SI422 Mid-Term

High, quarter, High, high, high, cost, high, high, few, high, low, critical, high, low, low, low, backward

Analysis of Environment - Taxi Industry: Threat of Entry (_________): Anyone can drive- no skills needed. High driver turnover- no unions. Oversupply- 40k for 15k "capacity" (Has the highest Power). Power of Buyers (Hi/lo?): Plenty of options BUT, Fares dictated by city (Only about one ________________ filled in for threat circle). Threat of Substitutes (____________): Subway. Limos/livery- may cherry pick more profitable fares (not "hailing" costs). ... and now Uber!! (Extent of rivalry, Suppliers, and Substitutes all three quarters filled). Extent of Rivalry (__________): Flood of taxis!! Crowd high-potential areas. Bid up prices of medallions. Power of Suppliers (__________): Medallions scarce & valuable, Leasing managers raising prices. Overall Assessment of Industry (Good/Bad?): Do you expect overall industry P to be above or below economic average? LOW. What are the most important factors that affect industry P ? See above marked with (High). Porter's Five Forces: If they are high ("strong" or "intense"), our industry's profits decline; if low ("benign"), profits increase: 1.) Supplier Power: If supplier power increases, profits decrease. 2.) If buyer power increases, profits decrease. 3.) If rivalry among existing competitors increases, then profits decrease. 4.) If the threat of new entrants increases, profits decrease. And if barriers to entry increase, then profits increase. 5.) If the threat of substitutes increases, then profits decrease. Customer's cost with a supplier affects their cost focus: Q: As a supplier to a jacket manufacturer, are you likelier to receive more intense cost focus from your customer if you are a: button supplier? or a leather supplier? A: The customer will focus more on cost (your price) negotiations on the leather, while less focus will be placed on buttons. The button supplier enjoys not so much "Supplier Power" as it does a vacuum of Buyer Power (or Buyer ___________ Focus). 1.) If Supplier Power is high, our industry's profits will decline: 8 sources of supplier power and reasons for supplier leverage. 1.) Supplier concentration is __________. Example: Microsoft: Near monopoly in operating systems drove up costs for PC makers (quite large in number). 2.) ___________ Switching Costs. Example Bloomberg: Financial service customers have purchased specialized equipment and invested in training. 3.) _________ Substitute inputs. Example Pilots' unions: Airlines have no alternative; they must have well-trained pilots. 4.) Product differentiation (inputs) is ___________. Example: Superstar athletes: Team owners must pay large salaries to star athletes to satisfy fan expectations. 5.) Customer's costs relative to total purchases are ________ (as a %). Example: Button manufacturer: Makers of high-end ski jackets are less likely to negotiate with their button supplier on price. 6.) Product is "mission _______________". Example: Airbag switch maker: Auto manufacturers are less likely to negotiate on price given the product's crucial role. 7.) Importance of volume to suppliers. Example: Suppliers that serve many industries will extract maximum profits from each one. 8.) Threat of forward integration: If industry makes too much money relative to suppliers, suppliers may be induced to enter. 2.) If Buyer Power is high, our industry's profits will decline: 1.) Buyer concentration is ___________. Example: Home Depot, There are few home-improvement superstores; if you supply them, they'll negotiate price. 2.) Customer concentration (as a % of a supplier's sales). Example: Wal-Mart, For most companies that supply Wal-Mart, given its size, Wal-Mart is a very large % of co. sales. 3.) _________ Switching Costs. Example: Online shoe buyer, The buyer can switch at will between Zappos and other vendors. 4.) Product differentiation is _______. Example: Smuckers. If you supply them with glass jars (commodity products), they will push for lower prices. 5.) Brand identity is _________. Example: Rental Car Customer. With no brand motivating purchase, buyers will focus mostly on price. 6.) Customer's costs relative to total cost are high (as % of cost bar). Example: Coach. They are "price sensitive" and focused on the price of leather in their negotiations with their suppliers. 7.) Threat of _______________ integration. Example: Costco. Warehouse clubs have launched a wide range of "private label" products (though much of the actual manufacturing is outsourced), thus competing with their branded-product vendors.

rivkin, Porter, Competitive, four, assets, OK,

Competitive Positioning & Relative Cost Analysis (Hostess) (Porter & Jan ____________ & P. Ghemawat): Industry Structure -> Industry-level sources -> Firm Economic Profits. Competitive Positioning, Competitive Dynamics, Corp & Global Strategy, Global & Technology strategy -> Firm-level sources -> Firm economic profits. We're moving into Competitive positioning and firm-level sources. Coors- how to best "fit" into the "go big or go home" beer industry from last class: Industry Trends from last class: 1.) Industry getting more favorable, especially for big powerful firms (e.g, Anheuser-Busch, Miller). 2.) Economies of Scale a big driver: fixed-cost buckets of Marketing and Distribution in particular. 3.) Big firms achieving national scale (important for national ads!!). 4.) Big firms putting most of their muscle behind one flagship brand. Against this backdrop, Coors was struggling as of end of case (1985). What should Coors do?? Coors Post-1985: Key to National Sales is Light Beer: 1989: Record firm beer sales (17.7M barrels, +7%) [LATimes, pg 1]. Coors Light +15% sales, passed 10M barrel benchmark. Coors Light is identified as the fastest growing premium light beer in the US. 1999: Coors Light is 4th most popular beer brand [Beverage World, pg 1/2]: 15M barrels, 7.7% mkt share, +13.6% growth (3 yr). Original Coors 2M barrels. Firm ranked 3rd nationally, Total firm mkt share: 11%. 2006: Coors Light represents 70% of business [USA Today, pg 1]. By 2012, Coors Light was the third largest selling beer brand in the United States!! Coors' sponsorship deal with sports leagues and teams helped boost sales: 2001-2011 - Coors Light was the official beer sponsor for the NFL. As of 2011, they still sponsor 21 of 32 teams in the league (Schulz 2011). 2007 - Coors Light becomes the official beer of Nascar. Five year, $20 million deal (Mullman 2007). 2011 - Coors Light signs seven year, $375 million deal to be official sponsor for the NHL (NHL 2011). Aside from generating more revenue, the sponsorship deals helped Coors: Generate more brand awareness. Develop customer loyalty to its product. At least 40% of Nascar fans correctly identified sponsors (Soat 2014). 76% are likely to purchase from/recommend a Nascar sponsor (Soat 2014). Coors Light built in (perceived?) product differentiation through packaging innovations: Coors Light Silver Bullet. Emphasized the silver can (Ghemawat 1992). Notable taglines include: "The World's Most Refreshing Beer". "Born in the Rockies". Created cold activated bottles and cans to go with taglines. Image of the Rocky Mountains will turn blue once a certain temperature is reached (Nason 2011). 2009 - 3% increase in sales during a year where industry sales were relatively low (Alsever 2009). Competitive Positioning: Goals for this Module : What explains a firm's profitability (relative to its rivals)? What is the firm's relative position in the industry? What costs & prices does it achieve? What activities drive its costs & prices? How can a firm outperform the industry average? Competitive Advantage: How can a firm outperform the Industry Average? Industry Average Returns (ROA): Some firms above this line, and some are below to create this average. Types of Strategies: (also unfortunately called "Generic Strategies"... (____________ author) Note: Prof. Kirks does not like this wording!!). A firm has a _____________________ Advantage if it achieves a higher profitability (e.g., ROA) than the average in its industry. There are __________ general ways that firms can obtain competitive advantage in mature markets with capable competitors. Broad Market: Many or all segments. Narrow Market: One or few segments. Cost leadership or Differentiation (Premium prices). Four box matrix. Firms that fail to choose a particular strategy get "stuck in the middle" and underperform. Cost Leadership & Differentiation Strategies: Price & Cost per unit on y-axis. On x-axis, 1.) Industry Average Competitors (Their price and cost aligns perfectly with price average and cost average). 2.) Low Price/Cost Leadership (Product of acceptable quality at lower price). 3.) Premium Price /Differentiation (Product of higher quality at higher price). These strategies are only successful in creating Competitive Advantage if they achieve a greater margin than the Average Firm in the Industry. Types of Competitive Advantage: Differentiation (premium price) -> Competitive Advantage, and Cost Leadership (lower cost) -> Competitive advantage. Cost Leadership Strategy: Invest in __________ to lower operating expenses. Deliver a product of ________ quality at lowest possible cost. If executed well, translates into above average profits with relatively low prices.

Backward, Forward, Scope, value, specific, created, Asset, hold up, relationship, fail, renege, piskorski

Corp Strategy Overview Disney-Pixar: Non-Market Strategy: Industry Structure -> Industry-level sources -> Firm Economic Profits. Competitive Positioning, Competitive Dynamics, Corp & Global Strategy, Global & Technology strategy -> Firm-level sources -> Firm economic profits. So far we have focused on Business-unit strategy (how to compete within a business). Industry Structure, Competitive positioning, resources & capabilities is all business-unit strategy. This module: Corporate Strategy. Grant discussed the differences between Corporate and Business Unit Strategy: Corporate: Where to play? What should the scope of the firm be (industries & markets): Diversification, Acquisitions, New Business Development, Vertical Integration (also a business unit issue). Allocation of capital amongst existing businesses. Business Unit: How to win?: How does the business compete?: Products, Customers. How can the business achieve a sustainable competitive advantage over its industry rivals?: What activities should a firm pursue?: Key "high value" activities, Outsource others, Vertical integration. Corporate Strategy: Choosing Corporate Scope: Vertical integration (also a business unit issue): How much of the value chain should we own? Horizontal integration: In which business areas should we be active? Geographic scope (not on midterm): In which countries or regions should we operate? Also a business unit issue!! Vertical integration asks "How much of the value chain should we own?": Business Area: Parts -> Manufacturing -> Distribution -> Retail. Firms own/operates these steps in the value chain. Parts is Upstream and Retail Downstream (Vertical Scope). Vertical Integration Types: _________________ integration -> occurs when a firm moves into a business that is "upstream" (i.e., CLOSER TO RAW MATERIALS). e.g., if Ducati were to begin to make more Supplies. _________________ integration -> occurs when firm moves into a business that is "downstream" (i.e., CLOSER TO THE END CONSUMER). e.g., Ducati entering Sales. Horizontal integration asks "In which business areas should we be active?": Horizontal ______________: Business Area #1, Business Area #2, Business Area #3. Firms owns/operates certain steps in the value chain in different business areas. Note: Another way to think about "Business Area" is to think of each as a different "Product". Issues In Corporate Strategy: Horizontal vs. Vertical Integration: Horizontal Integration: refers to extent to which firm is involved in multiple business areas (i.e., product/industry breadth of the firm). e.g., GE is a horizontally integrated (diversified) firm: Power, Financing, Airplane Engines, Med. Tech. Vertical Integration: Describes how firm participates in various stages of the value chain. Note: many "vertical" value chains are pictured from left to right!! Consider the example of the Brewery below: Raw materials (barley, Hops, H20) -> Brewing -> Marketing & Distribution -> Retailer -> Consumer. Two key tests to apply to any expansion in corporate scope: The Better-Off Test: Do the business units create and capture more ___________ if they are related than they could as separate, single-business entities without formal ties? -i.e., Is '1 + 1 > 2'? -Factors that matter: Lower costs: shared activities, shared resources, economies of scale or scope. Increased willingness-to-pay. The Ownership Test: Do the business units create more value under common ownership than they would through if they were related in other ways. -Are any alternative relationships superior to common ownership? Potential hold-up example: Coal mine & coal electricity plant: Suppose three things: 1.My firm owns a coal mine. 2.Your firm makes power plants that convert coal into electricity. 3.It is expensive to transport coal, but cheap to transport electricity. What should we do? Is there a potential for hold-up to arise? Why? What can we do about it? Example of Relationship-______________ Investment or "Asset Specificity": Co-Location! (Good News): Coal mine: Original price charged to (more distant) plant was ~$100/ unit (included $10 RR shipping charge): Coal mine revenues: $90 . Electricity plant total cost of coal: $100 . But now, after the plant "co-locates" next to the mine, there is $10 of savings per unit!! Good news, right?? Who gets to keep this "_______________ value"? Time for a negotiation!! Who gets to keep the $10 of created value?: "Greedy Electricity Plant Owner's Perspective". "Hey, I'm the one who built my plant here... I should keep all of the $10 savings!!". Also, the plant owner knows that the best (net) price the coal mine can charge a distant power plant customer (their 'BATNA') is $90 (that other customer pays $100 total but $10 goes to shipping). -Plant owner will offer to pay $91.... coal mine is still $1 ahead of the best alternative. -Plant owner will keep $9 of savings. "Greedy Coal Miner" (a.k.a., Greedy SI Professor!!): Hey, you're the one who decided to build here....I know that (once here) best cost in buying coal from distant coal mine would be $100. -I will offer you a price of $99.... your power plant is still $1 ahead of best alternative. -I'll keep $9 of savings. Who is right?? The next time (in for example the next negotiation), who will be right?? Example of Relationship-Specific Investment or "____________ Specificity": Co-Location! (Bad News). There is never a "right answer" as to how to split up the pie! Also, after the RSI is made, each party is reliant upon the other for the foreseeable future.... this dependence will never go away! After a contract between the two parties expires, there are three bad things that can happen: (1) One side or the other tries to negotiate better terms (though any threatened alternative to increase bargaining leverage would be less optimal and therefore costly) Also known as a ____________ ___. (2) Protracted/expensive contract renegotiations (costly). (3) Failure to agree and the _________________________ grinds to a halt (costly). But since either party can often escape a contract, these risks could pop up at any time, including during* a contract! Example of Relationship-Specific Investment: Co-Location! (So What?): Implications for Writing a Contract? Implications for Vertical Integration? Implications for Ownership Test? Vertical Scope: Costs of Market Transactions: Markets have costs, too Market relationships ________ under conditions of: When relationship-specific investments are needed to make a transaction work (a.k.a., "opportunism" or "hold-up"). The possibility that you can ____________ (go back on a promise/contract) on a 'cheat' the other person makes it difficult to have a market relationship. E.g., a market transaction for sharing skills or intangible assets. The receiving party won't want to pay for them until they really understand them. Once they understand them, they won't want to pay!! Class Questions: Which is an example of vertical integration?: Apple opening Apple stores. According to __________________, the "Better Off Test" tells us: are business units better off working together vs. being on their own. Which is an example of horizontal diversification?: Ducati acquiring a consumer product company. Business Unit (or Competitive) Strategy is about: business-unit strategy is about how to win (at the business-unit level). Corporate Strategy is about: Where to play. As the case went on, when the relationship between Disney and Pixar was more developed, the contracts between the two firms: Were more complex to negotiate. According to Piskorski, the "Ownership Test" tells us: is actual ownership better than an alternative arrangement.

Friedman, Philanthropic, Freeman, Secondary, Primary, WTP, Mintzberg

Corporate Social Responsibility & Tata Motors (Marques & Mintzberg): CSR is not a piece of cake: Non-market Strategy II, CSR, & social impact. Marques & Mintzberg use some "cake" analogies to share CSR thinking over time: 1.)"Let Them Eat Cake". 2.) "Icing on the Cake". 3.) "Everyone Earns a Slice of Cake". 4.) "Having your Cake and Eating it Too". 1.) "Let Them Eat Cake"-Milton Friedman questions CSR: "The Social Responsibility of Business Is to Increase Its Profits": 1976 Nobel Prize Winner in Economics. One of the most effective advocates of economic freedoms and free enterprise. "There is one and only one responsibility of business- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." (Milton __________________). The employee ("agent") is responsible to the owners ("principal"); what he/she does outside of work is their choice. "In a free-enterprise... system, a corporate executive is an employee (Agent) of the owners of the business (principal). He has direct responsibility to his employers (principal). .... Needless to say, this does not mean that it is easy to judge how well (Principal-Agent Problem, part) he is performing his task." - Milton Friedman. Of course, the corporate executive is also a person in his own right As a person, he may have many other responsibilities that he recognizes or assumes voluntarily- to his family, ..., his feelings of charity, his church, ..., his city, his country. .... But in these respects, he is acting as a principal and not an agent; he is spending his own money or time or energy, not [that] of his employer...." - Milton Friedman. 2.) "Icing on the Cake" - all superficial and no substance: 2a) Public relations. 2b) Pronouncements by the CEO 2c) "Greenwashing" 2d) _____________________ activity disconnected from business operations: NFL Breast Cancer drive?. Boston area businesses donating $$ to Boston Children's Hospital? 2e) Not much substance (or actual "cake"): BP's "Beyond Petroleum" Campaign before major oil spill. All perceptions on CSR and ethical indices came crashing down. 3.) "Everyone earns a slice of cake" (R. Edward _________________): "A Stakeholder Theory of the Modern Corporation": Both the stockholders and stakeholders have a right to demand certain actions from management...Why??? Both the stockholders and stakeholders have a right to demand certain actions from management...Because each has a vested stake in the corporation. Because firms operate only with the implicit support of all members of society. Can lead to "win win" opportunities.... "Having your cake and eating it too". Stakeholder view of the corporation: __________________ Stakeholders (outer circle of five): Media, Government, Competitors, Consumer Advocate Groups, Special Interest groups. _________________ stakeholders (inner circle of five): Communities, Customers, Employees, Suppliers, Financiers. Firm is at the center! Two types of stakeholder: Narrow definition - A stakeholder includes those groups who are vital to the survival and success of the organization. Wide definition - A stakeholder includes any group or individual who can affect or is affected by the corporation. Financiers = any entity or person with a financial stake in the firm (e.g., shareholder, lender, etc.). 4.) "Having your Cake and Eating it Too"- Win Win!!: If customers value your CSR initiatives, and it boosts _______ (e.g., Unilever?). If your stakeholders value your CSR initiatives: Employees (see Bain example to follow). Community/ Government (and firm benefits follow). Suppliers- ????? (Olam or Giant Bikes). Or CSR results in cost savings (Body Shop media attention avoided ad spending). Bain & Co. encourages (requires?) consultants to spend an "extra 10%" in community service: All consultants select a service project in which to participate. Note the implication: the consultant devotes 100% of his/her time to Bain, and an extra 10% to the community. Bain Pro Bono Work: Extra 10 % consulting: The Boston office helps coordinate opportunities for Bainies to do consulting with nonprofits on their own time as their extra 10% (a phrase that describes office contributions made outside of formal client consulting engagements). Inspire: A nonprofit organization that applies management consulting strategies, tools, and techniques to help other nonprofits achieve greater social impact. It was founded and is run by a completely volunteer staff of junior consultants from Bain as well as a few other consulting firms in the area. Q: How does Bain justify such an initiative ???: A few additional facts: A huge percentage of Bain's consulting staff is under 30 years old. Many are planning on applying to graduate schools in the near term. The firm has a view that its optimal utilization rates for consulting staff is well below 100% (~80% ??). Bain markets its "work-life balance" philosophy in the recruiting process. Reactions ??? "Having your Cake and Eating it Too"- Win Win!! Arguments against?? A more skeptical view on CSR Marques and ___________________: There's no simple recipe for responsible corporate behavior (p. 9). Market manipulations may be legal, and still harm society (e.g., subprime mortgage crisis). "Doing good by doing well" is an enticing proposition, but seldom attainable—CSR is a niche strategy.... i.e., very few firms can find "win win" opportunities. Plus, irresponsible firms do well, too!: -e.gWhat if much higher profits use information asymmetry. -e.gWhat if profits are much higher if they create negative externalities? Suggestions to foster responsible corporate behavior: Nurture ethical behaviors among managers and employees. Trim down executive compensations and rethink ownership models (e.g., family trusts, cooperatives). Embrace government regulation. Limit corporate lobbying. Civil society, including NGOs, social movements, may be more effective agents of change than governments and firms. Collective effort of government, corporations, and civil society may be a promising approach in building responsible societies.

lead, Employee, vertical, resource, cross-selling, synergies,

Cost-Benefit Analysis: Does this financial picture sound compelling ??? Integration risks ???: Disney faced integration risks: Who will _________?: Disney management would inevitably want some say and control over Pixars operation. However, Lasseter and Jobs would likely be intent to continue running their own smoothly operating machine. Personality Clash: Relations between the upper management of Pixar and Disney have been "rocky" in the past due to unshared goals and strong personalities of the heads of each company. The tension between Disney and Pixar management might present issues in major decision making once the firms have unified. Culture Clash: Pixar is a smaller, tightly knit team of employees who collaborate with one another as a cohesive unit. It would be difficult to introduce this team to Disney's massive animation team and expect a seamless transition into one effective and efficient team. Creating product of the highest quality would be difficult when the cultures of the two firms do not match. Pixar ___________________ Flight Risk: It is possible that (the very expensive) talent from Pixar might feel as if the purchase of Pixar is a sell-out and would leave the firm altogether due to the major anticipated changes in operations or to avoid a potential forced move to Disney's location. Conflict of interest with Apple?: Given Jobs's involvement with both companies, could there be a risk that Disney's best interests could be compromised in favor of Apple's? Disney-Pixar: Post-Script: Disney acquired Pixar in a stock deal worth $7.4 b. Steve Jobs became the largest shareholder of Disney (7% stake). Iger conscious of importance of dealing with Pixar assets: "The Pixar culture should be protected and allowed to continue...". Wrap-ups & Takeaways (I): This case speaks to a central issue in Corporate Strategy - the core logic of _______________ integration: Can an integrated supply chain produce a wider gap between WTP and cost than one could attain by lining up independent entities? The choice of vertical scope—make vs. buy—is a crucial strategic decision. Indeed, it is a crucial strategic decision that is often made poorly, particularly by managers who believe that they should always integrate vertically in order to "capture the margin" upstream or downstream. To identify the superior solution, we apply two tests: the Better-Off Test, the Ownership Test. Wrap-ups & Takeaways (II): Applying the better-off & ownership tests: BO: Does participation in a broad range of businesses lead to a wider total gap between WTP and cost. O: Must one own the assets in order to get the benefits? Is ownership better than alternative governance arrangements? A vertical integration decision must consider and compare the costs of using the market (e.g., costs of contracting, renegotiation, opportunism) and the costs of using a hierarchy. Neither is free. A corporation is more likely to pass the tests when it has some shared _________________...: That widens the gap for the chain as a whole and. Whose services are difficult to trade efficiently via the market. e.g., relationship-specific investments, such as specialized production facilities; or knowledge that can be transferred only within hierarchies. Apple & Corporate Strategy (Horizontal Scope): There are key differences between Corporate and Business Unit Strategy: Where to play? (Corporate strategy) how to win? (Business unit strategy). Two key tests to apply to any expansion in corporate scope: The Better-Off Test: Do the business units create and capture more value if they are related than they could as separate, single-business entities without formal ties? (i.e., is 1 + 1 > 2). -Factors that matter: Lower costs: shared activities, shared resources, economies of scale or scope. Increased willingness-to-pay! The Ownership Test: Do the business units create more value under common ownership than they would through if they were related in other ways. -Are any alternative relationships superior to common ownership? Better-Off Test & Ownership Test in Context of Horizontal Scope: Better Off Test in context of Horizontal Scope: Can firm achieve lower average costs or higher average prices by including multiple business units in same firm? Economies of scope (aka, synergies): -Diversify if (cost of having units A & B in same firm) < (cost of unit A in firm A) + (cost of unit B in firm B). Boost in WTP (aka, _________________________ or "bundled sale"): -Diversify if (WTP of activities A & B if done in same firm) > (WTP of activity A in firm A) + (WTP activity B in firm B). -Note: in some Strategy contexts, people categorize "WTP boosting" under "economies of scope" because this benefit comes from the same drivers. Ownership Test in context of Horizontal Scope: Should firm own both business units (or is another arrangement more profitable)? The prescription here cannot be characterized as easily by an algorithm, but the principle remains important. Note that many intangible assets satisfy this test, some do not. Examples of "cost __________________": Spreading/sharing fixed costs over more units. R&D. Marketing. Distribution. Also (outside scope of today's session): -Fixed Costs of Manufacturing. -Corporate G&A. Also "volume discounts" on parts, materials, ingredients, etc. (variable costs). Class Questions: The best example of a boost in WTP due to a diversified horizontal scope (ie customers are willing to pay more for each product because the firm offers all of them) can be seen with: Apple- because it sells computers, smartphones, and iPods. After an expansion of the business due to horizontal diversification (adding a new "business area" or an entirely new product category), reduction in costs might result from: Economies of scope due to shared costs of Distribution. Firms might consider horizontal integration if the two business units in question will benefit by: Raising Willingness-to-Pay ("WTP"), Reducing Costs. The dollars spent by Apple on Research and Development (R and D) in 2011 (when compared to 1998) was: Was ~10x the amount. In the Apple case, which reduction in costs as a percentage of sales was the biggest driver of Apple's improved operating margins between 2000 and 2011?: SG&A/ Sales

raise, fixed, activities,

Distribution: Wholesale: Sales subsidiaries, Reps. Retail stores: Dealers, Ducati stores. Green is activities key to Ducati's success. Key Question of the Case: Should Ducati enter the Cruiser Market?: Yes! Such entry would provide potential for growth & increased market share. It's just another motorcycle- how hard can it be? Maybe the brand can extend to other segments. Reaction?? Ducati should not enter the "Cruiser" market: Don't "wreck" this nicely differentiated industry! The Cruiser motorcycle is a very different design from Ducati's main products and caters to different customer preferences [Exh 4]; would require different design & R&D capabilities -Cruisers feature a comfortable ride; they are not as "high function" as Sport segment motorcycles -Ducati's products reside in the Sport segment where comfort is not important but function (e.g., speed, acceleration, handling) is more important. The Cruiser customer is much older (median age of 45.6 for H-D) than the customer for the Sport segment (60+% between 18 and 35) and would thus require different marketing and distribution capabilities [Exh 10]. Ducati has undertaken significant effort to rationalize suppliers (from 200 to 130- p. 11) in its heavily outsourced manufacturing operation, which has contributed to profit increases -Motorcycle material cost decreased from 55.8% of sales in 1996 to 43.4% in 2000, a 12.4% margin improvement [Exh 12] -Addition of new suppliers to support a new and very different product would reverse this trend. Successful launch less likely than recent launches; even if "successful", the upside is limited. There have been two successful launches recently; both enjoyed product similarities to existing product lines -BMW was able to launch a Cruiser product; product had similarities to BMW's Touring line -Ducati's Sport-Touring product had many similarities to its other Sport Segment products [Exh 9]. The new Touring product now represents only approximately 8% of Ducati's volume after five years (got there very quickly in first year, then flattened out). The competitive response from Harley-Davidson would be fierce if Ducati introduced a Cruiser; there is no need to jeopardize this nicely differentiated industry!! "Strategy requires you to make trade-offs in competing- to choose what not to do." -Michael Porter. What should Ducati do? Action Recommended: Push new consumer product line, raise prices, mix shift to higher priced items. And Continue to execute in recent years: Costs, "ride" industry growth, gain market share. There appear to be opportunities for Ducati to further increase revenues (and lower costs as %): There appears to be some room for Ducati to further ____________ prices, enhancing revenue growth: Admittedly, from 1997 to 2000, the price per bike has increased from $8,079 to $9,709 [Exh 1, Exh 8], in spite of mix shift noted below. BUT, Ducati's relative price premium (31%-Hyper-Sport line, 13%-Naked) has not changed since 1997 [Exh 11]. Ducati customers are not particularly concerned about the Quality/Price ratio [Exh 15], indicating pricing upside. There has been a mix shift to lower priced bikes, from ~51% of total to ~61% [Exh 8]; pushing highest price bikes should be priority. The market ("Ducati relevant market") has experienced attractive volume growth in three years (~350k to ~500k units from 1997 to 2000; CAGR of 13%) with no signs of slowing [Exh 2]. As in recent years, Ducati will continue to gain share vs. its competition, resulting in above-average volume growth. Market share has increased from 5.1% in 1997 to 6.7% in 2000 [Exh 1] as unit growth (CAGR 17%) has outpaced the market [Exh 8]. This momentum will continue because Ducati customer satisfaction is strong relative to competition -65% indicate a repeat purchase intention [Exh 16] -At least one direct competitor, Kawasaki, has a significantly lower satisfaction (40% repeat purchase intention). -Thus, Ducati will gain share on at least one major competitor. -Analysts agree with Ducati's share-gain prospects, with consensus estimates for Ducati share in 2001 rising to 7.0% [Exh 1]. With its current momentum, Ducati should catch and pass Harley-Davidson in profitability in the near term. Ducati's EBITDA margin is 15% vs. 18% for H-D [Exh 12]. The Company can "harvest" additional profitability by dialing down "___________ Sales Costs". -As sales grow, some margin improvement will come simply from operating leverage as fixed sales and marketing costs are amortized over larger volumes -On the other discretionary spend, though important to the new "World of Ducati" strategic push, Ducati could decrease the spend by several percentage points on a discretionary basis. -Given these two leverage points, the goal should be to cut Fixed Sales Costs from 14.5% to 10%. ØEven at this reduced level, Ducati would outspend H-D by 2x on a % of sales basis (10% vs. 5%), though H-D enjoys Econs of Scale. ØIf successful, EBITDA margin would be 19.5% and exceed H-D's. There appears to be significant upside in the Company's new Accessories and General Merchandise segments. Ducati views these segments as a central part of its "World of Ducati" strategy going forward [Exh 7] after buying Gio.Ca.Moto in 1997 (progress TBD as next step). H-D appears to be enjoying excellent success with their comparable Harley Davidson "General Merchandise" product line; growth has been 14% in 2000 [p. 4- bottom]; size/materiality of this business is unknown (TBD as next step). Wrap-ups & Takeaways: Ducati is a classic example of Differentiation. Minoli tried to build around Ducati brand & choose __________________ that contribute to customer WTP. -racing, image (museum), clothes, rider community, .... At the same time, he tried to reduce costs not essential to WTP. -e.g., manufacturing! The motorcycle industry is a classic example of a Favorable Industry. One of the keys is that Rivalry is not especially high. By not entering Harley's market segment, Ducati helps preserve industry structure! Class Questions: As a percentage of sales, how did Ducati's Marketing Costs change under Minoli's watch?: A. Increased as a percentage of sales. Why is the motorcycle industry so attractive?: Product differentiation helps reduce Rivalry and weakens Buyer Power. How would you characterize Ducati's strategy?: Differentiation & narrow scope. Should Ducati expand from the Sport/Racing segment into the Cruiser segment (Harley's segment)?: b. Ducati should not wreck nice industry structure.... stay in sport bikes and keep nice product differentiation. As a percentage of sales, how did "Motorcycle Materials" Costs change under Minoli's watch?: Decreased as a percentage of sales.

licensing, product, Opportunities, interests, targets

Examples of non-market strategy: Zoning restrictions: Efforts by incumbents of particular business district to raise prices for entrants via -public hearings, licensing, inspections,..._______________ requirements: Efforts by incumbents to require licensing for particular professions -e.g., real estate license; requiring law school + bar exam for lawyers. Operating restrictions: Efforts by incumbents to restrict who can operate business-e.g., preventing dental hygienists from cleaning teeth unless part of a dental practice. Minimum _______________ standards: Efforts by incumbents to build in specialized product requirements -e.g., from Oberholser & Gee (p. 11), "green" efficient washing machine requirement. Note that each of these may have legitimate public concerns as well; that is part of what makes these issues such ideal targets for non-market strategy! The following logic should guide your non-market strategy thinking: Markets fail due to: Market Power, Externalities, Information Asymmetry, Transaction Costs. When markets fail, certain types of groups tend to react: Government Officials. Social Activists. When these types of reactions occur, strategists need to recognize that both threats and opportunities emerge: 1.) "Hang on" as long as possible. 2.) Once change is inevitable, improve incumbent firms' position. The following framework can be used in non-market strategy thinking: OITT: ________________________: - e.g., a chance for improving industry or firm profits, which could be created by market failures. _______________ - i.e., which organizations have similar or aligned interests. _________________: - which groups to target... e.g., legislatures, agencies, courts, standards bodies, public opinion. Tools: - NMS toolkit items to use... e.g., money, information provision, lawsuits, human capital, etc. Mcdonald's Case: Is there a market failure in the McD case? If so, is anyone reacting?: There seems to be a link between fast food and the U.S. obesity epidemic: Information asymmetry, Negative externalities. Who is reacting?: Activist groups. Government officials. What were the industry's efforts to date to "address concerns"?: In 2005? (and industry's initial push-back). In 2012? Key differences? In 2005 they tried to hide it in their packaging but in 2012 they introduced calories on their menus before the federal legislation and set a standard for the industry and competitors. How was the 2012 approach also helpful to the industry? In the Past, McDonald's reluctantly Reacts to Health Movement: 2005: Packaging with nutritional facts. Avoided adding calories on menu due to perceived effect of slower customer service. Fast food industry attacked by being linked to obesity. 2005: Packaging with Visualization of Daily Suggested Intake and Easy-to-read Text. 2012: Calories on menu ahead of federal government. Aim to display company as more than junk food. 2008-2013 Cleaner Packaging with Images for Perceived Shift from Fast Food to Fast Casual. Market Failures: Negative externality: People becoming increasingly more informed about health. Asymmetric information: ingredients and nutritional facts in McDonald's products. Calorie labeling has not slowed down McDonald's!! Wrap up Takeaways: Markets fail to achieve optimal efficiency in presence of: Market power. Externalities: -negative externalities -> too much investment. -positive externalities -> too little investment. Transaction costs. Information asymmetries. In principle, government actions can correct or alleviate some of the negative consequences of market failure; in practice, this is hard. Non-market strategy: (a.k.a., 'strategies beyond the market'): Opportunities arise for non-market strategy whenever markets fail. Many opportunities exist if government or social movements/groups have an influence on the competitive process. Lobbying & persuasion are key instruments of non-market policy. Who benefits from non-market strategy: Oligopoly industries are (in general) better positioned than perfectly competitive industries to achieve success with non-market strategies. Within an industry, incumbents are better positioned (relative to potential entrants) and big firms are better positioned (relative to small firms) to benefit from non-market strategies. Class questions: According to Furman, which groups often react to and try to fix market failures (or "market imperfections")?: Governments. Non-market strategy relates primarily to a firm's interactions with which group?: Groups other than suppliers and buyers. [True/ False] According to Furman, firms with competitive advantage often exploit (or take advantage of) market failures (or "market imperfections").: True. In 2012, which McDonald's initiative may have been helped by its calorie-labeling solution?: Growth of its sale of healthier options. In 2005, the article mentioned that McDonald's senior management was concerned about what issue that could be caused by its calorie-labeling initiative?: Slowing down its customer service.

quarter, clear, quarter, quarter, quarter, good, engineers

Firm Examples: Competitive Advantage Wrap-Up & Takeaways (III): In the snack cake industry: Little Debbie achieved competitive advantage through a cost-leadership Strategy. Savory & Ontario achieved competitive advantage through a premium price/Differentiation Strategy. Hostess was stuck in the middle: -Costs above industry average but prices closer to industry average. -Hostess was not winning on any key customer criteria. Trader Joe's achieved competitive advantage (in an otherwise unattractive industry!) through a cost-leadership Strategy. Focus Strategy: Exploits same fundamental types of competitive advantage (cost leadership or differentiation). Selects a narrow target segment with unusual needs: 1.) Product attributes/ selection. 2.) Customer segment. 3.) Geographic location. Configure the organization to serve only targeted segments: 1.) Sacrifice incremental business. 2.) Advantage lies in limited scope. Narrowing of scope helps firms achieve either cost or differentiation advantage. Strategic Positions Example: Broad Cost Leadership: Wal-Mart, Southwest Airlines, Ikea, Marshall's (off-price retailer), McDonald's, Acer laptop computers, State universities. Broad Differentiation: Starbucks Coffee, Apple Computers, Whole Foods Market, Rolex watches, Match.com, Tiffany & Co., Boston University. Focused Cost Leadership: STA student travel agency, Super 88 (grocery, primarily Asian foods), Market Basket (Greater Boston), DSW (off-price retailer of shoes only), BU Credit Union (BU-only ), Campus Trolley (student lunches). Focused Differentiation: Ferrari - sports cars, Ducati- sports/racing motorcycles, Great Expectations Dating - dating service for Ivy League grads, Adventure Travel services, Luxury Retirement communities. Class Questions: In the snack cake industry, the unit price charged by Betsy Baking (Little Debbie) for its snack cakes was " " the unit price charged by Collins Kitchen (Hostess): Lower than. As of 2010 when the "Soft in the Middle" article was written, the profits (in dollars) and market share of Nokia's cell phone business, when compared to Apple's, were: Profits (in dollars) about the same; market share much higher. Nokia had much higher market share, but Apple was already making the same profits (in dollars). According to the New Yorker article "Soft in the Middle" by James Surowiecki, the problem for companies in the "mushy middle" is their products: are not exceptional enough to command premium prices and are not priced low enough to win over value-conscious customers. On key customer criteria in the snack cake industry, on which criterion was Collins Kitchen (Hostess) perceived as the best in the industry?: None of the above. In the snack cake industry, Betsy Baking (Little Debbie) appears to be using what type of Strategy?: Cost Leadership. Ducati Case (G. Gavetti): Industry Structure -> Industry-level sources -> Firm Economic Profits. Competitive Positioning, Competitive Dynamics, Corp & Global Strategy, Global & Technology strategy -> Firm-level sources -> Firm economic profits. We're moving into Competitive positioning and firm-level sources. Ducati Background: In Bologna Italy. Founded 1926: - A.C. Ducati & Sons, Bologna. making radio & electrical components. 1st motorcycle - after WW2: "il Cucciolo" à Blockbuster! technical signature = valve distribution system (power!) -led to success in racing, through 60s & 70s. Tough times in 80s: case attributes difficulties to state-owned parent firm. Turnaround: program initiated by Federico Minoli -previously at P&G, McKinsey, & Benetton. focus on engineering & designing. Analysis of the Motorcycle Industry - Porter's Five Forces Analysis: 1.) Threat of Entry: Brand identity key (Exh. 16). Strong pdt different'n (Exh. 4). Economies of scale are important (to amortize R&D, marketing). Capital requirements (Pg. 14, 43 million Euro investment to enter new segment BUT...Fast growing industry(sport segment CAGR ~17%, Exh. 2). Low switching costs to competing manufacturers. (One ______________ of the circle filled). 2.) Power of Suppliers: Majority value-added by motorcycle manufacturers (final assembly), Motorcycle manufacturers more likely to integrate backwards, Careful choosing of suppliers & backup suppliers (Pg. 11, Engine Technology Network), Short term contracts (Pg. 11), Low supplier concentration, Low switching costs to other suppliers, BUT: moderate importance of suppliers to provide certain components (Completely ___________ circle). 3.) Threat of Substitutes: Low switching costs to substitutes. Value of substitutes can be compelling (cars safer to drive, scooters cheaper). BUT....For motorcycle customers, nothing can truly replace what they're seeking (One ____________ filled). 4.) Extent of Rivalry: All major motorcycle mfrs already in sports segment (Exh. 5), with full line of 250cc, 500cc, and 750cc bikes BUT...Low price competition (Ducati raising prices, CAGR = 6.3%). Fast growing industry- 14% unit growth from 1996 to 2000 [Exh. 1]. Strong pdt differentiation (Exh. 4). High market concentration (World 2000, Exh. 3, C4 = 80%). More efficient fixed cost mgmt (outsourcing 80%-90%). Strong brand identity key (Exh. 16) (One _______________ of the circle is filled). 5.) Power of Buyers (Dealers): Ducati raising prices (CAGR = 6.3%). High end bikes command up to 31% price premiums in 2001, Exh. 11). Strong brand identity (Exh. 16). Strong product differentiation (Exh. 4). Ducati moving towards single product dealers. Ducati investing in a self-controlled distribution network (Exh. 14). BUT: easy access to rivals (existing dealers can easily buy from other mfrs, Exh. 9) (One _______________ filled). Segments of & Rivals in the Motorcycle Industry: Ducati: Only in Sports: Hyper-Sport, Super-sport, sport-touring, and naked. Harley only in cruiser, touring, and only sport is their naked. BMW is the same as Harley except they have a off road dual purpose. Triumph has them all except cruiser, and hyper-sport. Honda, Kawasaki, Suzuki, and Yamaha have every single type of motorcycle. Creating value in the motorcycle industry: Drivers of WTP. Physical/Tangible: Performance, handling, Speed, Skill level, Design, Service, Availability of parts Intangible: Image, Community, Lifestyle, Heritage & history. Drivers of Cost: R&D: Level of spending, Scope(number of segments; car division, racing division), Engineering vs. design. Manufacturing: Scale (volume), Scope, Outsourcing/supplier relations, Location. Marketing: Advertising choices, Number of segments/scope, Community, Related products & events. Distribution: Owned v. franchise, Quantity v. quality, Internet. What is Ducati's Strategy? (Competitive Positioning & Activities that affect Cost & WTP): Ducati (1996) (Narrow & differentiation). 2001 (Customer geographic, product scope) (More differentiated and a little more broader as well, but still Narrow and differentiation strategy). What are the origins of Minoli's Ducati Turnaround Plan?: Goals = Harley's P (~20%) & significant growth! Minoli found three advantages at Ducati. _________ product (though less efficient & reliable than Japanese). Top-Notch ____________________ (in R&D and Racing). Strong brand potential (high loyalty!). Minoli's Plan (Ex 7): Motorcycle products: hyper-sport, super-sport, naked. Emphasize advantages. -especially product design & brand. Sell Ducati as a Motorcycle Experience. What was Minoli's turnaround plan for Ducati?: Minoli's 1st Step: fix factory roof ?, build a museum !!! Minoli's next steps: Production: -rationalize supplier network (fewer suppliers). -outsource production more aggressively (more stuff outsource). -in-house = only R&D, design, quality control, & 2 components. Marketing, Sales, & Distribution: -expand sales/marketing -replace some with Ducati-owned operations. Product Dev + R&D: -increase R&D, especially racing! -internal design; reduce time-to-market. World of Ducati: -chic (retro) advertising, museum, clubs, events, consumer products. What were the results of Minoli's plan with respect to...Unit Pricing?? Margin Improvement?? What was the goal of Minoli's Turnaround Plan?: Minoli's Plan: Lower costs related to physical product without lowering willingness-to-pay. To do this, he needed to increase expenditures on non-physical (emotional) product attributes. By keeping prices relatively stable, he delivered value to buyers. With higher fixed costs, pressures to grow - should it enter a new segment (cruisers?). They increased overall emotional costs and increased the margin or willingness-to-pay. Price per bike increased from 8,079 to 9,709. Ducati's activities can also be mapped on a Value Chain: R&D: Research new engine designs, Research new key components, Suspension, Brakes. Design racing class special designs. Interface with racing community.Motorcycle Design: Synthesize elements of new motorcycles: Engine, Suspension, Brakes, Overall aesthetic.Motorcycle Manufacturing: Parts manufacturing: Engine, Suspension, Brakes, Crank cases, Cylinder heads. Final assembly. Quality control. Promotion: Advertising, Trade shows, Presence on racing circuit, Ducati museum, Apparel & consumer products.Delivery to Stores: Distribution: European continent, Overseas, Sales & Marketing: Sales subsidiaries. Ducati's core competencies are in the fields: R&D, motorcycle design, motorcycle manufacturing, and Promotion.

Coughlan, Size, Timing, scale, scope, network, learning, preemption, reputation, switching, patents

First Mover (Dis)Advantage & M-Pesa + Wizzit (P-________________): First-Mover Advantage: Common thread in Resource-Based View (RBV) and First-Mover Advantage (FMA) content???: Both have to do with Sustainability of Competitive Advantage: RBV: Does a bundle of resources (or capabilities) lead a firm to Sustained Competitive Advantage (can test this using 'VRIO' framework)? FMA: Does the first mover (or early mover) get a durable advantage over later entrants? The essence of the argument: Moving first does not always confer long-term competitive advantages! "Perhaps no strategic concept is more often cited, yet more greatly misunderstood than the notion of "first-mover advantage." Managers frequently assume ... that early movers have an inherent advantage over follower firms and, similarly, that large firms have an inherent advantage over their smaller rivals. While these assumptions may ... be accurate, the fundamental factors that actually generate such an advantage are often misunderstood, leading managers to expect advantage where none exists...". Possible outcomes from moving first: Moving first (entering a market before others enter it) might result in a Competitive Advantage. That said, it could also result in no advantage, and it could even result in a long-term Competitive Disadvantage! Moving 1st (entering a market before other firms) -> 1.) Competitive Advantage 2.) Neither Advantage nor Disadvantage 3.) Competitive Disadvantage. Sources of First-Mover Advantage: Advantages resulting from Firm __________: Scale economies, Scope economies, Network effects, Learning effects. Advantages resulting from Entry ________________: Preemption, Reputation effects, Buyer switching costs, Patents or institutional barriers. First-mover Advantages: Advantages resulting from Firm Size: Economies of ____________: Arise in situations in which average costs decline as current output increases. Economies of _____________: Arise if provision of multiple different goods or services by a single firm à lower costs. ________________ Effects: Arise when value of product or service depends on # of other people already using it. _________________ Effects: Arise in situations in which average costs decline as function of cumulative output (i.e., number of units). Sources of First-Mover Advantage: Advantages resulting from Firm Size: Scale economies: Example: Intel amortize research costs over many more units. Scope economies: UPS-lower cost of pickup/delivery w/ express mail due to ground business. Network effects: Verizon - most coverage; ebay - byers make it most compelling for sellers. Learning effects: Most manufacturing businesses. First-mover Advantages: Advantages resulting from Entry Timing:_____________________: 1. Channel preemption, 2. Location preemption, 3. Positioning preemption (All three are marketing and distribution). 4. Capacity preemption. 5. Input preemption (These two are suppliers & manufacturing). __________________ Effects: Advantage accruing to 1st movers based on ability to achieve premium brand-name. Buyer ____________________ Costs: Arises if 1st movers can lock in customers. _____________ or Institutional Barriers: Advantages that can arise if governing authority restricts future entry. Sources of First-Mover Advantage: Preemption (see following slide). Reputation Effects: Example: FedEx & UPS brand names will make it difficult for new players to enter. Buyer Switching costs: Example: Bloomberg- $$ invested in on-site equipment & staff training make switching less likely. Patents or institutional barriers: Example: Pharmaceutical companies- whoever develops the drug first makes it difficult/impossible for the next firm. Class Questions: A first mover is usually assured of achieving first-mover advantage: False. For an enterprise software firm that moves first (hint: volunteer slide coming in class!!), which of the following (timing benefits/advantages) might help them achieve sustained competitive advantage?: Patents, Preemption, Reputation Effects, Buyer Switching Costs. In the M-Pesa/ Wizzit case, what type of mobile phone penetration growth was occurring in developing (emerging) countries relative to developed countries?: Developing countries significantly higher growth. Which mobile-banking launch appeared to be the most successful?: M-Pesa in Kenya.

Input, capacity, positioning, costs, demand, incumbent, cost

First-mover Advantages: 5 ways that Preemption à Timing Advantage: ___________ Preemption: Occurs if 1st mover secures input factors under better terms than followers. e.g., Purchase of uranium for nuclear power; special deal (either exclusive access or preferred terms- if either were possible!!) for Vibram soles on hiking shoes. Channel Preemption: Occurs if 1st mover secures distribution channels than followers. e.g., Long-term contracts for retailers' shelf space; exclusive contracts w/ bottlers. Location Preemption: Occurs if 1st mover secures desirable locations; followers have to settle for next-best. e.g., Restaurant at main intersection in town; airlines getting gates @ airports. _______________ Preemption: Occurs if 1st mover achieves sufficient production capacity; potential followers recognize that they cannot enter profitably e.g., Steel, iron, copper. ___________________ Preemption: Choice of best position; followers must compete directly or position differently. e.g., Harley's positioning in the "Cruiser" market in the motorcycle manufacturing industry. Sources of First Mover Disadvantage: Pioneering ___________: Expenses incurred to 'blaze the trail' for the industry...-Including educating consumers, educating regulators, developing retail channels, early-stage R&D. -Free-riders can wait & see what works & what does not. ______________ uncertainty: Level of demand and consumer value for features? a.k.a., if you build it, will they come? Technological uncertainty: Standards may be uncertain. Developing product / features; how to manufacture? If imitation costs << pioneering costs, leadership in an industry is bad. Also, followers may leapfrog leaders. _________________ inertia: Market leaders often unable to change as market evolves. Sources of First-Mover Disadvantage: Pioneering costs: Example: Early MP3 players (names??) educated consumers, prepped market for Apple. Demand uncertainty: Example: McDonald's able to watch the market for premium coffee unfold pre-entry. Technological uncertainty: VCRs in the 1980s- 'Beta' standard lost to VHS. Incumbent inertia: Kodak's inability to migrate effectively from plain film to digital photography. M-Pesa & Wizzit: Comparing the Two: M-Pesa in Kenya & Wizzit in South Africa (Background and Business Model): Kenya's Mobile Banking leader, M-PESA: Background: In 2003 Mobile provider Safaricom and their largest shareholder Vodafone began exploring the ideas of mobile banking. In 2007 their mobile banking platform, M-PESA, officially launched -Page 10. By 2008, 1 year after launch, only 10% of Kenya's population had access to financial services. Mobile provider Safaricom thought that they could vastly improve that number using a unique mobile baking system. -Pages 9 &10. Model for mobile banking : Money Transfer Services: Fewer than 1% of M-PESA customers had a balance of over $13 in the account. M-PESA was mainly used for sending and receiving money. -Page 13 (i.e., not a bank!). Basic business plan: M-PESA came pre-downloaded on every Safaricom SIM card. This provided easy and convenient use to their mobile customers. Customer could also sign up at various locations around Kenya, M-PESA agents were located at gas stations, grocery's stores, Bus station Kiosks, and more. By 2010 M-PESA had 17,652 agents. Page 10-11. M-PESA provided money transfer services for its customers. Funds could be transferred between M-PESA accounts for the small fee of $0.40 USD. Money did not just have to be transferred to friends and family, it could also be used to pay for services such as taxi and bus fairs or to pay bills. -Page 11. M-PESA was designed to fill that 90% gap of people who did not have access to formal banking. However, it became so popular that even those with bank accounts began to use M-PESA. While it was designed for everyone, a survey of 3,000 users found that the average user was more literate, better educated, and had 65% higher expenditure than average. - Page 13. Growing & Scaling the business: Safaricom controlled 79% of Kenya's mobile market. M-PESA was pre-installed on all Safaricom SIM cards. This market was growing at vast rates, with mobile penetration in Kenya looking to reach 101% by 2012. Since M-PESA came pre-downloaded it was easy and convenient for Safaricom customers to use. This helped contribute to such vast growth. -Page 9. Regular bank transfers could take up to 2 days in Kenya, where as M-PESA transfers over a mobile network were instant, this convenience and speed attracted customers. -Page 10. M-PESA did not just have to be for individual users. M-PESA partnered with business around Kenya, these businesses used M-PESA to make bulk distribution payments. As of January 2010, 27 companies used M-PESA for these services. -Page 13. Key challenges: Kenya's Banking Act allows only institutions holding a valid banking license to perform banking activities. Having decided not to go though the process of receiving this license, M-PESA was not aloud to perform many of the key functions of a bank, such as taking deposits and lending funds. -Page 8. Results: As of January 2010 there were more than 9 million M-PESA Customers. - Page 13. In 2009, 47 % of money transfers in Kenya were mobile transfers. Of that 47%, M-PESA accounted for 40% -p. 13. 28 % of M-PESA transactions were to receive money. -Page 14. 25% of M-PESA transactions were to send money. -Page 14. Cash deposits and withdrawals averaged $650 million a month - Page 13. From April to September of 2009, M-PESA had a monthly revenue of $7 Million - Page 13. WIZZIT's launch in South Africa: Background and Getting Started: Mobile phone penetration in South Africa was very high -105% in 2009 (pg 3). Despite increase in mobile phone use, more than half of South Africa's population remained unbanked (pg 3). WIZZIT was founded in 2004 by Brian Richardson and Charles Rowlinson. -"How can we make economic citizens out of the vast majority of people who have been excluded from financial services?" - Richardson (pg 4). WIZZIT had to be a mobile banking platform that could be used on any phone on any mobile network. -RQubed: technical company created by WIZZIT to develop the technology and mobile banking platform. - EVEREST: Able to operate on any mobile network, on any phone using a USSD protocol. WIZZIT needed a bank partner: -Entered into an agreement with the South African Bank of Athens (SABA). -WIZZIT operated independently, but used SABA's back-end system. -Paid SABA a fee for each transaction and shared interest generated by account holders (pg 5). WIZZIT struggled to gain traction in South Africa: Basic Business Plan: Mobile banking platform: -Customers can make deposits at more than 4,000 physical locations and withdrawals at any ATM or Point-of-Sale (POS) (pg 6). Marketing initiative led by WIZZKids: -Recruited from unemployed pop. and were trained to educate potential clients and sell the service (pg 5)-4,000 WIZZKids by 2009 (pg 5). Target Customer: South Africa's lower income population: -Students and monthly contract or seasonal workers with average monthly income of $130 - $460 (pg 8). Founders wanted to operate without accruing debt, thus pursuing slow growth: -Opted to have a small number of customers who transacted frequently, rather than a large number of customers who transacted less often (pg 5). Key Challenges: A lot of laws and regulations for mobile banking, "up for interpretation" (pg 7). Working with a lesser known bank (SABA), it is hard to build trust with customers (pg 7). Most potential WIZZIT customers were uneducated and knew little about the advantages of having a bank account. This was a continuing struggle in 2010 (pg 8). Results: 2009: 4,000+ WIZZKids and 300,000+ customers (pg 8). Anticipated profitability in 2009, banking and global economic crisis deterred this (pg 9). Still exist today and are on a global scale: just introduced in Australia. Key takeaway: Sources of First-Mover Advantage for M-Pesa in Kenya?: Advantages resulting from Firm Size: Scale economies, Scope economies, Network effects, Learning effects. Advantages resulting from Entry Timing: Preemption, Reputation effects, Buyer switching costs, Patents or institutional barriers. By the way, what happened to M-Pesa in Tanzania?: FMA is not absolute. Can be country by country. Why is this???: This is because: Size-related benefits depend on rapid traction (aka, rapid revenue growth). Different countries have different features (very important!): Different customers with different customer needs and preferences. Different industry dynamics. A new country can be thought of as its own "industry" (e.g., SAB beer has dominant market share in South Africa and due to FMA will be dominant for the foreseeable future!). Wrap-ups & Takeaways: Leadership (1st mover) advantage is not absolute! Early entry to a market may provide sources of long-term competitive advantage, BUT....-Early entry may also create disadvantages. -It depends on underlying economics of industry, and the nature of competition within industry. Advantages associated with Size & Entry Timing can drive Leadership Advantage. Size: Economies of Scale & Scope, Learning Effects & Network Effects. Timing: Preemption, Reputation Effects, Switching costs, Patents. Disadvantages associated with Uncertainty and _________ differentials can drive Leadership Disadvantage. Pioneering costs, Demand & Technological uncertainty, and Incumbent Inertia can make followers -> achieve greater P than leaders.

dimension, value, focus, activities, Price, private, sales, activities

Goal = achieve significant cost gap over other competitors. But... Cost leaders must maintain proximity in quality. Cost leadership often involves tradeoffs with product differentiation. Examples: ??? (other than Wal-Mart.... obvious example!!), Southwest airlines, IKEA, Marshalls. Differentiation Strategy: Offer products and services that are widely acknowledged as superior in quality on at least one ____________________: e.g., durability, faster delivery, bundled services, greater variety, better image, easier to use, or overall higher quality. May be multiple dimensions of differentiation in an industry. Selectively incur costs as necessary to create quality. Invest in assets to maximize generation of __________ for buyers. BUT... Differentiation leads to above-average profitability only if the firm maintains cost proximity to competitors. Examples: Starbucks, Apple, Whole foods, Rolex. Types of Competitive Advantage: ______________ Strategy: A focus Strategy can also lead to Competitive Advantage. 1.) Cost-based focus (Narrow market and cost leadership). 2.) Differentiation-based Focus (Narrow Market and Differentiation). What is Strategy? (Porterian view): Operational effectiveness: refers to the extent to which perform similar activities better than rivals. Strategy: refers to performing different activities from rivals or performing them in a different way. choose the right configuration of activities, incentives, systems. make the right trade-offs. strategy rests on unique activities. Snack Cake Mini Case: Hostess's "Cents per Unit" chart: Let's discuss what it means : Price: x (# of units sold) = Company's revenue on income statement. COGS: 46%. (Gross Margin = 54%). Which only includes Raw Materials and manufacturing. There was also Delivery Marketing. What was left was profit. Has anyone ever heard of activity-based costs? Describe how they calculated costs per unit for Delivery and Marketing. Are other costs taken into account?: G&A expenses? Depreciation? Interest expense? Taxes? Does this "Profit" reflect "Net Income"? Costs: Different competitors in the Snack Cake market are pursuing different _________________: What strategy has Little Debbie selected?: Cost Leadership. What activities are they pursuing?: Low marketing, low delivery, low manufacturing, in the middle raw materials. What about Ontario and Savory?: Higher priced premium pricing. What activities are they pursuing?: Spend a lot on delivery, manufacturing, raw materials, marketing. How is Hostess doing?: Hostess in the middle, has the smallest profit per unit. Spend a lot on delivery, manufacturing, raw materials, marketing. Willingness to pay: Different competitors are emphasizing different activities: Which competitors are doing well on the most important criteria? Will Hostess gain or lose share going forward? Price and Brand ranked highest (4) each. THen freshness at 3. Then variety (2). Size is least important (1). Little Debbie leads heavily on __________. Ontario leads on brand while Hostess and Savory are equal and Little Debbie has low brand. Savory leads freshness, little Debbie has lowest scores, and hostess and ontario are equal for second. Ontario leads variety, then savory, then hostess, then little debbie. They are all equal in size. We will learn about the comb chart later in the semester, its helpful as well. Why not pursue both a low cost and differentiation strategy?: In many industries, low cost and differentiation are inconsistent with one another. A firm pursuing multiple strategies risks becoming stuck in the middle. "Somewhat low-priced" products with "pretty good" quality get squeezed from both directions. Examples: GM, Toys r us, Hostess. Trader joe's: Trader Joe's is competing in the grocery industry: What are some reasons the grocery industry is such a tough industry..... in general? The rest of our class time will be spent on competitive positioning choices made by TJ. Unique activities and approaches. That allowed them to best "fit" into the backdrop of that tough industry (aka, analogous to Coors earlier today.... and Lady Gaga!). A large % of Trader Joe's products are "______________ label". Trader Joe's - Different in Size and Scale: Far smaller and far less number of stores compared to walmrt and whole foods, and dollar general. Dollar general is the only store they are slightly bigger than per SF per store. 12 Largest Supermarkets in USA (sales per square foot).... Hint, how might this effect cost buckets?: Trader Joes has the highest _____________ per square foot. What are the key tradeoffs & interdependent choices at Trader Joe's?... aka Activity Map hints!: Why do they not sell certain products? Why do they have such small stores? Why do locate in urban areas? Why do they carry such strange products (e.g., pickle popcorn)? Why do they rotate products so often? Why do they not carry "branded" products? Why do their employees like to work there? Trader Joes Core competencies: Fun store environment, Unique product mix, streamlined supply chain, Customers: Sophisticated bargain hunters. Trader Joe's is a very nice example of a Narrow Cost Leadership Strategy. Whole Foods is narrow market differentiation. Broad vs. Narrow in terms of Customer scope, Product Scope, and Geographic Scope. TJ Joes has a much lower wages/unit lower, compared to Whole Foods even though they pay their employees high wages. Building Competitive Advantage: Wrap-Up & Takeaways (I): There are 2 classic trade-offs in strategic positioning: Source of advantage: low cost vs. differentiation. Scope of market: narrow vs. broad segment. Failing to make trade-offs will harm profits!! Firm should choose among these based on. Internal resources & distinctive capabilities/competencies. Tradeoffs are the cornerstone of Firm Strategy. Firms must decide what to do...-i.e., what activities they will engage in. And what not to do. -What activities they will avoid. -This is an essential element in deciding what to do. Building Competitive Advantage: Wrap-Up & Takeaways (II): What is Firm Strategy? in SI422, we take the perspective that Firm Strategy can be understood by identifying a firm's competitive position and the __________________ that enable the firm to achieve that position. (i.e., the activities that affect the Costs that the firm bears and the Prices that it is able to charge).

regional, first, light, fragmented

How did Coors get its premium reputation historically? Was it legit/justified? Or perception? How might that change in a new External environment? National distribution became a huge driver in the industry Why was this again ???.(ads- national scale, distribution- "hub" scale, and need critical mass to fill each brewery). Why was Coors slow to react? Were there cost (or "cost buckets") Coors was incurring that seemed questionable? A peek ahead to the Firm Level (next module)... Questions for Coors (aka, how to best "fit" in this external environment): Is Coors Strategy serving it well in the 1980s? Was Coors well-positioned or poorly-positioned to deal with the changes to its industry? What helped/prevented Coors to adapt to its industry? Should Coors open the East Coast Brewery? Was it suited for its industry environment? How did the strategy & industry environment change? Wrap ups & Takeaways: Rivalry in my view is one of the Five Forces that requires the most rigorous thought: Reflect back on the "gray and white line" slides. Structured thinking skills can help you navigate "messy" industry research findings. Industry structure is a powerful driver of average incumbent profitability: Firm choices can shape industry structure. At particular inflection points, opportunities to drive structural change exist (e.g., driving fixed costs that result in scale advantages). Coors historically successful _________________ strategy, production focus, and family leadership à strength...: Until national market emerges! Largest players benefited- the rich got richer! Smaller firms either died or were swept up in consolidation. The Virginia investment- What should Coors do?: Opening the bottling/packaging plant cost $95 million and allowed savings of $2.50 per barrel [p. 12]. Opening a brewery on site cost $500+ million and allowed a savings of an additional $2.50 per barrel. In other words, ROI (return on investment) is 5x more attractive on the _________ option! Need volume # to make the final call on both... BUT first looking highly likely to make sense! Post-Script: They eventually added more East Coast capacity: purchased a brewery from Strohs in Memphis in 1990. -Coors Memphis Brewery operated until 2003. converted capacity at Shenandoah Valley beer-packaging plant into a brewery in 2007. Put most muscle behind Coors _____________!!: Most firms had a "flagship" brand. Some "how" details to share next class. Merged with Molson in 2005. -HQ = Montreal. JV with SABMiller called MillerCoors. -HQ = Chicago. Class Questions: In 1985, the most profitable brewery spent the most (in dollars) on advertising: $471 million. Yet its Advertising $ per Barrel was lower than almost all of its competitors. What SI422 term below can be used to explain this?: Economies of scale. Which brewer enjoyed the most revenue growth, and experienced the largest improvement in operating profits (both in dollars and in % margin)?: Anheuser Busch. Between 1960 and 1980, what happened to beer consumption in the United States?: Volumes in 1980 were 2x (double) those in 1960. In the beer industry, what happened to prices from 1950 to 1985?: Prices on comparable beers down; mix shift to higher-priced premium beers up. What happened to brewery industry concentration over the time covered in the case (1950 to 1985)?: Less ____________________.

Fit, Grant,

How does strategy help with management: Case study (Walt Disney Co.): What is Disney's strategy in the sense of a unifying theme ??? "To be the best, most trusted provider of family entertainment". Note it's easy to identify even to the outside world!! Also note the exact wording is not really important. Now, how does this help with "strategic management" ??? Internally, the unifying theme is absolutely pervasive and helps by: Providing decision support. Serves as a coordinating device (builds consensus). Sets a target (ever-elusive, ambitious!!). Wrap-up & Takeaways (I): The Fundamental Fact about strategy is that 1)Some industries have systematically higher profits than others & 2)Some firms have systematically higher average profits. For example, nearly all of the best-performing supermarkets earn profits that are substantially lower than nearly all of the worst performing pharmaceutical companies! As a result, the 1st question we must answer in the course is, "Why are some industries more profitable than others?" To understand industry-level profits, we must draw on the Five Forces framework. Wrap-up & Takeaways (II): Lady Gaga, Jeff Bezos (and the Williams sisters) used key Strategic Elements to help them succeed. Each had different hurdles to overcome. Lady Gaga provides a great example of Grant's notion of Strategy-- how to best "________" one's personal capabilities into an evolving external environment. Effective strategy involves coordinating across all functions. Strategy is not a specific plan of action for particular events; instead it provides a unifying theme for action. Everyone in the firm should know what its strategy is! "Strategy" is a word attached to some very different concepts: Corporate Strategy: An organization (top management) determines where to play. Business Unit Strategy: The business unit (senior managers) determines how to win. Class Questions: According to the Grant article, the term "Strategy" derives from: Strategia- a Greek word which translates as generalship. Which of the following is true of the Resource Based View of the Firm (aka, the RBV)?: The RBV differs from earlier traditions of strategy thinking by emphasizing the analysis of internal capabilities. According to the reading, Business-Unit Strategy and Corporate Strategy are essentially different things. True. According to the reading, the question, "Which industry should we be in?" is an issue for corporate strategy, while the question, "How should we compete?" is an issue for business-unit strategy? True. According to Grant, Jeff Bezos at Amazon had to overcome what challenges in the late 1990s after starting Amazon: More established book retailers, A long period of forecasted operating losses, Heavy up front fixed costs. Economics of the Retail Drug Industry (Class #3): What were the key points?: In ___________'s (author) view: A strategy serves as a unifying theme. Firm strategy requires understanding the external (industry) environment and internal (firm) resources and making choices to create the best fit. That said, the Fundamental Fact about strategy is that: 1.) Some industries have systematically higher profits than others & 2.) Some firms have systematically higher average profits. For example, nearly all of the best-performing supermarkets earn profits that are substantially lower than nearly all of the worst performing pharmaceutical costs. As a result, the first question we must answer in the course is, "Why are some industries more profitable than others?". For each industry, we will see to explain why; there are specific drivers we will identify. To do so, we need the Five Forces framework! How does Grant see the role of strategy: Industry Structure -> Industry-level sources -> Firm Economic Profits. Competitive Positioning, Competitive Dynamics, Corp & Global Strategy, Technology -> Firm-level sources -> Firm economic profits. In Grant's view, Strategy is designed to help the frm use its internal resources & capabilities to deal with its external environment (industry & competition) Strategy must Fit (Lady gaga) with both! Grant discussed the differences between Corporate and Business Unit Strategy: Corporate: Key Question (Where to Play). Topics: What businesses should we be in? What should the scope of the firm be (industries & markets). Diversification. Acquisitions. New Business Development. Vertical Integration. Allocation of capital amongst existing businesses. Business Unit: Key Question: How to win?. Topics: How does the business compete? Products, Customers. How can the business achieve a sustainable competitive advantage over its industry rivals? What activities should a firm pursue? Key "high value" activities, Outsource others. How does strategy help with management: Case Study (Walt Disney Co.). What is Disney's strategy in the sense of unifying theme? "To be the best, most trusted provider of family entertainment". So what? How does this help The Walt Disney company? Note it's easy to identify even to the outside world!! Also note the exact wording is not really important Now, how does this help with "strategic management" ??? Internally, the unifying theme is absolutely pervasive and helps by: Providing decision support, Serves as a coordinating device (builds consensus), Sets a target (ever-elusive, ambitious!!), Narrows range of possible choices!!

Decreases, Decreases, Decreases, Decreases, scale, fit

Industry Evolution & Coors: Reflect back on the Rivalry "menu" from our "Five Forces" Sessions (#4 and #5). For this industry, which "sources" are relevant? Industry growth is low. Product differentiation. Brand identities. Fragmented market or concentrated market. Step 1: Eliminate the points that do NOT relate to Rivalry? Step 2: Reflect back on the Rivalry "menu" from our "Five Forces" Sessions (#4 and #5). For this industry, which "sources" are relevant? Step 2 (cont'd): Verify that all remaining points do indeed relate to Rivalry (there are 13 here). Step 3: Use logic and structured thinking to organize each piece of evidence. Step 4: Drive to an answer!! (MUST "make a call" on the force's Pressure on Industry Profits). Symptoms: Most prices in the industry are falling. Three firms successfully raised prices by 10% on one higher-end line. BUT....Prices under downward pressure across the board: 3-Year CAGR = - 4.0%. Firms rushed to offer lower-priced lines: most now ~20% of vol here [MIX SHIFT]. Costs in the industry are climbing. Development of lower-priced lines cost ea. firm on avg ~$10 MM. Firms have spent on average ~$20 MM to automate their mfr facilities. Causes: The industry has experienced 'flat' growth: 5-Year CAGR = 0.5%. The industry is not concentrated: 'C8' = 34%. There is little product differentiation in this industry. Brands are a non-factor. Customer survey indicated industry's products perceived "about the same". Rivalry's Pressure on Industry Profits: three quarters full circle. Brewing an old industry. Eastbound & Down: An American cultural moment, starring Coors Beer. The fact that Coors was only available in the West inspired one of the iconic American films of the 1970s: Smokey & The Bandit, starring Burt Reynolds. East Coast Beer embargo + Cars + Burt Reynolds = box office gold! Brewing industry concentration, 1934-2003. Figure 1. Number of U.S. macro brewers: 1934-2003. Concentration increased from 750 in 1934 to around 15 in 2003.Brewing industry structure, 1950s vs 1980s: 1950s: Salient features: Many small & medium sized, regional brewers. Local bars major outlet. Mostly "popular" regular beer. 1980s: Salient features: Small # of brewers with national distribution. Large shift to packaged sales. Proliferation of beers, incl. mix shift to premium. Changes to: Threat of Entry?(__________________) [Econs of Scale...e.g., ads!! Exh 4]. Supplier Power? (___________________) [Relative concentration... C6 = ~80% Exh 6]. Buyer Power? (wholesalers) (__________________) [Relative concentration]. [Have to have "key" beers...p. 3].Threat of Substitutes? (_________________) [High-end beers an "alternative] [Exh 5]. Rivalry? [Concentration up, nice growth (Exh 1)— BUT... ad spend "skyrocketed" (p.4), low pdt (Exh 6) and geog differentiation (Exh 8) (Increases and Decreases). Following Prohibition, how did industry structure evolve in the U.S. brewing industry? Changes in the 1930s-1950s: Repeal of Prohibition (FDR 1933; 22nd Amendment). Interstate Highway system (Eisenhower; 1956). National advertising opportunities in radio & TV. Changes in the 1950s-1980s: Dramatic increase in minimum efficient scale of breweries. -100,000 barrels (1950) à 4m-5m barrels (1980). -Doubling brewery scale à unit capital costs ↓ by 25% [p. 2]. Shift in distribution away from on-premise to off-premise: [p. 2]. -Bad news: Decrease in margins. -Good news: Large increase in volumes. Shift in consumer preferences à lighter beers (favoring national majors). Mix shift to other new segments (popular, premium, super-prem, ultra-prem). Wholesalers focused on leading brands (AB & Miller) [p. 3]. Brand proliferation. What do these changes do to industry structure?: changesà economies of ___________ à consolidation. Coors strategy was not serving it well in the 1980s, they had a farther higher ROS in 1960s. As the industry evolved, why was Coors' Strategy not the best "_____" for the new External environment?

gee, Yao, failure, prices, overproduction, underproduction, transaction, also

Non-Market Strategy & Mcdonald's Calorie Labeling: Non-Market Strategy: Industry Structure -> Industry-level sources -> Firm Economic Profits. Competitive Positioning, Competitive Dynamics, Corp & Global Strategy, Global & Technology strategy -> Firm-level sources -> Firm economic profits. We are focusing on Competitive Dynamics. Non-Market Strategies, a.k.a., Strategies beyond the market (Felix Oberholzer-_______, Dennis _______. "The strategist's job [is to]... implement strategies that allow your company to achieve and sustain superior performance. ... Strategists play against a powerful opponent- well-functioning markets. Where product markets work well, competition drives prices [downward].... Rule number one in the strategist's playbook is to seek out and even create situations in which markets cannot deploy their full force." (p. 1). It is possible that market failure can be a good thing!! Market Power in Action Remember: Perfect competition means zero profits!! Assume that demand, marginal cost, & marginal revenue curves are drawn correctly. In perfect competition, firms must accept prices = marginal costs & produce where marginal cost curve intersects with demand. Qpc = quantity produced (in perfect competition). if firms raise their price, they lose all sales. thus P=MC and P = 0!!! Ppc = MC -> Ppc = 0 (Price = marginal cost, Hence, profits = 0) and (Ppc = price at perfect competition). Price y-axis, and Quantity x-axis. Reasons for market ______________: Market power, Externalities (positive & negative). Information asymmetry. (As well as... less emphasis today... Transaction costs. And Public Goods. Reasons for market failure (I): Market power (non-competitive markets). In economics, "market power" means the ability to raise _____________ without losing all customers. This is inefficient b/c prices are higher (and supply lower) than would be experienced in perfect competition. For SI422, we have discussed some cases where this might arise, e.g.: -Oligopoly, duopoly or monopoly. -Weak buyer power. -Very differentiated products. -Low threat of substitutes. Reasons for market failure (II): Externalities: Negative externalities = Costs that individuals (or firms) can impose on others, thus distorting incentives. -E.g., (from Oberholser & Gee- p. 2) lots of new real estate development in an exclusive neighborhood can hurt real estate value for residents. -E.g., suppose that rubber tires costs $30/tire to manufacture & yields $10/tire waste; if the producer only pays the $30 production cost, they will overproduce tires and will impose the costs of pollution on others. -This can lead to ________________________ of unpriced negative externalities. -One solution involves taxation/regulation to help get prices right. E.g., taxes on pollution. It is sometimes easy/sometimes hard to identify right tax rates. Politics are often greater difficulty than economics. Positive externalities = Benefits that individuals (or firms) get without having to pay for them. -E.g., residents on a street "fire proof" their homes. Their neighbors benefit from this (better safety for the neighborhood) without having to pay for it!! -In business, this leads to _____________________ of unpriced positive externalities! -One solution involves subsidies/tax breaks to try to get to fair outcome. e.g., R&D tax credits; intellectual property rights. Reasons for market failure (III & IV): Information imperfection (information asymmetries): If one party in a transaction knows important information that the other party does know or cannot verify cheaply. -E.g., when selling a used car, the owner may know if it is a 'lemon,' but it is hard for the potential buyer to verify; as a consequence, it may be difficult to sell. -E.g., people may be reluctant to buy health insurance until they think they are at risk for health care costs; insurance companies cannot know and, thus, have to charge inefficient prices across individuals. ____________________ costs: Arise when there are costs to making transactions. -E.g., if it is costly to obtain payment for goods/services (collection costs). -E.g., if it is hard to reward provision of goods/services or incentives change over the course of business relationship (legal/ contracting costs). Firms exist, in large measure, to address problems of transaction costs in the market (we'll talk more about this in the Corp Strategy module). Non-market strategy opportunities: "Classic strategic analysis emphasizes how companies can gain competitive advantage by lowering their own cost [a.k.a., costs down] or increasing customers' WTP [a.k.a., revenues up] for their own product. In contrast, [non-market strategy] is ____________ concerned with rivals' cost and other companies' WTP and price" (p. 10). Larger incumbent firms may make some moves in order to raise costs for smaller rivals or would-be entrants (sometimes, these moves are unintuitive and may seem puzzling as on the surface they seem to hurt the incumbents also!!). Incumbent firms may make some moves in order to lower WTP for rivals' products. e.g., Social groups try to lower WTP for products of firms engaged in practices they dislike.... Strategists need to be on the lookout for these attacks!!

Informational, decentralized, licensing, sequals, backward, vertical, free-riding, culture, profits, rights

Vertical Scope: Benefits of Market Transactions: Powerful incentive mechanisms: Market relationships often involve higher incentives for performance! _____________________ efficiencies: Price mechanisms and _______________________ decision-making are often more efficient ways of allocating resources than those involving managers, organizational decisions, and politics (once the two transacting entities are owned by one firm, these factors begin to matter). Types of Vertical Relationships: From Low Degree of Commitment to high. Market Deals -> Short-term contracts -> Informal supplier/customer relationships -> Long-term contracts -> Strategic alliances -> Franchises -> Joint Ventures -> Vertical Integration. Good reasons sometimes drives firm diversification, but so do bad ones (sometimes): Good reasons...*: Efficient operations; Economies of scale (benefits of size). Economies of scope (synergies). Market power: Power over buyers, Power over suppliers, Reducing competition. Bad reasons...*: diversifying risk: if shareholders wanted to diversify risk, they could do it themselves. managerial hubris: empire building, piling on bonuses. "because the #s work": often, the numbers work out on paper, but fail in reality. * Good & Bad from the view of the firm = profits! - This is different from good & bad in the view of society! - Market power motivations often lead to P, but harm society! Disney & Pixar Histories: Snow White - Disney's first animated hit. Luxo Jr. - Pixar's first animated "hit". The Pixar Story. What does the supply chain look like in this industry? (a very simplified version!): Raw materials (Production: creative types - artists, screen writers, directors, producers, financiers, ...) -> Distribution: marketing, co-branding, promotions, licensing, games and... . -> Viewing: movie theaters, DVD, television, internet, iTunes, and ... . -> End consumers (viewers). In which aspects of the industry are Pixar and Disney engaged?: Pixar is in raw materials or Production: creative types - artists, screen writers, directors, producers, financiers, ... . Disney is in production and Distribution: marketing, co-branding, promotions, licensing, games. Where do the highest profits come from in this industry?: Co-branding, promotions, _________________, games, all of these especially from ________________!!!! Does this Merger pass the Better-Off & Ownership Tests?: What should Disney do?: Note that both firms faced the same basic decisions: Should we continue to maintain a long-term exclusive arrangement with the other party? If so, should we execute the arrangement as a merger or via (another) long-term contract? First, Better off test: Should Disney continue its long-term relationship with Pixar?: Yes or No. If Yes: Should Disney Negotiate a new long-term contract or Buy Pixar? Buying Pixar has a very different implications from Pixar's point of view. Vertical integration asks "How much of the value chain should we own?": Should disney _________________ integrate into production more by owning Pixar. Increasing Vertical Scope: Backward integration à occurs when a firm moves into a business that is "upstream" (i.e., CLOSER TO RAW MATERIALS). e.g., if Disney were to do more film production. Forward integration: occurs when firm moves into a business that is "downstream" (i.e., CLOSER TO THE END CONSUMER). e.g., Disney entering movie theaters. Better-Off Test & Ownership Test in Context of Vertical Integration: Tests in Context of _______________ Scope: Better Off Test: Does vertical integration lead to lower average cost or higher average WTP? Ownership Test: Is it best to 100% own vertically integrated entity or do alternative arrangements (long-term contracts, long-term relationship, etc.) achieve same benefits at lower cost? Factors that drive each: Quality and/or Cost control, Cost of contracting, Relationship-specific investments. -Result of relationship-specific investments that may change bargaining power with suppliers à a.k.a. Hold-up!! Downstream ___________________: -possibility that service you provide could be used by rival to lower their costs -e.g., a retailer (e.g., REI) that offers much product information about the products it sells (customers may shop there, gather info, buy elsewhere) -Owning more of the value chain can strip away this problem!! Or Alternative: Find an "alternative arrangement". Better-Off Test: Are Disney & Pixar better off working together?: Note: this is NOT asking whether they should merge. These firms had been "working together" for over a decade (in an exclusive long-term contract). Key question: Does each firm grow its slice of the pie (profits!!) by working with the other firm? The two firms should NOT continue working together- Arguments??? Better-Off Test: Are Disney & Pixar better off working together? NO!! Assume that Pixar makes the best animated characters. Disney seems to have the best platform for creating value in and extracting value from animated characters. But, Pixar can just use market transactions to sell its product: For each character, just hold an auction -Would allow use of the character in theme parks, consumer products, etc. If Disney is the best partner, they will win the auction. If not, perhaps another bidder will win, maximizing value for Pixar. Problems ???: Each auction would be high stress, cumbersome, and would eat up time. Both sides would be hesitant to make long-term investments (more to follow). The two firms should definitely continue working together- Arguments??? Better-Off Test: Are Disney & Pixar better off working together? YES!! Key question: Does each firm grow its slice of the pie (profits!!) by working with the other firm? Costs decrease: Over the past 10 years? -Pixar taps into Disney's Economies of Scope in marketing -Avoid duplicative corporate overhead (e.g., marketing functions). Going forward? With respect to Disney's costs, to the extent it could transition more animation work to Pixar, there are potential cost savings-Pixar made films at "fraction of cost" and at "faster" pace (p. 4). Toy Story staff was only 110 people (p. 4). Disney had between 208 and 573 animators, depending on budget (p. 3). WTP Increases: Appears to have a more important role in "growing the pie"!! Your thoughts ??? Examples ??? Better-Off Test: Are Disney & Pixar better off working together? YES!! Key question: Does each firm grow its slice of the pie (profits!!) by working with the other firm? WTP Increases: By joining together, prices are higher than if they were split apart, creating rivalry and some price competition. Putting the Disney brand on Pixar-made films increases WTP!! If they work together, both sides are willing to make long-term investments to grow the pie. e.g., if it has access to sequels (like Toy Story 2), it will invest in franchise: -Theme park rides -Consumer products -Exposure on cable channels, etc. With the resulting greater chance of success, Pixar is willing to invest its resources in development of Toy Story 2. Both firms do better as a result!! Key question: Does each firm grow its slice of the pie (profits!!) by working with the other firm. Are we sure that each firm can not do just as well on its own?? Disney- "Go it alone!":Hire talent from Pixar. Fix own animation unit Pixar- "Go it alone!": Find new distributor. Forward integrate and build out its own distribution "platform". To work together, the firms should negotiate a new long-term contract- Arguments??? To work together, the two firms should just negotiate a new long-term contract: Disney and Pixar have done it twice before!! Feature Film Agreement- May 1991 [Exh 6]. Co-Production Agreement- February 1997 [Exh 6]. This time- November 2005 (p.1). The two firms have had incredible success together using contracts.... "if it's not broken, don't fix it!!" A merger presents some challenges: A full merger would kill Pixar's unique ______________ (while a contract would continue to preserve it). Even inside a merged Disney-Pixar, you would still have tricky (intra-company) negotiations. Problems with a contract this time???: Balance of power has swung toward Pixar (but isn't that just about splitting pie?). Disney is both a distributor for Pixar as well as a competitor (trust is an issue!). Contract increasingly complex: 13 pages in 1991, 43 pages in 1997, this time??? [Exhibits 5 & 7]. Value of new animated character has become more complex: Value extends many years out. Variety of outlets makes it harder to predict how things will evolve. Contracts are more difficult when facing much uncertainty!! To work together, the two firms should merge!!: Value of new animated character is complex: Value extends many years out. Variety of outlets makes it harder to predict how things will evolve. In the face of uncertainty, ownership provides clarity. The owner will use assets to maximize its own profits. Financial picture: Cost to Disney: Pay ~$7B now (p. 11)-- really ~$6B because Pixar had ~$1B in cash on its bal sheet [Exh 4a] Dilutive to earnings-- Disney's P/E: 17x, Pixar's P/E: ~46x-- w/ premium higher!! (p. 11). Benefit to Disney: Instead of splitting the (profit) pie ~60-40 (p. 6) with 40% going to Pixar (or even more after a renegotiated contract). They keep 100% of the _____________. Said another way, they get to keep ~$200M (and growing) of annual operating income. And they seize full control of all ancillary revenues, sequel ______________, etc. of all future Disney-Pixar films (VERY IMPORTANT!!).

Jordan, unifying, Mintzberg, Grant, Corporate, business unit,

What are the key points from the Lady Gaga and Jeff Bezos cases?: Grant discusses the role of strategy in career and business success.... be different. Lady Gaga Hurdles: Talent not outstanding as: Vocalist, Songwriter, Fashion artist. Strategic Elements: Periodic reinvention of image, Pursue causes, Visual emphasis at concerts, Social media. Jeff Bezos Hurdles: More established competitors in books. Long period of losses before breaking even (1995 to 2001) (p. 4). Strategic Elements: Get big fast. Don't worry about profits... growth is key... GBF ("Get Big Fast") (p. 4). The ultimate scale business.... Fixed costs high, variable costs extremely low (p. 4). Williams Sisters Hurdles: Impoverished background. No family experience with tennis. Strategic Elements: Intense skill & strength development. Fostering drive. Unique family environment. -Compete w/ ea other! -Discipline. How do Grant/_______________ define Strategy?: Strategy is not a detailed plan or program of instructions; it is a __________________ theme that gives a coherence and direction to the actions and decisions of an individual or an organization. (Simple, consistent, long-term goals) + (profound understanding of the competitive environment) + (Objective appraisal of resources) = Effective implementation = Successful strategy. Henry _____________________: Strategy Design vs. Strategy Emergence: Strategy as Design: -> Planning and rational choice (top down) -> intended strategy -> realized strategy. Strategy as Process: Many decision makers responding to multitude of external and internal forces (Bottoms Up) -> Emergent Strategy -> Realized Strategy. In Mintzberg's view, it is incomplete to consider Strategy to be something that can simply be designed (analyzed); instead, it is important to recognize that Strategy emerges & changes over time, regardless of how carefully it is planned. We do not disagree - nonetheless we emphasize analysis in this course, for two reasons: (1) because sound analysis is a pre-requisite for successful strategy and (2) because processes are managed by Senior Execs, whereas analysis is pervasive throughout the firm. In ___________ view (author), Strategy is designed to help the firm use its internal resources & capabilities to deal with its external environment (industry & competition) Remember the graphic of industry-level sources and firm-level sources. Strategy must FIT (Lady gaga) with both! Grant discussed the differences between Corporate and Business Unit Strategy: __________________: Key Question (Where to Play). Topics: What businesses should we be in? What should the scope of the firm be (industries & markets). Diversification. Acquisitions. New Business Development. Vertical Integration. Allocation of capital amongst existing businesses. _________________ _________: Key Question: How to win?. Topics: How does the business compete? Products, Customers. How can the business achieve a sustainable competitive advantage over its industry rivals? What activities should a firm pursue? Key "high value" activities, Outsource others.

micro, low, clear, quarter, clear, clear, quarter,

Wrap-up & Takeaways (I): The Five Forces Framework...is based on the premise that competition in an industry is rooted in the underlying economics, competitive forces or structures that collectively determine the profit potential of the industry. Helps assess the long-run profit potential of an industry. We can view the Five Forces through the lens of __________economic analysis: The key issues associated with Suppliers' (Buyers') Power relate to whether Suppliers can drive up costs (drive down prices). The key issues associated with entry, rivalry, & substitutes ask whether potential profits get competed away by new firms in the industry, current firms, or alternative products. Wrap-up & Takeaways (II): Industry structure determines long-term average profitability in the industry! We can analyze this using the Five Forces framework! Firm profitability thus depends to a great extent on structural (economic) forces often outside of managerial control. But, study of the firm's industry structure is an important job of the strategist. Avoid behaviors that might harm industry profits. Pursue behaviors that could improve industry profits. Seek out a competitive positioning that puts one's firm at an advantage in the context of the firm's external environment. Class Questions: According to the Five Forces framework, if Supplier Power in an industry is Low, the (downward) pressure on industry profits will be: Benign (weak).... i.e., NOT a strong downward push on industry profits. According to the Five Forces, if Rivalry in an industry is High, the (downward) pressure on industry profits will be: Strong. According to the Five Forces, if Barriers to Entry in an industry are Low, the (downward) pressure on industry profits will be: Strong. Considering the Threat of New Entry, if an industry's incumbents (firms already in the industry) have economies of scale, then the Threat of New Entry is likely to be: Low. Considering Buyer Power, if an industry's products are differentiated, then Buyer Power is likely: Low. Five Forces & Coke vs. Pepsi: Industry Structure -> Industry-level sources -> Firm Economic Profits. Competitive Positioning, Competitive Dynamics, Corp & Global Strategy, Technology strategy -> Firm-level sources -> Firm economic profits. Industry Structure and Industry-level sources is what this class is on. Porter's Five Forces: If they are high ("strong" or "intense"), our industry's profits decline; if low ("benign"), profits increase. What can Suppliers do to industry? Strong suppliers can raise industry average costs (or deliver lower quality). Weak suppliers can be forced to accept lower cost (or to deliver higher quality). It can either decrease or increase the cost on the Price versus quantity graph. This graph has a decreasing line for demand. What can Buyers do to industry?: Strong buyers can force you to keep prices _______ (or deliver higher quality). Weak buyers can be forced to accept high prices (or low quality). Buyers can affect the price by increasing or decreasing it, in comparison to suppliers which can affect the cost by increasing or decreasing it. Does the taste of Coke and Pepsi matter? Taste testing experiment. People could not taste the difference between Pepsi and Coke and the store brands. So..... maybe you can save some money next time!! (why is pricing like this?). 2-Liter Bottle Price: 84 cents versus $2.19 for Coke and Pepsi. Implications of the taste test: What can we conclude about product differentiation? (see following page). Which of the Five Forces does this conclusion inform? Is there more to the story??? Key Questions in the Coke & Pepsi Case: How are the taste test results possible?? Low product differentiation?? (surprising!!) What else is going on here?? Does it make sense to talk about the "Soft Drink Industry" as a whole or should we consider various steps in the industry differently? Who is more profitable - the concentrate producers or the bottlers? Why? Suppose we had data for suppliers and retailers - who would have higher profits? Why? When we say the "Soft Drink Industry", what do we mean?: Concentrate Producers -> Bottlers (and Distributors) -> Local Retail -> Consumer. In this class we are discussing the Concentrate Producers and the Botters (and Distributors). Analysis of Environment- [Concentrate Producers or "CPs"]: Threat of Entry: CP plant- cost only $50-100MM (p. 2) BUT Bottlers are locked up. Access to distribution is scarce. Powerful brands protect incumbents. (___________ circle). Extent of Rivalry: Unit volumes eroding 2005-09 [Exh 1] BUT CPs- 20-year sales growth: 10% CAGR (p. 1). Never compete on price!! (See data in Buyers). 'C2' = 74.5% in 2005 (~duopoly!!) [Exh 2]. Coke/Pepsi always imitate ea. other, usually improving industry. (Has a _____________ of the circle filled). Power of Suppliers: Not sugar or water!! (bottlers add). Ingredients (coloring, flavoring) are "commodity" inputs. (__________ circle). Power of Buyers: C'trate now >50% of COGS (Exh 4). And receive Mkt $ & negot support from CPs. BUT, franchise agreements favor CPs. Many bottlers vs. duopoly in CP. CP threat to fwd integrate (credible!- p. 12). From '88 to '09, CPs forced the bottlers to pay steadily higher prices- an increase of 3.6% CAGR [Exh 5]. Buyers did not appear to pass these thru to retail accts- real prices down by -1.4% [Exh 5,p. 1] and no evidence of retail margin decreases (___________ circle). Threat of Substitutes [Exh 1]: Note Exh 1 shows "downstream" subst. Loser was Coffee!! Beer was flat. Real threats (CPs have "call options"). Bottled H20 (0 to ~11% share). Sports drinks (0 to ~2%) (Only one _______________ filled). Do you expect overall industry P to be above or below economic average? ABOVE. What are the most important factors that affect industry P? Nothing of note- all low strength!

dynamics, Capabilities, Competencies, value, causal, social, resource, goal

Zipcar and Resource-based View of Strategy (F-Rothaermel & R-Chase): RCA Redux: Midterm Expectations: Wanted to circle back on this. Also to assure you that. Prof. Kirks' "handout mistake that wasn't" will not hold you back (...). Mental math example. Resource-based View of Strategy: Industry Structure -> Industry-Level Sources -> Firm Economic Profits. Competitive Positioning + Competitive Dynamics + Corporate & Global Strategy + Technology Strategy -> Firm-level sources -> Firm Economic Profits. Competitive ___________________ involves thinking about both: Industry Structure & Competitive Positioning. Resources Intangible or Tangible (Items or Property, tangible or intangible, that can be leveraged in powerful ways) -> Value Chain: Corporate/cross-functional: ______________________: R&D, Manufacturing, Distribution, Sales (Activities or processes: designed to accomplish a specific task in a repeatable fashion) -> Sub-capabilities (Sub-activities: required to accomplish the higher-level value chain step) -> Core ________________________: Low Cost, Speed, Innovation (Aggregation: of firm-specific capabilities spanning functions and business units). Ducati's value chain highlights "core competencies" in bike design, manufacturing, and brand. Core Competencies: Design For Speed, Efficient Mfr, Brand. Several key capabilities positioned Apple to succeed with its iPod business unit. In their Corporate aspect Apple was just industry parity. In Cross-functional they excelled in Global brand management, and manufacturing (Economies of Scope). In R&D they excelled in: Idea generation. iPod technology development: iPod hardware & software, iTunes software, Windows compatibility. Product design refinement: Look and feel, Detail design, Macro design. Sourcing/Logistics they excelled in: iTunes Music Store: Digital rights management, Music content sourcing. In Marketing they excelled in: Brand management, iPod advertising. Their core competencies are Speed and innovation. Aren't "core competencies" the same thing as the blue bubbles?? How does a resource or capability lead to a sustained competitive advantage? Use the 'VRIO' Framework: 1.) Valuable? (No: Competitive Disadvantage) yes -> Rare? (No: Competitive Parity) yes -> Costly to Imitate? (No: Temporary Competitive Advantage) yes -> Organized to capture __________? (No: Temporary Competitive Advantage) yes -> Sustained Competitive Advantage. How do these 'capabilities' stack up using 'VRIO'? -Ducati's speed engineering' capabilities? (Yes we'd expect sustained competitive advantage) -Fenway Park as a 'Resource' for the Red Sox? (Yes) -Apple's 'sleek user-friendly design' capabilities? (Yes) -Hostess's 'premium snack cake manufacturing' capabilities? (No: Fails at 'V', not valuable to customers). Note: Valuable means valuable to the firm. -Examples on this slide -> valuable to customers and thus valuable to the firm. Valuable can also be a cost point... a proprietary manufacturing technique. Which resources might lead to sustained competitive advantage?: Skilled managers?: can they be hired away. Effective management trainee program?: May be difficult to imitate; embedded in firm. Technology leadership in key area?: Can others catch up? Key patents on technology?: Monopoly for X years. A key brand name?: Impossible to replicate (economies of scale a barrier). Secret formula for making the chocolate?: "Know how". Owning the land that has the most fertile soil?: Got there first!! Sustaining Competitive Advantage- some helpful internal conditions: Resource now more valuable (luck?): Better expectations of future resource value (sitting on valuable resource e.g., real estate). Tough to imitate: Path dependence (long path to get to this point). ______________ ambiguity (even firm itself not sure about drivers- ability to replicate?). ___________ complexity ("web" of activities). Taking stock of what we have seen thus far: Competitive Advantage in Strategy: Concepts & Frameworks: Competitive Advantage in Strategy: Competitive Advantage = P above the industry average. Sustained Competitive Advantage = P above the industry average for a long time! Frameworks for thinking about competitive advantage: 1.Porter: -OE + S è Competitive Advantage. 2.Relative Cost Analysis: -Doesn't say too much about how sustainable advantage is. 3.____________________-Based View: -Different perspective on Strategy (resources & capabilities). -VRIO explicitly designed to consider Sustained Competitive Advantage. 4.Coughlan (to be covered next class): -Explains which market conditions are likely to enable leaders to sustain advantage. Zipcar: RESOURCES & CAPABILITIES - OBTAINING & MAINTAINING COMPETITIVE ADVANTAGE. Zipcar background: 1999: Antje Danielson has idea to introduce car sharing to U.S. (after seeing it in Germany). Talks to daughter's friend's mom, Robin Chase, about the idea. Chase and Danielson write business plan. June 2000, they launch Zipcar in Cambridge, MA. Short-term, on-demand, private car access. Low-cost alternative to owning a car. Core customer: driver's who logged less than 6,000 miles/year. Chase was CEO. Danielson, VP. Zipcar: Own the trip not the car. The Zipcar story: Value Proposition? Target Customer? Key Activities? Key attributes/activities of Zipcar: "Car sharing" (Exh 7 AP article): Member-based. Subscription model. Wireless/internet enabled: Online rental. Remote access (via keycard). Dense urban environment (Exh 2). Convenience (location, access, ease of use, gas and insurance included). New technology platform. Limited (guerilla) marketing. Target customers (aka Zipsters!): Young professionals (nights/weekends- Exh 8b). College educated (p. 3 bot). Safe drivers (Exh 4). Needs: Convenience, Environ? What are Zipcar's resources? Their capabilities? Are they VRIO?: Resources?: Car Fleet, Key Parking spots, Zipcar brand, Technology (e.g., key cards), Others? Capabilities: Customer interface, Marketing. Are any VRIO?: Apply the decision tree! Post-Script: 2003: New CEO Scott Griffith (former consultant with Parthenon). 2007: Merged with Flexcar to create national presence. 2011: IPO. 2013: Bought by AVIS for $500 million. Wrap-ups & Takeaways: Resource-based view: __________ is to achieve sustainable competitive advantage. 'VRIO': with respect to a given resource or capability, all conditions must be met for sustained advantage (Valuable, Rare, costly to Imitate, and Organized to capture value). Zipcar had several resources and capabilities which appeared to position it well to sustain its competitive advantage: -Great brand. -Reputation for being the best (& 1st on East Coast) to offer ride sharing. -Note: technology advantage seems less likely. Class Questions: Competitive advantage is most likely to spring from which type of resource?: Intangible. Tangible resources: building, cash, equipment. In Strategy terminology, a capability is: An activity, or grouping of activities, the firm pursues in its strategy. The largest "cost bucket" for Zipcar (on a per-car basis) was: Leasing the car. In the 'VRIO' framework, the "thing" being tested at each checkpoint in the framework (the V, the R, the I, and the O) can be: A Resource. A Capability.

Direct, Downstream, Indirect, clear, quarter, completely, quarter, quarter, bottlers

____________ Substitutes: Alternative products with a compelling price-to-value ratio that the industry's current buyers are likely to consider, or are already considering. Note: one strong substitute is scarier than many weak substitutes. Example: Taxi Driving Indus & Subway: The subway is a real threat to NYC taxi drivers. While it has lower value to customers (wait times, dirtier?, must walk), the price is low & will attract some. Sp-R-E-B. Sb comes in at R. __________________ Substitutes: An alternative product chosen by the customers further down-stream from the industry. This in turn could reduce demand for the industry's product or service. CP Industry & Bottled Water: Coke & Pepsi faced a threat from bottled water, but this was downstream. It was actually a direct threat to the bottlers who were selling cola, but could still have an indirect effect on CPs. CP Industry: Sp-R-E-sb -> Bottlers: R-E-B-Sb. CP Industry & Bottled Water: Coke & Pepsi faced a threat from bottled water, but this was downstream. It was actually a direct threat to the bottlers who were selling cola, but could still have an indirect effect on CPs. _____________ Substitutes: An alternative that eliminates an industry's group of buyers, or reduces the number of potential buyers, by drawing them away from the industry. Lawn care: Sp-R-E-Sb-B. Lawn Care Indus & M-F Homes: Lawn care companies face an Indirect threat as the mix of buyers shifts away from the type they serve. Owners of multi-family housing units do not require lawn care services. Analysis of Environment- ["Bottlers"]: Threat of Entry: Exclusive franchises in place. Expensive, highly automated plants. Benefit from economies of scale. Access to distribution is locked up (___________ circle). ​​Extent of Rivalry: Geographic exclusivity limits competition (Why did CPs set it up this way?). Some rivalry w/ other CP's bottlers? (one _______________ filled). Power of Suppliers: CPs: wield much power (see CP page). Cans/glass bottles: commodities AND prices negotiated by CPs (clout). Sweetener: CPs help here also (Circle filled _________________). Power of Buyers: Retailers: real prices paid by con- sumers down -1.4% CAGR (88-09) [Exh 5]. Assume bottlers costs (price paid) down by similar amt (no evidence margin down) . Supermkts- pay far less per case [Exh 6]. Retail gross margin is "average" vs other beverages at 30% [Exh 10]. End Consumer- power weakened by brand loyalty and advertising spend (one _______________ filled). Threat of Substitutes: Directly) face same subst risks as CPs. For their function/services: Very limited substitute risk. CPs could "go direct" (One _______________ filled). Do you expect overall industry P to be above or below economic average? BELOW What are the most important factors that affect industry P ? Power of Suppliers. Wrap-up & Takeaways (I): If firms are not careful...they can wreck their industry structure! For example, if Coke & Pepsi decided to compete on price rather than advertising, things could look different. Alternatively, if they had not invested so heavily in the brand over the past 100+ years, things might look very different today. Analysis of industry profitability. Had 19% higher than the economic average for concentrates which is a +19% industry influence for ROE. Bottlers had 9% Industry Profitability: which is -1% less than economic average. Wrap-Up & Takeaways (II): Attractiveness of the "Soft Drink Industry": We need to be more specific!! Which graphic represents the "Concentrate Producer Industry"? And the "Soft Drink Bottler Industry?". Takeaway III: Do all Forces have to be "ugly" for profits to suffer??? Class Questions: A concentrate manufacturing plant that serves a geographic area the size of the U.S. costs $50 to $100 million to build (p. 2). From this we can conclude there are high barriers to entry in the Concentrate Producing industry. False. According to the case, the 'C2' (the concentration ratio of the top two players) in the Concentrate Producing industry was ~74% in 2005. If we analyze the CP industry, which of the Five Forces in that industry is most likely to be affected and what would be the effect? in a concentrated industry, we would expect Rivalry to be lower. What has been the pricing trend for Concentrate (in real prices) sold by Coke and Pepsi?: steady price increases for concentrate over many years. According to the case, in the bottling industry, economies of scale are very important. If we analyze the bottling industry, which of the Five Forces in that industry is most likely to be affected and what would be the effect?: Threat of New Entry (should be lower). Which industry is the more attractive industry (that is, which enjoys better profitability)?: Concentrate Producers. (True/False) Coke's and Pepsi's industry (the "Concentrate Producers") is characterized by high Buyer Power (i.e., Porter's "force" of Buyer Power is strong): False..... the CP's buyers (the ________________) are dominated by the CPs.... i.e They have weak buyer power.

industry, firm, low, low, High, low, High

The Five Forces: What do you already know?: 1.) At which level does Porter intend the Five forces analysis to be applied - the firm-level, the industry-level, the country-level, or a combination of some or all of these?: Industry-level because each forces acts, on average, across all firms in an industry. 2.) What is the goal of a Five Forces analysis (what do we learn from doing a Five Forces analysis)?: The goal of the Five Forces framework is to explain industry average profits and articulate the factors that affect industry-average profits.3.) What does it mean when we say that Rivalry is "high"?: "high Rivalry" means that firms in an industry compete in a way that squeeze profit margins, either by reducing average profits, increasing average costs, or prices. 4.) Is the competition between Coke and Pepsi an example of "high rivalry"? Why/why not?: No! Although animosity is high between the firms, the two form a happy oligopoly (along with Cadbury. Schweppes) in which neither firm competes aggressively on prices (price wars) or costs. 5.) What is the difference between rivals and substitutes?: Rivals are direct competitors within the same industry, while substitutes refer to alternative products/firms outside the industry. 6.) How does Porter recommend that firms apply the Five Forces framework in order to increase profitability?: In Porter's view, firms should conduct a Five Forces analysis in order to understand the factors affecting average profitability in their industry, and should draw lessons from the analysis about (a.) how to increase average profitability for the _____________ overall and (b.) how to take advantage of the forces in order to improve the profitability of the __________ relative to its rivals in the industry. Today's discussion about drug sales is complex and delicate: For the purpose of our discussion, please: Assume the data in the article are correct for the gang studied and are also representative for other retail drug sales organizations. Assume that there is only one principal drug (crack cocaine) for sale by firms in the industry and that other drugs are, at most, a secondary market. Consider each local gang as an individual firm. Be sure to consider the industry overall rather than the specifics of this organization (firm). Two opening questions: What do firms in this "industry" do? In other words, what is the business of the firms described in this article/chapter? What is the structure of the supply chain in this industry? What is the structure of the supply chain in this industry?: Agriculture (Growing) -> Harvesting (Processing) -> Export - Import -> Local Retail (The firms we are studying today operate only in this step in the value chain! (In this regard, they are like local Mcdonald's franchisees) -> Consumer. 1.) Buyer Power (__________): Key Issues & Questions: Who are the primary buyers from firms in this industry? (Please identify key buyers & their fraction of revenue!). Hint: Buyers include any orgnaization or individual who pays firms in the industry. Are key buyers price sensitive? (Why/why not?). Do buyers have strong bargaining power? (Why/why not?). Can key buyers (a) depress the prices that industry firms can charge or (b.) force industry firms to improve their products in ways that drive up costs? (Why/why not?). 2.) Substitutes for this industry's products (___________): Key Issues & Questions: What are the substitutes for the products sold by firms in this industry? Please consider this industry's chief product as crack cocaine (assume that other drugs are supplied by organizations outside the industry). Do alternative products offer a price-value ratio that is similar to that offered by the firms in this industry? (Why/why not?). What types of investments must industry firms make in order to ensure that the price-value ratio of their products stays high relative to those of alternative products? Are these investments sufficiently costly to drive down overall industry profits? 2.) Substitutes for crack cocaine?: "Because it required such a tiny amount of pure cocaine, one hit of crack cost only a few dollars. Its Powerful high hit the brain in only a few seconds- and then faded fast, sending the user back for more. From the outset, crack was bound to be a huge success". - Steven Levitt. 3.) Supplier Power (____________): Key Issues & Questions: Who are the primary suppliers for firms in this industry?: (Please identify key suppliers & their fraction of costs!). Hint: Suppliers include any organization or individual paid by firms in the industry. Do suppliers have strong bargaining power? (Why/why not?) Please explain for 2-3 most important suppliers. Can suppliers drive up the costs that industry firms are forced to bear? (Why/why not?). 4.) Entry into this Industry (_________): Key Issues & Questions: Suppose you wanted to assemble an organization to enter into this industry. What would you need in order to enter? Be as specific as possible; consider supplies, retail outlets, permits. How can incumbents try to deter entry? How will the effort to deter entry affect incumbents costs? 5.) Rivalry in this Industry (____________): Key Issues & Questions: Is the number of firms in this industry high or low? How does the number of firms affect profits in the industry? Does rivalry in this industry lead to firms competing mainly by driving down prices or driving up costs? Please explain your answer in detail. Does rivalry drive down prices & drive up costs in a way that affects profits negatively? What are the costs of gang wars? What are gang wars nearly one-fourth of the time over the period studied? Who wants gang wars? 5.) Rivalry: Gang wars caused tragic deaths as well as lower gang profits: During the pre-expansion time period, the move from peace to gang war caused major declines in profitability: Revenue decreases: Price declines: Unit prices dropped from $9.54 to $7.12, or -25%. Quantity down: Volumes went from 2,019 "bags"/mo. To 1,442, or -29%. Cost increases: Employee wae costs: Foot soldier pay climbed from $130/mo. To $220/mo., or +69%. Non-recurring costs of violence (Mercenaries, Funerals & Weapons costs): Climbed from $600/mo. To $5,200/mo., an increase of 8.7x. Profits available to leader: $8,400 to ($1,000)*.

Creation, Capture, levitt, price, value

Key concept: Value Creation & Value Capture (at Industry Level): -Street-selling drug gang is attractive "business" (at least in times of peace!!) -"Firms" in the industry have created some significant value (i.e., have benefited from "Value ______________" = WTP - Costs) due to several positive elements: WTP boosting due to: -Highly addictive and potent product. -Trust in dealer is big part of value proposition. Costs kept low due to: Drug dealers willing to work for very low wages due to aspirations to join. "Firms" in the industry (think of gang leader as "sole proprietor" of the firm) are also capturing a big chunk of the value ("Value ______________" = P - Costs) for several reasons: Pricing power due to: -Geographic differentiation (each gang has its own turf). -Loyal customers with low propensity to switch. Admittedly the "Board of Directors" captures a huge chunk of value also. The gang's leader (J.T. was the ultimate tournament winner, or was he?). The gang's leader was making an annual income of $174,00+ (in today's dollars) in the third year. Since he paid no taxes, this was equivalent to a $290,000+ pre-tax salary at a legitimate job. After six years of this, he was promoted to the board of directors (much more lucrative). He was sent to prison. Where are we going: Industry-level lessons: Industry average profits are affected by powerful economic factors. If ANY of these factors is sufficiently unfavorable, it can greatly limit the potential for the industry to achieve higher profits. Strategic behavior by industry participants may be able to alter industry conditions (either favorably or unfavorably). Firm-level lessons: By understanding and exploiting industry conditions, firms may be able to improve their profitability relative to others in their industry. ___________ and Venkatesh (authors ) highlights the four factors which affect a job's wage: How many people are willing to do the job? The more that are willing, the lower the wage. Does the job require specialized skills? It has low specialization which decreases wages. How unpleasant is the job? It is unpleasant which increases the wage. How strong is the demand for the services provided by this job? Demand is high which increases wages a little. These four examples are either supply-related factors or demand-related factors. Class Questions: What percentage of total sales of the drug-selling gang was represented by drug sales?: 75%..... a majority, but meaningful revenue from local businesses (rent of space on turf) and rank and file (dues). From Year 1 to Year 4, what revenue growth did the drug-selling gang achieve?: Revenues more than tripled by Year 4. Which "member" of the drug-selling gang actually paid dues to the gang for the right to be a member?: Rank & file paid dues to the gang, for protection and also given their aspiration to join the gang in the future. During periods of gang wars, what happened to the gang's drug-selling revenues?: Prices went down; volumes went down. If you were evaluating whether a particular product (e.g., pure cocaine, marijuana, alcohol) might be a substitute threat to crack cocaine, what would you analyze?: when evaluating a potential substitute, always consider the __________-to-___________ ratio, and The price of the alternative, and its relative value. We think of different steps in the value chain as different industries. Buyers: Anybody who pays us. Tributes that are the same as Cost of goods sold are both 5,000 showing that the suppliers have a lot of power.

Rivkin, OE, long, wedge, unit, cost

Relative Cost Analysis (Jan ___________): Industry Structure -> Industry-level sources -> Firm Economic Profits. Competitive Positioning, Competitive Dynamics, Corp & Global Strategy, Global & Technology strategy -> Firm-level sources -> Firm economic profits. We're moving into Competitive positioning and firm-level sources. Relative Cost Analysis- Ethical Questions: Relative cost work is "high stakes"- i.e., very important to companies. How far would you go to obtain competitive cost info?: Scouring publicly available info (financial info, press releases). Asking customers questions about competitor? [Rivkin, p. 8, 2nd paragraph]. "Spying" on competitor's facilities? [p. 8, 3rd paragraph]. Some consulting-firm anecdotes.... (pizza, tour). Flagstaff's Relative Cost Analysis in the "Nub" Industry- Key Findings??: What did Flagstaff learn? What did Flagstaff decide to do? Japan? Their own operations? Competitive signaling? What did Flagstaff learn?: They were roughly comparable in unit costs to Tsujimura (Flagstaff 96 cents vs. 92 cents for Tsujimura) [Exh 3]. However, if Tsujimura were to come to the U.S., they'd have a signficant edge (Flagstaff 96 cents vs. estimated 83 cents for Tsujimura) [Exh 4]. What did Flagstaff decide to do?: [p. 7, bottom]. NOT go to Japan (would have been at cost disadvantage!!). Achieve "______" (e.g., improve capac util and thus trim factory overhead, minimize inventory to reduce carrying costs)- could save 10 cents per unit... 96 cents down to 86 cents.... over 10%!!). Defend their turf in the U.S.!! -Lock up key customer accounts with _________-term contracts and increased customer service attention (tough for Tsujimura's plant to get up to full capacity upon entry). -Fake signals about going to Japan if forced (a bluff!!). Questrom Overnight Express In-Class Exercise: Relative Cost Analysis. Relative Cost Analysis Key Concept: Spreading Fixed Costs over Units. Unit Cost = Cost/Unit. Fixed Cost per unit = Fixed Cost/Unit. Questrom Overnight Express Given Facts: DHL Sales Cost per Unit: 42 cents. DHL Sales Rep Salaries: $189 million. Questrom Sales Rep Salaries : $90 million. DHL Annual Volume: 450 million letters (units). Questrom Annual Volume: 150 million letters. How do we figure out QOE's Sales Cost per Unit? DHL's Sales Cost per Unit: DHL Sales Rep Salaries: $189 million. DHL Annual Volume: 450 million letters. DHL Sales Cost per Unit: 42 cents. QOE's Sales Cost per Unit: Questrom Sales Rep Salaries: $90 million. Questrom Annual Volume: 150 million letters. Questrom Sales Cost per Unit: 60 cents. Rivkin also discussed analyzing customers' willingness-to-pay ("WTP"): Rivkin: "A firm achieves a competitive advantage by driving a wide _____________ between the willingness to pay (WTP) it generates among customers and the costs it incurs to serve those customers" [Rivkin, p. 14]. Relative cost analysis addresses the cost piece. WTP addresses the other element of the wedge!! A few takeaways: WTP = Maximum customer would pay to get product/service. Price can be set below WTP to drive market-share gains (e.g., Dell in 1990s [Rivkin, p. 14] with PCs)... i.e., price does not necessarily = WTP!! Willingness to pay: Different competitors are emphasizing different activities. Which competitors are doing well on the most important criteria? Will Hostess gain or lose share going forward? Wrap-Up: Relative Cost Analysis- Key Takeaways (i.e., So What??): What is the main point of Relative Cost Analysis? It quantifies the cost per _________ of a firm, relative to a rival, in a key (directly competitive) product. How does the purpose differ in the two cases we've seen thus far in SI422? In Hostess vs. Little Debbie vs. Ontario/Savory. .... it helped us see: -What a Cost-Leadership Strategy looked like (Little Debbie) -What a Premium Price/ Differentiation Strategy looked like (e.g., Savory) -What a company which is "stuck in the middle" looks like (Hostess). In Flagstaff vs. Tsujimura....-It was not about which type of Strategy (see above) each was pursuing... they were directly competitive with no major differences in the TYPE of strategy (Cost Leadership vs. Premium Price/ Differentiation). -Rather, it allowed us to see which firm had a _________ advantage if they started going "head to head" (historically they'd avoided much direct competition). Finally, it informed some decisions that Flagstaff would make about its competitive responses to Tsujimura. Class Questions: According to Rivkin, when conducting a Relative Cost Analysis, what should you focus on? A single product sold by the firm. In the Rikvin mini-case, why is the nub-producing industry (Flagstaff's industry) so attractive?: The 'C2' in the industry was likely greater than 80%. The incumbents stayed out of each other's way with their geographic scope. The Relative Cost Analysis comparing the unit costs of Flagstaff's "nub" products to Tsujimura's showed that: Flagstaff's unit costs were slightly higher. In a relative cost analysis, what should be the unit of measure? (or what should be on the y-axis?): Dollars or cents. Once Flagstaff saw the results of the Relative Cost Analysis, what did they decide to do?: Focused on improving efficiency in their manufacturing operations (Operational Effectivness or OE). B. Competitive signaling, and in particular threats that they would enter Japan if their rival came to the US. C. Locked up customers with longer-term contracts.

bottling, distribution, scope, standardization, Compatibility, learning, computer, holdup

In-class exercise: Corporate Strategy examples: Horizontal Scope Examples: Apple products: desktop, phone, watch, and Coca Cola products dasani, minute maid, diet coke. 1.Explain the example. 2.Assess whether the horizontal scope decisions of the firms identified on the right pass: Better-Off Test. Ownership test. Be precise & be ready to explain your reasoning and evidence! Horizontal integration asks "In which business areas should we be active?": Manufacturing and distribution in business area #1, and two different activities in business area #2 and business area #3. Another way to think about "Business Area" is to think of each as a different "Product". Coca Cola Horizontal Example: Costs (decreases?): Economies of Scope: -Infrastructure already exists to support ________________ & ______________________. -These fixed costs spread out over more units. -Volume discounts on some beverage ingredients. -Cost savings less clear on marketing (separate ads). WTP (Increases?): Brand Recognition: -Not a clear benefit here... different brands. Bundled sale (for bottlers? End consumers?). (Overall: Better thesis for horiz integration on the cost side!!). Ownership Test: Costs (decreases?): Contracts: -Like Disney and Pixar it is distracting, expensive and taxing to have to renegotiate a contract every couple of years. -Still, risk of holdup/ dependence. Other Considerations: Variety: -Can market their brand as having more to offer than their competitors (e.g., healthier lifestyle?). -Call option on new product areas (e.g., bottled water) in case these substitutes for cola become big businesses!! Apple Products Horizontal ____________ example: Better Off Test: Costs (decreases?): Economies of Scope: -Parts ______________________ (volume discounts). -Spread fixed costs over more units: R&D (H/W & S/W), Marketing. WTP (Increases?): ______________________ between products. Easier __________________ curve for products. -iPhone buyer doesn't have to ramp up to learn. Better customer support. -E.g., Genius Bar at Apple Stores. Ownership Test: Costs (Decreases?): Would forego some Economies of ______________ in a contract: With a contract to distribute a Sony MP3 player, they would not be able to spread some centralized costs (like R&D) over those units. Risk of hold up/ dependence. Other Considerations. Quality: -Apple would never outsource an entire business unit to another party. -Real or perceived quality differences!! Apple Case: Apple's Horizontal Scope: Can you find case evidence that backs up our arguments??: Cost Savings?? WTP Boosting??: Unit Cost Savings [Exh 1a]: R&D/ Sales: -5% in 1998; 2% in 2011 (beneath HP in 2011!!... [Exh 5]. -BUT.... note $$ spent climbed from ~$300M to ~$2.4B (up ~8x!!). SG&A/ Sales: -15% in 1998; 7% in 2011. -BUT.... note $$ spent climbed from ~$900M to ~$10B (up over 10x!!). -We don't know how much of this is the all-important Apple advertising budget (!!). WTP Boosting: Apple ___________________ sales have increased dramatically since 2002. -Revenues: $4.9B in 2004 to $21.8B in 2011 [Exh 1b]. -Units: 3.3B in 2004 to 16.7B in 2011 [Exh 1c]. -Suggests small decline in unit prices (BUT... note mix shift of desktop/portable was 50-50 in 2004; 25-75 in 2011). -But, it seems clear customer WTP went up dramatically!! Overall performance of Apple has been lifted: Main driver has been Apple's horizontal scope expansion!! Competitive advantage (in each business unit!!)..... consolidated profit margins: -ROS: 5% in 1998; 24% in 2011. -ROA: 4% in 1998; 22% in 2011. -ROE: 22% in 1998; 42% in 2011 [Exh 1a]. -Market value of stock: ~$5.5B to over $1,000B+... i.e., $1 Trillion+ (Wow.... see slide to follow!). Apple has a very compelling case for horizontal diversification: Better Off Test: Costs (Decreases?) (Full circle): Economies of Scope: -Parts standardization (vol discounts) (and three quarters filled). -Spread fixed costs over more units (Full circle): 1. R&D was $491m (6% of sales) in 2004, $2.8b (2%) in 2012,. 2. SG&A was $1.4b (17%) in 2004, $11.7b (6%) in 2012 [HBS, pg. 16]. WTP (Increases?): Ease of Use: -Compatibility between products (Full circle)-All products use the same OS/IOS [HBS, pg. 10] -Highest customer satisfaction score compared to competitors [Forrester, pg. 12]. (Full circle) All products benefit from Apple brand!!: -iPhone and iPad sales almost double every year after launch! [HBS, pg. 18]. Overall, Passes Better Off Test (Full circle). Full circle means very strong argument/benefit. Ownership Test: Costs (Decreases?) (and three quarters filled): Do not forego Economies of Scope in a contract (full circle). -E.g., with a contract to distribute a Sony MP3 player, they would not be able to spread some centralized costs (like R&D) over those units. Avoid risk of ___________ _____ / dependence (three quarters filled). Other Considerations (Full circle). Quality: -Apple would never outsource an entire business unit to another party. -Real or perceived quality differences!! Overall passes Ownership test (full circle). As Apple has diversified its product offerings, the value of the company has skyrocketed: Ipod launch 2001. Iphone launch 2007. Ipad launch 2010. iWatch launch 2015. Key Takeaways- Horizontal Scope: For expansions of horizontal scope, we use the same tests to check the strength of the thesis for horiz integration: Better-Off Test: Are there cost savings or WTP boosting? Ownership Test: Do you really have to own it??!!! Coke has a diversified horizontal scope (cola, bottled water, orange juice). With separate brands, most clear benefits are derived not from increased WTP but rather from cost savings (e.g., economies of scope!!). Apple is an even more powerful example of the benefits of horizontal diversification (computers, smartphones, iPods), fully benefiting on the cost side as well as the WTP side.

tradeoffs, Zappos, activities, similar

Strategy (in contrast to just OE) involves making ______________ about which activities to perform and which to avoid, which helps firm achieve potentially valuable positions. Who Wins and Why: Operational effectiveness. Necessary, but not sufficient for long-term competitive advantage. Having a strategy that fits the environment! A cogent configuration of activities, incentives, systems. That supports successful positioning. And makes the right trade-offs. Ultimately, Porter believes that firms can achieve competitive advantage only if they have both operational effectiveness and a superior strategy (that fits with the demands of the environment). New York Taxis Reading: Do cab drivers have high or low profits? How much competitive rivalry exists between drivers? Do they compete on price? How else does rivalry manifest itself? Who makes profits in this industry? Which group is most likely to affect public policy regarding taxis? Medallion owners, drivers, or consumers? SC Freiburg (German Moneyball) Reading: How is SC Freiburg different from other teams in German soccer? What are the elements of its approach? Is its approach successful? How do we know? Why did Finke choose to be different? Can Freiburg's success be imitated? Do we expect their success to continue? Does anyone in the room play fantasy football? (or will anyone admit it on the first day of class?) Were any different draft strategies used? Zappos Reading: In which industry does Zappos compete? Who are Zappos rivals? What makes Zappos different from other firms in its industry? Is it really different? (really?) Will Zappos be able to continue its success? Could Zappos be easily imitated? Zappos.com Post Script: Zappos reached $1 billion in sales in 2008 (net sales just $635M). Net income was just $10.8 million that same year. The company was acquired by Amazon.com; deal closed in November 2009 for $1.2 billion (almost all stock), more than 100x 2008 net income!! As of Sept 2021, Amazon's stock has climbed over 35x in value since the Zappos transaction closed!! Our principal job in SI422 will be to explain long-term organizational (primarily firm) performance. Long-term organizational (firm) performance depends, to a large degree, on the environment (industry) in which the organization competes. The reading on List A shows that, at the industry level, the "taxi driving industry" is a tough industry. This is not because taxi drivers are unintelligent and/or lazy. But, no matter how smart or hard-working they are, they will find it tough to make profits because their industry is extremely competitive. The readings on List B demonstrate the impact of Strategy at the firm level within a difficult competitive environment. Within a particular competitive environment (or industry), Strategy can affect a firm's performance relative to its rivals. And an effective Strategy requires trade offs -Such as the kinds that Freiburg made -Is ______________ doing enough to make itself truly different? Wrap-up and Takeaways: Porter argues that Strategy refers to performing different __________________ from rivals or performing them in a different way. Operational effectiveness, in contrast, refers to the extent to which they perform ______________ activities better than rivals. Tradeoffs are the key to strategy. ​ Firms can achieve sustained competitive advantage only if they have both operational effectiveness and a superior strategy. The goals for SI422 involve helping students...to analyze industry & competitive environments, to understand the sources of profits at the industry-level and firm-level, and to make recommendations on how firms can improve their long-term profitability. Industry & Firm Profitability Game: For the purposes of this game, please assume that you are the CEO of Company A. How would you assess your performance as CEO? Fact #1: Your Company has a net margin of 1.8%. Fact #2a: Your Company has not lost money in five years. Fact #2b: Your growth rate in sales over the past five years has been 5%. Fact #3: Your profitability has been much more consistent than your peers in the past five years. Your Company: Kroger. Your Industry: Supermarkets. Fact #4: Your direct competitors, Safeway & SuperValu, lost money in the most recent year (vs. your 1.8% net margin). Q: How would you assess your performance as CEO? Lessons from the Game: The Fundamental Fact of Strategy. The FUNDAMENTAL FACT in Strategy is that profits vary across industry & within industry. Some industries have higher ave P than others. Some firms have higher average P than others. These patterns tend to persist over time. Our job (as strategists) is to: Explain why industries & firms have high or low P. Help make recommendations to firms about how to improve their profitability. May be firm-specific recommendations (this is what most think of). Also may be recommendations which affect the health of the industry (e.g., Starbucks, Coke/Pepsi, Ducati vs. Harley). Industry Financial Comparisons: Return on Assets, Return on Sales, Return on Equity. Industry Structure -> Industry-level sources -> Firm Economic Profits. Competitive Positioning, Competitive Dynamics, Corp & Global Strategy, Technology strategy -> Firm-level sources -> Firm economic profits.

company, invisible, best

Tata Motors and CSR: Tata Motors case: Introduction: Tata Motors founded in 1945 to produce the first locomotives ever built on the Indian continent. Part of a vast conglomerate which grew out of a trading company founded by Jamsetji Tata in 1868. more than 100 companies in seven business sectors: communications and information technology, engineering, materials, services, energy, consumer products, and chemicals. In 2016, Tata Group had revenues of $103.5 billion and employed 660,000 people worldwide. 66% of Tata Group stocks owned by charitable trusts. Tata Motors spending on CSR had grown steadily - from 185 million rupees in 2014 to 258 million rupees in 2016. Experienced slowdown in profits for several years. In 2015, net loss of 47 billion rupees ($712 million). One reason was the sales fiasco of the Nano, the "world's cheapest car" launched in 2008. The __________________ Act of 2013: Background: Viewed as a solution to India's poverty issues: 224 million people living below the poverty line (on less than $1.90 per day) as of 2016. Required large corporations in India to allocate at least 2% of their average net profit for the last 3 years to corporate social responsibility (CSR) activities. First law in the World top establish mandatory corporate giving. If company fails to spend on CSR, must disclose why in annual report. Applied to any Indian company of a certain size..... net profit of 50 million rupees or more, or turnover of 10 billion rupees or more, or net worth of 5 billion rupees or more. Companies should not direct their CSR spending to projects that help their own businesses... i.e., "win win". The Company Act of 2013: Implications for Tata Motors: Tata Motors not legally required to corporate giving. Net loss at its domestic Indian unit in 2015 pushed it below the profit threshold set by the Act. But Tata had long-standing commitment to CSR. Adopted an eight-hour workday, maternity leave and worker pensions long before they became the norm. Helped less fortunate members of the community through healthcare and education programs (with the Pratham Institute, it offered professional training to 25,000 young people each year, many of whom had dropped out of regular schools). Unclear if Tata motors should keep spending in CSR when it's losing money (see next slide). Will the 2013 Company Act promote CSR among Indian Companies?: NO!: It's just another corporate tax. Philanthropy alone cannot solve systemic issues. Firms will just "check the box" and do the bare minimum. If companies cannot spend in areas related to their business, the opportunity ("O" from OIT&T framework) is missing. YES!: Most firms are unlike Tata and will do nothing without a law. Firms have the option to partner with NGOs or donate the money to a government fund... i.e., it is made easy for them. It's really quite small... 2% of profits (i.e., will never be sizable cost bucket as % of sales). It's a great example of collective effort of government, corporations, and civil society. Should TATA Motors keep sponsoring CSR programs?: CSR integral to Tata's belief system. Expectations towards Tata are high—keeping CSR commitment will maintain brand value and corporate reputation, pulling support will harm both beneficiaries and Tata. It's the moral/right thing to do. CSR initiatives make Tata act as a role model and generate trusts/loyalty with employees and society. Training programs provide skilled labor to Tata, too. CSR not a significant financial burden (and even less concerning when Tata returns to profitability). What types of CSR initiatives? (FY14-15 CSR projects for Tata Motors- Exh 14): Health: Child malnutrition, Female health, Preventive health. Employability: Driver training, Motor vehicle mechanic training, Training in non-auto trades, Training in agriculture trades. Education: Scholarships, Special coaching, School infrastructure, Co-curricular activities. Environment: Student awareness, Solar "study lamps" for students, Tree plantation. Drinking Water Projects. Prime Minister Narendra Modi made job skills a number one priority: Modi made this a "pet project" (p. 6). Only 2% of workforce had former career skills training. vs 52% of US workers. vs 68% of UK workers. vs 80% of Japanese workers. If Tata Motors prioritized job skills, how could this be a "win win"? Focus on rural areas or urban areas? Wrap-Ups & Takeaways: Should firms pursue profit or purpose? The debate on CSR is still open: There is some evidence that firms can do well by doing good (e.g., treating their employees well). But philanthropy and greenwashing cannot solve systemic issues. Multi-party initiatives that involve governments, corporations and civil society may be the most effective to foster a more responsible society. __________________ Hand viewed more closely: is a metaphor to express the view that the market is self-regulating. Several forces combine to play this role: Self-interest of people (see below), Competition, Supply and Demand. To be effective, the Invisible Hand does not require the benevolence of all (corporate) citizens: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.". In other words, the market economy works if all of these owner-operators (think "firms") focus exclusively on their own __________ interests (within a system of laws and morals). Corporate social responsibility (CSR): Definition and intro: "Corporate Social Responsibility (CSR) is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders" (United Nations Industrial Development Organization). Two main views on CSR. Normative - businesses are responsible toward society. Instrumental—CSR improves a company's bottom line (through improved reputation, employee performance, customer loyalty, etc.)- a.k.a. "Win-win". Philanthropy vs. "strategic CSR": Strategic CSR generates shared value by addressing social and environmental challenges.

Perfect, Monopolistic, Oligopoly, Monopoly, Concentration, industry, industry, substitutes, profits, keep

Some key five forces quotes: "The state of competition in an industry depends on five basic forces which are diagrammed in the Exhibit on page 6. The collective strength of these forces determines the ultimate profit potential of an industry." "In economists' 'perfectly competitive' industry, jockeying for position is unbridled and entry to the industry very easy. This kind of industry structure, of course, offers the worst prospect for long-run profitability. The weaker the forces collectively, however, the greater the opportunity for superior performance." Basic Five Forces Questions: At what level does Porter intend us to use the Five Forces?: Industry! If we do a Five Forces analysis, what do we learn?: It helps us understand whether an industry's incumbents are likely to earn high/low economic rents (profits). What is the purpose of a five forces analysis: 1.) To assess current average industry profitability of incumbent firms! 2.) To help us understand the impact of trends & events on average industry profitability! (think "before" and "after" 3.) To help us make recommendations to firms on how to improve: a) the overall industry environment & b) the firm's position relative to its industry environment. Economic Models of Industry Profit: 1.) _________________ Competition: Assumption: Entry, Many firms, no differentiation, no entry cost. Outcomes: P = MC,(Price = marginal cost) Econ Profit = 0. Examples: Taxi drivers, Lawn care. 2.) _____________________ Competition: Assumptions: Price & Entry, Many Firms, Some diff'n, entry cost > 0. Outcomes: P > MC , Econ profit = 0. Examples: Restaurants, Tax advice. 3.) ____________________: Assumptions: Un-differentiated Quality, Differentiated Price, Few firms, entry cost > 0. Outcomes: P > MC, Econ Profit > 0. Examples: Soft-drinks, Micro-processors. 4,) ___________________: Assumptions: Price -> Quant, Diff'n irrelevant, One firm, Entry cost -> 0. Outcomes: P >> MC, Econ profit >> 0. Examples: Patented drugs At&t (ca 1950). The Economics of the Five Forces (I): Perfect competition: In perfect competition, if firms raise their price, they lose all sales. Thus P=MC and P = 0!!! Lesson: Try not to be in a perfectly competitive industry!! Price and Quantity are on a graph, they intersect, in perfect competition price = marginal cost. As you move from Perfect competition to Monopoly, industry profits seem to get better. How can we recognize monopoly? Monopolists raise prices & limit output! This is good for company profits, but... bad for consumers: Because they have to pay higher prices, and get lower quality. Oligopolists do similar things: Oligopoly exists when there are only a few firms in an industry. An industry with 3, 4, 5, or 6 firms is probably an oligopoly. The more firms the industry has, the less likely it is to act like an oligopoly. _________________________ Ratios: C4, C5, C6 = Combined Market Share of top 4, 5, or 6 firms. "Rule of Thumb" if C4, C5, or C6 > 80% -> Oligopoly! Take sales of a company and divide it by total _________________ sales to create market share. ________________: Define the industry based on finding players that sell similar products with common suppliers and buyers. Suppliers: Organizations that firms in the industry pay. Buyers: Organizations that PAY firms in the industry. Rivals: Firms in same industry. ______________________: Stuff that could be an alternative to industry's products (with compelling price-to-value ratio). Potential Entrants: Firms (current/potential) that could enter industry. The Two dimensions of the Five Forces: Supplier, rivalry, and buyer are inside the industry. Supplier Power, Buyer Power and Industry Rivalry determine who gets the _____________ that the industry could potentially generate. And the threat of entrants and substitutes are outside. The Threat of Entry and Threat of Substitutes determine whether incumbents _____________ profits and if the industry can continue to generate any profits at all.

costs, profits, low, low, exit, low, non, scale, scope, network, distribution, government, low, high

Summary: Determinants of Industry Profitability: Entry Barriers: Economies of scale, Proprietary product differences, Brand identity, Capital requirements, Access to distribution, Government policy, Expected retaliation. Rivalry Determinants: Industry growth, Demand conditions (overcapacity), Exit barriers (corporate stakes, high fixed costs), Product differences, Brand identity, Concentration and balance. Determinants of Buyer Power: Bargaining leverage, Buyer concentration vs. industry, Buyer volume, Buyer switching costs, Price/total purchases, Product differences, Brand identity. Determinants of Substitution Threat: Relative price performance of substitutes, Switching costs, Buyer propensity to substitute. Determinants of Supplier Power: Dominated by few companies, Differentiation of product (inputs) causes high switching costs, Few substitute inputs, Supplier concentration, Importance of volume to supplier, Cost relative to total purchases in the industry, Threat of forward integration relative to threat of backward integration by firms in the industry. The Five Forces Framework... is based on the premise that competition in an industry is rooted in the underlying economics, competitive forces or structures that collectively determine the profit potential of the industry, helps assess the long-run profit potential of an industry. We can view the Five Forces through the lens of microeconomic analysis: The key issues associated with Suppliers' (Buyers') Power relate to whether Suppliers can drive up ____________ (drive down prices). The key issues associated with entry, rivalry, & substitutes ask whether potential ______________ get competed away by new firms in the industry, current firms, or alternative products. Industry structure determines long-term average profitability in the industry! We can analyze this using the Five Forces framework! Firm profitability thus depends to a great extent on structural (economic) forces often outside of managerial control. But, study of the firm's industry structure is an important job of the strategist: Avoid behaviors that might harm industry profits. Pursue behaviors that could improve industry profits. Seek out a competitive positioning that puts one's firm at an advantage in the context of the firm's external environment. In "pull" between Suppliers and Buyers, who has the power? (same factors can cut both ways!): There is a tug of war between Suppliers and Buyers, one has low when one has high in regards to buyer/customer concentration. 3.) If our industry's Rivalry is high, our industry's profits will decline. 1.) Industry growth is ______. Example: Investment baking in the last several years. Firms are competing on price to try to win clients and gain market share. 2.) Demand conditions are ______ (overcapacity exists). Example: Airlines: For years, there have been many empty seats on airplanes. 3.) _________ Barriers exist. Example: Shipbuilders. Defense spending decreased (1960s), forcing Litton Industries to stay in declining market due to highly specialized (and expensive) facility. 4.) Product differentiation is _________. Example: Plastic bottle manufacturers. Plastic bottles are a commodity product with virtually no product differentiation. 5.) Brand identities are _______-factors. Example: Crack cocaine dealers: Street-level drug users do not care about brand. 6.) Highly perishable products (or high storage costs). Example: farmers market vendors. As the day goes on, vendors will slash prices to unload their products. 7.) Fragmented market (too many players). Example: In NYC, there are 40,000 taxi drivers for about 15,000 driver capacity. 4.) If threat of New Entrants is low (or barriers to entry are high), our industry's profits will rise. 1.) Economies of __________ - Supply Side (Same product) . Example: Semiconductor manufacturers. Large players (e.g., Intel) spread fixed costs (mfr & res) over more units, resulting in a lower unit cost. 2.) Economies of _____________ (Two or more products). Example: Insurance companies. By selling life, home & auto insurance, they can amortize fixed costs over more products 3.) Demand-Side benefits (_______________ effects). Example: Online auctioneers. Given the large # of sellers of established players (e.g., eBay), buyers like it. Sellers also like having a huge number of buyers! 4.) Product differentiation. Example: Motorcycle manufacturers. Market already has highly differentiated products e.g., Harley's "Cruisers" & Ducati's "Sport" bikes 5.) brand. Example: Branded outerwear manufacturers. Powerful brands in industry (North Face, Marmot, Columbia, Patagonia, etc.) make entry difficult. 6.) Access to ____________________ is already claimed. Example: Cola. Grocery store shelf space is already taken; to gain share, expensive promotional effort is necessary. 7.) Large capital requirement (for facilities or working capital). Example: Bottlers. Incumbents have made huge investments in highly automated lines; not applicable w/ airlines! 8.) ___________________ policies. Example: Steel mills. The steel industry has benefited for years from protectionist tariffs assessed on imports. 9.) Expected retaliation. Example: Operating systems. Any new entrant would face a fierce fight from Microsoft. 5.) If the Threat of Substitutes is high, our industry's profits will decline. A. a compelling alternative exists, 1.) Compelling price-to-value ratio (or relative price performance). Example: video rental stores. Netflix had an extremely compelling value proposition for at-home movie viewers vs. the entrenched industry players (e.g., Blockbuster). B. The market share is up for grabs!!! For 2 and 3. 2.) Switching costs are _______. Example: Store-based music retailers. Apple made it easy and inexpensive to switch to iTunes; there was nothing the retailers could do to resist this catastrophic change. 3.) Buyer propensity to switch is _________ (no loyalty). Example: Taxi drivers. Taxi customers are not particularly loyal!! (and the subway isn't a bad alternative in NYC).

Porterian, Operational Effectiveness, Strategy, Sufficient, productivity, improvement

To help students understand the determinants of organizational performance. 2. To help students make recommendations to organizations that can help them improve their long-run performance. One view: How Companies achieve supra-normal profits. (profits > average) greater than average profits. Price and marginal cost, and The x-axis is quantity while y-axis is price. Demand is the downward sloping line. Industry Structure -> Industry-level sources -> Firm Economic Profits. Competitive Positioning, Competitive Dynamics, Corp & Global Strategy, Technology strategy -> Firm-level sources -> Firm economic profits. What is Strategy? (________________ view (author's view)): According to the article, what is the difference between: ____________________ ______________________: Being efficient, just as cost effective or at least as good as competitors. Refers to the extent to which perform similar activities better than rivals (or "at least as good!!"). ______________: Refers to performing different activities from rivals or performing them in a different way. Choose the right configuration of activities, incentives, systems. Make the right trade-offs. Strategy rests on unique activities. Which of the two are important to obtaining competitive advantage? Porter's necessary and sufficient conditions. A quick primer on "necessary" vs. "sufficient" conditions. If p, then q. 'p' is a sufficient condition for 'q'. 'q' is a necessary condition for 'p'. If it's raining outside, then the sidewalk gets wet. If it's raining, that's "good enough" (it's sufficient) to produce a wet sidewalk (though there could be other ways- e.g., a fire hydrant malfunctioned). If the sidewalk is not wet, then it is not raining!! (i.e., a wet sidewalk is necessary or a "guarantee" that it's raining). Porter's claim: "Operational Effectiveness: Necessary but Not __________________". Operational effectiveness ("OE") is necessary for superior profitability It is usually not sufficient. Translation- which one is correct? If a company enjoys superior profitability, then it has OE. If a company has OE, then it enjoys superior profitability. First one! Meaning: you must have OE, but it's not "good enough" to enable profits. Operational Effectiveness vs Strategy: a graphic & some more explanation: Differences in operational effectiveness are an important source of differences in profits. When a company improves its operational effectiveness, it moves towards the ______________________ frontier. The ______________________ frontier represents the sum of best practices at a given point in time. It is constantly shifting outward as new technologies and management approaches are developed and as new inputs become available. Constant __________________________ in OE is necessary to prevent falling behind the competition, but few companies can succeed on the basis of OE for an extended period. Rapid diffusion of best practices makes competitors look alike.