Strategia Afacerilor

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Pi t f Ill t ti C A l (C t ) IPicture from Illustrative Case: Apple (Computer) Inc.

In 2007 changed name, reflects evolution to their strategy,Was this a conscience choice or emergent? What is their strategy, what is their business model,The value proposition, is it a good strategy

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“Strategy is the pattern of decisions in a company that Strategy is the pattern of decisions in a company that determines and reveals its objectives, purposes, or goals, produces the principal policies and plans for achieving those goals, and defines the range of business the company is to pursue, the kind of economic and human organization it is or intends to be, and the nature of the economic and noneconomic contribution it intends to make to its shareholders, employees, customers, and communities.”

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Kenneth Andrews, The Concept of Corporate Strategy (Homewood, IL: Richard D. Irwin, 1971).


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Strategic Mission

How a firm positions itself in the market and develops and leverages internal resources and capabilities to accomplish its strategic mission.

Strategic Plan

A firm’s values and purpose and the scope of its operations in product and market terms.

Strategic Mission

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Individual actions taken to execute the strategic plan in pursuit of the strategic mission.

Strategic Actions

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def. the assessment of an organization’s current

From a generalist’s perspective (integrative, foundational)Using strategic reasoning (rivalry, dynamics, complexity)G i i

competitive position and the identification of future valuable competitive positions and how to achieve them

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Grounded in analytics and data Applying appropriate tools and frameworks

• Someone who formulates and implements strategyCEO or PresidentCEO or President

Entrepreneur/OwnerVP Strategic PlanningGeneral Manager of a Business Unit

• Someone who evaluates strategy Investors

Financial Analysts

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y

• Someone who recommends future strategic actionsConsultantsSecondary Stakeholders

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ValuesWhat is our mission?What is our scope?What do we value?

The mission of The Walt Disney Company is to be one of the world's leading

Our goal for Citigroup is to be the most respected global financial services company

producers and providers of entertainment and information.

Google's mission is to organize the world's information and make it universally accessible and useful.

Dell’s mission is to be the most successful computer company in the world at delivering the best customer experience in markets we serve.

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respected global financial services company. Like any other public company, we're obligated to deliver profits and growth to our shareholders. Of equal importance is to deliver those profits and generate growth responsibly.

Source: www.missionstatements.com

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At the heart of the Chevron way is our vision to be the global energy company most admired for its people, partnership and performance.

Ford: We are a global family with a proud heritage passionately committed to providing

McKesson: Our mission is to provide comprehensive pharmacy solutions that improve productivity, profitability and result in superior patient care and satisfaction.

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personal mobility for people around the world.

Source: www.missionstatements.com

Facebook’s mission is to give people the power to share and make the world more open and connected.

ValuesValuesWhat is our mission?What is our scope?What do we value?

OpportunitiesWhat does the market

demand? Who else, if anyone, offers this value proposition?

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CapabilitiesOpportunities What are our strengths?

Where might we have a competitive advantage?

What does the market demand? Who else, if anyone, offers this value proposition?


Opportunities CapabilitiesWhat are our strengths?Where might we have a competitive advantage?


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Valuable Competitive

PositionOpportunities Capabilities

What are our strengths?Where might we have a competitive advantage?


How do we create and

sustain value?

Position

Strengths Weaknesses

Inte

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Firm

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Opportunities Threats

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Performance Metrics

Capabilities Objectives/Values

Strategy

Focal Firm

Competitor 1

Competitor 2

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Competitor 3

Competitor 4

Competitor 5

Demographic Trends

Socio-cultural Influences

Technological Developments

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Macroeconomic Impacts

Political-Legal Pressures Global Trade Issues

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A business’ strategy is embodied in its mission, plan, d iand actions

Strategic analysis is useful for assessing the viability of a business strategy

Strategic analysis is not just the purview of the CEO

The strategist’s challenge is to balance values, i i d bili i id if d i bl opportunities, and capabilities to identify desirable

competitive positions that create and sustain value.

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“If everyone can do it, it’s difficult to create and capture value from it.”

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or, alternatively

“I f tl titi k t

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“In a perfectly competitive market, no firm realizes economic profits (rents).”

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def. economic profits (rents) are returns in excess of what an investor expects to earn from of what an investor expects to earn from investments of similar risk (i.e., in excess of the opportunity cost of capital)

$2,541

$4 490

$6,328 IBM

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All data in US $ millions from 1998. Abstracted from S. Oster, “Modern Competitive Analysis”. Oxford University Press. 1999.

$(5,525)

$3,776

$2,956

$4,490

General Motors

Microsoft

Accounting Profits Economic Profits

Tobin’s Q• Ratio of a firm’s market value to its asset replacement value• Directly measures “rents” above those to physical inputs• Difficult to calculate because it requires knowledge of assets’

replacement value

Discounted Cash Flow (DCF)• Measures value of firm going forwardg g• Discount rate reflects return to equity (i.e., opportunity cost)• Positive NPV indicates rents over and above returns to all inputs

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The existence of economic profits suggests some type of market inefficiency.


The strategists task is to identify ways in which firms may capitalize on these market imperfections.

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An Industry

S1

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An Industry

S1

P1

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Q1

An Industry A Firm

S1

P1

ACMC

P1

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An Industry A Firm

S1

P1

ACMC

P1

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D

Q1q1

Profits = Revenues – Variable Costs – Fixed Costs

π= P1q1 - c(q1) – cf

δπ/δq1 = δ(P1q1 - c(q1) – cf)/δq1 = 0

P1 – c’(q1) = 0

Profits Revenues Variable Costs Fixed Costs

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1 c (q1) 0

P1 = c’(q1) = MC

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An Industry A Firm

S1

P1

ACMC

P1

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Q1

An Industry A Firm

S1

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An Industry A Firm

S1

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An Industry A Firm

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An Industry A Firm

P2

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Q2

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An Industry A Firm

P2

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P2

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Q2

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An Industry A Firm

P2

S2

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P2

ACMC

P1

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Q2

D

Q1q2 q1

The existence of economic profits suggests some type of market inefficiency.


The strategists task is to identify ways in which firms may capitalize on these market imperfections.

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Facts:• Average industry returns vary even after controlling for risk• Average industry returns vary even after controlling for risk.• Returns among companies within industries vary even more.• Returns for individual companies vary over time.

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Returns

Den

sity

“When you are presented with a project that appears to When you are presented with a project that appears to have a positive NPV, don’t just accept the calculations at face value. They may reflect simple estimation errors in forecasting cash flows. Probe behind cash flow estimates and try to identify the source of economic rents. A positive NPV for a new project is believable only if you believe that the company has some special only if you believe that the company has some special advantage.”

From the chapter, “Where Positive Net Value Comes From”Brealey & Myers, Principles of Corporate Finance

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Monopoly Rents (Industrial Organization View)

Ricardian Rents(Resource Based View)

Schumpeterian Rents(Dynamic Capabilities View)

P

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(Industrial Organization View)

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(Resource Based View)

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-Barriers to entry-Industry structure matters

-Barriers to imitation-Firm structure matters

-Markets are dynamic-Innovation matters


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The Fundamental Principle -- In perfectly competitive k t fi li i fitmarkets, no firm realizes economic profits.

Economic profits are returns in excess of the opportunity cost of capital.

In the real world, product markets are rarely perfect and firms often have competitive advantage.

B dl ki fi t i fit Broadly speaking, firms may capture economic profits when there are either barriers to competition or barriers to imitation.

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1

Source: freedigitalphotos.net

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or, alternatively

“In a perfectly competitive market, no

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In a perfectly competitive market, no firm realizes economic profits (rents).”




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The Industrial Organization Perspective:

Premise that industry structure matters most

Economic rents due to barriers to competition (i l )

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The Industrial Organization Perspective:

(i.e. monopoly rents)

Some industries are more profitable than others

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Bargaining Power of Suppliers

Intensity of Rivalry

Bargaining Power of Buyers

Threat of Entry

Suppliers y

Threat of Substitutes

Buyers




Threat of Entry

Suppliers y


Buyers

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Entry is less likely when ...

1. Entrant faces high sunk costs

sunk costs are investments that cannot be recovered

2. Incumbents have a competitive advantagepotential entrants are at a competitive disadvantage compared to existing players, simply not profitable to enter

3. Entrant faces retaliation potential entrants are likely to be forced out of business by strategic (pricing) behavior of incumbents

Point: For sunk costs, emphasize non-recoverability (vs. large recoverable capital investment)large recoverable capital investment)Ex: R&D, hotel vs. big boxCounter Example:Leasing airplanes

Slide: Potential BarriersEx: Patents, etc: Taxis, Doctors, LawyersEx: Pioneering Brands: Quicken, Coke & Pepsi,

Foundations of Strategy

Ex: Pioneering Brands: Quicken, Coke & Pepsi, NikeEx: Pre-commitment: SWA in Detroit

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Patents & licensesPatents & licenses

Pioneering brands

Pre-commitment contracts (e.g., distribution)

Large economies of scale (relative to demand)

Steep learning (experience) curves

Others

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Slide: Economies of scalePoint: C = αqβ : calculate using regression ln C = ln α + β Point: C = αqβ : calculate using regression ln C = ln α + β

ln qPoint: Talk about slope

Slide: MESPoint: Expressed as market share, could change as

market grows


Slide: Learning curvesPoint: Similar to EOS, could be qualityEx: Far better at working with team by Term 2!

$

AC

OutputMES

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Minimum efficient firm size (% of Industry Capacity - 1979)

Canning (fruit)Oil Refining

Meat Packing

Fountain PensCopper

TypewritersFlour Milling

Metal Containers0.5

1.750.20

10.010.0

30.00.5

3.06.06.0

10.015.0

2.510.0

RayonFarm Machinery

AutomobilesTractors

ShoesCement

S l Liquor Distilling 1.753.0

20.033.0 Tires

Steel

Gypsum Products

Source: K. Lancaster and R. Dulaney, Modern Economics: Principles and Policy (1979)

Patents & licensesPatents & licenses

Pioneering brands

Pre-commitment contracts (e.g., distribution)

Large economies of scale (relative to demand)

Steep learning (experience) curves

Others

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Unit cost

Cumulative output over time

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Excess capacity of incumbentsp y

Economies of scale or other cost advantage

Substantial exit costs

• Exit costs are payments that must be made upon exit

• Exit costs provide an incentive to fight

Aggressive reputation of incumbents

• Must be credible

• Suffers from free-riding problem

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Slide: Likelihood of retaliation (for example, price cutting)Ex: Excess Capacity: airlines during recession Ex: Excess Capacity: airlines during recession,

semiconductor cycles & PC memory prices, fiber optic lines

Ex: EOS: Wal*Mart (war of attrition)Ex: Exit Costs: polluters, pensionsEx: Reputation: Microsoft

(Simpson’s example =


(Simpson s example CompuGlobalHyperMegaNet)




Threat of Entry

Suppliers y


Buyers

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Substitute products are less of a threat when ...

1. Cross-price elasticity of demand is low

2. Switching costs are highone-time costs customers incur when switching to a new product or service

Slide: Cross-Price ElasticityEx: Cellular vs landline 10 yrs ago & now; more Ex: Cellular vs. landline, 10 yrs ago & now; more

generally, digital convergenceEx: butter vs. margarine VS gas vs. alternatives

Note: Negative CPE implies complements

Slide: Switching CostsEx: Cellular vs. landline & number portability


Ex: Cellular vs. landline & number portabilityEx: car rentals vs. public transport

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The ratio of the % change in demand for one good given a 1% increase in price of another good

P1 P1P1

given a 1% increase in price of another good.

Q2Perfectly /Infinitely

Elastic Demand

Q2Perfectly

Inelastic Demand

Q2

“Moderately” Elastic Demand

The ratio of the % change in demand for one good given a 1% increase in price of another good

P1 P1P1

given a 1% increase in price of another good.

Q2Perfectly /Infinitely

Elastic Demand

Q2Perfectly

Inelastic Demand

Q2

“Moderately” Elastic Demand

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Substitute products are less of a threat when ...

1. Cross-price elasticity of demand is low

2. Switching costs are highone-time costs customers incur when switching to a new product or service




Threat of Entry

Suppliers y


Buyers

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Slide: Buyer BP, point 1 (buyers not concentrated) Ex: Counter example McDonald’s & CokeEx: Counter example -- McDonald s & Coke

Slide: Relative Concentration Ex: Monopoly = Wintel

Competitive = PCMonopsony = Hops in mass beerMutual = military aircraft


Buyers have less power when ...

1. Buyers are not concentrated (no monopsony)• Many potential buyers• Each accounts for a small fraction of sales

2. Buyers have few options• Products are differentiated (low intra-industry CPE)• High switching costs (relationship-specific assets)• Buyer cannot backward integrate

3. Buyers are segmented• Price information is not widely available• Price discrimination possible• Bundling possible

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Buyer

Many

Few

MonopolyPower

MonopsonyPower

Competitive

MutualDependence

Supplier

ManyFew

Slide: Buyer BP, point 2 (few buyer options) Ex: Differentiation: Coke & PepsiE S i hi M Wi l Ex: Switching costs: Mac vs. Wintel, contract

manufacturersEx: B. Integration: large industrial customers &

electricity

Slide: Buyer BP, point 3 (segmentation)Ex: Information not widely available: Mattress modelsSlide: Price DiscriminationEx: 1st degree: Auto sales, college tuition, auctions

2nd degree: Airlines w/ travel dates


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PP

D

S

Producer Surplus

pc

ConsumerSurplus

Q

D

qc

P i $60Profits = $60M

Price

$20

$40

$60

Profits = $100M

Profits = $60M

Demand (Millions)

1 2 3

Profits = $60M

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WTP for Product TypeConsumer Type A B C D Total

HR $100 $90 $70 $20 $280

Engineers $60 $120 $70 $70 $290

Sales $100 $80 $140 $60 $380

Consultants $70 $100 $60 $80 $310

Min. WTP for product $60 $80 $60 $20 $220




Threat of Entry

Suppliers y


Buyers

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Suppliers are less of a threat when ...

1. Sellers are not concentrated (no monopoly)

2. Firms have many alternatives• many substitutes for supplier’s products• firms face low switching costs• supplier cannot forward integrate

3. Sellers may not treat segments differently• price information is widely available• price discrimination not possible




Threat of Entry

Suppliers y


Buyers

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Note: Big issue is concentration. Economists have long been interested in this issue…

Slid B t d C tSlide: Bertrand vs CournotNote: Both are “one-shot” games with simultaneous

moves

Note: In the end, there is wide variance across industries.Note: Consider duopolies,

Coke vs. Pepsi (favorable)Bud vs. Miller (favorable)B i Ai b ( t ti )Boeing vs. Airbus (contentious)

Note: More useful to think about two broad conditions….


Slide: Intensity of rivalryNote: Catch 22 -- many of the factor that lower the y

incentives to “fight” also lower barriers to entryEx: Cyclical demand (autos, hotels in college towns,

PCs)

Slide: Value of coordinationPoint: So reduce output, raise priceSlide: Illegal forms of coordination, Crandall exampleA k Wh i OPEC i ?Ask: Why is OPEC not anti-trust?Note: What is allowed is various forms of tacit collusion…


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Rivalry is less intense when ...

1. The number of competitors is small !!!!!

2. Incentives to “fight” are low• Substantial market growth (especially if capacity constrained)• Opportunities to differentiate• Low exit costs• Little excess capacity (demand is not cyclical)

3. Coordination is feasible• Explicit price / market fixing (antitrust violation!)

• Tacit coordination (implicitly holding prices high, differentiating)

ACMCACMC

Price Taker Monopolist (or Cartel)

AC

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Cartels are classic examples (e.g., OPEC)

Such price-fixing is per se illegal in U.S.• No discussion of pricing allowed!!!• Includes functional equivalents• Other actions judged according to “rule of reason”

Examples of accused price-fixingIvy League financial aid• Ivy League financial aid

• U.S. airline reservation systems

Coordination is typically difficult to maintain (prisoners’ dilemma)

Structural factors may facilitate tacit coordination• Few competitors (concentration ratio)• A few dominant competitors (Herfindahl index)• Similar competitors

Facilitating devices may facilitate tacit coordination • Threat of price wars (tit-for-tat)• Best-price clauses

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Threat of Entry

Suppliers y


Buyers




Threat of Entry

Suppliers

Role of Compliments

y


Buyers

Role of Institutions

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Complements are products for which a decrease in price will increase demand for the target product (i.e., p g p ( ,negative cross-price elasticity)Examples: computers and software, VCRs and video tapes, bread and butter (?), guns and bullets

Important issues:• Who controls complementary products?• Who has bargaining power firms in the industry • Who has bargaining power, firms in the industry

or providers of complementary products?

Institutions set “the rules of the game”• Antitrust law and enforcement• Legal barriers to entry, trade (“natural”

monopolies)• Policymaking institutions (policy stability)• Institutions may be influenced by players

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Raise switching costs (e.g., frequent flyer programs)Differentiate (e.g., Swatch watches)Coordinate – tacitly of course (e.g., best-price clauses)Consolidate (e.g., telecoms industry)Integrate – vertically, that is (e.g., M&A in media)Innovate (e.g., CFCs to HCFCs)Certify / Lobby (e.g., lawyers, doctors)y y ( g , y , )

A key task in a strategic analysis is to identify and dd h i i f h li i i address the competitive forces that limit economic

rents:

• Entry is less likely when incumbent firms have a competitive advantage and can credibly retaliate against new entrants.

• Substitution is less likely when switching costs are high and cross-price elasticity is low.

• Buyer and supplier power depend on relative concentration, the viability of alternatives, and information availability.

• Rivalry is more intense when incentives to fight are large and tacit coordination is difficult.

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2


or, alternatively


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The Resource Based Perspective:

Premise that firm capabilities matter most

Economic rents due to barriers to imitation (i.e. Ricardian rents)

The Resource Based Perspective:

PAC 2

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PAC 2

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Some firms are more profitable than others q1 q2

AC 1

q1 q2

AC 1

PAC2

MC1

AC1

MC2 ACMC

P1

P2

q1 q2

Cost Advantage

q1 q2Demand Advantage

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CAPABILIITIES 1. _______ 2. _______ 3. _______ 4. _______

Processes

People

SystemsSystems

Alignment

Sustainability

Supplier Manufacture Distribution Buyer

Technological DevelopmentTechnological Development

Human Resource ManagementHuman Resource Management

Firm InfrastructureFirm Infrastructure

ProcurementProcurement

Technological DevelopmentTechnological Development

Human Resource ManagementHuman Resource Management

Firm InfrastructureFirm Infrastructure


SecondaryActivities

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CAPABILIITIES 1. _______ 2. _______ 3. _______ 4. _______

Processes

People

SystemsSystems

Alignment

Sustainability

Tangible Intangible

People/Assets

Systems/

g g

CashPhysical Plant

PatentsTalent

BrandsReputation

Technical ExpertiseLoyalty

C t t /Alli i i lSystems/Processes

Contracts/AlliancesIT Systems

Positive CultureTalent Acquisition

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CAPABILIITIES 1. _______ 2. _______ 3. _______ 4. _______

Processes

People

SystemsSystems

Alignment

Sustainability

Internal Alignmentg• Are our processes, people, and systems aligned with

each other?• Do they reinforce each other to build capability?

External Alignment• Are capabilities aligned with the value proposition?• The “value” in a VRIN analysis

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Human Resource Mgmt• Performance incentives at all levels• Non-unionized

Fl t hi h li it d t t

Value Proposition:Low Cost Per Ton

• Flat hierarchy, limited status• Participatory decision making Operating Efficiency

Capital Efficiency

High Utilization

Rapid Expansion• Little R&D, rely on suppliers• Steady investment / upgrading

Fi d ith t i d i

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• Financed with retained earnings• Kept debt to <30%• Required 25% ROA within 5 years

Capital Resource Mgmt• Built in low cost, rural areas• Acted as general contractor• Design plant as built (to save time)• Design plant with expansion in mind• “Tiger team” to start plant• Hired construction workers for plant

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CAPABILIITIES 1. _______ 2. _______ 3. _______ 4. _______

Processes

People

SystemsSystems

Alignment

Sustainability

The degree to which a competitive d t i t d d t i dadvantage is captured and sustained

Imitability• Can others do what we do?• Rarity and inimitability conditions of a VRIN analysis

Durability• Can we maintain our capabilities over time?• Will they degrade or become obsolete?

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Legal barriers present

Control scarce supply

Developed over unique historical path

Capabilities are socially complex

Value derives from tight combinations

Credibly commit a firm to a course of actionCredibly commit a firm to a course of action• Can they be used to keep others from exploiting

expanding opportunities? (scalable)• Are they limited to this purpose? (specificity)

The degree to which a competitive d t i t d d t i dadvantage is captured and sustained

Imitability• Can others do what we do?• Rarity and inimitability conditions of a VRIN analysis

Durability• Can we maintain our capabilities over time?• Will they degrade or become obsolete?

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Human and physical assets tend to degrade over titime

Core capabilities may become core rigidities • success breeds complacency, risk aversion, myopia

Valuable capabilities today may be obsolete tomorrow

Some assets may be more valuable to others and Some assets may be more valuable to others and thus are worth selling!

CAPABILIITIES 1. _______ 2. _______ 3. _______ 4. _______

Processes

People

SystemsSystems

Alignment

Sustainability

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Alternative 1: Acquired from othersq• Resource markets (e.g. labor, technology, patents)• Mergers & acquisitions• Alliances, associations, corporate venture capital

Limitations:• Only viable if these factor markets (markets for things

that firms buy) are imperfect!• Firm must have either superior information or pre-

existing complementary capabilities (or luck)

Valueleader

laggard

Performance

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Valueleader

laggard

Performance

Valueleader

laggard

Performance

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Alternative 2: Developed internally over timeAlternative 2: Developed internally over time• New product development and internal R&D• Knowledge management, training• Superior leadership

Limitations: Firm still must have either• Superior information (know-why) p ( y)• Pre-existing complementary capabilities (know-how) • Luck!

Capability analysis helps identify a firm’s value-creating activities (i e strengths and weaknesses)creating activities (i.e., strengths and weaknesses).

Capabilities arise through the interaction of people, processes, and systems.

To provide a sustainable competitive advantage, capabilities must by well aligned internally and externally, durable, and hard to imitate.

Superior capabilities are either acquired or built and required superior know-why or know-how (or luck!).

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3


or, alternatively


6


4

“Change is the only constant.”or, alternatively

“Over time, economic profits (rents)

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tend to dissipate as markets evolve.”




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Q

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The Dynamic Capabilities Perspective:

Premise that markets are dynamic

Economic rents due to temporal advantages (i.e. Schumpeterian rents)

The Dynamic Capabilities Perspective:

p )

Timing and adaptation is critical

High

neal

ing

hake

out

srup

tion

CumulativeRevenues

Margins (?)

An S h Dis

EmergentPhase

Low

Firms

GrowthPhase

MaturePhase

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Source: Dobrev et al., 2003

Source: Carroll et al., 1993

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Source: Wade 1996

In the beginning an era of ferment In the beginning, an era of ferment • innovation focuses on product features• is largely exploratory• often led by small entrepreneurial firms• profits are made through differentiation

and niche placement

Over time, a “dominant design” emerges Over time, a dominant design emerges • innovation shifts to process, delivery, and service• only a few large, efficient firms remain• pioneering firms often whither away

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• A new technology or business model emerges– exogenous technological change (technology push)exogenous technological change (technology push)– changes in market due to consumer shifts (demand pull)

• Emergence of a new dominant designNew technologies may be worse at first!– New technologies may be worse at first!

– New technologies supplant old as they improve – Some new technologies may fail to improve fast enough and thus

disappear

• Older firms that cannot adapt are driven from the market!

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No better positioned than new entrants• Innovations render existing capabilities valueless: • Innovations render existing capabilities valueless:

technologically, organizationally, and market-wise.

Worse positioned than entrants• Incumbent firms fail to see value in new innovations and

have difficulty adopting: core rigidities

Select not to change• There may be a fundamental tradeoff between short-term

and long-term competencies (e.g., cannibalization)

Innovation often requires extensive capital and expertise (not easily available to small/newly-founded firms)

Customers desire the assurance of established firms (often risk averse, unlikely to try new things)

Incumbent firms may leverage complementary resources or capabilities to their advantage

Incumbent has a “dynamic capability” to adjust to changing business conditions

10

The Competitive Life Cycle

EmergentPhase

MaturePhase

Disru

ption

y

GrowthPhase

Speedn


EmergentPhase

MaturePhase

Disru

ption

iPod iPad

20

GrowthPhase

Speed

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Phase Timing Severity

How important is innovation/adaptation?

Disruption How long is mature phase? Radical or incremental?

Annealing How long is emergent phase? Dominant design or multiple designs?

Shakeout How long is growth phase? Winner‐take‐all, duopoly, contested?

Overall Slowly evolving or hyper‐dynamic? First mover advantage?

• Do we have an innovation capability?• Can we appropriate value from innovation (ours or others)?

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Organizational incentives and mechanisms to integrate diverse technical knowledge.

The firm’s ability to recognize knowledge generated outside the boundaries of the firm and incorporate it into the organization.

Internal External AcquisitionInternal External AcquisitionDevelopment (R&D, NPD)

Development(CVC, Alliances)

(M&A, Licensing)Development (R&D, NPD)

Development(CVC, Alliances)

(M&A, Licensing)

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Strength of intellectual property protection

customers

(both the nature of the legal system and the nature of the technology and market)

Control of complementary assets

(those assets necessary to exploit the innovation such as marketing, di ib i d i

innovator

suppliers

imitators,competitors

Total value created by the innovation

distribution, and supporting technology)

Legal protections such as patents, copyrights, and trademarks are enforceable.

There are substantial first-mover advantages such as learning curves, customer loyalty, or branding.

Standardization is critical due to product compatibility or network externalities.

Diffusion among customers is fast (e.g., a large, l ti k t h d t t d t)lucrative market where products are easy to adopt).

Imitation by competitors is slow due to trade-secrets, technologically or socially complex innovation, or the need for specialized complementary assets.

13

Strength of intellectual property protection

customers

(both the nature of the legal system and the nature of the technology and market)

Control of complementary assets

(those assets necessary to exploit the innovation such as marketing, di ib i d i

innovator

suppliers

imitators,competitors

Total value created by the innovation

distribution, and supporting technology)

Depends on …• How important is a complementary asset?• How important is a complementary asset?• How tightly held is the complementary asset?

Innovation strategies in one technology often require rapid innovations in complementary technologies for the consumer (and producer) to realize any benefit.

Firms can encourage complementary technology g p y gydevelopment through interface design, investments that shift incentives toward complementary innovation, protecting the profits to complementary products.

14

Industries evolve through life cycles.

Industries are periodically disrupted by new innovations and business models that may alter the existing competitive order.

Competitive success is often determined by how you navigate these changes over time.

S f l i i i b h h i Successful innovation requires both the capacity to innovation and the ability appropriate value from innovations.

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2







sustain value?

Position

ompe

titiv

e sc

ope

with

in in

dust

ry Broad

Narrow

Costleadership

Differen-tiation

Focusedlow cost Niche

Source of competitive advantage

Cow

Cost Uniqueness

low cost

3

Profit = $2P fit $1 Profit = $2Profit = $1

Industry average Low-cost firm Differentiator

Cost = $5 Cost = $4Cost = $6

The extent to which a firm targets multiple

• Industries may be segmented into individual product markets

• characteristics of the product line

buyer group (e g age race gender)

product market segments within an industry.

• buyer group (e.g., age, race, gender)

• geographic market

4

ompe

titiv

e sc

ope

with

in in

dust

ry Broad

Narrow

Costleadership

Differen-tiation



Cow

Cost Uniqueness

low cost

Keeping costs lower than those of competitors to generate rents vis-à-vis the marginal producer Tend to generate rents vis-à-vis the marginal producer. Tend to

offer standardized products with broadly acceptable product features at the lowest price.

Examples: Wal-Mart, McDonald’s, Nucor, Charles Schwab

Strategic approaches:• Engage in cost cutting (e g Wal Mart)• Engage in cost-cutting (e.g., Wal-Mart)• Build market share to gain EOS (e.g., Anheuser-Busch)• Use low-cost inputs, offshoring (e.g. Wal-Mart, Dell)• Minimize overhead such as R&D, advertising (e.g., Dell)• State-of-the-art operations/continuous improvement (e.g., Nucor)

5

Generating rents from higher consumer willingness-to-pay Command price premium from unique features pay. Command price premium from unique features,

high quality, service and/or “prestige.”

Examples: Target, Apple, Intel, BMW, Goldman Sachs

Strategic approaches:• create brand through advertising (e.g., Nike)• develop innovative capability (e.g., Intel, Apple)• invest in human resources, R&D (e.g., Goldman)

Keeping costs lower than those of competitors in a narrow segment of the market Often used as an entry narrow segment of the market. Often used as an entry

strategy by foreign firms and new ventures into advanced markets.

Examples: Kia, generic drug manufacturers

Strategic approaches:• deter rivalry by dividing market (e.g., budget airlines)• capture narrow economies of scale (e.g., generic drugs)

6

Generating rents from higher consumer willingness-to-pay by targeting a small often premium segment of the pay by targeting a small, often premium segment of the

market.

Examples: Tiffany’s, Porsche, boutique consultancies

Strategic approaches:• gain knowledge and expertise (e.g., Juniper Networks)• build brand loyalty (e.g., Porsche)

ompe

titiv

e sc

ope

with

in in

dust

ry Broad

Narrow

Costleadership

Differen-tiation



Cow

Cost Uniqueness

low cost

7

The best of both worlds: Offering differentiated products at low cost!Offering differentiated products at low cost!

Examples: Toyota, Southwest Airlines

Strategic approaches:• adopt total quality management or lean production techniques• invest heavily in R&D / innovation

Beware of getting “stuck in the middle”!

= Factor 3

Fact

or

2 Firm F

Firm A

Firm B

Firm D

= Factor 3

14

Factor 1

F

Firm EFirm C

8

= Number of Models

Spo

rtin

ess

Toyota

Ford

Porsche

Mercedes

15

Average Vehicle Cost

Kia







sustain value?

Position

9

Second Corollary to the Fundamental Principle: If some competitive positions are more favorable than others,

we would expect firms to adopt those strategies.

Industry Structure

-----------------

Does the

Firm Capabilities

------------------

How may our

Competitive Dynamics

--------------

How are positions

17

structure shelter certain positions?

ycapabilities help

establish and defend a position?

plikely to evolve

over time?




Threat of Entry

Suppliers y


Buyers

10

CAPABILIITIES 1. _______ 2. _______ 3. _______ 4. _______

Processes

People

SystemsSystems

Alignment

Sustainability


EmergentPhase

MaturePhase

Disru

ption

y

GrowthPhase

Speed

11

What favorable strategic opportunities exist?

How contested is a position?• New markets, positions (Blue Ocean Strategy)• Existing markets and positions (Red Ocean Strategy)

Can we establish this competitive position?• Do we have the capabilities to execute especially vis-à-vis rivals?• Can we create value in unique ways versus established competitors?q y p

Can we defend this position once established?• How sustainable is any competitive advantage we may have?• How is the industry likely to evolve?

Positions, like markets, are defined both by market needs and ways of delivering on those needsneeds and ways of delivering on those needs.

Industries often have more than one rent-producing position.

Rent-producing positions rely on favorable industry structure and/or superior capabilities.

Firms can combine multiple positions, but need a p pstrategic logic for the combination.

The challenge of strategy is to capture these valuable, defensible competitive positions.

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2

Scope refers to the businesses that a firm operates and h th th tihow they govern those operations

Often called “corporate strategy”

Scope is a question about diversification• Can the firm leverage its position across markets to garner

economic rents in individual businesses?• Do the potential benefits of diversification exceed the costs?Do the potential benefits of diversification exceed the costs?

BUS ABUS B

BUS ABUS B

Single Business Dominant Business

Low>95% 70%-95%

sharing value chain

BUS ABUS BBUS C

BUS ABUS BBUS C

High

Related Unrelated

3

Hold Build

Indu

stry

At

trac

tiven

ess

Hig

h

5

Harvest Hold

Business Unit Competitive Advantage

Low

Low High

Financial • Capitalizing on market opportunitiesp g pp• Reduce risk by diversifying assets

Operational• Exploit economies of scale & scope• Transfer/leverage rent-generating assets• Improve coordination among businesses

Strategicg• Eliminate and prevent competition by subsidizing a price war• Reduce rivalry through mutual forbearance• Raise rivals’ costs (vertical foreclosure)• Reduce transaction costs of using markets & contracts

4




1. Capitalize on opportunities in unrelated markets

Argument: Firms can reinvest retained earnings and achieve growth targets by entering new (unrelated) markets

Critique: Shareholders can choose where to invest for themselves

Argument: Firms may have privileged information about fit bl t iti il bl t it l profitable opportunities unavailable to capital

marketsCritique: Little evidence that internal capital markets are more

efficient

5

2. Reduce risk by diversifying assetsy y g

Argument: Firms can reduce volatility of earnings Critique: Shareholders can diversify for themselves

Argument: Employment and financial costs may fall with reduced risk of bankruptcy

C iti C bi i it d i k it Critique: Combining units can compound risks across units, raising the costs of volatility and the risk of bankruptcy




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1. Exploit economies of scale and scopeArgument: Lower costs, for example, by eliminating duplicate

ff teffort

2. Transfer/leverage rent-generating assetsArgument: Share technology, know-how, reputations—i.e., put

underutilized rent-producing assets into use

3. Improve coordination among businessesArgument: Create broad incentives for cooperation and

information exchange

Caution: Synergies hard to realize in practiceOften achievable through contracts rather than integration




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1. Eliminate competition by subsidizing a price war1. Eliminate competition by subsidizing a price warArgument: Competitors have limited access to capitalCaution: May be an antitrust violation (e.g. Microsoft)!

2. Raise rivals’ costs (vertical foreclosure)Argument: Exert power through backward and forward

integrationintegrationCaution: A near monopoly position must be maintained in

the upstream or downstream activity

3. Reduce rivalry through mutual forbearancey gArgument: Multipoint competition (competitors are in similar

markets) reduces incentives to fightCaution: (1) Complexity makes such tacit collusion difficult

(2) When price wars do break out, they tend to be severe

4. Minimize transaction costs of using markets4. Minimize transaction costs of using marketsArgument: Often costly (impossible) to write complete

contract, leading to “hold-up” by partnersCaution: Assumes that trust is difficult in market exchange

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Why do firms exist? Why is all economic activity not organized through markets?g

All economic activity is a series of “transactions” between independent economic actors.

“Ownership” imparts residual rights of control:• Ability to choose course when disagreements or unforeseen

contingences arise.

• Creates common incentives & mechanisms for coordination.

• Minimizes risks and frictions of transacting through the market.

Relationship-specific assets and hold-up (opportunism)Inseparability of effort/resources expendedContracting on information: Arrow’s paradoxPrivate information (adverse selection)Uncertainty about future contingencies

Why is all economic activity not organized in one big firm? What limits firm scope?p

Government! (Antitrust to reduce monopoly power)

Bureaucratic Costs• Coordinating layers of management in firms• Slow, inflexible decision-making• Less able to adapt quickly to market changes

Agency Costs• Organizational politics, influence games• Opportunistic behavior of managers and employees• Monitoring and sanctioning difficult

9

Risks & frictions ofFirmsMarkets

“Tra

nsac

tion

cost

s”Risks & frictions of using markets

Bureaucratic & agency costs of using firms

“Complexity” of transaction

PER

FOR

MA

NC

E

LEVEL OF DIVERSIFICATION

Dominantbusiness

Concentric Conglomerate

10







sustain value?

Position

11

Firms expand their scope (diversify) to leverage their rent generating assets across markets and thereby rent-generating assets across markets, and thereby garner economic rents within individual markets.

Firms also diversify to protect market power, eliminate duplicate costs, and reduce transaction costs.

Firms are only one way of governing economic transactions and of achieving scope advantagestransactions and of achieving scope advantages

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Strategia Afacerilor

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