyzing competition and profit.

Porter’s Five Forces - Two ExamplesCampus Bookstore

Rivals? -

Entry Barriers? -

Substitutes -

Supplier Power -

Buyer Power -

Profitable?

PCs

Rivals -

Entry Barriers -

Substitutes -

Supplier Power -

Buyer Power -

Profitable ?

Industries and SegmentsWhat is a segment?

Different segments…..posses different combinations of 5-forces

therefore:reward different strategies

possess different levels of profitability

Therefore, not all firms can effectively compete across multiple segments

What Forces Are atWork to Change Industry Conditions?

Industries change because forces are driving industry participants to alter their actions

Driving forces are the major underlying causes of changing industry and competitive conditions

Common Types of Driving Forces

Changes in long-term industry growth rate

Changes in who buys the product and how they use it

Product innovation

Technological change/process innovation

Marketing innovation

Entry or exit of major firms

Diffusion of technical knowledge

Common Types of Driving Forces

Increasing globalization of industry

Changes in cost and efficiency

Market shift from standardized to differentiated products (or vice versa)

New regulatory policies and/or government legislation

Changing societal concerns, attitudes, and lifestyles

Changes in degree of uncertainty and risk

Which Companies are in Strongest / Weakest Positions?

Strategic group mapping

A strategic group consists of those rivals with similar competitive approaches in an industry

Price

Quality

National Jewelry Retailers

Price

Quality

National Jewelry Retailers

Cartier

Price

Quality

National Jewelry Retailers

CartierTiffany

Price

Quality

National Jewelry Retailers

CartierTiffany

Jerrods

Price

Quality

National Jewelry Retailers

CartierTiffany

JerrodsMarks & Morgan

Price

Quality

National Jewelry Retailers

CartierTiffany

JerrodsMarks & Morgan

Zales

Price

Quality

National Jewelry Retailers

CartierTiffany

JerrodsMarks & Morgan

ZalesKay

Price

Quality

National Jewelry Retailers

CartierTiffany

JerrodsMarks & Morgan

ZalesKay

WalMart

Price

Quality

National Jewelry Retailers

CartierTiffany

JerrodsMarks & Morgan

ZalesKay

WalMartK-Mart

Price

Quality

National Jewelry Retailers

CartierTiffany

JerrodsMarks & Morgan

ZalesKay

WalMartK-Mart

Price

Breadth of Product Line

National Jewelry RetailersCartierTiffany Nordstroms

Sachs

WalMartKmart

Target

SearsJCP

BurdinesDillards

ZalesKay

Pawn ShopChain-by-the-Foot Carts

JerrodsMarks & Morgan

Price

Breadth of Product Line

National Jewelry RetailersCartierTiffany Nordstroms

Sachs

WalMartKmart

Target

SearsJCP

BurdinesDillards

ZalesKay

Pawn ShopChain-by-the-Foot Carts

JerrodsMarks & Morgan

Price

Breadth of Product Line

National Jewelry RetailersCartierTiffany Nordstroms

Sachs

WalMartKmart

Target

SearsJCP

BurdinesDillards

ZalesKay

Pawn ShopChain-by-the-Foot Carts

JerrodsMarks & Morgan

Strategic Groups identify

Closest Rivals

Price

Breadth of Product Line

National Jewelry RetailersCartierTiffany Nordstroms

Sachs

WalMartKmart

Target

SearsJCP

BurdinesDillards

ZalesKay

Pawn ShopChain-by-the-Foot Carts

JerrodsMarks & Morgan

Strategic Groups identify

Mobility Barriers

Price

Breadth of Product Line

National Jewelry RetailersCartierTiffany Nordstroms

Sachs

WalMartKmart

SearsJCP

BurdinesDillards

ZalesKay

Pawn ShopChain-by-the-Foot Carts

JerrodsMarks & Morgan

Strategic Groups identify

Untapped Niches

Price

Breadth of Product Line

National Jewelry RetailersCartierTiffany Nordstroms

Sachs

WalMartKmart

Target

SearsJCP

BurdinesDillards

ZalesKay

Pawn ShopChain-by-the-Foot Carts

JerrodsMarks & Morgan

Strategic Groups identify

Untapped Niches

What strategic moves are rivals likely to make? - Competitive Analysis

Important in concentrated industries

Benefits– forecast future actions, predict reactions– can we influence rivals’ behavior?

Four Steps of CA

Identify their strategy

Identify the objectives

Identify their assumptions

Identity their capabilities

StrategyObjectivesAssumptionsCapabilities

Strategic Action

What are the Key Success Factors?

KSFs are product attributes, competencies, competitive capabilities, and market achievements with the greatest direct bearing on profitability

opportunities for competitive advantage

Example: KSFs for Beer Industry

Utilization of brewing capacity -- to keep manufacturing costs low

Strong network of wholesale distributors -- to gain access to retail outlets

Clever advertising -- to induce beer drinkers to buy a particular brand

Identifying Key Success Factors (KSFs) - vary by segment

Automotive Industry