Strategic Management Prelim 1
Trade Offs
"The essence of strategy is choosing what NOT to do" - Porter Don't straddle You can't be everything to everyone, but you can be everything to someone
Second-order fit
Activities are reinforcing
Generic (business-level) strategy
Pursue value investments (value drivers raise willingness to pay) when: 1. marginal customers are value-sensitive 2. returns to increasing value than returns on reducing costs Pursue cost reduction (cost drivers) when: 1. Marginal customers are price-sensitive 2. Value improvements are costly, difficult, or easily imitated by competitors
Access-based positioning
Segmenting customers who are accessible in different ways (e.g. geography or scale - anything that requires a different set of activities to reach them)
Core operational differences
Airbnb has no upper bound on its room capacity, platform reduces entry costs for "sellers," ease of adjusting availability Marriott's capacity is the same on any given day or week with a limited capacity given the hotel, high investment costs, low marginal costs
Airbnb value proposition
Airbnb suppliers: home owners value for suppliers: connects with guests, payment legitimacy, flexibility value for guests: diversity, local experience, price, group size, private, independent HOW: search & matching, pricing, online reviews
Airbnb vs Marriott's approach to data
Airbnb: each touch point, trying new things, continuously testing, improved algorithms "data warehouse" → integrated system Marriott: revenue management system, longevity, multiple ways to book (affects the amount of customer information)
Cross-network effects
more guests → more hosts → value to both sides
Differentiation → Value Drivers
relationships within/between firms attributes off products and services relationship with customers
Power of the 5 forces (threat of substitute products)
- Closeness (from the consumers' perspective) between substitutes and the industry's product/service - low switching costs
Disadvantages of Differentiation
- Customers, not producers, determine the product's value - Value is multi-dimensional, quality is not the only dimension of value - It is generally difficult to measure exact value - Can undermine costs of producing a high-value product
Factors that reduce the threat of new entrants
- Economies of scale: supply side - Demand side economies of scale - Switching costs - Capital requirements - Brand loyalty / reputation - Access to distribution channels - Government regulation - Expected retaliation
Power of the 5 forces (Bargaining power of buyers)
- High buyer concentration - slow market growth - high percent of product sold to buyer - lack of differentiation in products sold to buyers - lack of strategic importance of product to the buyer - threat of backward integration by buyers
Power of the 5 forces (bargaining power of suppliers)
- High supplier concentration - Low percentage volume sold to the industry - Distinctiveness of suppliers products - Strategic importance of the suppliers products - Threat of forward integration
Additional External Environment Factors
- Industry growth rate - Technology & innovation - Government - Complementary products and services
Power of the 5 forces (Risk of Entry by potential competitors)
- Lack of economies of scale (high capital requirements) - Lack of product differentiation - Low customer switching costs - Government regulation
Power of the 5 forces (Rivalry among established firms)
- Large number and relatively similar size of competitors - Price competition - Lack of product differentiation - Lack of mutual familiarity / repeated interaction
Why are trade offs necessary
-inconsistencies in image of reputation -incompatibility in activities -limits on internal coordination and control
When barriers to entry are high...
... the threat of new entrants is low (and vice versa)
Dangers of imitation
1. Collective Inertia (ex: open office plan) 2. Causal ambiguity - unclear actual source of differentiation (ex: successful movies - why do they do so well) 3. Management myopia - lack of foresight / imagination
Porter's Five Forces
1. Competitive rivalry 2. Power of suppliers 3. Power of buyers 4. Threat of entrants 5. Threat of substitutes
Bottlers Industry Analysis
High barriers to entry (exclusive franchises, high capital investment in bottling, lines, and distributions, limited shelf space) Threat of substitute products is LOW Bargaining power of suppliers (concentrate producers) is VERY HIGH - two big suppliers, high switching costs for bottlers Bargaining power of Buyers (i.e. restaurants/retailers) is HIGH - large volume purchases Competitive Rivalry is moderate to high - big competition between Coke and Pepsi
Cola Wars Summary
Industry chain has led to concentrate producer dominance Both Coke and Pepsi have been winning the war - increased share, expanded primary demand for colas Smaller brands are losing
Sustaining Competitive Advantage
Isolating mechanisms that prevent industry forces from eating up the firm's profits -- reduce imitation by competitors Barriers to imitation: - property rights (legal protection) - initial investments - increased customer switching costs - brand power - exclusivity - internal trade secrets
Why did Walmart open in small-towns / rural locations
Local monopolies - avoid direct competition Meet demand Lower rental costs Lower payroll First mover advantage - most of these towns can only support 1 discount retailer
Will the Cola War Continue
Market for carbonated soft drinks - health concerns, flat growth, but growth in substitutes, cost conscious buyers when economy turns Global markets - coke as defender & pepsi as raider Retailers & Suppliers - increasing power of mass merchandisers (consolidation in the retail sector) Distribution - consolidation among bottlers, increase in distribution costs, vertical integration
Marriott value Proposition
Marriott suppliers: hotel owners value for suppliers: reputation, loyalty, access to customers, infrastructure, industry knowledge, pricing higher, management capabilities value for guests: safety, consistency, other services/amenities, location, points for future stay, convenience HOW: loyalty program, management capabilities, brands
Was Walmart successful because of the industry
NO, Discount retailing isn't that attractive - margins are low - competing on pricing - low switching costs for buyers - undifferentiated products - high ad costs
third-order fit
Optimization of effort
Strategy
Performing different activities from competitors or performing similar activities in different ways
Operational Effectiveness
Performing similar activities better than competitors (increasing productivity, quality, speed) Important to success, but not sufficient NOT Strategy
Variety Based Positioning
Producing a subset of an industry's products or services Will likely serve only a subset of customer needs
Quantification of Walmart's competitive advantage
Sales were way larger COGs as a proportion of sales was higher than competitors Operating expenses were lower than competitors - payroll and rent are way less A 1% saving = $700 million
Needs-based positioning
Servicing most or all the needs of a particular group of customers
First-Order fit
Simple consistency between each activity (function) and the overall strategy
Internal Analysis: Resource Based View (RBV)
Some firms can thrive in unattractive industries - because they have internal resources/capabilities that enable them to neutralize the disadvantages in their external environment To understand why some firms are more profitable than others, look inside for sustained basis of competitive advantage
What is strategy
Strategy is the attempt to achieve a sustainable competitive advantage through: 1. Strategic/unique positioning: deliberately choosing a different set of activities to deliver a unique mix of values 2. Trade-offs: choosing what NOT to do is equally important 3. Everything matters: creating fit among a company's system of activities
Bargaining Power of Suppliers
Suppliers have bargaining power when: 1. their products have few substitutes and are important to buyers 2. the focal industry is not an important customer to the supplier 3. Differentiation makes it costly for buyers to switch suppliers 4. Can threaten to integrate forward
Added-value
maximal value created - maximal value created without the firm If another firm offers an identical product, there is no added value in order to increase added value, add services (increase consumers' willingness to pay) and/or cut costs
Same side network effects
more guest → more reviews, information, data, better search → more value for each user
Why is creating a sustainable strategy difficult
strategy should be thought of in terms of decades, long term horizons shifts in positioning are expensive (both in time and money) can lead managers to focus on operational effectiveness - quick returns, short term horizons, concrete outcomes growth trap: go after easy, new customers - blurs strategic position
Given the differences in business models and operating models, why should Marriott worry about airbnb
undercutting price & occupancy changing demographics changing needs of travelers (less business travel)
Competitive Rivalry
Damaging when it comes to price competition
A "sixth" factor - Complements
Complements: companies whose products are sold in tandem with another companies products Complementary products are "best" used together
How to create cost leadership
Consistency among value-chain activities A firm tries to gain competitive advantage by decreasing the cost of its products relative to the cost of other firms products A firm mainly focuses on developing cost drivers
Industry Structure
Consolidation: one firm or one dominant firm, monopoly In-between: few firms share dominance, oligopoly Fragmented: many firms, no one dominant - Each firm only a small % of industry output - Will resemble "perfect competition" where no one will make a profit above capital costs
Sources of Competitive Advantage
Increase consumers willingness to pay Decrease costs
Walmart Case Takeaways
Created competitive advantage through cost leadership - reduce costs lower than competitors & provide products at lower price for customers
5 elements of strategy - Hambrick & Fredrickson
1. Economic Logic - how will we obtain our returns? 2. Arenas - Where will we be active? and with how much emphasis? 3. Staging - what will be our speed and sequence of moves 4. Vehicles - how will we get there? 5. Differentiators - How will we win?
The intensity of rivalry depends on
1. Number of - and similarity among - competitors 2. Height of industry exit barriers (specialized equipment) 3. Fixed costs are high and/or product is perishable 4. Industry growth is slow 5. Firms can't read one another's signals well
Examples of Cost Drivers
1. Scale or volume of economies - average cost per unit decreases in bulk 2. Scope economies - cost of producing two products together is lower than separately 3. Learning curve 4. Low input costs - easier to absorb changes 5. Vertical integration - for tasks that are (not) specialized to the firm, coordination costs are lower (higher) within the firm than with a market supplier 6. Organizational practices (ex. Walmart frugality)
Differentiation
A firm tries to gain competitive advantage by increasing (perceived) value of its products relative to the value of other firms products By increasing the perceived value off its products, the firm can charge a higher price than it would otherwise A firm mainly focuses on developing value drivers
A multi-sided platform
A marketplace to facilitate transactions between seller and buyer, usually a "spot transaction"
Unique Positioning
Being different: deliberately choosing a different set of activities to deliver a unique mix of values - Porter
Bargaining power of buyers
Buyers are most powerful when: 1. When the buyer industry is more concentrated than the seller industry 2. Buyers purchase in large quantities 3. A single buyer is a large customer to a firm 4. Buyers can switch suppliers at low cost
Marriott Case Takeaways
Customer segmentation is the first step in assessing how big of a threat an entrant can be Assessing differences in how incumbents and entrants store, analyze, and use data for strategic decisions Understand the difference between dedicated and flexible capacity → helps assess the effect that airbnb has had on hotels Measuring impact of entrants can be a challenge in industries with demand fluctuations
Threat of substitute products
Different products serving similar customer needs (ex: railways vs. airlines vs cars) May initially appear to be very different from the industries product - can be easy to overlook (EX: blockbuster vs. netflix vs. youtube OR walkman vs. iPod) Threat of substitute is high when buyer's cost of switching are low
Why is Operational Effectiveness not sufficient
Easy for competitors to imitate Competitive convergence > mutually destructive - leads to zero sum competition (price wars) - productivity gains captured by consumers - more difficult to invest in longer term strategy
How does Walmart's culture and HR management practices contribute to low cost strategy
Empowering associates Upper management came from working in the store Business trips with shared rooms Aligned their success with the company → employees were monetarily incentivized to stop shoplifting
Fit among activities
Everything matters - creating a fit among a company's activities, system not collection of parts System of activities are far more sustainable than individual activities - more difficult to imitate && requires integration of all decisions and actions EXAMPLE: Southwest
Why is the soft drink concentrate industry so profitable
First mover advantage - Barriers to entry are high -Coke and Pepsi have high levels of brand equity and consumer loyalty - New entrants are unlikely to sway persisting consumer tastes - Pre-existing contracts with bottlers, limiting bottlers' ability to produce similar products with rivals - essentially impossible for new entrants to find bottlers for the distribution of their drinks
Concentrate Producer Industry Summary
High barriers to entry Locked-in buyers Low supplier power Constrained competition Lots of substitutes but limited impact
Willingness to Pay
The highest price a customer would be willing to pay for a product in absence of a competing product and in context of other purchasing opportunities How to estimate - differs depending on different levels (individual, group, or nation), different contexts, and different times
How does Walmart achieve cost leadership
Transparency in supply chain - automatic orders (tech) Low inventory in stores with a mix of products (everything is in the front, not back) Partnerships with important vendors, negotiations "no nonsense" Warehouse / Distribution Centers - buy in bulk, efficient in distribution,*cross docking (truck to truck so saves time), hub & spoke (commitment with warehouses and fill in with stores) Low costs always Management is frugal Located in more rural areas
Cola Wars Takeaways
Understand the underlying economics of the industry & how it affects profitability ** Attractiveness of the industry affects both incumbents and new entrants
Sustainability of Walmart's Advantage
Walmart's dominance over vendors - relatively high/strong buying power (buys in huge quantities & undifferentiated product)
Competitive Advantage
When a company earns a higher rate of profit than the average rate off other firms within the same industry Through doing something unique and valuable Through an integrated set of choices that is distinguishable from its rivals
Ryan Air Case Takeaways
dangers off entering a market with a set off choices that closely resembles those made by incumbents (Ryan Air lacked a distinctive position - launch strategy is hazardous even though incumbents are bloated and inefficient When fixed costs are high and variable costs are low, in the context of a rivalry, such an advantage is often not sufficient to be profitable Incumbents are sorely tempted to retaliate against an entrant in order to retain customers: can drop prices significantly to "save" an incremental customer
