Industry vs. Firm
Combination Outcomes
*Look at Chart in Notes PIC 8
Strategic Questions in SWOT Analysis
*Look at Chart in Notes PIC 9 & 10
The External Environment
Industry Environment: Demographic, Economic, Sustainable Physical, Sociocultural PIC 2 Competitor Environment: Global, Technological, Political/Legal
How?
Models of Competitive Advantage PIC 6
Value Chain Analysis
PIC 11 • Value Chain Analysis: • Allows a firm to understand the parts of its operations that create value and those that do not. • It is a template that firms use to o Understand their cost position o Identify multiple means that might be used to facilitate implementation of a chosen business-level strategy • Value Chain chows how a product moves from the raw material stage to the final customer • To be a source of competitive advantage, a resource or capability must allow the firm to perform o An activity in a manner that is superior to the way competitors perform it o A value creating activity that competitors cannot complete
Competitive Positioning
PIC 12 & 13 • Cost leadership: Low cost, broad market • Differentiation: Distinctiveness, broad market • Focused Cost Leadership: Narrow market, low cost • Focused Differentiation: Distinctive, narrow market • Integrated Cost Leadership/Differentation
Level 1: The General Environment
PIC 3 • Demographics • Economic Segment • Political/Legal segment • Sociocultural segment • Technological Segment • Global segment • Sustainable Physical Environment segment
Level 2: Industry Analysis → 5 Forces Analysis
PIC 4 • Premise: Competition is rooted in the underlying economics of industrial organization • Purpose: Resulting forces collectively determine the profit potential (attractiveness) of the industry • First Appeared in: How Competitive forces Shape Strategy o Michael Porter, 1979
Competitor Analysis
PIC 5 • Future objectives o How do firms goals compare with competitors? o In terms of focus areas and risk • Current Strategy o How is the firm currently competing? o Is it competitive? • Assumptions o What are the firm's key assumptions relative to competitors and future industry volatility? o Is there data and logic to support the assumptions? • Capabilities o What are the firm's strengths and weaknesses relative to competitors? • Response o What will the firms competitors do in the future? o Where does the firm hold an advantage over competitors? o How will the relationship with competitors change?
Capabilities
PIC 7 • Capabilities: o Firm's capacity to deploy that have been purposely integrated to achieve a desired end state o Based on enacted knowledge of the firm's human capital o Emerge over time through Are intangible complex interactions o Cannot be traded without trading the company or unit o Example: Distribution, HR, Management Information Systems, Management. Manufacturing, R&D
Who?
Stakeholders
Where?
The Competitive Landscape
What?
Vision and Mission
Three Levels of Environmental Analysis
• 1. General environment • 2. Industry analysis • 3. Competitor analysis
Resource-Based Model Assumptions
• Above-Average returns are determined primarily by factors internal to the firm • What matters in theresource-based model o developing/obtaining valuable resources o resources should also be hard to imitate o Barriers to resource/capabilities acquisition • Firms acquire different resources • Firms develop unique capabilities based on how they combine and use resources. • Resources and certain capabilities are not highly mobile across firms. • Differences in resources and capabilities are the bases of competitive advantage and a firm's performance rather than its industry's structural characteristics.
The Industry Organization (I/O) Model of Competition Advantage
• Assess external environment • Select attractive industry • Formulate strategy for industry • Develop or acquire assets and skills • Implement strategy
Value Creation Frontier
• Assumption 1: Failure to make operational commitments: Firms that try to do both fail to become masters at doing either one. • Assumption 2: Consumer confusion over price-quality mix.
How does a firm capture value from its resources
• Capturing value: o When the firm develops the resource itself o When the firm had the foresight to buy the resource when it was cheap o When the resource is not worth as much to any other firm • The firms needs to have the organization to capture returns to resources (e.g. incentive for key scientists to remain with organization) • When the firms competitive advantage cannot "walk out the door" e.g. Embed/capture knowledge from individual employees into the organization
A 6th Force: Complemetns?
• Companies or entities that sell or offer goods and services that are compatible with, or complementary to, the goods and services produced and sold in a given industry • Complementary goods offer more value to the consumer together than apart
The 5 'ions
• Competition: increased quantity and quality of competitive alternatives • Globalization: the increasing economic interdependence among countries and their organizations as reflected in the flow of goods and services, financial capital and knowledge across country borders • Diffusion: Increased speed at which new technologies become available and are used o time to reach 25% of population: telephone = 35 years; TV = 26 years; radio = 22 years; PCs = 16 years; internet = 7 years • Information: increased access to vast quantities of information • Adaptation: Increased need to respond to vast quantities of information and opportunities existing in a dynamic and uncertain environment
Level 3: Competitor Analysis
• Competitor Intelligence: The ethical gathering of needed information and data that provides understanding of what: • drives the competitor, as shown by its future objectives • the competitor is doing and can do, as revealed by its current strategy • the competitor believes about the industry, as shown by its assumptions • the competitor's capabilities are, as shown by its weaknesses and strengths
Techniques for analyzing Competitive Landscape
• Competitor environment (focus on competitors) • General environment (focus on future and current trends) • Industry environment (focus on industry profitability)
SWOT Analysis
• Conduct a SWOT after external and internal analysis completed • SWOT combines external and internal analysis • Internal Strengths and Weaknesses o From VRIS Framework • External Opportunities and Threats o From PESTEL of 5 forces framework • Leverage internal strengths to exploit external opportunities o Achieve such dynamic fit yields sustained competitive advantage • Sometimes its difficult to classify factors cleanly into the SWOT framework. Hence context is necessary • SWOT does not tell us the cause-effect mechanism
Core Competencies
• Core Competencies: o Resources and capabilities that are the sources of a firm's competitive advantage that: o distinguish a firm competitively and reflect its personality. o Emerges overtime through an organizational process of accumulating and learning how to deploy different resources and capabilities. o Activities that a firm performs especially well compared to competitors
Limitations of the 5 Forces
• Endogenous structural change • Collaboration and cooperation • Company differences • Industry analysis doesn't consider these phenomena
Relationship between Industry Structure and Internal analysis
• External analysis (PESTEL, Porter's 5 forces) describes o "Average" profitability of the "average" firm o How "tough" the environment is • Firm internal analysis (VRIS/Value Chain[next class]) o Firm uniqueness o How well a particular firm is positioned within the industry
Analysis of External Environment
• General environment: Focused on the future (Useful for Projections/ Trends) • Industry environment: Focused on factors influencing a firm's profitability within an industry • Competitor environment: Focused on predicting the dynamics of competitors' actions, responses and intentions
Limitations of RBV
• Glorify uniqueness: justify the Status Quo • Misplaced confidence, esp. when new entrants can copy your activities or when environments are liable to change • Retrospective rationalization • Hard to translate into strategic action • When and how do firms develop or change capabilities?
The Resource Based Model of Competitive Advantage
• Identify resources: strengths and weaknesses • Determine capabilities • Identify competitive advantage • Locate an attractive industry • Formulate and implement strategy
Industry vs. Firm
• Industry 20% • Firm 30-45% • Other effects 35-50%
Industry
• Industry: A group of companies offering products or services that are close substitutes for each other and that satisfy the same basic customer needs o Industry boundaries may change as customer needs evolve and technology changes • Sector: A group of closely related industries • Market Segments: Distinct groups of customers of an industry o Can be differentiated from each other with distinct attributes and specific demands
Threat of Substitutes
• KEY ISSUE: How high can we raise prices before substitutes become a significant threat? • Substitute: An alternative from outside the given industry for its product or service. When its performance increases or its price falls, industry demand decreases. o Plastic vs. aluminium containers o Video conference vs. business travel • The existence of close substitutes is a strong competitive threat
Threat of New Entrants
• KEY ISSUE: If profits rise, will new entrants rush into market in an attempt to successfully capture rents? • Desirability of entry is not the same as ability to enter (from a firm's perspective) • Key question is whether there are substantial barriers to entry (from an industry's perspective • Ex. Economies of Scale, High Capital Requirements, Strong Brand Loyalty
Bargaining Power of Suppliers
• Key Issue: Can suppliers exert bargaining power over industry participants? • Some major factors: o Number, size and concentration of suppliers o Credible threat of forward integration (integrating downstream) o Existence of viable substitute supplies o Importance of supplier to industry o Importance of industry to supplier o Extent to which product is standardized or differentiated
Bargaining Power of Buyers
• Key Issue: Do buyers possess enough market power to appropriate rents from industry participants? • Some major factors: o Number, size and concentration of buyers o Credible threat of backward integration o Importance of seller business to buyer o Importance of buyer business to seller o Switching costs o Extent of information available to buyers
Rivalry Among Established Companies
• Key Issue: To what extent will industry participants fight away profits? • Intensity of rivalry is a function of: o Industry Competitive Structure ( number, size and similarity of competitors) o Industry growth rate (high when industry growth is slow) o Unfavorable demand and supply conditions ( e.g. highly variable supply and demand, perishable inventory) o Height of Exit Barriers - prevents companies from leaving industry (specialized assets, managerial commitment)
Industry Dynamics
• Models apply to a snapshot of the industry in time • But industries are dynamic, not static • Hence, always need to be mindful of : o Changing industry speed o Rate of innovation
Challenges of defining the industry
• Multiple levels of aggregation possible o Ex. beer vs. craft beer • New industries emerge from existing industries o Ex. TV, VCR, computers, electronics industry of 60's is now multiple industries • Domestic versus global perspective • New Entrants with radically new market offerings
When is a Resource difficult to imitate?
• Path dependence: accumulated over time or having specific predecessors • Casual ambiguity: difficult to disentangle the causes of what exactly casue advantages • Social Complexity: such as culture, trust , reputation • Physical uniqueness: patent, land/location
Stakeholders
• People affected by a firms performance • Capital Market Stakeholders: o Shareholders o Lenders • Product Market Stakeholders: o Customers o Suppliers o Communities o Unions • Organizational Stakeholders: o Employees o Managers
Value Chain Activities
• Primary Activities: o are involved with: • a product's physical creation. • a product's sale and distribution to buyers. • the product's service after the sale. • Support Activities: o Provide the assistance necessary for the primary activities to take place.
The Ideal Industry Opportunity
• Profit will flow to firms in the industry and not to suppliers or buyers o High power over buyers o High power over suppliers • High profit available in the industry o Low threat of new entrants o Low threat of substitutes o Low level of competitive rivalry
Research Heterogeneity Resource Immobility
• Research Heterogeneity: o Bundles of resources and capabilities differ across firms o SW Airlines and Alaska Airlines have different resources o SWA • Higher employee productivity • Ex. Informational organization, pilots help load luggage • Resource Immobility: o Resources tend to be "sticky" & don't move easily o Southwest Airlines sustained advantage • Several decades superior performance • Competitors have unsuccessfully imitatesd SWA model
Takeaways
• Resources and capanbilities allow firms to differentaiate their products and services to create more value for consumers than their rivals • Firms possess both tangible and intangible resources (and capabilities) but it is the intangibles that are the hardest to imitate • The VRIS framework allows us to understand the competitive • A SWOT analysis is based on synthesizing insights obtained from an internal analysis of the company's S & W with those from an analysis of external O & T
Resources
• Resources: o A firm's assets, including people and the value of its brand name, that represent inputs into a firm's production process o Source of a firm's capabilities, but alone, do not yield a competitive advantage o Tangible: capital, land, buildings, plant, supplies, equiptment o Intangible: Culture, knowledge, brand equity, reputation, intellectual property, patents, copyrights, trademarks, trade secrets
5 Forces
• Rivalry among existing competitors • Threat of New Entrants • Threat of substitute products of services • Bargaining power of Suppliers • Bargaining power of Buyers
Key Concepts
• Strategy: integrated and coordinated set of commitments and actions designed to exploit core competence and gain competitive advantage • Competitive advantage: strategy that competitors are unable to or can't afford to duplicate that enables a firm to earn above average returns • Above average returns: returns in excess of what an investor expects to earn from similar investments with similar risk • Risk: an investors uncertainty about the economic gains or losses that will result from a particular investment
Model
• Support Functions: Finance → HR → MIS • Value Chain Activities: Supply chain Management → Operations → Distribution → Marketing (Including Sales) → Follow-up Service
Takeaways
• The 5 Forces and Industry Profitability: • Helps determine the profit potential of an industry • Helps clarify where 'rents' accrue in a production process, i.e. determines who gets to keep the money • Provides ideas for what firms can do to improve their positions within their industries • Note that the Porter's five forces analysis itself is a static framework but the strength of forces change over time • As the strengths of Forces change over time, so dynamic consideration are important
I/O Model Assumptions
• The external environment imposes pressures and constraints that determine strategic choices. • Similarity in strategically relevant resources cause competitors to pursue similar strategies • Resource differences among competitors are short-lived due to resource mobility across firms • Strategic decision makers are rational and engage in profit maximizing behaviors
Vision Mission
• Vision: A picture of what the firm wants to be, in broad terms and what it ultimately wants to achieve • Mission: A specification of the business(es) in which a firm intends to compete and the customers it intends to serve