BUAD 497 mid

Despite "Cola Wars", Coke and Pepsi never engaged in price competition on concentrate

- the price of concentrate held steady, any discounting was selective and occurred in downstream markets (i.e., retail not concentrate prices - these discounts increased volume, trimmed margins for bottlers) - Tit for tat copycat dynamics, clear that price cutting concentrate would be mutually destructive (reading signals)

Operational Effectiveness is measured by a firm's ability to deliver superior value to customers, relative to rivals

False (not relative)

Why would Google release proprietary code, making implementation of deep learning algorithms easier for statisticians

To reduce supplier opportunity costs

•The validity of different go-to-market strategies and other strategic decisions will likely be influenced by

(a) your value prop and (b) how you believe other actors will respond and behave.

Industry Value Chain

Upstream Suppliers --> Suppliers --> Skateboard Decks --> Buyers --> Downstream Buyers

STRATEGIC POSITIONING attempts to

attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company - it means performing different activities from rivals, or performing similar activities in different ways

so basically a few powerful firms DOES NOT mean increased rivalry in an industry

probs because they can read each other's signals better

Operational effectiveness

• Refers to performing the above activities better than rivals (e.g., faster, fewer inputs, etc.) • Note that new tech, which is proprietary, may form the basis for a cost-leadership strategy

Ducati Turnaround Logic

1. Attract new riders w/Naked bikes (4x increase) •Investments in the history of Ducati will bring them in •Increase WTP for new riders at a greater rate than loyal riders •Deliver consumer surplus to attract them (Lower Premiums) •Reduce costs w/o sacrificing product quality to widen wedge 2. Sell them high margin Ducati apparel/accessories •Jackets, clothing, gloves, etc. •Sell these in Ducati-focused dealers (mono-dealers provide limited other options) 3. Make them part of the Ducati family (loyalty) •Rides, races, events, tours, internet groups, indoctrination, demand-side network •Demand side network effects particularly strong for new riders 4. Sell them higher margin bikes (hyper-sport) (2.5x increase) •Ducati enthusiasts will buy these, new riders will upgrade •Maintain/increase price premium

Value Chain Activity Analysis (VCAA) Steps

1. Catalog activities and map what the firm does - Break the activities down using the VC template 2.Examine activities to analyze costs - Analyze activities - Analyze critical drivers for each activity - Look for ways to lower costs (that are hard to imitate) 3.Examine activities to analyze willingness-to-pay (WTP) - Analyze activities - Analyze critical drivers for each activity - Look for ways to lower costs (that are hard to imitate) 4.Explore options and make choices - Holistic view of firm - What really drives value creation?

Porter Five Forces

1. Threat of New Entrants 2. Bargaining Power of Suppliers 3. Bargaining Power of Buyers 4. Threat of Substitute Products or Services 5. Rivalry Among Existing Entrants Complementors "The 6th force"

According to Porter, why is fit amongst related activities so important to the sustainability of competitive advantage?

As activities and their fit increase, probability of copying decreases

Be careful how much you choose to exert superior bargaining power over downstream/upstream players - there are breaking points, eventually you will push a supplier/buyer too far

Coke/Pepsi had to forward integrate because bottlers were underperforming/squeezed (now returning to independent bottlers)

Strategic groups

Companies which pursue similar strategies within an industry If plotted on productivity frontier (positioning theory), these firms will tend to cluster near one another - Within industries, firms differ with respect to how they position their products (recall positioning theory) - Due to these differences, we can identify groups of firms that are similar to other firms within their group (within-group similarity) but different to firms in other groups (between-group differences)

To determine if a new technology is potentially disruptive you should:

Compare trajectory of the new tech with demands of existing customers

Total value created by a transaction can be calculated as the:

Difference between buyer willingness to pay and supplier opportunity cost

Types of adjustment cost:

Direct costs - costs associated with creating new assets and capabilities associated with new technology Indirect costs - costs associated with current business/technology when firm undertakes new technology (cannibalization, frictions between business units, human capital, etc.)

What is disruptive innovation?

Disruptive technologies introduce a different package of attributes and often perform poorly on some metrics incumbents care deeply about

Given adjustment costs, disruptive tech is often (but not always) commercialized by start-ups

Empirical evidence suggests start-ups are often driven by internal disagreements Technical, strategic, other form of disagreement between employee and employer

Demand-side economies of scale means unit cost falls as production rises

False

Industry rivalry tends to increase when firms in the industry can clearly read each other's signals

False

Threat of new entrants

Entrants can affect industry profitability - If industry profits are high and entry barriers are low... we will expect to see entry which can lead to more competition and erosion of profits (typically) Free entry and exit links to perfect competition, where economic profits tend to be zero long term Higher barriers to entry (BTE) make the industry more attractive as the threat of entry will be lower. - Students commonly ask if an industry is "attractive" from the perspective of an incumbent or a new entrant. The focus is the industry. Even though it is hard to enter an industry because the BTE are high, it is still attractive as an industry

Which of the following statements is true?

Even in winner-take-all markets, it is possible to enter on a small scale

Ducati Case Takeaways

Example of a highly successful differentiation strategy (and turnaround) •Increase costs related to "intangibles" and WTP •Decrease costs which do not impact WTP (e.g., increased power against suppliers, etc.) •Increase in WTP > Increase in cost •Create value (higher WTP) for new customers (naked bikes), sell high margin apparel, sell expensive bikes Leverage VRI resources (prior to Minoli, History and Legacy was not leveraged). Valuable Resources Must be Organized to Capture Value •Ducati Tradition and History (stuff Honda/Yamaha doesn't have per se), this was Valuable, Rare, Inimitable, but not Organized to capture value (until the turnaround) Sound Economic Logic: Bring riders into the Ducati family (lower-end naked bikes), sell them high margin apparel, generate loyalty, sell higher-end bikes (rinse and repeat) •WTP is not unidimensional and different choices may have more/less effect on different populations (investments such as Museums have a higher impact on new riders) Tradeoffs and fit, can provide protection from imitation, even from powerful players like Honda. •Ducati has great motorcycles, but also a history which cannot be imitated •The interlocking activities work together in a coherent way •Tradeoffs made by a focused differentiator may come at the cost of constrained growth - movements outside the niche may blur original position (recall the revenue trap in positioning!) •Unclear you want to fight w/ Harley who has the same attributes Ducati, what are the opportunity costs of doing so? •From motorcycle to entertainment company --> change the multiple!

A Five Forces Analysis will explain why a firm achieves superior performance to rivals

False

Five forces analysis identifies forces that influence average industry attractiveness - it puts structure on the problem (no pun intended)

Goals is to understand key drivers of industry profitability What explains most of the variance? And what can you do about it? Provides a useful checklist to make sure we are comprehensive Then you need to do more... - Dig into the key forces and drivers that shape the industry - Find ways to give quantitative interpretations to the data - What steps can you take to make the industry more attractive for you?

According to Porter, the pursuit of revenue growth:

Has the potential to erode competitive advantage

Which of the following tends to increase rivalry within an industry

Industry growth rate is slowing

Industry rivalry tends to be higher when...

Industry products are perishable and exit barriers to the industry are high

Cola Wars Value Chain

Inputs --> CSD --> Bottlers --> Retailers --> Consumers

Sustaining innovations

Maintains a steady rate of product improvement on attributes important to core customers; they give customers something more or better in attributes they already value

In Porter's opinion, Operational Effectiveness is:

Necessary but not sufficient for competitive advantage

Which of the following statements is true?

Niche players in specialized market are not insulated from disruption

Bargaining Power of Buyers Power of buyers

Note that the focal firm plays the role of supplier - Power of suppliers applied to the focal firm Factors influencing power of buyers - Number of buyers (many buyers, less power) - Relative concentrations matters - Purchasing power/fraction of budget purchase represents - Price sensitivity Switching costs of buyers to another firm in the same industry (low costs, more power) - Industry product has little effect on buyers' other costs Threat of backward integration i.e. absorb the focal firm Ability to influence downstream buyers

Rivalry and competition on price

Number/concentration of firms - More firms means more competition (e.g., agriculture) Industry growth is slow - When the pie no longer is increasing, the fight for a slice goes up Exit barriers - A cornered dog is more likely to bite (what are some exit barriers?) Rivals are highly committed - If a market means something to you, you fight for it Firms cannot read each other's signals well - Signals allow for "implicit" collusion, and avoidance of price comp Overlap in dimensions of competition (including non-price dimensions) - The more similar the firms, the less there is to compete on Industry products are (not) differentiated (as perceived by consumers) - What do you compete on if the product is the same (commodity and prices?) Fixed costs are high and marginal costs low - When fixed costs are high, incentive is to lower price to cover fixed costs (need volume) Product is perishable - If a product doesn't sell, you lose money Capacity expanded in large increments - Major shifts increase supply, which tends to lower prices (supply curve right shift)

In one example, Porter argues that Southwest Air has a valuable strategic position because Southwest:

Offers a combination of low cost and convenience full service airlines cannot

Rivalry

Perfect Competition •Numerous firms •No market power: Price-takers •Identical products •Free entry & exit = long-run cost efficiency •Long-run: Economic profits driven to zero •Good for consumers, bad for firms Monopoly •One firm •Market power: Chose price to maximize profit subject to market demand •No entry or exit •Long-run: Positive economic profits •Good for firm, sometimes bad for consumers

PESTEL (or PEST) Analysis

Political Economic Sociocultural Technological Ecological/Environmental Legal Affect focal industry

Ducati Turnaround Choices

Reduce Costs w/o Compromising Performance - Number of suppliers - Small suppliers - Co-located (District) - Dual sourcing - Standardization - Short-term contracts - Economies of scope - Racing r&d subsidy - neutral effect on WTP but minimized cost Increase WTP (also increase costs) - World of Ducati - Museum - Race day - Racing (but sponsors) - Events - Apparel - Less dealers (growth?) - Advertising - Partnerships - increased WTP but also increased cost Physical Attributes: Performance Reliability Desmo Sound Intangible Attributes History Community Exclusivity Tradition Design

Rivalry Among Existing Entrants

Refers to competition within an industry - First need to define the industry, then analyze factors influencing competition - Potential for industry profitability goes down as competition goes up Recall Market Structure from Economics - Perfect competition - Monopolistic competition - Oligopoly - Monopoly Number/concentration of firms Industry growth is slow Exit barriers Rivals are highly committed Firms cannot read each other's signals well Overlap in dimensions of competition (including non-price dimensions) Industry products are (not) differentiated Fixed costs are high and marginal costs low Product is perishable Capacity expanded in large increments Product is perishable

According to Porter, needs-based positioning can best be described as

Serving most or all of the needs of a particular group of customers

What are some steps a firm may take to reduce supplier power

Standardize specifications for parts Merge with other firms within the industry Threaten backward integration

Which of the following statements is true?

Substitutes limit industry profit potential by placing a ceiling on prices

Threat of Substitute Products or Services

Substitutes refer to product or services in other industries that perform the "same" or a similar function - Must be a "credible" substitute Why do we care about substitutes? - Offer alternative options to customers - Customers' choices impact industry profitability Factors influencing the threat of substitution Price differentials - Threat lower if outside options more expensive Switching costs - Can customers easily switch once in? The performance-price trade-off - What is the relative trade-off for performance/utility with respect to price

Why is the Soft-Drink Industry so Profitable?

Supplier Power (low) •Most commodities/No differentiation, No forward integration (BTE) •Natural flavors, phosphoric acid, caffeine, caramel coloring •CSD producers COGS are just 17% of sales Rivalry •Intensity and basis for competition? •Competing on product features (flavors) and/ad spend, not competing on concentrate price (any discounts were downstream) •Concentrate prices rose over time •Highly concentrated industry, tit-for-tat approach, clear ability to read signals Substitutes •Plenty, trends toward health •CSD responds with new products, diet colas, own the substitutes, addiction? Buyer Power (Bottlers) - low •Contractual limitations held them captive to CSD players (coke/pepsi) and create substantial switching costs to other CSD companies, if even possible •Could not bottle/distribute other "cola brands" Cola brands make up the lion's share of total soft drink sales, so a massive component of market was tied to coke/pepsi •CSD makes up the bulk of COGS (prices keep getting raised) BTE - high •Need distribution - bottlers tied up in contracts, to build distribution is capital intensive •Mkt. is more attractive if you sell "colas" which mean you cannot piggy-back off existing distributors, raising barriers •Brand equity and scale advantages of incumbents (e.g., advertising)

Bargaining Power of Suppliers Supplier Power

Supplier industry five forces (e.g. substitutes, rivalry) - If there are substitutes to supplier product, they have less power - Keep in mind relative concentration (if suppliers are more concentrated than buyers, supplier power up) The number of industries that suppliers serve - If supplier serves many folks, they have more power (you are less valuable to them and less important) The number of industry customers the supplier serves - If supplier serves many customers, they have more power (you are less valuable to them and less important) Switching costs - If it is easy for you to switch suppliers, supplier has less power as you can more easily go elsewhere Threat of Forward integration - If the supplier can enter your space and sell product you sell, they have more power Industry products are (not) differentiated - When supplier products are not unique, the power of the supplier is lower (e.g., suppliers are commodities) Industry's products do not impact quality of buyer's products - When supplier products do not impact quality of buyer products (and customer WTP), supplier power low Industry's products do not impact buyer's other costs - If the suppliers' products influence the buyers' other costs, then supplier power is greater Threat of backward integration - If you can enter the supplier's space and make what they sell you, supplier has less power

Threat of Entrants or Barriers to Entry

Supply-side economies of scale - Size leads to lower unit cost (new entrants need to scale up) Demand-side economies of scale - The more users, the more valuable the product (network effect) Switching costs - Buyers face costs to switch products or services, tough to capture market Capital requirements - High costs reduce ease of entry (starting an auto plant versus an app) Size-invariant incumbency advantages - Are there non-size reasons (i.e., not econ of scale) which make incumbents better off? Geographic locations, proprietary tech, access to raw materials, brand identity, cumulative experience - Do these fit under "first-mover"? Unequal access to distribution channels - Preemption and incumbent advantage due to distribution Restrictive government policy - Regulation, certifications, or other legal hurdles (once cleared they allow you in) Expected retaliation - Firms less likely to enter if they know incumbent firms will attack them - Why would a firm attack? Slowing market growth? Exit barriers?

Which of the following statements is true

The ability to influence downstream buyers increases buyer power

Buyers tend to be price sensitive when:

The industry's product represents a big portion of buyers' cost structure

Winner-Take-All (WTA) Dynamics

The scalability of platforms can give rise to WTA dynamics. WTA dynamics or (Winner-Take-Most) are more likely when: •Multi-homing costs are high for at least one user side •If it costs a lot to be a user of a platform (adoption, operation, and opportunity costs), users need a more convincing reason to home on multiple platforms •Network effects are positive and strong, at least for the users on the side of the network with high multi-homing costs •Same side effects can also increase the probability of WTA •Neither side's users have a strong preference for special features •If there is clear differentiation of user needs, then a number of smaller and more niche platforms may emerge, but if preferences are more homogeneous then there is less need for multiple platforms Consider these factors in tandem! It is possible for multi-homing costs to be low, but still see WTA dynamics perhaps due to strong network effects. Not all MSPs have a WTA structure

According to Porter, a strategic position is not sustainable unless:

The tradeoffs with other positions make copying that position impossible

Expected retaliation by incumbents is a barrier to industry entry

True

Why do some companies succeed over the long-term while others do not?

Two categories of answers External factors: (What might the firm do? Opportunities & Threats) - Number & behavior of competitors - Barriers to entry - Industry-wide technology - Macroeconomic cycles - Social/regulatory/political environment - Customers & suppliers - Substitute products Internal factors: (What can the firm do? Strengths & Weaknesses) - Resources controlled by the firm (e.g., reputation, proprietary technology) - Ability to innovate/change - Incentives/control systems - Leadership - Organization, cost structure - Systems/processes - WTP

Who Gets Subsidized: Some General Rules

User sensitivity to price •Typically, platforms subsidize the more price-sensitive side User sensitivity to quality •Typically, platforms subsidize the side that supplies quality User brand value •In markets where influencers may generate strong cross or same side effects, platforms may try to secure exclusive rights Same side network effects •If there are strong negative same side effects, platforms may consider exclusive arrangements •In sum, many factors play into this decision, but in a platform with network effects, the side that is the stronger attractant typically gets subsidized - the side that drives a positive cross-side effect. Both sides can be subsidized.

Identifying Strategic Groups

Usually captured by a few number of key strategic factors that differentiate groups - A simple plot of key dimensions is useful Example: Airline Industry - Prices charged - Routes offered Recall the productivity frontier (non-price value) and relative cost

Types of Strategic Positioning

VARIETY-BASED positioning: providing a subset of an industry's products or services •Product/service-based specialization •Most firms choose variety based-positions NEEDS-BASED positioning: serving all the needs of a particular group of customers •Customer-based specialization •Makes economic sense when different groups of customers have sharply different needs that required tailoring ACCESS-BASED positioning: serving a group of customers that are accessed in a particular way •Channel or geographic-based specialization •Makes economic sense when accessing different groups requires different capabilities (e.g. urban vs. rural) - akin to natural monopoly

What is a key reason discussed which makes pricing so important in MSPs?

With positive indirect effects, lowering price can result in demand shifts

Disruptive innovations

introduce a different package of attributes from what mainstream customers historically value, and they often perform poorly on some metrics incumbents care deeply about

Operational effectiveness might offer competitive advantage, but this is not sustainable because

• Tend to be easily emulated • Eventually competitive convergence • Consultant speak "best practices" • Firms may do these things to "trim the fat from the business", but they cannot be the source of an advantage if others can copy • Operational effectiveness can lead to superior performance, but if is imitable, the advantage will be eroded. This is not to say that firms who are imitated will fail, but rather they will find it more difficult to sustain superior returns.

The Strategic Groups Model

•Competitive rivalry is usually strongest within group •Exists even within narrowly defined industries •Differences in mean profitability (at least temporally) •External environment (PESTEL) can impact different strategic groups relatively differently •Example: Pharma (generic vs. proprietary) •Porter's five forces can impact groups relatively differently, usually on one key dimension, but there is enough similarity that it is more useful to analyze as groups within industries rather than separately

The innovator's dilemma and profit pursuit

•Disruptive technologies often are lower-margin, costly, and not valued by a firm's most profitable customers •Requires going "down market" and sacrificing profit - potentially risking your core market in the process •By the time the technology comes upmarket, it is often too late for incumbents to recover - their core market is lost •"Good Mgmt" and "pursuit of profit" can be the demise of firms •How does this relate to positioning theory and the notion of the "revenue trap"?

First Mover (dis)Advantage?

•Endogeneity of entry timing? •Firms do not randomly decide to enter markets •Resources and Capabilities •Benefits of entry timing depend on the firm's capabilities •Free rider problem •Do late movers benefit from early entrant investments? •Market and technological uncertainty •Late movers benefit from uncertainty resolution •Technological discontinuities, industry change, regulation •Incumbent inertia •First movers may suffer from path dependence •Anticipated competitor response What will rivals do and what are they capable of?

Dealing with Disruptive Technologies

•Established firms vary in the "adjustment costs" they face when responding to a disruptive technology •Higher adjustment costs means that a firm is more likely to struggle to respond to disruption or disregard the possibility Types of adjustment cost: •Direct costs - costs associated with creating new assets and capabilities associated with new technology •Indirect costs - costs associated with current business/technology when firm undertakes new technology (cannibalization, frictions between business units, human capital, etc.) There are also psychological adjustment "costs" •Organizational Inertia, Identity, Hubris, Risk-preferences, etc. •How many people would "bet the farm" on a new technology when there are real consequences - i.e., jobs, promotions, company fate, etc.

•As an MSP, you need to manage these potential effects •It is often useful to draw out the connections, like mapping activities from positioning theory, things will offset •Different effects will start to offset one another, so you need to think net effects and negative impacts

•In practice, most MSPs create and capture value by facilitating positive (net) cross-side network effects

Variety-Based, Needs-Based, and Access-Based positions are a useful way to think about relative trade-offs you are making (walmart

•In practice, the types of positions are somewhat blurry. It is important to understand the categories, but placing firms in particular categories is less important (in my view) than is the emphasis on using this framework to think about trade-offs •Example: Wal-Mart could credibly be argued as a needs-based or access-based position, particularly in the 1960's to early 2000's (but clearly never was variety-based - they sell everything!) •The important thing to consider with this example is Wal-Mart made clear choices - not trying to serve the extremely wealthy customer and not serving densely populated metro areas

•Cross-side (indirect) positive network effect

•More users on one side of the platform incentivizes users to join the other side of the platform Example: More riders leads to more drivers, and vice versa

•Cross-side (indirect) negative network effect

•More users on one side of the platform repels users to join the other side of the platform Example: More advertising on IG may lead to less users

Types of Network Effects

•Network Effects can be positive or negative •Networks can be same-side (direct) or cross-side (indirect) •As a successful MSP, you need to manage these various network effects

First-Mover Advantage?

•Technological leadership •Learning curves, time compression diseconomies •Preemption of scarce assets •Intellectual, physical, human, etc. •Buyer switching costs •Firm-specific investment and embeddedness (buyer) •Firm-specific investment and embeddedness (supplier) •Network effects or contractual limitations •Psychological attachment to first satisfactory entrant •You want to create **substantial switching costs**

Same-side (direct) negative network effect

•Users get less value or utility when there are other users on the same side for various reasons Example: More riders on a rideshare platform means you have more competition for rides (potentially longer wait times) •Think about this as a general competition effect

Same-side () positive network effect

•Users get more value or utility when there are more users on the same side for various reasons Example: With more riders on a rideshare platform it may be easier to split rides or split payments

VRIO framework can be used to evaluate resources, capabilities, competencies, within the firm

•VRIO •Valuable •Rare •Inimitable (Costly to imitate) •Organized to capture value