MAN 5721

Orders of Entry Effects

First Movers Second Movers Later Movers

Rare

Possessed by few, if any, other firms

value-destroying motives

decreasing managerial risk employment risk increasing managerial compensation

Firms must have both the incentives and the resources and capabilities to

diversify

market segmentation

dividing customers into groups

value-creating motives

economies (scale and scope) market power financial economies

Business-level Strategies

focus on competing within particular product markets.

Corporate-level strategies

focus on the firms entire portfolio of business

tradeoffs

force companies to make difficult choices, can discourage imitation by making potential imitators choose among seemingly incompatible activities

a narrow focus on __________ can lead to poor decisions

growth

consumer markets

individuals using their own incomes to make purchases o Segmentation based on demographics, socioeconomics, geography, consumption patterns, etc.

intangible

not concrete; invisible; difficult to value

product and service quality

o A basic level of quality is necessary to compete o Firms are less aggressive when they lack this basic level of quality; as quality improves, these firms might become more aggressive. o Quality alone is not sufficient to ensure success.

Tactical action or tactical response

o A move involving few resources, perhaps to fine-tune existing strategy, that is relatively easy to implement and reverse.

• Strategic action or strategic response

o A move involving significant resources, perhaps altering the firm's strategy, that is difficult to implement and reverse.

Differentiation

o Allows premium pricing based on perceived quality. o Often based on superior technology, features, and customer service; suited for luxury items. o Price is not irrelevant; subject to economic downturns and counterfeits.

• Scope: array of product markets served.

o Broad: compete in many segments. o Narrow: selects one or a few segments; excludes others.

What is the value of corporate level strategy

o Businesses in a portfolio may be worth more under common ownership and management than they would be separately. o Corporate level change alters the risks and returns of the corporation and its business units. • Business-level Strategy occurs within product markets.

Second Movers

o Can learn about markets by observing first movers, customers, etc. o Often can build on the market-building expenses of first movers (e.g., selling to customers who are familiar with the products already). o Can both imitate and improve on first-movers' offerings.

First Movers

o Can obtain customer loyalty, brand awareness, and profits before other firms enter; some of these advantages persist. o Tend to have more influence over market standards. o Often must spend heavily on R&D and commercialization; also tend to confront more uncertainty than do firms that enter later.

international diversification

o Changes to the countries in which the firm competes (covered later in the semester).

Product diversification

o Changes to the industries and markets in which the firm competes. o Applying or extending resources and capabilities across businesses.

integrated cost leadership/differentiation strategy

o Combines aspects of the strategies above. o Firms are competitive on each dimension, but they might not be the absolute cost leader or the most differentiated firm. o Difficult to implement; could be stuck in the middle.

Cost Leadership

o Compete based on price; small profit margins. o Requires large scale and tight financial controls; suited for standardized offerings and large volumes. o Basic quality is necessary, despite low prices.

• Competitive rivalry

o Competitive behavior between rivals; at the firm or dyad level. o Awareness, motivation, and ability are necessary. o Compete aggressively yet try to minimize rivals' responses.

• Sources of Competitive Advantage:

o Cost: achieve costs below those of rivals. o Uniqueness: offer distinct features, often based on quality.

related diversification

o Economies of scale: per unit cost savings arising from large volumes. o Economies of scope: revenue gains and/or cost savings from sharing resources and capabilities across businesses, often due to synergy. o Synergy: resources and capabilities may be worth more in conjunction that any resource or capability would be separately. o Market power: allows firms to sell products/services above the competitive level and/or reduce costs below it. o Vertical Integration: a firm produces or delivers its own inputs (backward) or operates output distribution systems (forward).

Later Movers

o Enter once the market has matured (or as it is maturing). o Tend to face more competition; may have to take market share away from firms that entered earlier. o Success may be slower, more difficult, and lower than that achieved by firms that entered earlier.

unrelated diversification

o Internal capital markets: allocating capital without involving outsiders. o Risk reduction (e.g., investment in counter-cyclical business). o Purchasing firms, restructuring them, and reselling parts of them.

Factors driving focus strategies

o Large firms may overlook small niches. o Firms may lack resources to target broader markets. o Focusing may help firms excel in specific activities.

organizational size

o Larger firms can initiate more and larger attacks, but such firms often lack flexibility, act more slowly, initiate attacks that are less complex. o Smaller firms often rely on speed, surprise, stealth, creativity, and partnerships with other firms to attack rivals; tend to be more flexible. o Sumo strategy: larger firms overwhelm smaller firms. Judo strategy: smaller firms turn larger firms' advantages into disadvantages

Focus Strategies

o Producing product offerings for narrow segments or niches (e.g., specialized products, buyers, etc.). o Can be used with cost leadership and differentiation (especially the latter).

Market Dependence

o Reflects the extent to which certain markets contribute to firms' revenues or profits (including indirectly via supply chains). In general, firms are likely to respond strongly to attacks on their positions in markets on which they are more dependent

Types of competitive action

o Tactical responses often follow tactical attacks; the responses happen more quickly and there tends to be more of them. o Strategic responses often follow strategic attacks; the responses happen more slowly and there tends to be fewer of them.

Fast-cycle Markets

o Technology changes quickly, and imitation is often relatively inexpensive. o Competitive advantages are highly susceptible to imitation and may therefore be short-lived. o Firms concentrate their efforts on developing new sources of advantage and improving upon rivals' offerings.

Competitive dynamics

o The total competitive behavior of all firms in a product market. o Involves analysis at the level of the product market or industry.

Disadvantages of focus strategies

o Vulnerable to adverse conditions in targeted segments. o Narrow focus may limit growth opportunities. o Large firms may enter fast growing segments.

Factors affecting competitive attacks

order of entry organizational size product and service quality type of competitive action reputation market dependence

Consider the ___________ that must be captured to fill a new facility

percent if industry sales

Capabilities

the capacity to deploy resources in an integrated manner · Often routine- and knowledge-based, and dependent on employees' interactions. · Often develop within specific functional areas.

Cyber Security

· A striking number of companies have experienced cyberattacks in recent years, and the prevalence of such attacks is increasing. · Cyberattacks can be time consuming and expensive to address, and they can reduce stakeholders' confidence in the firm for years to come; firms should have plans for preventing and handling such attacks.

Valuable

· Allow a firm to take advantage of opportunities and/or neutralize threats in the external environment

Analytics

· Associated with big data and evidence-based decision making. · Has a long history in sports and marketing but increasingly is being used in other areas (e.g., scheduling and performance appraisal).

Chip Shortages

· Chips are used to power each of the technologies profiled in the article; price increases in chips can lead to price increases in the other technologies also. · Shortages began prior to the COVID-19 pandemic, but it has exacerbated them; the pandemic raised the demand for such chips, while labor and supply chain problems made it more difficult to meet the demand (thus raising chip prices).

Vaccine Technology

· Clearly, the demand for vaccines has increased in recent months. · Possible applications of mRNA technology to other vaccines and other medical treatments.

Metaverse

· Digital environments that operate alongside the physical world. · Already evident in social media and virtual reality but is expanding.

General Environment: Dimensions in the broader society that influence industries and firms within it:

· Economic (growth and recessions) · Sociocultural (norms and social movements) · Global (trade barriers and foreign market conditions) · Technological (artificial intelligence and digitization) · Political/legal (laws, regulations, taxes) · Demographic (age, gender, and race)

Competitive Advantages

· Enable firms to create and capture more value than rivals can; unique to a firm but defined relative to rivals. · Few are sustainable over the long term; firms need to establish temporary competitive advantages repeatedly. · Competitive disadvantages: prevent firms from performing at the level of their peers.

Opportunities

· External conditions potentially beneficial to the firm · Has a positive connotation

Threats

· External conditions potentially harmful to the firm · Has a negative connotation

Strategic Group

· Firms using similar strategies, perhaps to appeal to similar customers bases · Competition within strategic groups often is greater than is competition among firms in different strategic groups Identifying strategic groups can simplify competitor analysis

artificial intelligence (AI)

· Gaining traction in multiple industries (e.g., vehicles, healthcare, and telecom) and business functions (e.g., human resource management, marketing, and innovation). · Some firms have begun to offer AI technology as a service.

Space Technologies

· Growing potential for private space travel; potential source of new competition and conflict among major geopolitical powers (e.g., the U.S., EU, Russia, and China). · Use of satellites to improve other technologies (e.g., web access in the developing world and self-driving automobiles).

General Environment: Environmental Hierarchy

· Industries exist within the general environment · Strategic groups exist within industries · The general environment, industries, and strategic groups all influence another · They also influence, and are influenced by, firms and their managers

Price Competition

· Nearly identical products/services (farmers; commodities) · Fixed or storage costs are high and marginal cost is low (delivery companies) · Capacity must be expanded in large chunks · Product may perish (rot; become obsolete; diffuses; fixed in time) -Price competition is especially destructive. Non-price competition can be beneficial

Intensity of Competition

· Numerous or equally balanced competitors (airlines) · Slow or declining industry growth (pie is shrinking; mobile phone carriers) · Exit barriers (excess capacity is difficult to shed; specific assets) · Non-economic commitment (SOEs; image; ego) · Signaling is difficult (unfamiliarity, diversity, attention)

Inimitable

· Other firms cannot obtain the resources or capabilities, at least on terms comparable to those the focal firm can invoke · Historical: Resources and capabilities are an outcome of the firm's unique history · Ambiguous cause: Sources, uses, and bases of resources and capabilities are unclear · Social complexity: Built on interpersonal relationships among employees, suppliers, consumers, and/or partners

Nonsubstitutable

· Other resources and capabilities that perform the same functions are not available

Dynamic Pricing

· Real-time pricing adjustments have been around for a long time (e.g., in airline tickets), though they are becoming more common. · Controls are needed to prevent automated algorithms from causing public relations and other problems (e.g., Uber's surge pricing following a terrorist attack).

Crypto Currency

· Stores value in currency not specific to a nation state; multiple crypto currencies exist and their respective prices tend to fluctuate significantly. · Can reduce transaction costs associated with currency conversions; also might hinder governments' efforts to manipulate the economy (e.g., due to the lack of a central bank that can influence the cost and supply of such digital money).

Digital Enterprise

· The COVID-19 pandemic ushered in a new era of remote work, potentially broadening firms' access to global talent pools, while also creating a need for new tools to foster collaboration and accountability among more distributed workforces. · Firms are finding digital ways to conduct other functions, such as interacting with customers and processing payments; pandemic-era declines in the demand for commercial real estate, in-person shopping, and business travel might persist.

Bargaining Power of Buyers: Price Sensitivities

· The industry's products are a large share of buyers' costs (mortgages) · Buyers lack funds · Quality of buyers' products (movie cameras) or other costs (investment banking) is little affected by industry's products

There are several barriers to developing enduring competitive advantages.

· Tradeoffs create the need to make difficult choices. Companies have to exercise discretion in choosing judiciously not only what do, but also what not to do. · Managing activity systems increase coordination demands. · Pressures to grow, such as Wall Street's quarterly targets, cause firms to lose focus, to overdiversify, to disregard important tradeoffs, and to prioritize operational effectiveness. · Leadership is critical to formulating an effective strategy.

Outsource with caution

· Use partners especially skilled in outsourced activities. · Managers often should avoid outsourcing: Critical or sensitive activities (e.g., that are the source of competitive advantage), especially to current or potential rivals. Activities in which the firm itself can create and capture value. Activities that provide a platform to new opportunities

Value Creation and Value Capture

· Value creation: exists when customers are willing to exchange money for products and services. · Value capture: the firm's ability to access, retain, or otherwise benefit from the value created. · Both are critical for firm success.

Identifying Rivals

• Market commonality: extent to which firms are involved in the same product markets. • Resource similarity: extent to which firms' (tangible and intangible) resources overlap. • Firms are more likely to view one another as rivals when both market commonality and resource similarity are high. • Asymmetric competition: one firm may consider another firm to be an important rival; the reverse is not always true. • Multimarket competition: some firms compete against one another in several markets (i.e., multimarket contact). o Often leads to mutual forbearance (i.e., firms with multimarket contact sometimes are less aggressive with one another)

Diversification Challenges

• Often expensive. • Integration and coordination can be complex. • Demands attention and resources, which can undermine investments in other opportunities. • Often subject to regulatory constraints. • Increases a firm's exposure to multiple competitors. • Requires expertise in multiple areas. • Managers' information processing capabilities are limited. • May increase risk, not reduce it.

Outsourcing

Purchasing a value chain activity from an external supplier · Allows a firm to concentrate on areas in which it is more competitive. · Partners might perform the outsourced activities more effectively and efficiently. · A firm can share risk with other firms.

Intensity of Competitive Rivalry

Rivalry manifests in pricing, products, advertising, services, etc., often limiting industry profitability by transferring value to others

Related Diversification

Sharing or transferring resources, capabilities, activities, and/or skills across similar or interconnected businesses

Three Resource Management Processes

Structure the firm's resources: Involves both accessing resources and divesting resources that are no longer useful Bundle the firm's resources by combining and integrating them: Can produce unique capabilities Leverage the firm's resources and capabilities by using them to exploit market opportunities: In current product and geographic markets · In new product and geographic markets

Threat of Substitute Products

Substitutes exist when a product or service performs the same function in a different manner (may exist in the same industry or in a different industry; plastics vs. metals). · Price-performance characteristics of the substitute are higher (driving vs. flying; long distance phone service; VOD) · Buyers face few switching costs (name brand vs. generic drugs).

The Value Chain

The process through which a firm converts raw materials into goods and services · Primary activities: involve a product's physical creation, distribution, and after-sale service. · Secondary activities: assist in the execution of primary activities.

Characteristics of Resources and Capabilities that are Possible Sources of Competitive Advantage

Valuable, Rare, Inimitable, Non-substitutable

Why are Porter's 5 Forces important?

• Shape industry profitability by enabling value capture by different groups • Firms can shape conditions in their favor (DuPont; Sysco) or exploit changing circumstances (music industry firms vs. Apple) • Firms can find segments in industries wherein conditions are more favorable (Paccar) • Firms can identify attractive/unattractive industries (computers looked attractive at one time) • Investors can make smarter investment decisions • Governments can use them to understand the implications of policies, regulations, etc. • All of the forces are important and deserve consideration, but some may be more problematic for a given industry at a given time

Corporate-level Strategy

• integrated and coordinated commitments, actions, and behaviors to facilitate competitiveness in multiple businesses and product markets. o In what businesses should the firm compete? o How should the firm manage the group of businesses as a whole?

Industrial Markets

• organizations using their incomes to make purchases (i.e., business-to business; B2B). o Segmentation based on industries, geography, buying factors (i.e., supplies), customer size, etc.

value-neutral motives

antitrust and tax laws imitating other firms low performance uncertainty and risk reduction

Tangible

can be seen and quantified

Order of Entry

o Advantages and disadvantages associated with order of entry can, in turn, shape firms' incentives and abilities to initiate attacks.

Reputation

o Often (but not always), past behavior is indicative of future behavior. o A reputation for aggressiveness can be a deterrent for other firms.

Slow-cycle Markets

o Technology changes slowly, and imitation is costly. o Competitive advantages are somewhat sustainable in that they are shielded from imitation for long periods of time.

Strategic dimensions

· Product quality · Product categories · Pricing policies · Technological leadership · Distribution channels · Customer service

Hyper-Automation

· Recent labor shortages are fueling additional efforts to automate tasks. · Can reduce costs and improve reliability; also can lead to problems, especially in cases where exceptions, non-standardized practices, or novel solutions are required.

Porter's 5 forces

· Suppliers and buyers have weak (strong) positions · High (low) entry barriers · Moderate (intense) rivalry among competitors · Few (many) threats from substitute products àAll lead to: Attractive (Unattractive) Industry

Analyzing the value chain allows a firm to:

· Understand its costs relative to what is valued by its customers. · Understand the parts of its operations that create value and enable value capture. · Identify multiple means of strategy formulation and implementation. Make necessary changes regarding the performance and location of certain activities

Unrelated diversification

combining dissimilar businesses under a single corporate ownership

Firms should ____________(the casino industry seeks new locations, grander buildings, entertainers, etc.)

compete in ways other than solely on price

Investments should be judged relative to the ___________, as it reflects both a real outlays and opportunity costs

cost of capital

Two ways to be different:

(1) perform different activities or (2) perform the same activities differently.

__________ can have negative consequences, as they pertain to rivalry

Standardization

Five Forces Model of Competition

An industry's profitability results from interaction among: · The power of Buyers · The threat of potential Entrants into the industry · The power of Suppliers · The threat of product Substitutes · The Intensity of competitive rivalry *These forces exist at the industry level

Bargaining Power of Buyers

As with supplier power, buyer power is evident in value capture, quality, terms, etc. These factors are based on needs/dependencies and alternatives, relative to suppliers. · Buyers are large and few in number (discount retailers; box retailers vs. contractors) · Products are standardized (farmers) · Buyers may integrate backward into the sellers' industry (soft drinks; beer) · Buyers face few switching costs · Intermediate customers can influence the buying decisions of downstream customers (sales representatives; big box retailers; jewelers)

Bargaining Power of Suppliers

Bargaining power is often based on two factors: need/dependency (positive) and the availability of alternatives (negative). These factors should all be considered relative to buyers, although the author does not emphasize this point. · Supplier industry is more concentrated than is the receiver industry (Microsoft vs. PC assemblers) · Supplier industry is not dependent on the receiver industry (automobile parts makers) · Suppliers' products create switching costs (tooling and equipment; training; Bloomberg; Microsoft) · Suppliers' products are differentiated · Suitable substitutes products are not available (pilots and oil hurt air carriers' profits; medical equipment). · Suppliers pose a threat to integrate forward into buyers' industry (paper companies became packagers)

___________ (products and services with functionality greater together than separately) can enhance/protect demand for a product (video games; JVC; automobiles) and may be necessary (hardware and software)

Complementors

____________ is important (products/services and locations that are in and out; assess it multiple ways)

Defining the Industry

__________ is risky (they may be replaced with stronger firms; New York banking)

Eliminating rivals

Opportunities and threats

Opportunities and threats are sometimes ambiguous · Some conditions can be opportunities for some individuals or firms yet also be threats for others · Whether conditions are opportunities or threats often depends on the firm's behavior

Threat of New Entrants and Entry Barriers

Potential entrants include new ventures and existing firms, who can leverage their resources (e.g., Pepsi, Apple, & Microsoft ) Supply-side economies of scale Demand-side benefits of scale (networking and trust) Switching costs (accounting and information systems; SAP) Capital requirements (capital is less of a problem for air carriers because of external financing and resale values; extending credit; startup times) Incumbent cost advantages beyond scale (raw materials; locations; experience; branding) Access to distribution channels (shelf-space; air carriers) Government policy (cable companies; patent rules; subsidies and grants) Expected retaliation (history; resources; commitment; industry growth; signaling)

_________ describes how many industries change (long periods of stability or gradual change, interrupted by seismic shifts and transformation; telecommunications)

Punctuated equilibrium