mgt 380 #2

BLOCKBUSTER REVENUE SHARING MODEL

$4 to rent 40% to studio for 6 months 100% to retailer thereafter 100 videotapes @ $65/tape = $6,500 Rented for $3/tape at 40x rented = $12,000 GROSS PROFIT: $5,500 At $65/tape, the 101st tape would have to rent 22x at $3/rent to break even. If 101st tape is expected to generate 20 more rentals, then at $65/tape, only order 100 tapes. GROSS PROFIT: $5,200 BUT, THERE IS AN INCENTIVE TO BUY MORE TAPES! 100 videotapes @ $8/tape = $800 50% revenue sharing = $6,000 At $8/tape, the 101st tape would have to rent 6x at $3/rent to break even. But, at $8/tape with 50% revenue sharing, ordering more copies until marginal expected rental is less than 6x. after 6 months, dec price of VHS tapes and popularity wanes off --> after 6 months, sell them; paying less per tape, share some profit, make more money

TIVO'S FUTURE "AVERAGE REVENUE PER USER"

$6.15 / month 50% of users get the lifetime subscription for $299 50% of users pay the monthly fee

CHALLENGE OF FIRST MOVERS

01 Establish the category 02 Establish the brand 03 Build Scale(cost advantage) to spread fixed costs 04 Build an ecosystem 05 Build Switching Costs & STE At time of the Case: TiVo is a Highly Differentiated Product Superior features Strongest brand (TiVo is used as a verb) Largest installed base

APPLICATION: THE COLA "WARS"

020 PROFIT MARGINS Coca-Cola 27.3% PepsiCo 14.3% Keurig Dr. Pepper 21.3% Concentrate Industry BARRIERS TO ENTRY 1st Movers Advantages § Brand § Limited Shelf Space § Vending Slots § Fountains § Franchise System (Bottlers have exclusive rlships) § Economies of Scale in Advertising RIVALRY War? Not on price! § On Shelf Space, Advertising, Brand, Selective Discounting BUYERS Immediate Customers (Bottlers) § High Switching Costs§ Franchise Agreements lock bottlers into exclusive deals § Concentrate 40% of Bottlers COGS but CP offer Buying Power for Cans, Sugar, Marketing, Brand & Product Development Final Customers § Fragmented; Loyal to Brand so only somewhat price sensitive; No switching costs, but substitutes not always available SUPPLIERS A Secret § Not Bottles§ Not Sugar§ Not Water Doesn't Cost Much SUBSTITUTES Many § Water § Coffee § Juice But not always conveniently available

CLAY CHRISTENSEN'S DEFINITION OF DISRUPTION INNOVATION

1 A disruptive innovation possesses a different package of performance attributes, not all of which are valued by existing customers 2 Performance attributes of the innovation that existing customers do value, improve at such a rapid rate that a new entrant can later move up and capture those customers as well 3 Disruptive innovators typically enter at the low end of the market or create entirely new markets INCUMBENTS Often have difficulty adopting disruptive innovations because, as they initially serve existing customers poorly, adopting new innovations could mean loss of existing revenues - often wait to see market reaction to new innovations and maybe acquire or do soemthing in-house NEW ENTRANTS Conversely, these new entrants have no current customers to lose, nor even current customers to ask to gauge acceptance of disruptive innovation disruptive technology is forward-looking

MUSIC INDUSTRY CONCLUSIONS

1 Majors aren't going anywhere 2 Good economic reasons why majors retain power EVEN TODAY, MAJORS ARE POWERFUL

ARTIST PORTFOLIO

1 RECORDED MUSIC 2 LIVE PERFORMANCES 3 MERCHANDISE

INNOVATION GROWTH CYCLE

1. PRODUCT OR PROCESS INNOVATION 2. IMPROVED MARKET POSITION THROUGH HIGHER VALUE, LOWER COST, OR BOTH 3. IMPROVED PROFITABILITY 4. CAPACITY EXPANSION 5. FIRM SIZE repeat steps

EXPERT SKIER (NICHE PLAYER)

1. TTT (Tracking, Traversing, Turning pg. 7) 2. No Vibration (pg. 8) 3. No Snapping on the Hill (Easy Maintenance) 4. Go Fast; Turn easily (Save 1/10 of a second)

BLOCKBUSTER BUSINESS MODEL

1. content 2. packaging 3. distributor 4. retailer 5. consumer Blockbuster packaged studio content through its exclusive contracts, cut out the middleman distributor and sold directly to consumers at their retail stores. studios willing to give discount b/c needed BB to sell more (like how music needed iTuens) gets film 4-6 month quicker than everyone else

BLOCKBUSTER REVENUE SHARING MODEL

1980'S AND 1990'S CHANGE IN VIDEO RETAILING REVENUE SHARING RESULTS OTHER RENTAL STORES Studios sold licensing to Mom and Pop shops for $80-$100 per title Indie retailers used Rentrak for 28% of their rented titles, accounting for 25% of revenue BLOCKBUSTER Studios sold licensing to Blockbuster for $20-$30, giving 55-65% discount through their contract agreements Blockbuster boasted 90% of revenue from revenue-sharing titles in 2000 DVR Services: High value drivers—convenience, features, low cost Pay-Per-View: Content variety increased—offered high-demand sports and adult content and new releases Cable and Satellite: Technology and fiber improved, increasing reach of cable services MODERN COMPETITORS: NETFLIX AND STREAMING SERVICES

BLOCKBUSTER TIMELINE

1985 David Cook opens the first Blockbuster store. 1987 Wayne Huizenga joins as investor, becomes CEO 1993 After bulldozing its way across the country, Blockbuster has over 3,500 stores. 1994 Blockbuster is sold to Viacom. 1996 Blockbuster posts a positive net income for the last time for a decade. 1998 Hastings and Marc Randolph launch Netflix. 2004 Blockbuster boasts 60,000 employees and 9,000 stores. 2010 Blockbuster files for bankruptcy. 2011 The company's remaining stores are bought by Dish Network at auction for $233 million. 2011-2013 Closed 200 stores in 2011, 500 in 2012, and 300 in 2013, leaving only 500 stores operable that are not company owned. FINAL BLOCKBUSTER STORE BEND, OREGON LEADERSHIP CHALLENGES DAVID COOK 1983-1987 WAYNE HUIZENGA 1987-1997 JOHN ANTIOCO 1997-2007 JIM KEYES 2007-2010

TIMELINE OF MOVIE RENTAL & STREAMING

1990 The DVD player is invented 1998 Netflix launches online rental service website 2003 The first Blu-ray device is released 2004 Blockbuster has over 4,500 stores in the United States 2007 Netflix announces streaming 2007 Hulu is launched 2013 Blockbuster goes bankrupt 2015 CBS releases "All Access" 2015 HBO Now is released 2019 Disney launches Disney+

NEW ERA OF THE MUSIC INDUSTRY

1999 Rise of piracy networks FIXED ACCESS 2003 Rise of download stores FIXED PORTABILITY 2008 Rise of streaming services FIXED STREAMING 2013 Rise of curated and "Listen" services? FIXED DISCOVERY? ARTISTS ARE ADJUSTING STREAMING MADE IT POSSIBLE TO DISCOVER MORE ARTISTS Much easier to put music up for discovery ALBUM LENGTH HAS DECREASED (NO MORE FILLER TRACKS) Some artists release singles instead of an album, which generates more buzz. Think about The Chainsmokers' most popular songs...

NETFLIX STOCK CHART

2002: Netflix files for its IPO 2005: Netflix reaches 4.2 million subscribers 2007: Netflix announces streaming 2008: Netflix starts streaming on the Xbox 360, Blu-ray disc players and TV set-top boxes 2009: Netflix adds streaming to PS3 and other devices 2010: Netflix was released on Apple products 2011: Netflix launches in Latin America & Caribbean 2012: Netflix launches in Europe 2013: Netflix launches its first slate of original content 2014: Netflix nominated for 31 Emmy awards 2016: Netflix is available worldwide 2017: Netflix wins its first Oscar 2018: Netflix becomes the most nominated service at the Emmy's

RESOURCES & CAPABILITIES

A firm's expertise in exploiting a resource strongly influences how much the resource is worth to the firm Capabilities often contribute to performance by supporting other resources

ARTIST LABEL RELATIONSHIP

ARTIST (NEW & KNOWN) Expertise in "Music Making" Composing Recording Songs RECORD COMPANY Expertise in "Star Making" Creating a "Star Image" Promotion & Marketing Distribution Management ARTISTS INVEST IN • Composing & Recording Music • Working with Company's employees to create "image," videos, etc. LABELS INVEST IN • Financing • Work with the artist to create "star image" • Promotion & Marketing • Distribution • Management WORK TO CREATE A PORTFOLIO OF GOODS 1. Physical GoodsCDs, Merchandise & Videos 2. Digital GoodsMp3s (etc.), Videos, Ringtones 3. Experience GoodsPerformances, Guest Appearances, etc.

NEW BUSINESS MODEL (music)

ARTIST MAKES THE MUSIC, LABEL MARKETS IT Impatient Customers Think about new ways to create demand PHYSICAL GOODS Physical albums, Music Videos, Merchandise DIGITAL GOODS Videos, Digital Copies of Albums EXPERIENCE GOODS Live Performances, Guest Appearances

CONCERT TICKET PRICES OVER TIME

ARTIST MAKES THE MUSIC, LABEL MARKETS IT OVER THE LONG RUN... Ticket prices have grown faster than inflation OVER THE SHORT RUN... Recent acceleration in ticket prices

HOW DO PLAYERS SEE TIVO

Advertisers Like: "Showcase options" & Research Stats Dislike: Skip commercials Networks Like: Can target specific users Dislike: Time shifting (affects advertising) MSOs (Cable & Satellite) Like: Search & Save increases the value of channels Dislike: Time shifting Content Producers Like: Potential for decreasing power of MSOs because they provide mechanisms for broad band distribution and local storage Dislike: Recording because of copyrights Consumer Electronics Like: TiVo-like functionality can produce a boom in new CE sales into the long run (CE = consumer electronic) Dislike: Competition for other DVRs, computers, etc.

IMPLICATIONS OF INDUSTRY EVOLUTION

All industries evolve over time as new firms enter and failing firms exit Industry evolution threatens all sources of competitive advantage The more a firm resists evolutionary change, the less likely it is to survive Product life cycle (not equivalent to industry evolution but closely linked to it)

Netflix competitors

Amazon prime video: rich due to amazon web services; where they make $$ create own content by buying independent films, hire creatives use as advertising, cost advantage streaming industry analysis UNATTRACTIVE Applee TV CBS all access direcTV Now HBO Now hulu playstation vue showtime sling TV

RESOURCES

An asset, may be observable or tradable, that contributes to producing a firm's outputs. Observable, tradable in the market - Improves Value, Lowers Cost, or both - Provides an advantage if difficult to imitate or substitute Tacit or Intangible: human capital, brand, culture Tangible: natural resources, patent stock, distribution network, location

Matrix advantages

Avoids problems of placing one organizing dimension (function) over another (geography or customer segment) - dimensions are roughly equal in importance. Provides professionals with a broader range of responsibility and experience.

INDUSTRY FORCES INFLUENCE PERFORMANCE

BARRIERS TO ENTRY POWER OF SUPPLIERS POWER OF BUYERS THREAT OF SUBSTITUTES RIVALRY Addition: Complements (ex. cars and gas stations). Strong complements raise product's value WHEN FORCES ARE STRONG, PROFITABILITY IS LOW & VICE VERSA

DOWNLOADABLE MUSIC

BARRIERS TO ENTRY: STATIC BENEFITS OF SCALE new data high fixed costs and low marginal costs Pooling of Risk Is it still a risky business? Have consumer tastes changed? Have Fixed or Variable Costs Changed? Still Risky, Giants can still Pool Risk, Consumer Tastes the Same, Fixed & Variable Costs Unlikely to Change Will it make it harder/easier to predict the Sales of New Artists/Albums?Could they use the Internet to Identify Hit Artists before they Invest? Conventional Economies of Scale Distribution & Manufacturing Unnecessary but Overhead Remains the Same & costs $ to Digitally Distribute (fixed costs) ... May be another source of Economies of Scale • BargainingPowerOverArtists? Modest • BargainingPoweroverPromotionalChannels? Entrants can now sell directly to Consumers • BargainingPoweroverRetailChannels? Shelf Space Still an Issue CUSTOMER POWER: WHAT IS DIFFERENT? • Piracywasaproblemwith Cassettes • WhatdoesDemandlooklike? • WhatisthePriceofFile- Sharing? SUPPLIER POWER: Artists: New vs. EstablishedStill need the Label: ClutterEstablished Artists: Always had Bargaining Power (Rihanna, Kanye West) RIVALRY: High Fixed Costs and Low Marginal Costs but Gentlemanly Is the Oligopoly Threatened?Retailers Suffer RELATIVE POSITION: Benefits of Scale: May still mean Giants Trade-offs: Retailers can't say to BMG that if they promote downloading, they will promote another majors music LABELS STILL HAVE POWER: a lot of power (over Indie), expertise, network, negotiations (e.g. Prince went back to major label) despite industry disruption, market didn't change that much

Netflix competitive advantage

BEFORE: value drivers: delivery (get it anywhere), brand/reputation, breadth of line, service (recommendation algorithm) cost drivers: economies of scale (spread DVDs fixed costs over lots of units) isolating mechanisms: transition costs (have to rebuild preferences), not super strong overall AFTER (streaming service): value drivers: delivery, service, breadth of line cost drivers: economies of scale (if shift customers online), low input costs (Existing relationships) isolating mechanisms: depends on content

GROWTH STAGE: EARLY MOVER ADVANTAGE

BEGINNING Early entrants can establish an enduring Value - Cost advantage by leveraging scalable V-C drivers that are protected for imitation. GROWTH Earliest entrants have longer exposure to opportunities for growth and innovation, making it important to seize those growth opportunities. SURVIVAL Only entrants that establish and defend a superior V-C position, and continuously adapt as an industry evolves, will survive. END Whether an early mover thrives is dependent on establishing a competitive advantage in the short run and a dynamic capability to support long run growth.

BLOCKBUSTER CASES

BLOCKBUSTER A Describes the home video rental business o SellingVCRTapeso HowBBwasableto"create"a competitive advantage BLOCKBUSTER D Describes technological substitution and the threat of digital distribution o Personalvideorecording o Pay-per-viewo Videoondemand

Zara KEY COMPETITORS

Benetton Italian company outsourced labor scale intensive to subcontractors licenses low fashion high price Gap 90% outsourced US-centric retailing lack of fashion posiiton decreased profit low fashion so so price H&M closest competitor outsourced 50% to Europe - quicker lead times but not like Zara outsourced 50% outside of Europe high fashion low pirice

Zara MAIN VALUE DRIVERS

Breadth of Line* Brand Quality* & Geography* also: brand/reputation deliver: just in time, six weeks

TIVO'S ISOLATING MECHANISMS

Break it Down § Switching Costs § Imitation: patents, etc.

BMG BUSINESS ISSUES

Business Leaders have riled against "piracy" arguing that it threatens their profitability and survival (Movies, Publishing, Software, Music) RESULT Costly legal battles Search for technology which makes piracy difficult OPPOSING VIEWS "Is it the responsibility of the world at large to protect an industry whose business model is facing a strategic challenge? Or is it up to the entertainment industry to adapt to a new technical reality and a new set of consumers who want to take advantage of it?" —Andy Grove, 2002— "[T]he only thing I can say is it's very hard to create a new business model against something that is perfect to copy for free. It would even challenge the greatest business man that ever was." —Michael Eisner, 2002—

ORGANIZATIONAL DIMENSIONS

CAPABILITY DEVELOPMENT Complementarity & Consistency within the Activity System Control & Coordination Systems Compensation & Incentive Systems Organizational Culture & Learning Individual elements in the Activity System, except resources Capabilities Value & Cost Drivers Isolating Mechanisms Resources

TRANSACTION COSTS & UNCERTAINTY

CONTRACTUAL INCOMPLETENESS IS INCREASED BY UNCERTAINTY IN THE SUPPLY RELATIONSHIP, providing the supplier with opportunities to use its bargaining power. Uncertainty can be due to: § Volatility in downstream demand or volume. § Changes in technology. § Shifts in input market prices or volume. WHEN THE SUPPLY RELATIONSHIP'S FUTURE STATES CANNOT BE DEFINED CLEARLY, THEN THE TWO FIRMS MUST RENEGOTIATE THE CONTRACT WHEN CHANGES ARE NEEDED. As Uncertainty increases, more discussion & negotiation The Frequency of Change strains the relationship...making Vertical Integration more Attractive. or can Make investment in company to resole issues so skin ht game

DESIGNING INCENTIVE SYSTEM problems

CONTROLLABILITY Occurs when managers are unable to identify how much performance is due to individual skill and effort and how much is due to luck. ALIGNMENT Occurs when less important tasks are weighted more than they should be just because they can be measured. INTERDEPENDENCY Occurs when performance depends on the efforts of a team, making it difficult to identify individual contributions. These problems reflect noise & distortion in compensation systems.

Zara OPERATING ADVANTAGE

CORE CAPABILITY: Fast at sensing and responding to market trends Zara does not compete across entire FRUSTRATIONS value chain - instead, they: Emphasize partnerships Invest in brands Minimize tangible investments Arbitrage international price differences Business Model (not obvious): • Globalization through localization : adapt to local, get products to stores • Commitment to fixed assets • Vertical integration to achieve flexibility Create Value: Creation of premium image and stores without advertising Fashion follower instead of fashion leader

DUCATI'S STRATEGY (cont)

COST CHANGES Economies of scale through Standardization of products & Increased Sales Research and development Increased REVENUE BREAKDOWN • Ducati: R&D 3.8% of revenue • HD: R&D 2% of revenue • Racing Division: *Tech Dev. and *Sports Image MINOLI'S RACING VISION • Increased racing budget (3.9M Euros à10.2M Euros) • Run as independent company (0à7.9M Euros in sponsors)

CHALLENGES OF FIRST MOVERS: POTENTIAL OUTCOMES

Cable & satellite companies crush TiVo • Outspend, give away for free, match product features TiVo becomes like Apple at the time of the case Differentiated, niche product serving high end Difficult because of missing features TiVo becomes a software, service & platform firm • Requires volume and becoming more horizontal • • CHALLENGES OF FIRST MOVERS: LESSONS LEARNED IN HINDSIGHT 2003: drive for volume (relatively successful execution) 2005: retain differentiation, drive profitability 2006-7: focus on a horizontal slice (e.g. a platform for the digital home)

Zara COMPETITION: IMITATION

Capital is not an entry barrier Lack of scale to justify fixed costs for manufacturing, distribution, etc. Access to inputs Learning DAs Complexity of implementing change Mind sets about managing inertia Timing DAs

TRENDS IN OUTSOURCING MANUFACTURING ACTIVITIES TO CHINA

China has a country advantage, based on low labor costs, in rapidly growing industries. U.S. firms are replacing independent, non-Chinese suppliers, in the U.S. or elsewhere, with Chinese companies. U.S. firms are outsourcing their production activities to China. What control issues between Customer & Supplier may complicate this trend toward buying from Chinese firms? • • Given the types of goods produced, the suppliers have low asset specificity (non-specialized goods or processes). The cost advantage is due to being located in China à customers can find other Chinese suppliers with comparable efficiencyàstrong competition induces cooperation.

BLOCKBUSTER INDUSTRY ANALYSIS COMPETITORS

Company 2001 Percentage of Market Revenue Blockbuster 33.3% Hollywood Video 16.9% Movie Gallery 3.0% Family Video 1.4% Video Update 0.9% Others 51.2% How much of this revenue split is coming from Adult Film? What happened to the Mom and Pop stores? died b/c of free porn online

HAROLD SEIGLE'S CONSIDERATIONS FOR A NEW PRODUCT

Consistency with the quality and prestige of Head Ski + MUST INCLUDE ONE OR MORE OF THE FOLLOWING CHARACTERISTICS High innovative content High engineering content High style appeal Be patentable

TRANSACTION COST THEORY

Contracts are incomplete because there are always contingencies in a supply relationship that cannot be specified in advance. § Firms&managersactopportunisticallywithinthegrey area of contracts to make sure they benefit the most à exchange hazards. What are transaction costs? "Costs of conducting an exchange in the market." The theory specifies two basic conditions that, in combination, tend to increase transaction costs and in turn, lead to vertical integration: Uncertainty & Asset Specificity

TYPES OF CONTROL PROBLEMS

Control Over Issue The distribution of economic gain (Value - Cost) from the supply relationship. Who gets what? Negotiation over price: What is the buyer's surplus? What is the supplier's surplus? Supplier investment decisions that affect Value and Cost. Common areas:Assets, human resources, product design, management processes, production processes, etc.. Supplier incentives Aligning incentives with the firm's strategy. Information that is valuable and sensitive to the firm Two types of information: The firm may gain information about the supplier's business. The supplier may share information about the firm's business with the firm's competitors.

Ducati ENTRY INTO CRUISER MARKET

Cost of Entry: 17M Euro + 26M Euro (additional cost - assumed one-time) Assume average price per bike: 11K Euro MC=43.4+5.0+5.9=54.3%oftotalrevenue(EX12) Payback after selling (17M Euro + 26M Euro)/[(11K*(1-54.3%)] = 8500 bikes Investment for entering market is small pros: - Size of investment smaller - Ducati could target younger demographic - Ducati has strong distribution network cons: Lifestyle cruiser goes against their brand image - No competitive advantage- Might alienate core customers - Naked Bikes have elements of a cruiser can Honda copy? it's not focused differentiation hard: different riding experience (long-term) and can sit back and relax vs. sport bike bent over Harley popular in US while Europe diff landscape not compatible b/c diff kinds of riders, diff manufacturing, diff cultures, customers don't overlap dienst amke sense

ECONOMIC LOGIC OF DUCATI'S TURNAROUND

DECREASE COSTS for "physical" attributes without changing willingness to pay "Physical attribute" Costs Decrease cost without compromising physical # Suppliers Economies of scale Bargaining Standardizing Racing R&D INCREASE COSTS to boost WTP for "intangible" attributes; adopted aggressive growth strategy Increase cost to boost intangibles Stores World of Ducati Internalized design Internet "Intangible attribute" WTP PHYSICAL Performance Sport: Handling Sound Engine INTANGIBLE Sports character Community Design Exclusivity Italian-ness Tradition: linked to history and location in Romania *didn't raise prices to reach more of public, aggressive growth, capture inexperienced riders long-term strategy: invest for growth not just cost cutting

NETFLIX BUSINESS MODEL

DVDS COULD BE MAILED VS. VHS TAPES PRICING MODEL WAS HARD TO IMITATE (NO LATE FEES) 1ST PER RENTAL -> LIMITED SUBSCRIPTION -> UNLIMITED SUBSCRIPTION RAISED SWITCHING COSTS BY BUILDING ONGOING RELATIONSHIPS WITH SUBSCRIPTIONS EXPLORED NEW MARKETS INVESTED HEAVILY IN OPERATIONAL OPTIMIZATION

SAMSUNG'S VIRTUOUS CYCLE IN 2003

DYNAMIC CAPABILITY EXAMPLE: 1. INVESTMENT AHEAD OF THE COMPETITION (INNOVATION) 2. MARKET LEADERSHIP (IMPROVEMENT IN THE FIRM'S V-C POSITION) 3. IMPROVED PROFITABILITY 4. CASH FLOWS AND BALANCE SHEET FLEXIBILITY Samsung spreads its innovation over a diversified portfolio of products, capturing economies of scope in technology INDUSTRY DISRUPTION 20 platforms such as LCD technology for both cell phones and large screen TVs.

FACTORS INDICATING INDUSTRY MATURATION

Decline in the industry growth rate Increase in buyer experience with products resulting in increased buyer powe Higher concentration of market share among large, relatively similar firms Persistence of niche markets

head ski MOTIVES FOR DIVERSIFICATION

Decrease earnings volatility and risk Acquire a new source of revenues and earnings Reposition current business in parent firm Employ current R&C into new markets thought w/ distribution and reputation, success in skiwear Leverage dealer relationships to help with distribution HEAD SKI APPAREL PRODUCTS ugly

ACTIVITY SYSTEMS

Demonstrates how components relate to and reinforce each other in support of the firm's strategy. are composed of interconnected components of a firm that contribute to, or detract from, the firm's Value and Cost drivers. § The core of the system includes activities that significantly affect a firm's V-C position. contain policies governing: § Value chain activities § Critical resources, such as technologies and brands § Product characteristics § Characteristics of the firm's organizational structure & culture

coordination systems

Determine how projects will be executed across units. Examples: § Standardizedprocedures § Jointplanning § Liaisonpersonnel § Taskforceswithmembers from multiple activities. § Teamsthatinstitutionalizethe task forces § Hierarchicalreferral

Radical Institutional Change

Dramatic shift in the regulation of competition that opens the market to firms with innovative capabilities Entry Decline in the number of incumbent firms Industry consolidation

BMG POLICY & LEGAL ISSUES

ECONOMISTS Rethinking the Copyright System/Length • Do copyrights benefit Consumers & Music creators? Or are they used to create abnormal profits for intermediaries such as Record companies and Music publishers? LAWYERS Many Lawsuits Labels (RIAA &4 Labels sue BU Grad student) ISPs (Labels want ISPs to Police Pirates) Artists - Think they're being short-changed

INDUSTRY OF GIANTS

ENTRY BARRIERS What is the probability of having a hit? Low: 4/5 Recordings Lose Money (Risky) What does this Mean for Profits? Profits are Concentrated in a Small Number of Hits Big Hits Sell Magnitudes More than Flops Why is revenue concentrated in a small number of hits? Heterogeneous Consumer Tastes Cascade Effect (word of mouth) Why are profits so concentrated? Fixed Costs: $300,000àMarginal Cost: Small Hits & Flops Cost the Same Given risk, what should we expect about small firms' profitability? • Small Labels: A few flops could sink them Static Benefits of Scale: Giants can Pool Risk & Amortize Fixed Costs over Many Units (Distribution Networks, Manufacturing, Overhead) BENEFITS OF SCALE: SUPPLIERS, RETAILERS • How does a record label attract the best talent? • Reputation based on Resources & Capabilities (New Artists) How does it get airplay for its new artists? Weekly, 1000 new songs released (3-4 get added to radio play lists) If they have superstars, they give radio stations special access for increased airplay Giants attract the best talent big labels have more bargaining power to get songs played on radio How did they secure shelf space? Shelf Space Limited in Supply If they have hit artists, they can negotiate for New Artists HIGH LEVEL OF CONCENTRATION C5=85% STATIC BENEFITS OF SCALE Pooled Risk & Standar\d Economies of Scale DYNAMIC BENEFITS OF SCALE Bargaining Power over Artists, Promotional Channels & Retail

WHY INCUMBENTS DELAY ADOPTING TECHNOLOGICAL SUBSTITUTES

Emphasis on total (rather than marginal) return on investment The new technology may cannibalize profits from the traditional technology -don't want ot upset consumers Weak absorptive capacity to adopt the new technology = do I have skillset and tech to adapt e.g. Dragonspeak --> voice transcription --> Microsoft bought why change? customers liek things the way they are

COMPENSATION & INCENTIVE SYSTEMS

Employees must be compensated so that they contribute effectively to strategy execution. achieve 3 goals Measure task outcomes related to the firm's value and cost drivers Set appropriate targets for each outcome. Reward managers for achieving these targets.

EMPLOYMENT RELATIONSHIP

Employees' duties as per the U.S. legal system Duty of Obedience Managers have the right to control both the process and outcomes of work. This often means that the employee must behave in a socially acceptable, respectful way with the employer. Duty of Loyalty The employee should act in the interests of his employer and cannot benefit at the employer's expense. Self- dealing is legally unacceptable. Duty of Disclosure The employee must disclose information that may benefit the employer. In fact, the employees may be held legally accountable for losses that result from a failure to disclose critical information.

Growth

Entry Rate > Exit Rate Innovation -> Buyer Surplus of New Products > Substitutes High market uncertainty Firms pursue innovation to increase value or lower costs Wide variation in capabilities & resources

Maturity

Entry and Exit Rates are about equal Variability in Entry & Exit Rates Emergence of Dominant Design Heterogeneity in Competitive Positions

PAY-FOR PERFORMANCE SYSTEMS

Example - Piece-rate pay: related to the quantity of output of a person over a period of time. Conditions for effective implementation of Pay-for Performance incentive systems Problem addressed Employees control the pace of production. Controllability Performance standards are perceived as fair. Controllability The firm absorbs some of the risk when there is significant uncertainty & employees are risk averse. Controllability Group members' preferences are similar. Interdependency Cooperation and innovation are rewarded. Interdependency A lower bound on quality is explicit. Alignment

Shakeout

Exit Rate > Entry Rate Development of Dynamic Capabilities, Scale- based Value & Cost Drivers, & Sustainable V-C positions Wide Variation in Value & Cost Drivers

BLOCKBUSTER TARGET CUSTOMER

Families defined Blockbuster's target segment, offering a variety of children and family content. Blockbuster "reinvented" family time.

control systems

Financial: determine how financial resources are allocated Operational: determine how materials and people are allocated across tasks and how task performance is measured.

Ducati value chain

Firm Infrastructure: Love of change at the Top HR management: Key selection criteria: Shared passion for Ducati Employees at center of advantage Tech development: R&D increase 4x; 3.7% of sales Product standardization Racing division Internal design procurement Few suppliers (200-130) Short-term contracts Engine tech distinct Dual-sourcing Platform approach operations • Increased outsourcing (90%) • Little but assembly in-house marketing adn sales Owned sales and marketing sub Effort: Few High Quality Dealers Ducati stores Premium prices Open paddock Ads in special magazines Museum Owners club World Ducati Weekend Ducati.com

Zara Merchandising

Focus on fickle, fashionable young, particularly women with highest fashion sensitivity/risk Broad product line but relatively standardized across countries Rapid product variation/limited price variation over time (less spikes, continuous replenishment easier) Freshness plus deliberate creation of scarcity Word of mouth buzz/window marketing (no advertising)

TRADITIONAL FORMS OF ORGANIZATIONAL STRUCTURE

Functional Structure The activities of the firm are organized by function such as production, marketing, R&D, and accounting. Customer-Based Structure The activities of the firm are organized by well-defined customer segments. Geographic Structure The activities of the firm are organized by geography. Matrix Structure Form where there are multiple organizing dimensions, such as function and geography, and managers report along 2 hierarchies instead of one. Rivals with different hierarchical structures build different kinds of capability.

Zara TARGET MARKET

GENDER Primary Market: Women Secondary Market: Men AGE Between 25-40 years STYLE SENSE Fashion forward, trendy, slightly edgy style INCOME/SPENDING HABITS Mid-range income, unwilling to spend on expensive brand names

BLOCKBUSTER VALUE DRIVERS

GEOGRAPHY Could reach most of the population through its stores 64% of US population within 1 min drive of one SERVICE Staffed knowledgeable people, reducing walkout rate by one-half: in person store employee recs ; less choice overload BREADTH OF LINE Offered a breadth of line incomparable to competitors for selection; more copies of hit titles HOWEVER no electric Indies films like Netflix or adult films like mom and pop stores COMPLEMENTS Availability of complements drove popularity of services brand adn reputation

head ski CURRENT STRATEGY

GOALS Place primary emphasis in next five years on growth in the ski business through penetration with current products Secondary emphasis on "functional" skiwear Future areas of interest are: Skis for lower-price segment "Hardware" ski accessories Estimated growth rate 20-25% POLICIES • Maintain high-quality/prestige image • Build on innovation, engineering, style, and patentability

Other Diversification Options head ski

GROWTH: NEED TO EXPAND V-C Value is created but P-C is small Dead endàHead won this market COMPLEMENT 1: SKI POLES • Same distribution channel, metal, need to avoid buckling (but limited size)• Look good with U-turn, black • Margins: • 85% Poles • 15% Skis COMPLEMENT 2: RACKETS • Similar tech features are relevant WHY TENNIS? Fits in with their core competencies Technology is key Not dependent on fashion (not a value driver for Head Ski) - don't have resources and capabilities to design nice stuff; funcition over fashion

PROBLEM OF CONSISTENCY

Gains from consistency among activities determine, in part, the firm's need for control over them. System-wide benefits from coordination inhibit the outsourcing of a single activity.

TWO KEY GOVERNANCE ISSUES

Given these advantages of the employment relationship, why don't firms always vertically integrate? Relative Cost of... Markets vs. Managerial Control LEGITIMATE HIERARCHICAL AUTHORITY ENABLES MANAGERS TO: Align incentives with the Firm's Market Position Make the Firm's Activities more Consistent with each other Develop a Culture that supports the Firm's Strategy IN TURN, EMPLOYEES • In turn, employees generate useful strategic information, leading to better decision making.

Ducati FOCUSED DIFFERENTIATION

HIGH WTP Higher WTP than competition without high costs TAILORED All activities are tailored to a specific set of products, customers, and geographic markets TRADEOFFS & FIT Tradeoffs and fit can protect from potential imitators LIMITS How to overcome focused strategy's limits on growth

Products based on disruptive innovations

Have lower initial functionality, value, and price as well as a lower cost to produce, compared to incumbents' products Offer market opportunities that are too small to attract incumbents' attention Have attributes that are weaknesses in established markets but strengths in emerging markets Have a price-value profile that does not initially attract incumbents' established customers (customers in the industry's core) Offer market opportunities that are too small to attract incumbents' attention Have lower initial functionality, value, and price as well as a lower cost to produce, compared to incumbents' products

Zara Management

Heavy investment in IT—largely proprietary—to facilitate JIT/near real time operation High frequency/bandwidth linkages (information channels) Store managers with very intense incentives/broad responsibilities Flat organization/minimum coordination with other chains Creative teams to coordinate across manufacturing in retailing focused on ultimate customer

STRATEGIC SOURCING FRAMEWORK

Higher Strategic Value à Increases Need for Control Strategic Value of the Activity: What does the firm need to control? vs. Relative Capability (Competence) of the Firm compared to the Best Supplier high and high = make medium and high = tend to amke medium and medium = make or buy low and high = make or buy low and medium = tend to. buy low and low = buy ProcessInnovation (leading to Make) § Partnership

BLOCKBUSTER COMPETITORS

Hollywood video Direct rival Smaller business model 1,900 stores Defaulted on loans BANKRUPT Blockbuster Top player First Mover 9,000 stores Rejected Netflix purchase BANKRUPT Family Video Small towns Midwest player 700 stores Began renting adult content Adult customers most loyal BANKRUPT ways to prevent? - 13% profits are from late fees; what to do with stores? - impulse purhcases - buy NEtflix - streaming

RESOURCE REDEPLOYMENT

How can firms redeploy their resources to: § § Help others survive the pandemic? Keep the business out of bankruptcy?

VALUE CHAIN FRAMEWORK

IDENTIFYING CAPABILITIES IN SPECIFIC ACTIVITIES Support activities: Activities that enable the primary activities; support activities may enable multiple primary activities. Primary activities: Activities specific to the creation of the product or service.

FIRST MOVER ADVANTAGE (TIVO)

IS TIVO AN EXPERIENCE GOOD? Demo in store isn't really enough No analogous product First Mover Disadvantage if experience good since don't know how much you can do until you buy product Later entrants have advantage

MATURE STAGE: NICHE MARKETS

In many mature industries, small firms may thrive in low volume nichemarkets that large firms are unable or unwilling to serve NICHE ATTRIBUTES The size and growth rate of the niche Barriers to entry: may need specialized expertise Buyer's preferences for niche vs. core market products Minimum level of scale required to compete SUCCESS DEPENDS ON A FIRM'S ABILITY TO Improve non-scale-based cost and value drivers Increase buyer switching costs

STRATEGIC BOUNDARIES OVER THE INDUSTRY LIFE CYCLE

In the early stages of an industry's development, firms are integrated because the demand for input is too small to attract the entry of suppliers. As the industry grows and matures, suppliers enter à Firms outsource to benefit from lower supplier costs. Over time, as demand drops due to the introduction of substitutes, suppliers exit and firms in the industry re-integrate production.

MAKADOK'S MODEL

In this auction, a firm can become more profitable than competitors after bidding for the resource (asset) when: The asset complements the firm's resources more than the resources of competitors. Complementary resources or capabilities produce a more effective outcome together than independently. Higher complementarityà allows the firm to raise its bid. The firm has a superior resource picking capability: an ability to forecast the value of the resource after it is acquired. In this case, the firm's bid depends on the forecast. The capabilities of the firm contribute more strongly to the resource's post- acquisition performance than the capabilities of competitors. The resource is worth more to the firmàraises the firm's bid.

Geographic advantages

Increased focus on the characteristics of different regions may increase Value or Lower Costs or both. Benefits may stem from access to:• Unique local competitors • Unique local suppliers• Unique local customer preferences

Customer-based ADVANTAGES

Increased focus on unique characteristics of customer segments. Benefits may stem from a stronger understanding of: Unique marketing requirements (knowledge of customer industry) Unique customer preferences (e.g., products tied to unique practices in a segment)

BLOCKBUSTER VS NETFLIX

Innovators 2.5% Early Adopters 13.5% EarlyMajority34% Late Majority 34% Laggards 16% Netflix go high at end vs BB normal distribution Netflix disrupted BB In 2 ways: 1 mail by DVD 2 online on demand

EMBRACING THE TRANSFORMATION (music)

LABELS HAD RESOURCES & CAPABILITIES AND POWER TO WRITE CONTRACTS AROUND THE "GOODS PORTFOLIO" BUNDLE THE SALE OF CDS TO CONCERT TICKET SALES Record live concerts and sell the CDs after the shows like they do in China (bundle the experience good with a physical good) Increase the length of the concerts to increase concession sales ENGAGE IN LEGAL FILE SHARING TO LOWER RISK Country music artists asked local DJs to play their music to get a following BMG can go back t ocmpmetitive advantage and isolate itself from competition; lots of diff revenues streams (like marketed Britney Spears in website before selling)

HEAD SKI cost drivers

LEARNING CURVE ECONOMIES OF SCOPE (increased efficiency through shared use of assets) VERTICAL INTEGRATION (materials) not a low cost producer; al ot still made by hand

BLOCKBUSTER INDUSTRY ANALYSIS BARRIERS TO ENTRY

LOW need store front and content from distributor (NOT studios) BB most money spent on rental inventory purchases; dw about competitors Blockbuster's Expenses Percentage of Revenue Rental Inventory Purchases 35.9% Payroll/Taxes 16.9% Occupancy Costs 15.3% Sale Inventory Purchase 3.4% Advertising 3.5% Operating Margin 25.8% complements • Posters • T-Shirts • Candy/Drinks/Popcorn • Satellite dish systems • DVD players and VCR systems for rent

Zara Design

Large design team • Emphasis on developing new items rather than just matching supply Fashion follower vs. fashioner Permanent hunt for ideas—open innovation Quick market testing • Design as link between production and merchandise Clothes designed to be worn 10x

Zara BUSINESS MODEL: BREAKDOWN OF NUMBERS

Local Procurement = Higher Costs 15-20% higher costs (manufacturing selling prices - MSP) on 80% of output sourced from Europe and N.A. Penalty = 14% of MSP OR Assume: 100% markups by / 50% Gross Margins for retailers to 7% of RSP relative to Asia Advertising .3% of revenue on Ads vs. 3-4% industry average Savings of 3.2% of RSP just use storefront Low Markdowns Repres. European retailer 30-40% of sales at marked down prices (avg. is 30%) Total markdown is 10.5% PSP

TIVO'S CONCERNS AT THE TIME OF THE CASE

Long Run Business Model Imitation Adoption Becoming Niche (e.g. Apple was in decline at the time of the case) Murdock & DirectTV: more reliable if you have satellite dish

southwest vs. American Airlines

Low Price Short Routes No Frills Point-to-Point: small towns, more direct One Aircraft — Boeing 737 High number of Aircraft per Route No Meals Flexible/Lower Staffing monopoly in smaller airpots; 15 min turnaround by perfecting logistics; better culture; diff business model Premium Price Short, Long & Int'l Variety Hub & Spoke System: all over the world Multiple Aircraft Low number of Aircraft per Route Meals & Service Higher Staffing Airlines have tried to create low-cost carriers as subsidiaries (All Failed)§ United-TedAirline§ BritishAirways-GoAirline § Continental-ContinentalLight

Functional ADVANTAGES

Lower Costs: Reduced overhead Standardized procedures within functions Process innovation specific to functions Power over suppliers via scale advantages in purchasing Higher Value: • Via development of expertise in each function (R&D, marketing, etc.) Growth: • Centralization of new product introduction • Investment in stronger technology platforms

TRANSACTION GOVERNANCE CONTINUUM

MARKET BUYStrategic Value = Low Relative Competence = Low - Reliance on Market Prices to set price for the exchange - Simple Contracts RELATIONAL - Partner or Relational Arrangements- Complex Contracts- Establish a Community of Interest - Hostage Taking EXAMPLES:- Long Term Contracts- Value Added Partnerships - Cross Equity Investments - Exclusive Dealing Arrangements- Cooperative R & D HIERARCHICAL MAKEStrategic Value = High Relative Competence = High - Transfer Prices set by in-house contracts - Exchange governed by Managerial Hierarchy

WHY INCUMBENTS FAIL TO ADAPT

MARKET ISSUES New Market: Too small to attract their attention; involves competing for a smaller P-C. Uncertainty Established Market: more predictable, lots of data available. ORGANIZATIONAL CONSTRAINTS Traditional resource allocation processes Resource dependence Emotional attachments Administrative inertia These conditions provide a window of opportunity for firms selling the new product to develop an innovation cycle that helps them penetrate the core market rapidly via scale-based cost drivers

BLOCKBUSTER BUSINESS MODEL (HISTORICAL)

MERCHANDISE 2001 gross rev: 84% movie & video game rentals (including late fees and sales) 13% late fees + complements DISTRIBUTION Mechanically re-packaged new releases straight to stores (cut out distributor) SUPPLIERS Went directly to studios Indies tried to sue (to no avail) More copies -> "guaranteed in stock" '93 - 30% of customers left store with nothing OPERATIONS 80% owned; 20% franchised Same products in each store; 10am-12am

BLOCKBUSTER IDENTITY

MISSION STATEMENT At Blockbuster, we are committed to supporting the communities that our members and employees call home. VISION At Blockbuster, diversity means valuing differences. It's a corporate value that must be continually developed, embraced and incorporated into the way we do business. SLOGAN Never be without a movie. too vague great business model but couldn't pivot

MATURE STAGE: LARGE VS. SMALL FIRM COMPETITION

MULTIPOINT COMPETITION In some industries, large firms compete across many products in a product line & across geographies Mutual footholds in the core markets of rival firms ensure competitive stability at diff levels e.g. Coca Cola, sprite, Odwalla juice, Dasani water ARMS RACE Firms innovating in Value and Cost in the same way, and at roughly the same pace, in order to keep up with competitors HYPERCOMPETITION Stems from the combination of multipoint competition and arms race conditions Increments to profits and capacity are low even as firms repeatedly innovate combination fo the two

MUSIC INDUSTRY ANALYSIS

Major Labels: Why a Game of Giants? Conduct an Industry Analysis Pre-Napster Conduct an Industry Analysis Post-Napster

CAPABILITIES

Managerial and organizational skills that a company uses to organize & deploy its resources transforming inputs into outputs. - Unobservable and difficult to trade or price in the market - Improves Value, Lowers Cost, or both - Developed: by people through coordinated action; and independently of resources - Less stable than a resource Tacit or Intangible: marketing capabilities, product development capabilities, forecasting capability ARE BUILT BY SPECIFIC ACTIVITIES & POLICIES Two frameworks for mapping activities and policies are:: value chain & activity system VALUE CHAIN FRAMEWORK

WILLINGNESS TO PAY (Tivo)

Market Research Indicators: 5% of Consumers' W.T.P. Monthly Fee $5 - $10 to Cable Operators $3 to Direct TV Box: < $200 Compared to: § § $12.95 / month $299 / lifetime Box: $249

GROWTH STAGE: STRATEGIC PRICING

May choose to price below marginal cost to attract additional buyers makes sense under two conditions: 1. Customer switching costs are high enough to support retention (reducing costs associated with customer acquisition) 2. Scale-based cost drivers are in place or can be developed. common in industries where average costs decline as volume increases, e.g. industries with: Strong learning curves (aircraft, semiconductor manufacturing) Strong scale economies (money market funds)

Zara BUSINESS MODEL: DOWNSTREAM

Merchandising Store Operations Management strategy: Focus on boosting traffic (essential niche targeting), margins and turns to compensate for heavy capital investment

DISRUPTIVE INNOVATION

More profitable Initially, the new product does not meet the needs of the established customers so, incumbents are not interested Less Profitable Performance which customers demand or can absorb Overshooting customers' needs Market Trajectories V-P (DI) > V-P(SI) OVERSHOOTING Products often include attributes that exceed what established customers in a market actually utilize or want Why? Technological progress often is faster than the ability of customers to absorb it ADJUSTMENT Once customers' needs/preferences are filled, established customers shift attention to price for performance IMPLICATION Changes the way firms must compete for business in the over-served tier of them market

DILEMMAS OF NOISE & DISTORTION

NOISE = measurement error Controllability & Interdependencyincrease noise that lowers the ability of management to measure current progress in achieving results. DISTORTION = misalignment of measurement Increases through the improper weighting of tasks àunderweighting hard-to-measure activities and overweighting easy- to-measure activities. Optimal System? Low levels of noise and distortion but rarely achieved Implication: There is an inevitable tradeoff between these dilemmas.

FANS WILLING TO PAY FOR CONTENT

Nielsen estimates the industry's incremental revenue potential from selling exclusive content is $564 million, as an individual buys content from only one band. That number jumps to $2.6 billion of incremental revenue if the individual buys exclusive content from all other favorite bands as well.

STRATEGY EXECUTION

Not about strategy development, strategic planning, or luck Strategic Planning articulates a strategy and the programs to implement it, whereas Strategy Execution is the day-to-day substance of a strategy Involves putting a firm's resources and capabilities into action to increase Value, lower Costs, or both

PROBLEMS WITH DIVERSIFICATION head ski

Not enough economies of scope No knowledge of fashion Manufacturing cannot support mass production Did not align with core capabilities POSSIBLE CONTRIBUTIONS OF PARENT COMPANY TO NEW VENTURE Financial capital (firms on average can't be more efficient than capital markets) capabilities resources Management (Entrepreneurship and Management) Why sell clothes? Same consumer base but different sizes, styles, etc. High margins on sportswear 2 What percent of the sportswear market could Head Ski capture? 3 Do these customers prioritize function over fashion? Why is this important?

CONCERT TICKET PRICING

OverviewofTicketPricing IndustryTrends DatafromKruegerStudy Pollstar&RollingStone 1,786artists,fromAbbatoZZ Top; 1,274 in Pollstar database Responsiblefor75%ofticket sales, 1981-2013 PRICES SOARED LITTLE PRICE VARIATIONACROSS CITIES LOW, HIGH, AND AVERAGE TICKET PRICE, THE BOSS

PIECE RATE PAY

PICKING CUCUMBERS: Don't pay by piece b/c it might be a bad cucumber Executive pay: arguments over WHETHER to link Management is not about telling ppl hat to do, it's about making ppl feel good about what they do

SUMMARY OF KEY POINTS

POINT A VERTICAL INTEGRATION & OUTSOURCING DECISIONS ...are always made for an activity or for an asset associated with an activity not for product. PBOINT B WHAT DOMINATES? Control needs dominate vertical integration decisions. Control and buyer relative capability affect outsourcing decisions. PCOINT C VERTICAL INTEGRATION ALMOST ALWAYS INVOLVES A CHANGE IN THE WAY AN ACTIVITY IS EXECUTED. Otherwise there would be no benefit from increased control.

KREUGER

POLLSTAR October2001editionofRolling Stone's Encyclopedia of Rock and Roll 1,786artists,fromAbbatoZZ TOP; 1,274 in Pollstar database Responsiblefor75%ofticket sales, 1981-2003 Rolling Stones LAST TOUR GROSSED $80.7 MILLION, WITH AVE. TICKET PRICE OF $178.44 VS AVE. OF POLLSTAR TRACKED SHOWS AT $76.20.

BLOCKBUSTER INDUSTRY ANALYSIS SUBSTITUTES

PPV = pay per view Other forms of entertainment served as _ Closest competitor was pay- per-view offerings More substitutes quickly entered the market as Blockbuster matured PPV only offered at certain times, not on demand, grainy and buggy movie airs in theaters and not video stores for 6 months but BB get earlier

geographic disadvantages

Potential conflicts between local and corporate managementà exposing inconsistencies in strategy.

GROWTH STAGE: SCALE-BASED COST DRIVERS

Practices developed at startup (for low volumes) typically become inefficient as a firm grows Firm growth requires investments in processes that lower costs with a higher volume & a broader product line: economies of scale and scope; learning curve Key Point: Timing of investments to match segment Managing tradeoffs in Cost vs. Value investments

COST TO TIVO OF PRODUCING THE SERIES 2 BOX

Price = $249 Retailers = 15% - 30% Assuming 15%, TiVo charges Best Buy: $212 / Box According to TiVo's Income Statement: COGS on hardware produced ~ 98%: ($212)* 98% = $208 Variable Cost / Box Based on 25 employees involved in hardware and management & the cost of employees including benefits and other directly related overhead being $100k: 25 * $100,000 = $2.5 Million Ramsey says Non-Direct TV subscribers will grow by 50% (Ex2 433,000), 216,000. Assume 10% Churning at 43,000: 216k + 43k ≈ 250,000 TiVo Overhead / Machine: $2.5 Million / 250,000 = $10/machine Variable Cost and Overhead: $208 (variable) + $10 (overhead) = $218 losing money on every box

Innovation

Processes by which a firm transforms labor, capital, materials, and information into new products or services to create value

COMPLEMENTARY RESOURCES OR CAPABILITIES

Produce a more effective outcome together than independently Example: Channel complementarity 1990s: 3 types of incumbents pursuing Internet: Catalogue only (Lands End); Stores (Gap); Catalogue & Stores (JC Penny) *Catalogue & Stores did better than Catalogue alone. Why? = help with processing, logistic systems

Disruptive Innovation

Product based on the disruptive innovation has a lower value and lower price, and has a stronger position than the industry's current product.

strategic pricing risks

Profits gained from a cost decrease do not compensate for profits forgone from a low price A firm may be unable to protect its low-cost advantage from rivals

EXAMPLE: AGREEMENT BETWEEN TOYS R US & AMAZON, 2000

Provides the "hot" toys & give up its own website. Provides the online sales infrastructure and agrees that Toys R Us will be the sole seller of toys, games and baby products on Amazon ("exclusivity") Control Problems or Exchange Hazards: For Amazon: How do you measure "hot"? For Toys R Us: How do you interpret "exclusivity"? By 2006 - Agreement Breaks Down Amazon claims that Toys R Us failed to deliver on its promise to maintain a certain selection of toys.Toys R Us alleges that Amazon violated its promise that Toys R Us would be the sole seller of toys, games and baby products.

BLOCKBUSTER'S COSTS

REVENUE SHARING Revenue sharing model led to 90% of Blockbuster's revenue ECONOMIES OF SCALE Reached economies of scale in marketing and distribution VERTICAL CONTRACTS Vertical contracts with studios reduced distribution costs low input costs

SKI INDUSTRY CHARACTERISTICS

RIVALRY International rivalry in the high- priced segment; European competition is strong FRAGMENTED Positioned as product for "master skier" in high-quality market; not the largest worldwide, sales concentrated in 1 of 6 markets DIFFERENTIATED PRODUCT Differentiation has decreased; in 1950 Head led the market, 1967 gap narrowed - increase in black metal skis DISTRIBUTION Increase in distribution channels; old-line producers used special shops - needed to decrease price or increase service NEW MATERIALS New materials came to market, metal was good but Head became "old fashioned"

Technological Substitution

Radically new technology with higher ROI in R&D than the current technology

CONSISTENCY (FIT)

Resources or capabilities are jointly aligned with the requirements of the firm's strategy and market position Example: Southwest's activity system with its low-cost position Tradeoff: The more consistency in activities àthe more difficult they are to change

RADEOFFS IN NOISE & DISTORTION

Reward managers using: FIRM-LEVEL PERFORMANCE METRICS Solves the alignment problem à reduces distortion Increases problems of controllability & interdependencyàincreases noise The reward system does not separate the active contributor from the free rider. INDIVIDUAL PERFORMANCE METRICS Reduces the controllability & interdependency problemsàreduces noise But, rewarding managers for performance on measurable tasks skews attention away from important activities such as interunit coordination àincreases distortion

SKI INDUSTRY ANALYSIS

SEGMENT: Young, affluent, well-educated growth: Trading up New skiers Effects Price skiing: Wild colors Opulent surroundings Soft muscles "Good life" very competitive

TIVO'S VALUE PROPOSITIONS

SEGMENTS Busy Bees, Sports Nuts, Kid Friendly , Tech Weenies, Program Lovers, Control Freaks CHARACTERISTICS Time Shift, Search Across Channels, Personalized Automated Search, Skip Commercials, Additional Content in Ads, Wireless Network, User- Friendly Design, TiVo Specific can pause, rewind --> great for sports, families, busy people VALUE DRIVERS Specific to each segment (brand, cusotmization, technology, quality, service, delivery)

CLASSIC TRADEOFFS

SPECIALIZATION VS. INTEGRATION Functional: Focus is on knowledge generation Both: - Power concentrated for more rapid decision making - Clear reporting relationships - Coherent incentives and expectations Product/Customer Market:Focus is on knowledge integration

DUCATI'S STRATEGY: SOURCING

SUPPLIERS Decrease number of suppliers (1996: 200à2000: 130) Increased quality of suppliers and Ducati's bargaining power with them OUTSOURCING • Increased outsourcing (1996: 80%à2000: 90%)• Exploited Emilian mech. district fully; tapping suppliers, economies of scale • 2400 small-mid size manufacturers close to Ducati • SOURCING CONTRACTS Dual-sourcing for major components/adopted short-term contracts

TIVO'S OPTIONS

Sell vertical solutions Box, software and service Differentiated Product/Service (R&D) TiVo Basic (Mass Market w/ Upsell) Concentrate on a horizontal layer Software and service with or without box Content Distributor Advertising Services Software layer for Cable set-top boxes

HEAD SKI value drivers

Service Quality & Durability Technology: use aluminum instead of wood Brand/ Reputation Delivery

ECONOMICS OF SUPERSTARS

Sherwin Rosen (AER, 1981) Think of Heart Surgery. Consumers are willing-to-pay much more for the "Very Best" Surgeon over the "2nd best" surgeon SUPERSTAR THEORY § ImperfectSubstitutes § SizeofmarketLarge: The "very best" reaches more consumers" § HumanCapitaldoes not have a linear effect SUPERSTARS ARE KNOWN TO A BROADER AUDIENCE BECAUSE OF TECHNOLOGY § Improved technology differentiates the best from the rest and permits bigger audience § Demand to hear the "Very Best" is higher § Rewards for the Best should Rise GETTING MORE OF THE TICKET REVENUE CONCERT TICKET VS. MOVIE, SPORTS & THEATRE TICKETS (now higher)

Tivo Current Strategy

Showcases & Market Research Alliances Technology Opportunities Subscriptions Producing at Cost of Hardware Licensing

customer-based disadvantages

Silos may emerge that make knowledge sharing and coordination challenging. Competition between units can lead to short term thinking.

Functional disadvantages

Silos may emerge that make knowledge sharing and coordination challenging. Difficult to establish uniform performance standards.

Zara distribution

Small shipments Centralization to tap economies of scale Delivery target within 48 hrs (with help of air shipments outside Europe) Delivery to stores 2x/weeks Surge capacity Proximity to manufacturing Proprietary logistics Packaging

BLOCKBUSTER INDUSTRY ANALYSIS BUYERS

Spur of the moment decision to buy Emergence of new entrants gave buyers more choices some bargaining power BB always 3.99/price; had movies 1st and guarantee in stock or get voucher

GROWTH STAGE: SCALE-BASED VALUE DRIVERS

Startup's Initial Value Drivers: Advanced technologyàattracts early adopters Market Penetration In The Growth Stage: Requires investments in broader set of value drivers to retain & attract customers. Key Point: Successful firms time their investments to match the customer segment served. early adopter -> early majority -> late majority -> legends

BLOCKBUSTER INDUSTRY ANALYSIS SUPPLIERS

Studios function as oligopoly Few hits emerge, unpredictable market HOWEVER... • • Large video chains had high bargaining power Home videos are not released until 6 months after, while video chains are sooner

hybrid sourcing arrangements: key observations

Suppliers of creative input, either inside or outside the firm, tend not to be controlled. Franchises and piece-work employees have similar profiles - high productivity incentives & strong firm control over the task. In-house profit centers tend to be like commodity producers - strong productivity incentives and weak firm control over the task. In-house cost centers with measurement problems tend to be like outside partners - weak productivity incentives (to prevent alignment problems) and strong control over the task.

CASUAL SKIERS

TECHNOLOGY Have Fun;Avoid falling and breaking legs; Look Good on the Slope TECH SUPPORTS VALUE DRIVERS: Less likely to wipe out; Higher likelihood of skiing better & having more fun "Skiing, in fact, has become almost an incidental activity at some ski resorts; indeed, some of the most enthusiastic patrons here at Squaw Valley and other resorts don't even know how to ski." 'So why do they come here?' " 'Men, M-E-N. They're here in bunches, and so am I, baby,' answers slinky, sloe-eyed Betty Reames."

LIVE MUSIC

THE TREND IN CONCERT REVENUE DEPENDENCY DIDN'T STOP IN 2003... Streaming helps because the labels have a significant amount of control over the streaming services, but Live Shows are increasingly important IT'S ABOUT THE EXPERIENCE (COACHELLA) HOW DO YOU THINK RECORD LABELS WILL EVOLVE IN THE FUTURE? Does the DIY artist have the formula to make major labels minor players? In what ways can Streaming Services like Spotify or Pandora affect labels' profits?

THREE TYPES OF INDUSTRY DISRUPTION

Technological Substitution Radical Institutional Change Disruptive Innovation

THE S-CURVE: INDUSTRY DISRUPTION & TECHNOLOGICAL SUBSTITUTION

Technology 1 Period of Discontinuity Technology 2 period where returns to R&D go down b/c ramping up for new product

matrix disadvantages

Tensions between 2 reporting hierarchies can contribute to battles over resource allocation and policy formulation. Working relationships are more complex & decisions may take longer. More expensive to manage due to higher admin. overhead vs. single hierarchy structures.

Absorptive Capacity

The ability of a firm to adopt innovations developed by other organizations based on its prior experience with similar or related practices or technologies.

Dynamic Capability

The ability of a firm, as it grows, to build its innovative potential and exploit it effectively.

Innovation Cycle

The cycle of firm growth linking size, innovation, productivity, profitability, and capacity expansion. DEVELOPING & MAINTAINING A DYNAMIC CAPABILITY

FACTORS DETERMINING A SHAKEOUT

The emergence of a dominant, sustainable Value minus Cost model Stronger firms use their higher productivity to drive out weaker firms can occur in the same time period: Asa product's life cycle shifts toward maturity Asa dominant design emerges

Core Rigidity

The inability of a firm to adapt to changing market or technological conditions because of its attachments to its core practices and customers.

Path Dependence

The tendency of a firm over time to invest in innovations that are upwardly compatible with each other, thereby creating a relatively unique path of product and process development.

CULTURE

The values and expressive behavior of employees as they direct thought and activity toward or away from the organization's goals. Can be viewed as the development and maintenance of focal points for decision makingàinfluencing strategy execution. STRONG Enduring, greater consistency in behavior of employees WEAK Fragile, subject to fragmentation and violation of the understood rules of behavior.

HOW INCUMBENTS ADAPT TO DISRUPTION

They control assets (e.g. distribution) that are critical for competing in the industry Isolating mechanisms protecting the innovations are weak = does disruptor have isolating mechanisms that prevent incumbent from copying? They do not suffer large short-term opportunity costs in switching to the new innovation

SUBERBOWL SUNDAY

Ticket Prices in 2000 List Price = $325 Market price = $2500 Secondary Market Develops if • Price too low, but its market size can be exaggerated (20%) NFL could raise short-run profit by raising prices But NFL wants to reward loyal fans to build enterprise Besides, 60% of $4 billion of football revenue from TV

TRANSACTION COSTS & ASSET SPECIFICITY

Uncertainty alone is not sufficient to lead to Vertical Integration; Repeated Problems in forming a new contract must also exist. WHAT DETERMINES THESE PROBLEMS? Asset Specificity: A supplier invests in assets specialized to the firm, increasing the supplier's bargaining power. However, this also presents an opportunity for the supplier to improve its profits by: • Decreasing the Value it provides to the Firm, or • Raising its Price. last wo: Opportunistic behavior may lead to holdup.

BLOCKBUSTER'S COMPETITIVE ADVANTAGE

VIDEO RENTAL REDEFINED Blockbuster focused on families when most video retailers made the bulk of their revenue from adult content. VERTICAL CONTRACTS Blockbuster had packaging contracts direct with content producers to get the newest releases fast. REPUTATION & SERVICE Blockbuster was THE name for movie nights and staffed knowledgeable employees to make the selection experience smooth. strategy was to diversify distribution channels, online, kiosks, keep stores relevant w/ video games --> vs Netflix just went online so more simple tried random stuff like candy, bars, DVD players --> too much going on for the consumer; didn't know what they wanted to be and waited too long

COMPETITION INTERACTS WITH UNCERTAINTY

VOLUME UNCERTAINTY Higher volume uncertaintyàhigher levels of vertical integration, especially when supplier competition is weak. TECHNOLOGICAL UNCERTAINTY Higher technological uncertaintyà lower levels of vertical integration, especially when supplier competition is strong.

HYBRID SOURCING ARRANGEMENTS

Vertical Integration, Outsourcing & Partnering are only three possible forms of supplier arrangements. But often, a firm needs to control an activity (task design) but not the incentive system or vice versa àHybrid Arrangements§ Franchising §Decentralizedprofitcentersinsideafirm 3 CONTROL DIMENSIONS USEFUL FOR CAPTURING THE RANGE OF HYBRID ARRANGEMENTS Makadok & Coff (2008) Asset ownership Control over task design Control over incentives see table

Zara Sourcing & manufacturing

Vertically integrated (unique for a clothing co) • Leading operations and technology (Toyota • collaboration) • Purchase of greige fabric ; in-house dyeing, patterning & finishing • Focused factories; specialization by garment type • Produce small batches to minimize bullwhip effect • Ltd. # of dependent external suppliers/long term relations with minimal contractual commitments Employee training multiskilling Geographic concentration (sourcing & manufacturing)

NETFLIX RESPONDS TO DISRUPTION

Video Downloading vs. Streaming (Limitless Inventory) ADS ON WEBSITE STARTING INDEPENDENT PRODUCTION COMPANY BUYING DVDS OUT OF THE SUNDANCE FILM FESTIVAL advantages: existing relationships (subscribers and content providers) disadvantages: no knowledge about streaming video (completely diff business model) options: acquisitions, make investments and pivot to do it itself, keep DVD-by-mail service since some demand adn cinumbnet not sure if can effectively stream video (Fiber $$$) POTENTIAL RISKS 1 Some existing customers wouldn't switch to DVDs 2 Some customers would switch from DVDs but go to another streaming service 3 Netflix would be seen by Hollywood as a partner and as a competitor 4 Netflix would be both a platform and provider of complementary products Netflix has worked to be a "Real" Studio Won 3 Academy Awards (2019) ------------------------ Best DirectorBest Foreign Language Film Best Cinematography Won 2 Academy Awards (2020) ------------------------ Best Supporting Actress Best Feature Documentary more niche segments (like Indie)

STRATEGY & CONTROL

WHAT DOES A FIRM NEED TO CONTROL? Investment decisions in supplier resources and capabilities that make a strategic contribution to the firm (increasing Value, decreasing Costs or both).These strategically valuable activities are more likely to be firm-specific. EXAMPLE: APPLE Designing their own chips would help Apple control activities critical to Quality and Delivery

THE PROPERTY RIGHTS APPROACH

WHY DOES A FIRM VERTICALLY INTEGRATE INTO A SUPPLIER'S ACTIVITY, INSTEAD OF THE SUPPLIER VERTICALLY INTEGRATING INTO THE FIRM'S ACTIVITY? • • A firm vertically integrates because it has more to gain from owning and operating (controlling) an activity than the market supplier. The theory applies to tradable resources that are not attached to capabilities. Why? • It is often difficult to identify the value of an asset independent of employees (with specific capabilities) attached to it. VIACOM'S MOTIVATION FOR BUYING CBS? Coordinating TV content production (Viacom) with content distribution (CBS) would be more efficient in- house. If this argument is valid, why didn't CBS buy Viacom? assumes that the firm that benefits the most from performing an activity also is the most competent, i.e. It has a stronger capability relative to suppliers Analyzing MAKE vs. BUY decisions requires considering: A Firm's Capability or Competence relative to the best supplier. Control problems in the supply relationship.

CONTROL & COORDINATION SYSTEMS

Why do they matter for capability building? These systems enable the specific capabilities a firm needs to achieve its desired market position. IF... Control and Coordination systems conflict with Capability needs -> weaker execution.

Zara product lines

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DUCATI'S STRATEGY

World of Ducati Increased fixed sales costs (Ducati Owners Clubs) Increased advertising (Museum) Targeted magazines (Internet) Distribution Decreased number of dealers (incentives tied to # bikes sold; 150 registrations/dealer) Built network of mono- franchise dealers Owned some stores Increased R&D Increased R&D by 4x Established internal Design Division Substituted for external design house (outsourced other things) ACCESSORIES Get inexpensive bikes with lower prices (Naked) Sell high-margin accessoriesàdouble revenue since 1996 COMMUNITY Become part of the "Ducati community" Eventually sell them high-margin bikes in Hyper-Sport segment

FACTORS SLOWING THE SHAKEOUT PROCESS

about 6% of the firms in an industry will exit 01Expectations about future demand & the degree of sunk costs Exit slows when weaker firms have sunk investments in resources and expect demand to exceed production capacity of dominant firms 02Ease of imitation of the dominant firm's market position. Firms will postpone exit when they perceive an opportunity to improve their market positions by imitating industry leaders 03The existence of defendable niche markets. Exit also slows when weaker firms can avoid direct rivalry with dominant firms by competing in niche markets

Stream rippers

are more likely to be young, male, and frequently engage in other piracy methods such as BitTorrent & CyberLockers. They commonly use stream ripping to obtain individual tracks. PIRACY IS A SMALL PART OF STREAMING

TYPES OF VERTICAL INTEGRATION

cost price value supplier value chain -> firm value chain -> channel value chain -> buyer value chain

MATURE STAGE: INDUSTRY CONCENTRATION

depends on 1. minimum efficient scale (MES) required to compete relative to the market size higher concentration = fewer firms Higher Concentration: when MES is large relative to market size(Ex: Aluminum industry) Lower Concentration: when MES is small relative to market sizeàmore firms are viable(Ex: Retail bakeries) 2. Sunk cost investments in value drivers that have increasing returns to scale Higher sunk costs force out small rivals and deter entry

Zara BUSINESS MODEL: UPSTREAM

design sourcing & manufacturing distribution Commitment to flexibility: heavy capital investments, delayed commitment to specific products owns entire value chain which is unique; self produce low volumes and item sesnetivie

forward vertical integration

firm value chain --> channel value chain

backward vertical integration

firm value chain --> supplier value chain

problem solving

firm's culture also produces models for effective questioning and problem solving à to support learning and adaptation 1) Single Loop Learning Working within the constraints of a problem or task to achieve a solution. Necessary and sufficient to solve routine problems 02 Double Loop Learning Extends the problem-solving process outside the problem or task's domain & raises questions about the task parameters. Becomes increasingly necessary with industry evolution. "Effective strategy execution requires the ability to engage in both types of learning."

THREE STAGES OF INDUSTRY EVOLUTION

growth, shakeout, maturity Industry Disruption -> Period of Discontinuity -> Strategic responses = f(type of industry shock or nature of discontinuity) Firms develop Value & Cost Drivers within market constraints that are historically determined

TIVO DIFFERENTIATION

highly differentiated product: § Superiorfeatures § Strongestbrand § Susceptibletoimitation § Steadyerosionofmarketshare

Shift to Streaming

isnowanimportantpartofthe industry • Made people willing to pay for music again Physicalalbumsalesdroppedfrom785 million in 2000 to 55.7 million in 2019 Theamountofmusicproductscreated between 2000 and 2008 tripled Share of streaming in total music revenues in the United States from 2009 to 2020: increasing DIGITAL MUSIC TRACK SALES (US): decreeing Spotfy general playlists are cool even quality of sound can differentiate

TIVO'S COST DRIVERS

of Producing the Series 2 Box? § Overhead § VariableCost

COMPETITION IN HARDWARE

price free and low features: cable DVRs price 1000+ and high features: media center PCs middle:TiVo

Rate of Product & Process Innovation over the History of the Industry

product innovation dec from stage 0 to 1 of industry development process innovation peak at 2 and 3

PROS & CONS OF VERTICAL INTEGRATION

pros: - no reliance on suppliers - potential access to monopolizing suppliers - economies of scale - knocking off most popular brand-name products - lower costs cons - expensive - reduces flexibility - loss of ofcus - not likely to have a culture that supports both retail stores and factories

EFFICIENT BOUNDARIES MODEL

says that in making a decision to Vertically Integrate, firms should consider the sum of: TRANSACTION COSTS PRODUCTION COSTS Assumes that the market supply is always more attractive when the input is not customized to the buyer. § The Buyer incurs bureaucratic costs not present in the market. § Production costs are much higher in-house. § Compares in-house and market costs as an input's degree of specialization for the buyer increases. Up to point a: Costs of coordinating & producing in-house > market à Buy $$ Sum of Coordination and Production Costs As input specialization increases, the production cost difference weakens; and as suppliers use their power to reduce the firm's surplus, the aggregate cost difference approaches point càVertically Integrate (Make) Production Costs: In-House Minus the Market Degree of Customization of the Supplier's Input Suppliers typically maintain a production cost advantage due to EOS. This advantage declines with customization lower volume of purchases à reduction in scale-based efficiencies. 0 a c

PATTERNS OF OUTSOURCING

see diagram

PATTERNS OF VERTICAL INTEGRATION

see diagram rip t=1 Make BUT Misalignment of Strategic Value & Relative Capability t=2 Buy (standard input) Low Strategic Value High Relative Capability =3 Vertical Integration = Dead Weight

MUSIC CONSUMERS AND THEIR MUSIC SPENDING

tHE 40% OF MUSIC CONSUMERS WHO ARE FANS ACCOUNT FOR 75% OF ALL MUSIC SPENDING Aficionado FansBig Box Fans Ambivalent Consumers Digital FansOccasional Concert Background Music Consumers

Ducati competitive advantage

value drivers: quality, brand/reputation, tech cost drivers: dual sourcing, vertical integration not huge economies of scale, some standardization

Tivo Future Strategy

• Create platform for for advertising with high switching costs • Offer an App • New DVR and HE capabilities • Make "TiVo basic DVR" • Cheap & CE • Decrease licensing fee to CE manufacturers

Tivo Challenges

• Hardware to transition content production to advertisers • Profit conflict with video on demand • DVR becomes like Apple at the time Compete with Microsoft and Sony Problem with copyright or content • Give away • Costs, competition, and quality control • Compare decreased R(.) vs. increased installed base

Zara Store Operations

• Integration into stores (unlike Benetton) • • Large stores (unlike Benetton, World Company) • Prestigious/heavily trafficked locations • Frequent refurbishment/outstanding instore design • Dual functions: window to world plus source of • information

LIST PRICE VS. SCALPING

• Survey at Springsteen "The Rising" Concert, Oct. 6, 2003 in Philadelphia, PA • Every Ticket sold for $75 Interviewed 858 people in the 15 minutes before the start of the show 20-25% of tickets scalped. Worst seats more likely to be resold • Average resale price was $3000• Springsteen gave away $3 Million in consumer surplus