Competitive and Corporate Strategy · Value Chain • What creates a certain cost position? How is...

Competitive and Corporate StrategyValue Chain

Professor Nicolaj Siggelkow

Value Chain

• What creates a certain cost position? How is a product created for which

customers are willing to pay a high price?

• Value Chain

• Introduced by Michael Porter.

• Analytically break down the firm into different activity buckets, or into different

types of activities

Inbound

Logistics

Operations Outbound

Logistics

Marketing

& Sales

After-Sales

Service

M

arg

i

n

Primary

Activities

Support

Activities

Firm Infrastructure

Procurement

Technology Development

Human Resource Management

Source: Porter 1985

This figure illustrates: A strategists needs to know (at least a bit) about everything.

A strategist is an integrator.

Generic Value Chain

Inbound Logistics

• Cost Leadership:

• Highly efficient systems to link supplier’s products with the firm’s production

processes

• Efficient processing of incoming preference information from customers (click

data)

• JIT (Just in time)

• Differentiation:

• Superior handling of incoming raw materials to guarantee high quality of final

product

• Sufficiency of supply

Operations

• Cost leadership:

• Consolidate production to exploit economies of scale

• Choice of production technologies


• Rapid responses to customer demands

• Smaller lot sizes; more customization; wide variety

• Defect-free 100% of the time

Outbound Logistics


• Selection of low cost transportation carriers

• Delivery schedule that reduces costs

• Coordination with other units of the firm

• Focus on regionally clustered customers


• Accurate fulfillment

• Rapid and timely product delivery to customers

Marketing and Sales


• Smaller sales force; less personal touch

• Scale is important

• Buyer density for sales force utilization

• Standardization of processes and products


• Personal relationships with customers

• High sales force coverage and quality

• Building of brand that stands for more than the product (life style; high

quality)

• Broad range of financing options available

After-sale Service


• Proper product installation in order to reduce frequency of recalls

• Encourage peer-to-peer help


• Fast responses to customer requests

• Guarantee uptime

• Extensive back-up plans

• Extensive training for customers

Procurement


• Focus on finding lowest cost suppliers

• Frequent evaluation of each supplier’s cost performance

• Try to keep our switching cost low

• Timing of capital purchases when demand for them is soft


• Systems in place to find highest-quality raw materials and components

• Frequent evaluation of supplier’s quality and consistency



• Investments in technologies primarily to reduce production costs

• Develop easy-to-manufacture products (standardized parts)

• Fast follower rather than innovator

• Scale is important (R&D is a fixed cost)


• Strong capabilities in research and development

• Sourcing from ideas from outside the organization (JV and alliances)

• Rapid product introductions; unique products



• Focus of worker training on efficiency

• Balance wages and benefits with costs of turnover


• Big investments in screening and hiring to attract the most qualified personnel

• Incentives in place to reward creativity

• Broader set of performance criteria (beyond productivity)

• Extensive and continuous training

Firm Infrastructure


• Few management layers

• Culture of low cost

• Few perks at the top (WalMart, Vanguard, AB InBev)


• Highly developed information systems to understand customer demands

• Legal capabilities to protect intellectual property

• Culture of high quality and service (Nordstrom, FedEx)

• More perks (Google)

Competitive and Corporate StrategyVanguard Example of Value Chain


Vanguard Example of Value Chain

• Mutual Fund Provider, >$3trillion in investments

• Founded in 1975; unique organizational structure

• Positioning: Vanguard is a low cost provider

• Industry average expense ratio: 1.02%

• Vanguard average expense ratio (2014): 0.18%

Inbound

Logistics

Operations Outbound

Logistics

Marketing

& Sales

After-Sales

Service

M

arg

i

n

Primary

Activities

Support

Activities

Firm Infrastructure

Procurement



Source: Porter 1985

Generic Value Chain

Asset

Management

Account

Management

Selling &

Marketing

Information &

Customer Service

Human Resource Practices

Organizational Structure

Product Portfolio

Value Chain of Typical Mutual Fund Provider

Vanguard’s Asset Management Activities

• Internal management of index and fixed-income funds

• Limited research

• Reduced fees for outside investment companies

• Incentive fee for outside managers

General: We will focus on activities that are different from

those of competitors

Vanguard’s Account Management Activities

• High quality (yet limited) service

• Internalized shareholder accounting

• Internalized institutional shareholder accounting

• Vanguard Quality Program

• Bogle Barometers

Vanguard’s Selling and Marketing Activities

• Direct distribution, 1-800 number

• No-load

• Very few retail branches

• Little advertising (relative to assets)

• No telephone exchange for Index 500

• Decline assets if considered “hot” money

Vanguard’s Information and Customer Service Activities

• Candid communication

• Warning letters

• Plain talk brochures

• Clearly written annual reports

• Invest in on-line technology (first to web)

• Website for financial advisors, including analysis tools and economic analysis

• Low cost Personal Advisor Services (0.3% of assets)

Vanguard’s Human Resource Practices

• Moderate wages

• Bonuses based on cost savings

• No perks for management

• Swiss Army- Everyone is trained to deal with customer requests

• Hiring

• Do not hire from Wall Street

• Hire primarily college graduates

Vanguard’s Product Portfolio

• Focus on conservatively managed funds

• Balanced funds, index funds, fixed income funds

• Servicing of defined benefit plans

• Client services for retirement plan sponsors

• Personal Advisor Services

Firm Infrastructure

• Culture of low cost (“we always fly coach”)

• Mutual structure

• Owned by fund shareholders not by outside shareholders

Product focus: - fixed income - money market - index funds - balanced

Focus

on low

cost

higher long-term

returns

scale effects

scale effects particularly large

low costs particularly effective

organizational structure ensures that savings are fully passed through to customers

finances

high retention

educate customers to look at the long-term mutual

structure

candid

commu-

nication

focus on long-term

performance

high-

quality

service

more assets

Exercise

• Think about your own organization

• Construct a value chain

• What are the relevant “activity buckets”

• Identify activities within each stage of the value chain

• Which activities are most different from those of your competitors?

Competitive and Corporate StrategyIndustry Analysis


Average Industry Returns 2000 - 20140.33

0.210.200.20

0.200.190.19

0.180.18

0.170.170.17

0.160.16

0.160.15

0.140.13

0.130.12

0.120.12

0.110.100.100.100.090.09

0.090.090.080.080.08

0.070.070.07

0.05AirlinesAutomobiles

BiotechnologyInternet Software & Services

Household DurablesTrading Companies & Distributors

Electronic Equipment, Instruments & ComponentsIndependent Power and Renewable Electricity Producers

Communications EquipmentMedia

Electric UtilitiesIndustrial Conglomerates

Wireless Telecommunication ServicesMulti-Utilities

Semiconductors & Semiconductor EquipmentDiversified Telecommunication Services

Hotels, Restaurants & LeisureRoad & Rail

Commercial Services & SuppliesEnergy Equipment & Services

Metals & MiningMachineryChemicals

Health Care Equipment & SuppliesHealth Care Providers & Services

Oil, Gas & Consumable FuelsFood Products

Food & Staples RetailingBeverages

Technology Hardware, Storage & PeripheralsAerospace & Defense

SoftwareIT Services

Specialty RetailPharmaceuticals

Household ProductsTobacco

0.0 0.1 0.2 0.3

Average pre-tax ROIC 2000-2014

Se

lect

ed

ind

ust

rie

s

Industry Analysis

Porter’s 5 Forces:

1. Rivalry

2. Buyer Power

3. Supplier Power

4. Threat of Substitutes

5. Threat of New Entrants

Rivalry

• Concentration can affect the degree of competition:

• Perfect competition (many firms; commodity product; fish market)

• Oligopoly (a few firms; product differentiation) [cell phones]

• Duopoly (two firms) [Boeing and Airbus]

• Monopoly [firms with patents; Intel; Microsoft]

• Few firms => can be high or low competition

• Market growth rate can affect the degree of rivalry

• Cost structure/scale economies: Excess capacity

• Product differentiation

• Buyers’ switching costs

• Importance of Brand

• Buyers’ information about alternative offers/features

• Exit barriers (strategic stakes)

Buyer Power

• Price sensitivity:

• Cost of product relative to total cost/purchases

• Meaningful perceived product differences

• (if it is an input) Impact on quality/performance of buyer’s output

• Competition between buyers [PC manufacturers vis a vis Intel]

• Buyer’s profits

• Decision maker’s incentives [cost center?]

• Bargaining Power:

• Size and concentration of buyers relative to producers

• Buyers’ switching cost (search costs; transition costs; learning costs)

• Buyers’ information

• Buyers’ ability to backward integrate (Walmart and trucking)

Supplier Power

• Importance of volume to supplier

• Supplier concentration

• Differentiation of inputs

• Switching costs for firms to use a different supplier (search costs; transition costs;

learning costs)

• Pull-through from end customers [Pepsi and supermarkets]

• Credible threat of forward integration (Intel and PCs)

• Availability of substitutes

Threat of Substitutes

• Buyers’ propensity to substitute

• Buyer switching costs

• Relative prices and performance of substitutes

• Barriers to entry for substitutes

Threat of New Entrants

• Capital requirements

• Economies of scale; or steep learning curves

• Importance of brand, reputation, trust

• Difficulty of imitation:

• Property rights (trademarks and patents)

• Tying up distributors or suppliers

• Causal ambiguity: what needs to be copied?

• Time-compression diseconomies

• Legal barriers (certifications; licenses)

• Threat of retaliation

• First-mover advantages

Industry Analysis

• SWOT framework

• Strengths

• Weaknesses

• Opportunities

• Threats

• The same resource can have multiple features; e.g., specialized

production facility may create entry barrier through economies of scale but

also raise supplier power by raising switching costs

Competitive and Corporate StrategyIndustry Analysis Example


Example: US Mutual Fund Industry

• ~$16 trillion

• More than 9000 funds

• Hundreds of “fund families”

• Biggest players include Vanguard, Fidelity, State Street

Rivalry

• Red is problematic; blue is neutral; green is beneficial for firms in the industry

• Perfect competition (many firms; commodity product = index fund)

• Oligopoly (a few firms; product differentiation)

• Duopoly (two firms)

• Monopoly

• Few firms => can be high or low competition

• Market growth rate

• Cost structure/scale economies: Excess capacity

• Product differentiation for some fund types

• Importance of Brand

• Buyers’ switching costs

• Buyers’ information about alternative offers/features (depends on customer)

• Exit barriers (strategic stakes)

Buyer Power

• Individuals vs institutional buyers (employers buying pension plans)

• Price sensitivity:

• Cost of product relative to total cost/purchases

• Meaningful product differences

• (if it is an input) Impact on quality/performance

• Competition between buyers

• Buyer’s profits

• Decision maker’s incentives (maybe more service than price)

• Bargaining Power:

• Size and concentration of buyers relative to producers

• Buyer’s volume

• Buyers’ switching cost (search costs; transition costs; learning costs)

• Buyers’ information (depends on customer)

• Buyers’ ability to backward integrate

Supplier Power

• Who are the suppliers: IT, real estate (Wall Street, Boston, SF, London), fund

managers, call centers, sales agents, advertising agencies

• Supplier concentration

• Importance of volume to supplier

• Differentiation of inputs (fund managers)

• Switching costs for firms to use a different supplier (search costs; transition costs;

learning costs)

• Pull-through from end customers (only exception: star manager)

• Credible threat of forward integration

• Availability of substitutes

Threat of Substitutes

• Any other investment opportunity:

• Own brokerage account to trade stocks and bonds

• CD’s

• Hedge funds

• ETFs

• Buyers’ propensity to substitute

• Buyer switching costs

• Relative prices and performance of substitutes

• Barriers to entry for substitutes

Threat of New Entrants

• Capital requirements

• Economies of scale, learning

• Importance of brand, reputation, trust

• Difficulty of imitation:

• Property rights (trademarks and patents)

• Tying up distributors or suppliers

• Causal ambiguity: what needs to be copied?

• Time-compression diseconomies

• Legal barriers (certifications; licenses)

• Threat of retaliation

Firm and Industry Analysis

• Vanguard (with its low cost positioning)

• Rivalry: Higher since lower product differentiation; but built up reputation, and

their low prices have made their segments less attractive for others

• Buyer power: Brand has increased switching costs; perhaps even pull

through by individuals who want it as an option for their pension plans

• Supplier power: No active management; reduces power of fund managers;

also allows facilities in less expensive location

• Substitutes: At the low price point fewer options; but if lower cost option

comes in (like ETF) then potential threat; (they are selling them now as well)

• Barriers to Entry: Fairly high given scale economies (Vanguard manages

about $3 trillion; about 17% of all money in mutual funds)

Exercise

• Conduct an industry analysis for your own industry

• Then ask yourself, “How do we address each force? Given our positioning and

choices we have made along the value chain, are we affected more or less by

each of these forces than the average firm in our industry?”

Competitive and Corporate StrategyCompetitor Dynamics


Example: Entrant

Entrant

Very low price Low price

High price 300 / 200 500 / 100

Incumbent Reduce price 350 / 150 450 / 80

Match price 320 / 40 430 / 70

Prisoner’s Dilemma

• Firms can get themselves into tricky situations.

Clyde

Confess Don’t

Bonnie Confess -3, -3 0, -5

Don’t -5, 0 -1, -1

Firm B

Sale Don’t

Firm A Sale -2, -2 2, -4

Don’t -4, 2 0 , 0

Game Theory/Competitor response analysis in practice

1. Will the competitor react at all?

a) Will the competitor see your action?

• Action in small markets?

• Action in non-central distribution channels

b) Will the competitor feel threatened by your action?

• Will your action cause your competitor miss their mark?

• Firms announce earning goals; security analysts make earnings forecasts

Source: Coyne et al. HBR 2009

Will the Competitor React at all?

c) Will a response be a priority?

• What other items are on the competitor’s agenda? (product launches,

marketing campaigns, reorganizations, mergers, plant openings etc.)

• Which of these are set by the corporate parent?

d) Can the competitor overcome inertia?

• How large a change would be required for the competitor to react? Re-

org? Change of prior, successful strategy? Reconceptualization of

business? Third- parties involved? (e.g., franchisees?)


Competitor Response Analysis

2. What options will your competitor consider?

Common thought processes within firms:

• Most commonly considered option is: “match” (the price, the new feature, the new

product, etc.) (esp. for price)

• What did we do last time this happened?

• What did other business units of our firm do last time this happened to them?

• What do our board members advise us to do?

• What did we do the time before last?


Competitor Response Analysis

3. Which option will your competitor most likely choose?

• What metrics does the competitor use?

• This is not necessarily your metric!

• What measure would have led my competitor to chose the actions s/he

has previously chosen?

• 15% use NPV

• 17% short-term market share

• 17% short-term earnings

• 20% “long-term” market share (2 -4 years)

• 21% “long-term” earnings

• or “instinct” of decision makers (How have they reacted previously?

How have they fared?)


Competitor Profiling

• What are the stated financial goals of the competitor?

• What are the stated growth objectives of the competitor?

• What is the competitor’s attitude towards risk?

• Does the competitor hold beliefs that affect its goals?

• What is the organizational structure?

• What is the background of top management? What kinds of managers get promoted?

• Who is on the board of directors?

• What does the competitor believe about its relative positioning (Cost? Value? Quality?)

Is this accurate?

• The same set of questions for the corporate parent.

• What is the strategic importance of this division? Emotional importance?Source: Porter, 1980

Competitive and Corporate StrategyIndustry, Firm and Product Life Cycles


Industry, Firm, and Product Life Cycles

Introduction Growth Maturity Decline

Time

Sales

Product/Technology Lifecycle

• Early in the lifecycle:

• Importance of R&D

• Lead customers; or sell to another firm

• Struggle to establish the standard; dominant design

• Middle in the lifecycle:

• Product adoption speeds up; how to reach the mass market

• Firms trying to create and exploit possible network effects

• Importance of sales, marketing, access to distribution

• Differentiation possible; different segment emerge

• Late in the lifecycle:

• Commoditization of the product

• Less differentiation possible within each segment (but niche segments can remain)

• Importance of operational excellence; lower cost

Three Horizons

time

sales

Horizon 1 Horizon 2 Horizon 3

Horizon 1: The company’s current core business; incremental innovations; efficiency

improvements

Horizon 2: The rising stars that may become the core businesses in the future

Horizon 3: Nascent businesses that might become future growth engines

Industry Lifecycle

• Early

• Few firms; all try to find a different way to address a need

• Middle

• Many firms enter as market has been proven to be profitable; market grows

rapidly overall

• Eventual shakeout (more leave than enter)

• Mature

• Consolidation as scale economies become ever more important

• But new technologies might create turmoil again (e.g., automobile industry)

Rate of

innovation

time

Process innovation

Product innovation

Firm Lifecycle

• Young firm:

• Entrepreneurial

• Importance of imprinting; blue print of founders

• Relatively informal

• CEO and founders very involved in day-to-day details

• Possible re-shifting, “pivoting” of strategy/positioning (e.g., Lycos)

• Growing firm:

• Quite different skill set necessary to grow

• Firm becomes more “managed” as number of employees increases

• Possibly some global experience is necessary

• Starting to create cross-firm alliances and bridges

Firm Lifecycle

• Mature firm:

• Control of large firm difficult

• Issues of corporate scope

• M&A, JV, alliances

• How to keep an entrepreneurial mindset while being good at exploiting

existing capabilities and resources; e.g. advantage of having good

relationships with current customers – vs being blind of new customer

segments and demands

Firm Life Cycle

Introduction Growth Maturity Decline

Time

Sales

World’s Largest Companies in Terms of Market Capitalization

1. US Steel

2. Standard Oil NJ (Exxon)

3. J&P Coates

4. Pullman

5. Royal Dutch Shell

6. Anaconda

7. General Electric

8. Singer

9. American Brands

10. Navistar

1912 2015

1. Apple

2. Alphabet

3. Microsoft

4. Exxon Mobile

5. Berkshire Hathaway

6. Amazon

7. General Electric

8. Facebook

9. Johnson & Johnson

10. Wells Fargo

L. Hannah (1999) in Grant, p. 221)

List of Fortune 500 (revenue based)

1. General Motors

2. Exxon

3. US Steel

4. General Electric

5. Esmark (Swift)

6. Chrysler

7. Armour (meat; Dial)

8. Gulf Oil

9. Mobil

10. DuPont

1. Walmart

2. Exxon Mobil

3. Chevron

4. Berkshire Hathaway

5. Apple

6. General Motors

7. Phillips 66

8. General Electric

9. Ford

10. CVS Health

Full list: 2015 vs 1955: only 12% overlap

Top 10: 1955 Top 10: 2015

Competitive and Corporate Strategy · Value Chain • What creates a certain cost position? How is...

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