SI422 Study Guide

Determinants of Buyer Power

- Bargaining leverage - Buyer concentration vs. industryBuyer volume - Buyer switching costs - Price/total purchases - Product differences - Brand identity

Case: Hurtigruten Overall, how would you summarize Hurtigruten's key strategic tradeoffs?

- Build large ships that, if filled, have low unit costs - Ensure ships are full - choose prices low enough to attract many customers - deliver experience similar that of smaller vessels - Avoid costly amenities

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

Entry Barriers

- Economies of scale - Proprietary product differences - Brand identity - Capital requirements - Access to distribution - Government policy - Expected retaliation

Narrow Market Strategy

- Exploits same fundamental types of competitive advantage (cost leadership or differentiation) - Selects a narrow target segment with unusual needs - product attributes - geographic location Configure the organization to serve only targeted segments - sacrifice incremental business - advantage lies in limited scope - Narrowing of scope should help the firm achieve either cost or differentiation advantage

Broad Market Strategy

- Exploits same fundamental types of competitive advantage (cost leadership or differentiation) - Serves all (or nearly all) segments of an industry - all (or nearly all) product attributes - all (or nearly all) geographic locations Takes advantage of... - economies of scale within industry - economies of scope within industry Choice of broad scope helps firm achieve either cost or differentiation advantage

How might firms wreck their industry structure?

- For example, if Coke & Pepsi decided to compete on price rather than advertising, things could look different. - Or if Ducati had entered Harley's market space... - Alternatively, if they had not invested so heavily in brand over the past 100+ years, things might look very different today- e.g., compare the German beer market with the US market

The link between positioning, activities, & profit

- Ideally, we could design strategies (tradeoffs about the configuration of activities in which we invest and which we avoid) to achieve the ideal competitive position of our firm relative to its rivals - When you think about a firm's strategy, consider its competitive position and its activities and then link these the firm's average cost and average prices... - In practice, the difficult "art" of strategy comes in identifying and implementing configurations of activities that will enable the firm to - achieve high prices with proximity in costs - achieve low costs with proximity in prices

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 - Moderately priced products with moderate equality get squeezed from both directions - ex: GM, Sony, Dell, ToysRus, Hostess

Mintzberg's view of strategy vs. Grant & Porter's view (i.e., intended vs. emergent strategy, where is Mintzberg's view similar and where different)

- It is incomplete to consider strategy to be something that can simply be designed (analyzed); instead, it is important to recognize that strategy emerges and changes over time, regardless of how carefully it is planned - Your realized strategy is not exactly going to be the same as your intended strategy - Its not all about planning, you have to get information on the way (emergent strategy) - Mintzberg's 5 P's

Monopoly

- Monopolists face the industry demand curve - They choose prices equal to marginal revenue to maximize profits - Good for company profits but bad for consumers because they have to pay higher prices and get lower quality

Role of Government in the five forces

- Porter notes that government actions & policies can affect any (or all) of the Five Forces - thus, he suggests considering each government influence separately and under the appropriate force examples: - regulatory policy may make Entry more difficult or easy - the US FDA places high barriers for safety and efficacy on drug companies - policy regarding unions & strikes can affect Supplier Power - anti-trust policies (like the Sherman Act) have a substantial impact on Rivalry

Determinants of Substitution

- Relative price performance of substitutes - Switching costs - Buyer propensity to substitute

Role of early size advantages in achieving leadership advantage

- Scale economies - Scope economies - Network effects - Learning effects

OIT&T: Interests

- all parties who might be affected by the rules of the market - rivals, substitutes, potential entrants, suppliers, buyers - NGOs, consumer groups, industry associations, governments (local, state, national, international), agencies, unions, etc

What is the resource-based view (RBV) of the firm?

- firms differ b/c they possess different experiences, resources, skills, routines,& capabilities - focuses on firms' internal resources as determinants of competitive advantage

Marquez & Mintzberg's recommendations for CSR

- 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

How technological change affects the five forces

- technological change (or changes in preferences, etc.) can affect any force at any time - Porter suggests assessing the Five Forces before and after such changes in order to ascertain their impact Examples: - the diffusion of the Internet greatly increased Buyer Power & Rivalry for Car Dealerships - the invention of the telephone greatly increased the Power of Substitutes relative to the telegraph - Improvements in package delivery services and online platforms, like Amazon and eBay, have decreased the costs to enter small-scale retailing and, thus, have increased the Threat of Entry into small-scale retailing

Rivalry Determinants

-Industry growth - Demand conditions(overcapacity) - Exit barriers (corporate stakes, high fixed costs) - Product differences - Brand identity - Concentration and balance

Case: Hurtigruten 1. How is Hurtigruten different from its rivals? 2. How do these choices effect costs and WTP?

1. - Bigger ships (500 berths vs. 150-200 berths) * lower crew to passenger ratio * economies of scale in marketing &ship operations * if ships are mostly full - Mid-luxury segment of expedition cruises * ower cost food * lower costservice - Hybrid engines * lower fuel cost 2. - Ave cost ships decreased - Ave cost fuel, crew, food decreased - WTP down (a little)

1. What are the 2 classic trade-offs in strategic positioning? 2. Firms should choose among these based on?

1. - source of advantage: low cost vs. differentiation• scope of - market: narrow vs. broad segment *failing to make trade-offs will harm profits 2. - own internal resources & distinctive competences - and the competitive positions they aim to achieve

The four different perspectives on CSR (cake analogies) and the shortcomings of these recipe

1. "Let them eat cake": the Social Responsibility of Business Is to Increase Its Profits 2. "Icing on the Cake": all superficial and no substance - Public relations - Pronouncements by the CEO - "Greenwashing" - Philanthropic activity disconnected from business operations (ex: NFL Breast Cancer drive) 3. "Everyone earns a slice of cake": Both the stockholders and stakeholders have a rightto demand certain actions from management 4. "Having your Cake and Eating it Too": If customers value your CSR initiatives, and it boosts WTP, CSR could lower costs

OIT&T: Targets

1. Legislatures (applying tools of money & information can yield...) • goal = favorable legislators elected • goal = favorable legislation 2. Agencies (applying tools of money, information, & staffing can yield...) • goal = priorities consistent with firm/industry goals • goal = actions/ruling consistent with firm/industry goals • note: influencing choices of agency staff can yield goals 3. Courts (applying tools of money, information, & time can yield...) • goal = rulings consistent with firm/industry goals • goal = delaying rulings inconsistent with firm/industry goals 4. Public opinion (applying tools of money & information can yield...) • goal = shifting opinion to achieve success in L, A, or C...

Types/Drivers of Market Failure

1. Market Power 2. Externalities 3. Information Asymmetry 4. Transaction Costs 5. Public Goods

Market Power

1. Market power (non-competitive markets) - in economics, "market power" means the ability to raise prices without losing all customers - this is inefficient b/c prices are higher (and supply lower) than would be in perfect competition - this occurs whenever there are high fixed costs! - e.g., oligopoly (or monopoly) oil extraction

Frameworks for thinking about competitive advantage: How do the various tools of Firm Analysis, including Strategic Activity Mapping, Competitive Positioning& Relative Cost Analysis, RBV/VRIO, and Coughlan's perspective on Leadership Advantage, providedifferent insights into firm performance? What are the various purposes of each & how do theycomplement each other?

1. Porter ("What is Strategy?") - OE + S -> Competitive Advantage 2. Relative Cost Analysis - if activity choices à larger wedge between WTP & C, then CA will arise - is not as focused on SCA vs. CA as RBV & Coughlan 3. Resource-Based View - explicitly designed for analyzing CA & SCA - argues that these depend on qualities of firms' resources 4. Coughlan - designed to explain whether advantage persists & whether it can be gained by obtaining leadership - explains which market conditions are likely to enable leaders to sustain advantage 5. Mintzberg - his view is that "strategy emerges & is not designed" - this view has little to say about why CA arises & whether it can be sustained

Mintzberg's 5 P's

1. Strategy is a plan: direction, a guide or course of action into the future (Intended) 2. Strategy is a pattern: consistency in behavior over time (Realized) 3. Strategy is a position: locating particular products in particular markets 4. Strategy is a perspective: an organizations fundamental way of doing things 5. Strategy is a ploy: specific maneuver intended to outwit and competitor

Two Dimensions of the Five Forces Analysis

1. The Power of Buyers,Suppliers, and Industry Rivalry determines who gets the profits that the industry could potentially generate 2. The Threat of Entry and Threat of Substitutes determine whether the industry value chain can generate any profits at all

What are the various steps in a Relative Cost Analysis?

1. consider a representative product for 2 or more rivals in an industry (note that the representative will be a 'stand-in' for the average of all the things that the company sells) 2. identify key activities that rivals perform in order to achieve its competitive positions (these demonstrate the firm's key tradeoffs!) 3. estimate average costs associated with each activity (& their impact on WTP & overall price) (graph & compare these!) 4. draw comparisons & implications about relationship between firm strategy choices & overall profit

Case: Cola Wars Bottlers 1. what are the main jobs of these firms? 2. how expensive is each plant? 3. how many are needed in the USA? 4. how are these firms organized?

1. mix ingredients and deliver to customers 2. plant costs ~$75m 3. need 80-85 for USA 4. organized as franchises -with exclusive territories

What assumptions does the RBV make?

1. resource heterogeneity = resources differ across firms 2. resource immobility = some resources cannot be easily traded or imitated

what are the five forces?

1. threat of entry 2. power of suppliers 3. power of buyers 4. threat of substitutes 5. rivalry among existing competitors

What is the purpose of a Five Forces Analysis

1. to assess current average industry profitability of incumbent firms 2. help us understand the impact of trends and events on average industry profitability 3. to help us make recommendations to firms on how to improve a. the overall industry environment b. firm's position relative to its industry environment

What is a Strategic Activities Map (according to Porter)?

A picture that identifies the strategic themes and key activities of a firm (i.e., their tradeoffs and the investments that they make) and identifies the linkages between them (via lines) o These can be further linked to costs and customer willingness-to-pay o A Strategic Activity Map can be created to guide strategy implementation and operations o The Strategic Activity Map leads to operational activities that are coordinated and "fit"

Case: Coors 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% - shift in distribution away from on-premise to off-premise- big decrease in margins - shift in consumer preferences -> lighter beers (favoring national majors) - new segments (popular, premium, super premium, ultra premium) - wholesalers focused on leading brands (AB & Miller) - brand proliferation What do these changes do to industry structure? - changes -> economies of scale -> consolidation

Cost Leadership

Cost Leadership: - Invest in assets to lower operating expenses - Deliver a product of OK quality at lowest possible cost - If executed well, translates into above average profits with relatively low prices - Goal = achieve significant cost gap over other competitors - Cost leaders must maintain proximity in quality Cost leadership often involves tradeoffs with product differentiation - ex: Walmart, Southwest Airlines, Ikea, Marshals

Explaining why profits are different for different firms in an industry

Differences in competitive advantage

Premium Price (Differentiation)

Differentiation: - Offer products and services that are widely acknowledged as superior in quality on at least one dimension - 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 value for buyers - Differentiation leads to above-average profitability only if the firm maintains cost proximity to competitors. -ex: Starbucks, Apple, Whole Foods, Rolex

Factors Affecting Threat of Entry(Barriers of Entry)

High Barriers - if economies of scale exist - if products are very differentiated - substantial network effects - cost disadvantages for new entrants - access to distribution channels difficult to get - favorable government policies * if barriers of entry are HIGH, the threat of entry is LOW * Desirability of entry is not the same as threat of entry Overall Conclusion: High - i.e., sufficiently strong to drive down industry average prices or drive up industry average costs Low - i.e., sufficiently strong to drive down industry average prices or drive up industry average costs Medium - i.e., somewhere in the middle * if any one factor leads the threat to be High, that could be enough for the Threat of Entry to be high

Rivalry

High Rivalry = competition that drive industry average prices down or drives industry average costs up! Rivalry = High - if firms compete in ways that drive down average prices or drive up average costs Rivalry = Low - if firms compete in ways that do not drive down average prices or drive up average costs

the difference between horizontal scope and vertical scope

Horizontal Integration • refers to extent to which firm is involved in multiple product areas • describes product/industry breadth of the firm • horizontally integrated (diversified) firms include GE, Mitsubishi, & Vivendi • e.g., Mitsubishi - cars, stereos, computers - "In which business areas should we be active?" Vertical Integration • refers to extent to which firm is involved in aspects of value chain (or supply chain) - "How muchof the value chain should we own?"

Role of preemption in affecting advantages due to entry timing

Input Preemption - occurs if 1st mover secures input factors under better terms than followers - e.g., purchase of uranium for nuclear power; stockpile of diamonds Channel Preemption - occurs if 1st mover secures distribution channels than followers - e.g., long-term contracts for shelf space at key retailers Location Preemption - occurs if 1st mover secures locations than followers - e.g., Wal-Mart's rural locations; airlines getting gates @ airports Capacity Preemption - occurs if 1st mover achieves sufficient production capacity that potential followers recognize that they cannot enter profitably - e.g., steel, iron, copper Positioning Preemption - choice of best position; followers must compete directly or position differently - e.g., Starbucks premium coffee position

Case: Super Soaker

Inventor: - Dr. Lonnie Johnson, space engineer, inventor Inventive Act (1982) - was working on heat pump based on H2O and hooked up to sink and decided it would make a great water gun Commercialization Story: - licensed by a BB gun maker - failed to bring to market 1985-1987 improved design for manufacture during this period - Lonnie went into business for himself Larami Toys - finally brought to market in 1991 initially as "power Drencher", then as "super Soaker"

What are market failures & what is their impact?

Market failures: failures that interfere with effective market competition (thus preventing optimal resource allocation) - in market failure, the social costs of production are not minimized (i.e., some resources are wasted and markets are not efficient) - economic efficiency arises when Price = Marginal Cost = Average Total Cost- (basically, this only happens in perfect competition; everything else is a departure from efficiency Impact: negative impact of market failures can sometimes be mitigated by government intervention - such interventions (e.g., taxes, subsidies, bailouts, price controls, regulations) often cannot completely correct the failures and come with some disadvantages

The difference between the use of the term 'differentiation' in Marketing and Strategy

Marketing - make a product unique Strategy - ability to charge premium prices for a product

Externalities

Negative externalities = costs that individuals (or firms) can impose on others, thus distorting incentives - 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 leads to overproduction of unpriced negative externalities - one solution involves taxation/regulation to help get prices right * e.g., carbon taxes * 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., firms investing in science & technology may find that some knowledge "leaks out" to other firms (that have not paid for the science or technology) - this leads to underproduction of unpriced positive externalities! - one solution involves subsidies/tax breaks to help get prices right *e.g., R&D tax credits; intellectual property rights * e.g., vaccinations/flu shots, home improvements (help neighbors' property values), education, polite social behavior

Keys to Relative Cost Analysis

RCA illustrates firm strategy inaction! - i.e., how firm activity choices -> competitive position, costs, & profit - decompose average costs (& price) of"representative product" by average costs of firm's strategic activities - "activities" firm choices/tradeoffs; they are not = accounting categories in "What is Strategy?" Porter describes strategy as "doing different activities or doing the same activities differently"- "different activities" à set of activities affecting costs will differ by firm- "same activities differently" -> differing costs for same activities If all done well, RCA will help visualize strategy (tradeoffs -> costs) & will help explain why some firms achieve higher than average profits!

Which step in the music industry supply chain has the highest rate or return and why?

Record labels are the most profitable part of the value chain because they are an oligopoly.

Structure of Recorded Music Industry

Record labels have vertically integrated into other segments - publishers -retail/streaming *now they own the largest publishers and streaming platforms as well

Case: ZipCar What resources did Chase & Danielson develop at Zipcar? Which could/should they have developed?

Resources: - Cars - Firm name - Marketing - Culture - Management Team - Technology platform: online reservations + car access + billing +car location tracking - Parking spots

Tradeoffs in Strategy

Tradeoffs occur when the need for one thing is higher resulting in the reduction of another thing. Tradeoffs allow customers to choose an option, removing the idea of being undecided and limit what the company can provide. - they are the key to strategy

Effective strategy involves________________.

coordinating across allfunctions • 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

What is high rivalry?

high rivalry means that firms in an industry compete in a way that squeezes profit margins, either by reducing average prices, increasing average costs, or both

Perfect Competition

in perfect competition, if firms raise their price, they lose all sales lesson: try not to be in a perfectly competitive industry

An industry that faces _______ threats to its profitability is Favorable

limited

Public Goods

products or services that are neither excludable nor rivalrous - e.g., defense, air, primary school education, national mail

How are firms in an industry affected when barriers to entry are low?

the threat of entry is HIGH and sufficiently strong to drive down industry average prices or drive up industry average costs

How are firms in an industry affected when supplier power is high?

sufficiently strong to boost Industry Average Costs

Realized Strategy

combination of intended and emergent strategy

switching costs

the "costs" that customers must bear when the try to switch from one product to another. - sometimes these are very high, even though consumers do not have to pay extra to switch - ex: users of Windows find it difficult to switch to Apple computers - ex: it is difficult to switch architects once building has begun

Economies of Scale

economies or scale arise when average costs decline as output increases - this occurs when the fixed cost of production is very high relative to the variable cost - if economies of scale big firms will have much lower average costs - if fixed costs are relative to the size of the market then economies of scale can ensure a monopoly or oligopoly

Relationship-specific investments

exists when a valuable investment can only be used in the context of a single business relationship (e.g., building a factory to make engines that only fit with Ducati motorcycles) • once created, bargaining power changes among participants and makes efficient agreement difficult (this creates the possibility of "opportunism" or "hold-up") • knowing this, neither the supplier nor the buyer will want to make the investment without a long-term contract (or full integration) • this makes it difficult to have a short-term (market) relationship• instead, such investments require long-term contracts or full integration

What does it mean to be "stuck in the middle?"

firms that fail to choose a particular strategy end up stuck in the middle and underperform

Strategy helps coordinate all internal firm activities by ______________.

giving guidelines to each function within the firm • e.g., The answers to the questions... - Should we invest more in Marketing than rivals? - Should we invest more in R&D than rivals? - Should we invest more in Logistics than rivals? • ...all depend on the firm's Strategy - if we are world's best razor blade (Gillette), then Yes to all! - if we are Wal-Mart, then Yes only to Logistics

The role of industry concentration in affecting rivalry

high industry concentration -> low rivalry

At what level does Porter intend us to use the five forces?

industry level

How are firms in an industry affected when buyer power is high?

industry profits decline

What is the main point of Relative Cost Analysis (RCA)?

it quantifies the cost (and revenue) per unit of a firm, relative to rivals, in a key (directly competitive) product

OIT&T: Opportunities

opportunity = any chance to shape the rules of a market - will arise anytime there is a market failure, regulation, and a market - creativity helps! - e.g., opportunity to raise rivals' costs via environmental regulation - e.g., opportunity to raise barriers to entry or lower value of substitutes

Operational effectiveness vs. Strategy (and which is needed to achieve sustained competitive advantage?)

"Operational effectiveness (OE) means performing similar activities better than rivals perform them. In contrast, strategic positioning [or operational strategy] means performing similar activities in different ways." Both strategy and OE are needed for sustained competitive advantage

Under what conditions will a resource or capability lead to (a) competitive DISadvantage (b) competitive parity (c) temporary competitive advantage (d) sustained competitive advantage? What are examples of resources that might lead to above?

(a) competitive DISadvantage - resource that does not provide value or is easily replicable by competitors can lead to competitive disadvantage - Outdated technology, poor product quality, bad reputation (b) competitive parity - resource that provides value but is not rare or imitable will lead to competitive parity - Good customer service, adequate product quality, access to financial resources (c) temporary competitive advantage - a resource that is rte or unique but not difficult to imitate - New product design, temporary exclusive distribution agreement d) sustained competitive advantage - a resource that is rare and difficult to imitate can lead to competitive advantage - Strong brand reputation, proprietary technology, unique distribution network, high skilled employees

Henry Mintzberg: Strategy Design vs. Strategy Emergence

- incomplete to consider strategy to be something that can simply be designed (analyzed); instead, it is important to recognize that strategy emerges and changes over time, regardless of how carefully it is planned. Strategy Design: planning and rational choice (intended strategy) Strategy as Process: many decision-makers responding of multitude of external and internal forces -we do not disagree with Mintzberg- nonetheless we emphasize analysis in this course because sound analysis is a pre-requisite for successful strategy and because processes are managed by Senior Execs, whereas analysis is pervasive throughout the firm

How does Relative Cost Analysis compare to other Competitive Positioning tools?

- it links positioning on Porter Competitive Strategy grid with activity choices -unlike Strategic Activity Maps (SAMs), it links activities to costs (and WTP) -but it does not identify linkages across activities (which SAMs do!)

Case: Ducati Minoli's Turnaround 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?)

Fundamental Fact of Strategy

-profits vary across industry and within industry -some industries have higher average profit than others -some firms have higher average profit than others -these patterns persist over time (though with caveats) - depends on the forces -our job (as strategists) is to explain why industries and firms have hi or lo profit and help make recommendations to firms about what strategic plans may help improve their profitability ex: nearly all of the best-performing supermarkets earn profits thatare substantially lower than the nearly all of the worst performingpharmaceutical companies!

The role of activities in enabling a firm to achieve its intended competitive position

...enabling a firm to achieve its intended competitive position - Firm must perform set of activities that create value for its customers and differentiate it from competitors (R&D, design, production, marketing, sales) ...driving WTP, average costs, & profits relative to industry average - By focusing on R&D they can understand their customers better and get them what they want - If they invest in tech - they can reduce waste

What are the 3 main tools of firm strategy?

1. Competitive Positioning (CP): tells us about the core choices that firms make regarding how to compete and where to compete 2. Strategic Activity Maps (SAM): help us understand the sets of activities & interrelated choices in which firms invest in order to achieve their competitive positions 3. Relative Cost Analysis (RCA): helps us quantify the impact of activity choices on average costs, prices (WTP), and, hence, profits! - while CP & SAM do not tell us about costs, RCA does - SAM & RCA involve analyzing activities, while CP does not - taken together, the 3 provide an econ-oriented view of firm strategy

Competitive positioning options

1. Cost Leadership 2. Differentiation 3. Broad Market 4. Narrow Market

What are some of the goals of non-market strategy & how to firms achieve them?

1. Improving industry profits• - Ex 1: convincing legislators not to regulate smoking - Ex 2: making entry difficult for restaurants in Brookline MA 2. Improving firm profits relative to rivals - Ex 1: big hotel firms adopting environmental standards that are too expensive for small firms to adopt profitably 3. Improving social/business environment (not concerned with P) - Ex 1: shipping firms convincing port authorities to support implementation of "containers""

Case: Cola Wars Concentrate Producers: 1. what is the main manu-facturing job of these firms? 2. what do they do with the finished product 3. how much does it cost to build a plant? 4. is brand name important? 5. are firms national or regional?

1. blend materials into concentrate 2. packaged in plastic & ship to bottler 3. $25m-$50m to build plant for all USA 4. brand name is important 5. centralized national firms

How should we do Relative Cost Analysis?

1. consider a representative product for 2 or more rivals in an industry 2. identify key activities that rivals perform in order to achieve its competitivepositions 3. estimate average costs associated with each activity (& their impact onWTP & overall price) 4. draw comparisons & implications about relationship between firm strategy choices & overall Profit

Case: Coors Brewing Industry Structure 950s vs 1980s

1950's: Salient features: - many small & medium sized, regional brewers - brew & bottle together Barriers to Entry? Supplier Power? Buyer Power? Threat of Substitutes? Rivalry? 1980's: Salient features: - small # of brewers with national distribution - brew & bottle together Barriers to Entry? Supplier Power? Buyer Power? Threat of Substitutes? Rivalry?

What is competitive advantage? (having a greater wedge between WTP & costs than competitors)

A firm a Competitive Advantage if it achieves a higher profitability (e.g., Return on Assets) than the average in its industry

Transaction Costs

Arise when there are costs to making transactions - e.g., if it is costly to obtain payment for goods/services - e.g., if it is hard to reward provision of goods/services - e.g., when incentives change over course of business relationship * 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)

Structure of Live Music Industry

Artists capture the greater percentage of profits

Case: BTS

BTS forward integrates - they can become their own record label

Why do we focus on firm profitability in Strategy (as opposed to firm revenues, size, growth, etc.)?

Because profitability changes because of a firm's strategy.

difference between business unit strategy and corporate strategy

Business Unit Strategy: choices about how a firm will compete in its various activities - ex: based on cost or differentiation and how it will exploit its resources to achieve these goals Corporate Strategy: choices about the industries and value chain steps in which a firm competes - ex: should Coach sell hats and shoes as well as purses?

How focus can lead to either cost advantages or premium prices

By delivering a superior value to the targeted customer market and understanding specific needs and preferences that group needs Cost advantage - allow companies to achieve economies of scale or scope. - by specializing in a specific product or customer group - they can optimize their production processes, reduce waste and be more efficient leading to lower costs Premium prices - allow companies to differentiate their products from their competitors - By targeting a specific customer or market niche companies can create products or services that better meet unique needs allowing them to charge higher prices

How do we identify monopolies and oligopolies?

By looking at concentration rations C4, C5, C6= coimbined market share of top 4, 5, or 6 firms "Rule of Thumb" if C4, C5, C6 > 80%= oligopoly

What makes a good Strategic Activities Map?

Clear, concise, visually appealing and capture key activities

What is sustained (or sustainable) competitive advantage?

Competitive advantage that is not easily imitated by competitors and can be maintained over a long period of time

How Complements affect the five forces

Complements = products & services that add value to those of the industry - ex: software adds value to hardware (MS Office & computers or Apps &the Apple iOS) Some industries are substantially affected by complements; some are not - if demand for an industry's products depends on the value of products made by another industry, we should evaluate the potential impact of complements Key concern: - can complementors force firms to accept lower prices... - can complementors force firms to accept higher costs... - ...in order to promote complements? Key (potential) benefit - success of complements à increased prices!

Operational Effectiveness

refers to the extent to which perform similar activities better than rivals (or "at least as good") - necessary, but not sufficient for long-term competitive advantage

How to define an industry

Define the industry based on similar products that have common suppliers and buyers

What are the key questions that the RBV asks?

Does firm possess resources that will allow it to attain sustainable competitive advantage? 1. is it Valuable 2. is it Rare? 3. is it Difficult to Imitate? 4. is firm Organized to capture value

corporate advantage (i.e., does the corporation have an advantage in bringing in the business unit under its• corporate roof?)

Does joint ownership of multiple activities yield greater cost savings or differentiation advantages than would be achieved if the activities were owned separately! • if YES, then diversification/integration is a good idea! • if NO, then it is probably a bad idea! - The logic behind this is that Corporate HQ is expensive to maintain & can only be justified if the cross-selling benefits (WTP ↑) or cost savings(Costs↓) justify the costs of HQ

How do the Five Forces affect industry profitability?

Each of the FiveForces affects Average IndustryProfits by acting upon either Industry Average Prices, Average Costs, or both - Forces that are "High" or "Strong" exert squeeze industry average profits! - Forces that are "Low" or "Weak" cannot squeeze industry average profits - Forces can also exert "medium"downward pressure on prices or costs

Scale vs. scope economies vs. learning and network effects in driving leadership advantages associated with size

Economies of Scale - cost advantage: resulting in situations in which average costs decline as current output increases Economies of Scope - arise if provision of multiple different goods or services by single firm -> lower costs &/or higher WTP Network Effects - arise when value of product or service depends on # of other people already using it * occurs especially in information-based products/services * e.g., Windows/Office, eBay, QWERTY keyboard Learning Effects - cost advantage: arise in situations in which average costs decline as function of cumulative output

Oligopoly

Exist when there are only a few firms in an industry

Why is Rivalry higher when an industry has more firms?

Few Rivals: - firms less likely to respond to competition by lowering prices& increasing costs! - loss of 1% of overall market share may not be significant fraction of firm market share - it is easy to observe other firm actions and to coordinate implicitly (or explicitly) Many Rivals: - lots of firms can start price &cost wars - each firm fights intensely for market share - the gain or loss of 1% of the total market means a great deal to small firms, thus providing very high incentives to compete aggressively

How can firms create value?And how is that different from the ways that they can capture value?

Firms can create value by: 1. Increasing WTP(differentiation) - product innovation - improved marketing - better services 2. Lower Costs(cost leadership) - process innovation - cheaper materials - more efficient logistics Firms can capture value by: 1. oligopoly/monopoly-not socially good, but privately good 2. innovation/new products/processes- socially and privately good 3. unique and hard to imitate strategy-socially and privately good This is different from the ways they can capture value because that would be changing the price.

the difference between forward integration vs. backward integration

Forwards integration: occurs when firm moves into business CLOSER TO END CONSUMER - "downstream" - e.g., Ducati entering Sales Backward integration: occurs when firm moves into business CLOSER TO RAW MATERIALS - "upstream" - e.g., if Ducati were to begin to make more Supplies

How are firms in an industry affected when the power of substitutes is high?

If alternative products have similar price-value ratio à power of substitutes is High • Substitutes are products that are outside the industry, where rivals are firms that are competing within the industry already • Close substitutes can drive prices down (or force costs/quality up) and weak substitutes allow prices to stay high

How the Threat of Entry matters for industry average profits

Impact on Ave Price - If Entry = Easy, firms may have to keep prices low to prevent entry - If Entry = Hard, this will not put downward pressure on prices Impact on Ave Cost - If Entry = Easy, firms may have to improve quality or invest heavily to prevent entry - If Entry = Hard, this will not put upward pressure on costs

How the Complements matter for industry average profits

Impact on Ave Price - if strong, Complements can force firms to lower prices to promote complements Impact on Ave Cost - if strong, Complements can force firms to raise costs to promote complements * success of complements can enable firms to raise prices

Information Asymmetry

Imperfect information (e.g., information asymmetries) - if one party in a transaction knows important info that the other party does not 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

Industry change - identifying the impact of changes on expected future industry profitability

Industry structure can change over time! As a result of... - technological changes - government policies - consumer preferences - changes in the structure of related industries One of the best ways to think about how world events will impact the industry is to think about how those changes will affect industry structure - i.e., ask how those changes will affect the 5 Forces

Reconciling Five Forces analysis with data on industry average profitability

Industry structure determines long-term average profitability! - we can analyze this using the Five Forces framework! - firm profitability depends to a great extent on structural (economic) forces often outside of managerial control But... firm strategy matters too - Firms can use Five Forces analysis to... • help make decisions to ensure favorable industry structure - e.g., Ducati preserved low rivalry by not entering H-D's mkt space • help identify which firms have advantages within industries (likeCoke & Pepsi do!) - their investments in brand image help create barriers to entry & increase power over buyers - they also manage their bottlers well and keep their power low • help choose positions within industries - like Dr. Pepper does (avoiding direct competition with Coke & Pepsi)

Intermediate Forms of Organization

Intermediate relationships may combine the benefits(and some of the costs) of both market transactions &firm-internal transactions • sometimes firms opt for intermediate forms of integration

Case: Music Industry(Key players, supply chain)

Key players: - songwriter -publisher -performer -record label - retail/streaming -consumer - royalty collection There a multiple supply chains: -purchase of recorded music->end consumer - broadcasting of recorded music-> end consumer - live music-> end consumer

Cost of the Market

Less control • keeping things inside firm à easier oversight & stronger control • e.g., owners of McDonald's franchises have more latitude to make decisions than do managers of McDonalds' restaurants owned by McDonalds HQ Relationship-specific investments -> market relationships inefficient

Factors Affecting Rivalry

Low Rivalry - high industry concentration (oligopoly conditions) - growing industry - segments very different - highly differentiated products - low exit barriers - very different sizes - favorable demand and supply conditions Ex: unsold cars at the end of the year -> increased rivalry Overall Conclusion: High - i.e., sufficiently strong to drive down industry average prices or drive up industry average costs Low - i.e., not sufficiently strong to drive down industry average prices or driveup industry average costs Medium - i.e., somewhere in the middle

The difference between the terms "low market share" and "narrow scope"

Low market share - small share of the overall market Narrow scope - refers to companies focus on specific segment or niche

Where to the revenues from streaming go>

Majority goes to record label and second is the streaming service. -least is artist

OIT&T: Tools

Money & Lobbying • providing information or funding (campaign $ or bribes) • can be directed at government agencies, courts, or legislatures • can apply at multiple levels - local, regional, national, super-national • can be done by individual firms or industry associations • can result in "capture" - e.g., "regulatory capture" = circumstance that regulatory agencies serve firms they regulate rather than the public • some unexpected examples - Boston U = ~$1,000,000 per year on lobbying Staffing (Human Capital) • enabling "friendly" individuals obtain positions in relevant agencies or political bodies Affecting public perception - Aim is to shape competitive landscape by affecting public opinion or perception - general public, customer base, other relevant stakeholders: employees, regulators, communities - could be proactive: designed to improve WTP of product -could be defensive: designed to minimize risk of regulation or social protest

Does being a first-mover (early market leader) confer long-term competitive advantages?

Moving first (entering a market before others do) might result in aCompetitive Advantage, but it could also result in a no advantage, and it could even result or in a long-term Competitive Disadvantage

What is non-market strategy (or "strategy beyond the market") and when does it matter?

Non-market strategy: refers to firm or industry efforts to shape the environment in which competition takes place (i.e., the rules of the game) Non-market strategy (NMS) will be relevant anytime that organizations havean opportunity to affect the rules of the market - especially when there are market failures, regulation (by government or self-regulation), and anytime that the competitive environment can be affected by public opinion - yep, nearly every segment can be affected by non-market strategy When does it matter? if government and social forces play a role in dealing with market failure, market failures can -> specific opportunities for non-market strategy

OIT&T Framework for Non-market Strategy (NMS)

Opportunities - strategic opportunities to apply non-market strategy Interests - the parties interested in the non-market strategy outcomes i.e., those subject to the environment for competition that may be affected by the non-market strategy opportunity Targets - the institutions (legislatures, agencies, courts) that constitute the most effective targets for the non-market strategy Tools - the specific tools of non-market strategy (financing, lobbying, staffing, etc.) ideally applied to achieve the non-market strategy objectives

What types of resources enable firm to sustain competitive advantage?

Path dependence: those that emerged over long time & as result of numerous valuable and unlikely to recur events Causal ambiguity: circumstance in which it is not clear exactly why things work as they do ("cause and effect are not readily apparent") Social complexity: characterized by highly inter-related, inter-dependent systems of behavior and organization - e.g., Southwest's system for turning around planes quickly & ensuring customer service *According to the RBV, if a firm's resources possess all three characteristics, then those resources should enable sustainable competitive advantage

Sources of first mover (leadership) disadvantage

Pioneering costs - expenses incurred to 'blaze the trail' for the industry... - including educating consumers, educating regulators, developing retail channels, early-stage R&D - free-riders can what works & what what does not Demand uncertainty - level of demand and consumer value for features? Technological uncertainty - developing product / features; how to manufacture? - if imitation costs << pioneering costs, leadership bad - also, followers may leapfrog leaders Incumbent inertia - market leaders often unable to change as market evolves

Case: Hurtigruten Rivals

Ponant - French luxury; 5-star service - $38m00 for 24-night cruise - e.g., ancient Mediterranean civilizations - 6 new 184-bed, ships - 270-bed icebreaker due 2021 Lindblad - National Geographic alliance - 8 ships + 5 seasonal charters - 1st carbon-neutral cruise ship Silversea - based in Monaco - initially a luxury cruise line - expanded into expeditions in 2008 - 2/3 owned by Royal Caribbean Australis - based in Chile - one of many niche firms - Cruises mainly in Patagonia &Cape Horn - two 200-bed ships; less luxurious

What is Strategy (according to Porter and according to Grant)?

Porter: believes that firms can achieve sustainable competitive advantage only if they have both operational effectiveness and a superior strategy -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 -make sure strategy fits the environment Grant: firm strategy requires understanding the external (industry) environment and internal (firm) environment and making choices to create the greatest fit between the two. - designed to help the firm use its internal resources and characteristics to deal with its industry and competitive environment; strategy must fit with the firm and its environment! - not a detailed plan or program of instructions; it is a unifying theme that gives coherence and direction to the actions and decisions of an individual or an organization

Benefits of the Market

Powerful incentive mechanisms • market relationships often involve higher incentives for performance! Informational efficiencies • price mechanisms and decentralized decision-making are often more efficient ways of allocating resources than those involving managers & organizational decisions

Role of entry timing in achieving leadership advantage

Preemption - input preemption - channel preemption - location preemption - capacity preemption - positioning preemption Reputation Effects - advantage accruing to 1st movers based on ability to achieve premium brand-name Buyer Switching Costs - arises if 1st movers can lock-in customers Patents or institutional barriers - advantages that can arise if governing authority restricts future entry

What is the role of price in value creation?

Price plays no role in value creation, but it is relevant to value capture. - price determines the split of value between supplier and buyer - it is the outcome of the negotiation (power relationship) between the buyer and supplier

Strategic Positions Examples (Snack Cakes)

Rivals in the Snack Cake market are pursuing different activities Little Debbie: cost leader Savory: differentiator

The difference between rivals & substitutes

Rivals: firms in same industry Substitutes: stuff that could be alternative to industry's products

Strategic CSR vs. Philanthropy

Strategic CSR generates shared value by addressing social and environmental challenges Philanthropy is the desire to promote the welfare of others, expressed especially by the generous donation of money to good causes.

What is the difference between strategy and management?

Strategy: the unifying themes of the organization Management: the organization's specific policies and practices - should be determined by a firm's strategy. - ex: the Strategy at BU is to be a top-ranked Research University;therefore, Research Quality should be a prime consideration in my getting fired or getting promoted and in deciding which classes faculty should teach and at which times

Factors affecting Buyer Power

Strong buyers can drive down industry average prices and weak buyers can be forced to accept high average prices High Power: - high buyer concentration - industry sells commodity products - many good alternatives to industry's products - industry highly dependent on buyers - buyers' switching costs = low - buyers can easily backward integrate Low Power: - low buyer concentration - industry sells specialized or effectively branded products - few good alternatives to industry's products - buyers highly dependent on industry - buyers' switching costs = high - buyers cannot backward integrate Overall conclusion: High - i.e., sufficiently strong to depress Industry Average Prices Low - i.e., not strong enough to depress Industry Average Prices Medium - i.e., somewhere in the middle

Factors Impacting Supplier Power

Strong suppliers can raise industry average costs and weak suppliers will be unable to increase average industry costs High Power: - high supplier concentration - suppliers make differentiated products - few good alternative supplies - industry highly dependent on supplier - costs of switching suppliers high - suppliers can easily forward integrate Low Power - low supplier concentration - suppliers make standardized products - many good alternative supplies - supplier highly dependent on industry - costs of switching suppliers = low - suppliers cannot forward integrate Overall Conclusion: High - i.e., sufficiently strong to boost Industry Average Costs Low - i.e., not strong enough to boost Industry Average Costs Medium - i.e., somewhere in the middle

The battle for profits between Suppliers,Buyers, & Firms in the Industry

Suppliers: - If Suppliers are the strongest step in the industry supply chain, they will get the majority of the profits Buyers: - If Buyers are the strongest step in the industry supply chain, they will get the majority of the profits (rents) Rivalry: - If firms in the industry are the strongest, they will get to keep most of the profits

Tangible & intangible resources What is the difference between tangible and intangible resources and examples?

Tangible: physical attributes (visible) • ex: financial resources, equipment, land Intangible: not physical attributes (invisible) • ex: organizational culture, atmosphere of creativity, Intellectual property, reputation, brand equity, customer relationships

Corporate Scope: the better-off test & ownership test

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? - factors that matter ("synergies"): -> 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?

Comparing how industry profitability varies across & within industries

The stronger the forces, the lower the profitability - the forces squeez out profits

Soft Drink Industry: Which graphic do you think better represents profitability in Concentrate Production?

The top graphic is the concentrate producers because the bottlers are less profitable because they have to pay a lot and because coke and pepsi are key players in the industry

What do the lines, arrows, and circles indicate on a Strategic Activities Map?

There are a number of high-order strategic themes and then how they can be achieved are connected in a different color. Lines = linkage between activities Arrows = direction of influence Circles = key activity

Case: Coors What happened with Coors?

They eventually added 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 brewery in 2007 Innovations (?) - introduced Zima (1994) - missed "draft" marketing, although all Coors beer =draft - bought Bass (from InBev) 2002 Merged with Molson in 2005 - HQ = Montreal JV with SABMiller called MillerCoors - HQ = Chicago

Threat of Substitutes

Threat of Subs = High - if substitutes can drive prices down (or force costs or quality up) - this will happen if price &value of substitutes is sufficiently attractive Threat of Subs = Low - if substitutes are sufficiently weak that they allow prices to stay high(or costs to remain low) If substitutes have offer sufficiently high values at a sufficiently low price a power of substitutes is high! Overall conclusion: High - i.e., sufficiently strong to drive down industry average prices or drive up industry average costs Low - i.e., sufficiently strong to drive down industry average prices or drive up industry average costs Medium - i.e., somewhere in the middleØ if any one category of Substitutes is sufficiently strong, that could be enough for the Threat of Substitutes to be high

What are the roles of Willingness to Pay, Price, and Cost in Value Creation and Value Capture?

Value Capture: o WTP - Price = Buyer's profit(Value captured by Buyer) o Price - Cost = Seller's profit(Value captured by Seller) Value Creation: o WTP - Cost = value created by seller

What are Value Creation and Value Capture??

Value Creation: the activities and processes that increase the worth of a product or service. - reflects what customers are willing to pay for a product or service Value Capture: The difference between the price a firm receives from its customers and the price it pays to its suppliers for inputs

How does value capture differ from value creation and why do we care about the difference?

Value creation is creating value for your customers. The more value the better. Value capture is capturing the value you create and turning it into profit. We care about the difference because strategy cares because an understanding of both is needed to achieve profits and society cares because both are needed for social welfare.

What is VRIO and how does it relate to sustainable competitive advantage?

Vrio is a framework for analyzing resources and determine their contribution to sustainable competitive advantage - Value, rare, imitate, organized to capture value

Five Forces Analysis and what do we learn?

We learn whether an industry's incumbents are likely to earn high/low economic rented (profits)

Dual advantage (and why so rare)

able to lower cost and increase WTP, have a combination of cost leadership and differentiation - example: Trader Joe's

The role of precise industry definition in conducting a Five Forces analysis

by using the precise definition of an industry you can properly see how each force is impacting the firm based on the industry it is in

Focus on the industry incumbents' perspective

• When we do a five forces analysis, it helps us understand whether an industry's incumbents are likely to earn high/low economic profits • The five forces effect our ability to fully capture profits from the value the firm has created → we are competing for profits o Helps assess the long-run profit potential of an industry