SI422 Midterm

How Does Grant/Jordan Define Strategy?

"Strategy is about success. ... Strategy is not a detailed plan or program of instructions; it is a unifying theme that gives a coherence and direction to the actions and decisions of an individual or an organization."

Buyers

"bargaining power" to capture more value organizations that PAY firms in the industry - Not the end customer, but the DIRECT buyer

Understanding Michael Porter's view of strategy

§"You can call any plan or program a strategy, and that's how most people use the word. But a good strategy, one that will result in superior economic performance, is something else. Broadly speaking, a robust strategy is the antidote to competition." §"Strategy explains how an organization, faced with competition, will achieve superior performance." §"'Strategy', for Porter, is shorthand for 'a good competitive strategy that will result in sustainably superior performance.'" §"Porter's definition of strategy is normative, not descriptive. That is, it distinguishes a good strategy from a bad one. His focus is on content, not process. His focus is on where you want to be, not on the decision-making process by which you get there." §"The granddaddy of all mistakes is competing to be the best, going down the same path as everybody else and thinking that somehow you can achieve better results. This is a hard race to win."

What is a strategic activities map?

§A strategic activities map is a picture that identifies the strategic themes and key activities of a firm (i.e., their tradeoffs and the investments that the make) and identifies the linkages between them (via lines) §These can be further linked to costs and customer willingness- to-pay (and, therefore, to firm P as well) §we will make these linkages in the Competitive Positioning module!

Preemption

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

Threat of Substitutes

§KEY ISSUE: Are there other products that fulfill needs similar to those fulfilled by my industry's product? Compare price-value ratio of the industry's products vs. those of alternative products -if alternative products have similar price-value ratio à power of substitutes is High! Difference between Substitutes and Rivals -Rivals = all firms that are compete within the industry -Substitutes = products that are outside the industry -sometimes, though, the boundaries of the industry are blurry!

LaCroix Case Study

-Sales jumped -> social media and aesthetic cans -Cornered Millennials (change in tastes) -New logo that appealed to younger people -boosted carbonation -declining soda sale -sell in upscale markets -Distributors wanted discounts, but LaCroix raised prices Competition -Crowding (Coke, Pepsi...) Culture -tasting ceremonies -Cult of Caporella -All natural -> misleading

Generic Strategies

1. Cost leadership 2. Differentiation 3. Focus

CSR Case Study

1. Let Them Eat Cake -"The Social Responsibility of Business Is to Increase Its Profits" 2. Icing on the cake -all superficial and no substance 3. Everyone earns a slice of cake -Corporations are a social institution responsible to all stakeholders 4. Having Your Cake and Eating It Too -Companies can do well by doing good -> the business case for CSR

What are the goals of non-market strategy?

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

Definitions of Strategy - Michael Porter

1.Operational Effectiveness is Not Strategy §The creation of a unique and valuable position, involving a different set of activities. Aka, "Strategic Position". §Less (no?) direct competition - (with a real market) §Services require a different set of activities to create a different basis for value §Making trade-offs in competing. §Activities are truly different - not just renamed. §About combining activities ... and ... Creating fit among a company's activities. §Consistent, coordinated view across the company.

Strategic Positions

1.Variety-based positioning - a subset of products/services -> Jiffy Lube only selling lubes 2.Needs-based positioning - a subset of customers (all needs) -> IKEA seeks to meet all home furnishing needs 3.Access-based positioning - specific path(s) to customers -> Carmike Cinemas operates theatres in small towns and cities

value created

= willingness to pay - cost

Strategic Positioning: General Types of Strategies

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

Competitive Positioning

A firm is said to have a competitive advantage if it has driven a wide wedge between the willingness to pay it generates and the costs it incurs -- indeed, a wider wedge than its competitors To create a competitive advantage, a firm must configure itself to do something unique and valuable Competitive advantage usually comes from the full range of a firm's activities ... acting in harmony. Industry analysis is crucial ... -Devise strategies that neutralize negative, exploit attractive -Industry conditions have a large influence - even "straightjackets" -Firm decisions/actions affect industry structure

Stakeholder Analysis

A technique of systematically gathering and analyzing quantitative and qualitative information to determine whose interests should be taken into account throughout the project.

Reputation Effects

Advantage accruing to 1st movers based on ability to achieve premium brand-name

Sources of Leadership Advantage

Advantages resulting from Firm Size: §Scale economies §Scope economies §Network effects §Learning effects Advantages resulting from Entry Timing: §Preemption §Reputation effects §Buyer switching costs §Patents or institutional barriers

Patents or institutional barriers

Advantages that can arise if governing authority restricts future entry

Economies of Scope

Arise if provision of multiple different goods or services by single firm -> lower costs &/or higher WTP

Buyer Switching Costs

Arises if 1st movers can lock-in customers

WIZZIT/M-Pesa Case Study

Background -1 billion in developing countries owned a phone in 2009 but did not have access to FE services -Africa had highest mobile phone growth rate -Value: productivity gains that wireless customers received by using mobile phones Mobile Banking -Provided FE accesses to poor -Safe way to carry money -Easy way to transfer funds/pay bills Third Party Led Model -Wizzit -South Africa regulations only licensed bank to take deposits -> expensive to get license -> worked with a bank -> offered bank accounts -Used on any phone -Operate w/o debt -Wizzkids -Open Wizzit account at various locations (stores) -Deposit funds at more than 4k physical locations -Challenge: predictability and usage -> 60% of accounts were active -> majority were students or seasonal workers -M-PESA -Safaricom -> not a bank -> phone provider in Kenyra -Not offer banking (can't hold deposits) -50% of Kenya was below poverty line -Used to transfer money -Promote through SMS -Locations would keep lots of money on hand Issues faced by Wizzit and M-Pesa? §Regulations §Relationships with financial services industry §Relationships with mobile network operators §Technology on phones and in agents §Customer needs, education, marketing and distribution §Product definition §Supporting infrastructure and agents §Costs & revenues, transaction volumes

Zipcar Case Study

Background -Environmental and convenience implications of the service -Organized car sharing began in Switzerland -Zipcar could be a new low cost convenient alt to owning a car Market -Usage was growing Business Plan -Convience, ease of use, low cost, freedom to travel, hassle free ownership -URBAN -Solution for people who did not need a car to get to work but wanted the convience of a private vehicle -Phone support -Rez two months in advance -Tech that confirmed driver and usage -Pricing model -Usage fee on hours -Capture info when car is returned -Card reader -$75/year and tiered pricing structure with hourly rate between $4.50-$7 ($44 max per day) -Purchased parking spots to keep cars around cities Marketing -WOM -Earned media -Guerilla marketing -Z on car

Generic Bottling Industry = Not Very Attractive

Bottlers: Treat to Entry ... LOW Barrier are HIGH -Exclusive franchises -High capital investment in bottling lines -High investment in delivery systems -Limited outlets (shelf space is limited) Bottlers: Buyer Power ... MODERATE - LOW Food stores -supermarkets, convenience & gas, supercenters, ... -enjoy the high traffic -want to offer variety of options Bottlers minimize stores' power by offering to supply greater efficiency -Direct to Shelf Delivery Bottlers: Supplier Power ... HIGH to MODERATE §Concentrate producers have significant (HIGH) power (as discussed in CP portion)... also...they can (and have) forward integrate! §For both packaging & sugar, Coke & Pepsi negotiate on their behalf, thus these have LOW power. Bottlers: Substitutes ... NONE Bottlers: Rivalry ... MODERATE -Between brands Rivalry is High - e.g. vending machines -Within a brand, geographical exclusivity of franchise contracts limits the competition among bottlers is LOW

Business Unit vs. Corporate Strategy

Business Unit (Firm) Strategy refers to decisions about how a firm will compete in its various activities §e.g., based on cost or differentiation & how it will exploit its resources to achieve these goals Corporate Strategy refers to decisions regarding the industries and value chain steps in which a firm competes §e.g., should Coach sell hats & shoes as well as purses? §e.g., should Mitsubishi sell computers & stereos as well as cars? §e.g., should Boston U outsource its admissions office to a private company?

Bounded Rationality

Cognitive limitations that constrain one's ability to interpret, process, and act on information.

Learning Effects

Cost advantage: arise in situations in which average costs decline as function of cumulative output

Industry

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

Disney Case Study

Disney Culture -Gong show -> everyone can tell ideas -Lion King killed it in box offices -Top animators were making bank -Disney "Secret Lab" -> 3D animation -> closed -> focused on 2D Movie Ecnomics -Box office revenues were measure of success -FE successes from home videos, pay per view, etc Pixar -Originally just computer tech company -Became full fledged animation studio -Culture of creativity, tech and blending -Open communication Disney x Pixar -Signed deal in 1991 for 3 movies -Disney funds but owns movie rights -Disney owned a chunk of Pixar -Distro, Sequel, and Exploitation rights = Disney -Relationship got rocky when wanted to renegotiate deal

Trader Joe's Case Study

Employees: -Greet customers with high gives and free cookies -Make livable wages Location: -344 locations in 23 states -Strip malls and in offbeat areas -Look at demographics for store locations Scale: -Deliberately scaled down -Selects small stores with a carefully curated selection of items -Less SKUs Culture: -Very secretive (who makes products) -Paradox of Choice (customers don't want to choose from a ton of things) -High R&D expenses because people go out and find good quality foods Food: -Mostly generic TJs -A majority of store products are made by big names (PepsiCo, Danon...) -Great selection of frozen foods -Organic -2 Buck Chuck -Limited selection and high turnover model (4 kinds of peanut butter rather than 1) -Changes out food regularly so ever-changing selection Cost Leadership -Trader Joe's focuses on lower cost and higher quality products in order to attract customers' eyes -Small store -> saving money -No ads -Low cost wine -Lower SKUs than typical grocery store -Pay employees more

Narrow (or "Focus") Strategy

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

Broad Strategy

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

Vertical Integration

Extent to which firm participates in various stages of the value chain Forward = closer to consumer; backward = closer to raw materials

Intensity of Rivalry

Factors affecting Rivalry: §number of rivals §size of rivals §industry growth §high barriers to exit §switching costs §unfavorable supply and demand conditions §examples: highly variable supply and demand, perishable inventory How they affect Rivalry: §Few rivals (<6) -> low rivalry §different sizes -> low rivalry §growing industry -> low rivalry §low exit barriers -> low rivalry §high switch costs -> low rivalry §favorable demand & supply -> low rivalry

Why is Rivalry higher when an industry has more firms?

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

Potential Entrants

Firms (current/potential) that could enter industry

Role of strategy in success

Goals that are simple, consistent and long term Profound understanding of the competitive environment Objective appraisal of resources Effective implementation

Citi vs RIAA - where is the $34 billion?

Goes to touring, radio and publishing of third party providers not directly associated with the label

What is Rivalry & what can Rivals do?

High Rivalry = competition that drives down prices or drives up costs! •intense rivalry subs can drive prices down (or force costs or quality up) •weak rivalry/weak subs allow prices to stay high

Factors that affect the Power of Suppliers & Buyers

How factors affect Supplier power: •many suppliers -> low power •small suppliers -> low power •cannot forward integrate -> low power •many good alternative supplies -> low power •supplier not important to industry -> low power •industry very important to supplier -> low power •standardized products -> low power •low switching costs -> low power How factors affect Buyer power: •many buyers -> low power •small buyers -> low power •cannot backward integrate -> low power •few good alternatives to industry products -> low power •industry very important to buyer -> low power •buyer not very important to industry -> low power •differentiated products -> low power •high switching costs -> low power

Other Corporate Scope Considerations:thinking about acquisitions

How much do you pay for acquisition? §seller will want... §net present value of expected future returns Winner's Curse §the "winning" bidder likely pays too much In practice (on average)... §acquiring firm's stock drops when acquisition proposed; drop again as deal nears completion §however, acquired firm's stock rises

RIAA Case Study

How should business work? -In an ideal world, the consumer pays the artist directly but in reality there are a lot of third parties Consumers -Choosing to rent music Physical music -dying and causing artists to tour more

Business Stratefy

How the firm competes within a particular industry or market

Key question regarding Buyers & Suppliers: If economic benefits are generated, which step in the value chain gets the greatest share?

If Suppliers/Buyers §are very Price Sensitive §have high Bargaining Power ...they can squeeze Profits out of the industry

Key question regarding Entry, Substitutes, & Rivalry: Do economic benefits get kept by incumbents?

If it is easy to do so, Entrants can rush into profitable industries (& drive down P) If Rivalry is high, then P will be eroded as firms compete by driving down Prices or raising Costs P will be limited based on whether other products offer similar value for similar price

Why not pursue both a low cost and differentiation strategy?

In many industries, low cost and differentiation are inconsistent with one another A firm pursuing multiple strategies risks becoming stuck in the middle Moderately priced products with moderate quality get squeezed from both directions

Reasons why there are trade offs?

Inconsistencies in image or reputations Arise from activities since different positionings require different needs Limits on internal coordination and control

At what level does Porter intend us to use the Five Forces?

Industry

In-between Markets and Firms:Intermediate Forms of Organization

Intermediate relationships may combine the benefits (and some of the costs) of both market transactions & firm-internal transactions

Cost Leadership Strategy

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

If we do a Five Forces analysis, what do we learn?

It helps us understand WHY an industry's incumbents earn high/low economic profits, and provides a basis to study opportunities and risks

Threat of Entry

§KEY ISSUE: How easy is it for new firms to entry our industry and become rivals? §desirability of entry is NOT SAME AS ability to enter §key question is whether there are BARRIERS to entry §Why barriers to entry matter: §If entry barriers are low, then firms could more easily enter the industry (in good times) and compete away profits §If entry barriers are low, then firms in the industry must act to deter potential entry - either by lowering prices or by driving up costs (quality) What factors affect Entry Barriers: §economies of scale §product differentiation §capital requirements §cost disadvantages for new entrants §access to distribution channels §government policy How they affect Entry Barriers: if economies of scale exist -> high BTEs if products are very differentiated -> high BTEs high capital requirements -> high BTEs cost disadvantages for new entrants -> high BTEs access to distribution channels difficult to get -> high BTEs favorable government policies -> high BTEs

Who are the targets of non-market strategy?

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

How do Operational Effectiveness & Strategy lead to a Competitive Advantage?

§Operational effectiveness §necessary, but not sufficient for long-term competitive Adv. §Having a strategy that fits the environment! §a cogent configuration of activities, incentives, systems §that supports successful positioning §and makes the right trade-offs §Ultimately, Porter believes that firms can achieve competitive advantage only if they have both operational effectiveness and a superior strategy (that fits with the demands of the environment)

What is the main driver of non-market strategy?

Market failure is the core concept behind Non-Market Strategy - an attempt to capture value by protecting, correcting or creating a market failure.

Reasons for market failure

Market power -In economics, "market power" means the ability to raise prices without losing all customers -this is inefficient b/c prices are higher (and supply lower) than would be experienced in perfect competition -this occurs whenever there are high fixed costs! Externalities -negative externalities = costs that individuals (or firms) can impose on others, thus distorting incentives -positive externalities = benefits that individuals (or firms) get without having to pay for them Information imperfection (information asymmetries) If one party in a transaction knows important info that the other party does know or cannot verify cheaply Transaction costs Arise when there are costs to making transactions

Cost of the Market

Market relationships work less well than internal relationships... §when relationship-specific investments are needed to make a transaction work (aka, "opportunism" or "hold-up") §when power compels information flows (transfers information) more effectively and achieves optimal control over costs or quality

What are some key tools of non-market strategy?

Money & Lobbying §providing information or funding (campaign $ or bribes) §can be directed at government agencies, courts, or legislatures §can apply at multiple levels - local, regional, national, super-national §can be done by individual firms or industry associations §can result in "capture" §e.g., "regulatory capture" = circumstance that regulatory agencies serve firms they regulate rather than the public §some unexpected examples §Boston U = ~$1,000,000 per year on lobbying Staffing (Human Capital) §enabling "friendly" individuals obtain positions in relevant agencies or political bodies Affecting public perception

How can we recognize monopoly?

Monopolists raise prices & limit output! §This is good for company profits, but... §Bad for consumers §because they have to pay higher prices §and get lower quality Oligopolists do similar things §Oligopoly exists when there are only a few firms in an industry. §An industry with 3, 4, 5, or 6 firms is probably an oligopoly. The more firms the industry has, the less likely it is to act like an oligopoly. Concentration Ratios §C4, C5, C6 = Combined Market Share of top 4, 5, or 6 firms §"Rule of Thumb" if C4, C5, or C6 > 80% à Oligopoly!

Do "Best Practices" Create Value?

No because they can be easily copied

When is Non-Market strategy relevant?

Non-market strategy will be relevant anytime that there are market failures, anytime that an industry is regulated (by government or through industry self-regulation), and anytime that the competitive environment can be affected by public opinion §yep, non-market strategy Is relevant to every industry!

Differentiation Strategy

Offer products and services that are widely acknowledged as superior in quality on at least one dimension May be multiple dimensions of differentiation in an industry Selectively incur costs as necessary to create quality Invest in assets to maximize generation of value for buyers BUT Differentiation leads to above-average profitability only if the firm maintains cost proximity to competitors

The OIT&T Framework

Opportunities §opportunity = any chance to shape the rules of a market §will arise anytime there is a market failure, or regulation, or a market (i.e., everywhere!) §goals: raise industry P or raise own P vs. rivals §creativity helps! §e.g., opportunity to raise rivals' costs via environmental regulation §e.g., opportunity to raise barriers to entry or lower value of substitutes Interests §all parties who might be affected by the rules of the market §could be any stakeholder §including rivals, substitutes, potential entrants, suppliers, buyers, & the public §examples §NGOs, consumer groups, industry associations, governments (local, state, national, international), agencies, unions, etc.

Beer Industry Case Study

Participants in the industry? -Coors -Miller -Bud Lite -Heinneken -Generic Products? -Beer -Kegs Consumer preferences? -1945 (on premise) -More kegs, bottle -Less can -1985 (off premise) -Less keg, bottle -More can Distribution? -On/off premise Sources of value creation? -Pure Rocky mountain spring waters -Own grain processing facitility -Canned beer -Premium hops Focus of value capture? -Good quality raw materials (water from west coast) Geographic limitations/differences? -Sell beer in mostly western states till fairly recently -Focus on western water sources -Bud Lite and others had more intense TV marketing campaigns that reached all over

Benefits of the Market

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

Sources of Leadership Disadvantage

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

Non-market strategy & public perception: Public pressure/information provision

Public pressure/information provision aim is to shape competitive landscape by affecting public opinion or perception targets: §general public §customer base §other relevant stakeholders: employees, regulators, communities often involves enlisting 'opinion leaders' could be proactive §i.e., designed to improve relative WTP of own products §e.g., wine-makers financing research on health benefits of red wine could be defensive §i.e., designed to minimize risk of regulation or social protest §e.g., International Council of Chemical Associations "Responsible Care" program, a response to Bhopal Gas Tragedy §e.g., Wal-Mart provided >$20m in cash, merchandise, & food to victims of Hurricane Katrina (at time that firm was under scrutiny for lack of health benefits)

Non-market strategy

Refers to firm or industry efforts to shape the environment in which competition takes place (i.e., the rules of the game)

Ducati Case Study

Rivals in the Motorcycle Industry ■Harley-Davidson (204,000 bikes) •Highest proftis in industry; mostly US; lifestyle •Cruiser & sport segments (Buell = sport) ■Honda (5.4 million bikes) •world's largest motorcycle manufacturer •competed in all segments; reliability & excellence ■BMW (12,000 bikes) •innovation leader; German engineering; touring + cruiser ■Ducati (39,000 bikes) •39,000 bikes in Focused in sports segments; performance; association with racing ■Other Japanese manufacturers •Yamaha, Suzuki, Kawasaki (2001 - 57% of Ducati's segment) •Innovation, scale Creating value in the motorcycle industry Drivers of WTP Physical/Tangible: • Performance, handling • Speed • Skill level • Design • Service • Availability of parts Intangible: • Image • Community • Lifestyle • Heritage & history Drivers of Cost R&D Level of spending Scope(number of segments; car division, racing division) Engineering vs. design Manufacturing Scale (volume) Scope Outsourcing/supplier relations Location Marketing Advertising choices Number of segments/scope Community Related products & events Distribution Owned v. franchise Quantity v. quality Internet What are the origins of Minoli's Ducati Turnaround Plan? ■Goals = Harley's P (~20%) & significant growth! ■Minoli found three advantages at Ducati •Good product (though less efficient & reliable than Japanese) •Top-Notch Engineers (in R&D and Racing) •Strong brand potential (high loyalty!) ■Minoli's Plan (Ex 7) •Motorcycle products: hyper-sport, super-sport, naked •Emphasize advantages -especially product design & brand •Sell Ducati as a Motorcycle Experience What was Minoli's turnaround plan for Ducati? ■Minoli's 1st Step: •build a museum !!! ■Minoli's next steps: •Production -rationalize supplier network (fewer suppliers) -outsource production more aggressively (more stuff outsource) -in-house = only R&D, design, quality control, & 2 components •Marketing, Sales, & Distribution -expand sales/marketing -replace some with Ducati-owned operations •Product Dev + R&D: -increase R&D, especially racing! -internal design; reduce time-to-market •World of Ducati -chic (retro) advertising, museum, clubs, events, consumer products What was the goal of Minoli's Turnaround Plan? ■Minoli's Plan: •Lower costs related to physical product without lowering willingness-to-pay •To do this, he needed to increase expenditures on non-physical (emotional) product attributes •By keeping prices relatively stable, he delivered value to buyers •With higher fixed costs, pressures to grow - should it enter a new segment (cruisers?) Activities which were key to Ducati's success ■Research new engine designs ■Research new key components •Suspension •Brakes ■Design racing class special designs ■Interface with racing community ■Synthesize elements of new motorcycles •Engine •Suspension •Brakes •Overall aesthetic ■Quality control •Crank cases •Cylinder heads ■Advertising ■Trade shows ■Presence on racing circuit ■Ducati museum ■Apparel & consumer products •Sales subsidiaries

Operational Effectiveness is not strategy

Root of the problem is the failure to distinguish between operational effectiveness and strategy Management tools CANNOT take the place of strategy Company can outperform rivals only if it can establish a difference that it can preserve Must deliver greater value to customers or create comparable value at a lower cost, or do both Delivering greater value allows a company to charge higher average unit prices; greater efficiency results in lower avg unit costs

When does Leadership Advantage exist?

SOMETIMES §Advantages associated with Firm Size & Entry Timing can drive 1st Mover Advantage §e.g., economies of scale, scope, & learning, network effects §Disadvantages associated with Uncertainty and Cost differentials can drive 1st Mover Disadvantage §e.g., pioneer costs, demand & technological uncertainty, and potential inertia can make followers à achieve greater P than leaders

Kinds of fit

Simple consistency between each activity and the overall strategy Activities are reinforcing Optimization of effort -> The Gap and product availability since the stock from warehouses

A Step-by-Step Guide to Applying the Five Forces Framework

Step I: Define the Industry Step II: Identify the organizations/products involved in each relevant force Step III: Assess the Strength of the Forces within the Industry Step IV: Ascertain the Overall Effect of the Forces Step V: Trends & Changes Step VI: Think about the Firm in the context of its Industry Environment

Intended strategy

Strategy as conceived of by the top management team

Substitutes

Stuff that could be alternative to industry's products

Key Issues about Power of Suppliers & Buyers

Suppliers: §Key Issue: Can Suppliers exert power over industry firms? §If YES - they can raise the costs that industry firms face §If NO - then industry will be able to keep costs low Buyers: §Key Issue: Can Buyers exert power over industry firms? §If YES - then industry firms will be forced to charge low prices §If NO - then industry will be able to charge high prices to the buyers §Some Major Factors: -number, size, & concentration of suppliers / buyers -credible threat of forward / backward integration -existence of acceptable alternative supplies / goods or -services to buy -importance of supplier to industry / industry to buyer -importance of industry to supplier / buyer to industry -extent to which product is standardized of differentiated -switching costs

What are switching costs?

Switching costs describes the "costs" that customers must bear when the try to switch from one product to another.

Two key tests to apply to any expansion in corporate scope

The Better-Off Test §Do the business units create and capture more value if they are related than they could as separate, single-business entities without formal ties? §Factors that matter: §Lower costs: shared activities, shared resources, economies of scale or scope §Increased willingness-to-pay! The Ownership Test §Do the business units create more value under common ownership than they would through if they were related in other ways §Are any alternative relationships superior to common ownership?

Five Forces - Impact on Profitability

The Forces have an impact on industry costs and/or prices, and thus, an impact on profitability. We look at Factors or Determinants to analyze each Force.

Realized strategy

The actual strategy that is implemented

Relative Cost Analysis

The analysis of how a firm's costs compare to its competitors for various activities in its business model. Why important? -Compare with competition - catch up or just improve -Eval threats of new entrants or new positions/substitutes -Sanity check of our future options -Understand how firm/industry works from perspective or activities and costs ZARA -Flexibility -Fast fashion -Takes weeks to put out design -Flow of return visitors -85% of full price

Scope

The choice of what to do and what not to do

Emergent strategy (Mintzberg)

The decision that emerges from the complex processes in which individual managers interpret the intended strategy and adapt to changing external circumstances

Resource leverage

The process of adapting a company's core competencies to exploit new opportunities.

Corporate Strategy

The scope of the firm in terms of the industries and markets in which it competes

What is fit?

The ways a company's activities interact and reinforce one another Vanguard: aligns all of its activities with a low cost strategy

Competitive Strategy

Three principles -Making trade offs and choosing what not to do -Creating a unique and profitable strategy by choosing different set of activities -Alignment and fit of a firm's activitites

VRIO Framework

Valuable -Does something to create more profit for company -expensive does not = valuable -High MW does not = valuable ■Better expectations of future resource value (sitting on valuable resource- e.g., real estate) Rare -Not common among other places Costly to imitate -Beyond financial (brands) ■Path dependence (long path to get to this point) ■Causal ambiguity (even co. not sure about drivers- ability to replicate?) ■Social complexity ("web" of activities) Organized to capture value -Conceptually could be not organized to capture value from it

Value captured

Value captured = Price - Costs

Market Failures

What do we mean by market failures? Failures that interfere with effective market competition (thus preventing optimal resource allocation) -in market failure, the social costs of production are not minimized (i.e., some resources are wasted and markets are not efficient) -economic efficiency arises when Price = Marginal Cost = Average Total Cost -(basically, this only happens in perfect competition; everything else is a departure from efficiency) What is the impact of market failures? negative impact of market failures can sometimes be mitigated by government intervention -such interventions (e.g., taxes, subsidies, bailouts, price controls, regulations) often cannot completely correct the failures and come with some disadvantages When does non-market strategy matter? if government and social forces play a role in dealing with market failure, market failures can -> opportunities for non-market strategy

Creating Nonmarket Strategies

What is the issue? §Could the resolution significantly affect the company's ability to create and/or appropriate value Who are the actors? §Those with an economic or ideological stake in the issue What are their interests? §What is their motivation? How critical? Is there consensus? In which arena do these actors meet? §Courtrooms and regulatory proceedings, legislative committee hearings, industry forums, news media, the blogsphere and the public domain What information will move the issue in this arena? §Scientific, data, evidence What assets do the actors need to prevail in this arena? §Reputation, procedural knowledge, networks/connections, coalitions

competitive advantage

When a firm creates and captures more value than its competitors

Cola Wars Case Study

Why was the development of the concentrate industry important? -The greatest improvement made besides [the fountain] is the manufacture of syrup. Large establishments exist that do this work solely. It looks like a small affair at first, but when you come to think about it, [...] you will very soon come to the conclusion that it is a heap bigger thing than you at first imagined CPs: Threat to Entry... LOW Barriers to Entry - High -Brand equity Limited outlets (shelf space, vending, fountains) & difficult to displace incumbent Franchise system of bottlers -bottling is very capital intensive (~$6B for US distribributors) -franchised system with exclusive arrangements with Coke & Pepsi CPs: Threat of Substitutes ... LOW* What substitutes are available? -Water, coffee, juice, sports drinks, tea drinks,... How does the industry get away with charging $1 for a product when there are free substitutes? -Subs are not always conveniently available -Addiction (strong preference) -Soft drinks are often impulse buys (register, vending machine) -Substitutes still have to build the channel! CPs: Supplier's Power... LOW What goes into a typical concentrate? -Not sugar (added by the bottler usually) -Not carbonated water (added by the bottler) -IT'S A SECRET! No one knows! -How much do you think the ingredients cost? -> NOT MUCH CPs: Buyer's Power... LOW For Bottlers -high switching costs -franchise agreements have them locked-in to exclusive deals -CP's offer benefits with suppliers for cans, sweeteners, ... -CPs own some bottlers as well (already forward integrated) CPs: Rivalry ... LOW -How can companies make so much money in the middle of a "war"? High degree of perceived differentiation -2 Players with long histories of interaction, dominate the market -The terms of competition tend to be clear...avoid downward spirals -Do NOT compete on concentrate prices Competition is focused largely on: -shelf space -market share (advertising) -selective discounts downstream -Direct Store Delivery (against private labels) -Most competition for the bottlers!

Suppose you are Disney: Is Pixar good for Disney?

Yes! §Disney needs Pixar to rejuvenate its character production §Pixar has a remarkable performance §Great financial deal: Pixar is cheap considering synergies with Disney §Defensive move: Pixar can distribute its films with somebody else §Disney depends more and more on Pixar §Disney know Pixar quite well, no surprises and clear idea of synergies No! §Pixar has been lucky, the stream of hit movies will end soon §Terrible financial deal: Disney is overpaying §Pixar needs Disney, nobody can produce revenue streams from a movie as well as Disney §Disney will destroy Pixar §Precisely, Pixar has been working so well with Disney...why change?

Examples of non-market strategy

Zoning restrictions §efforts by incumbents of particular business district to raise prices for entrants via §public hearings, licensing, inspections,... Licensing requirements §efforts by incumbents to require licensing for particular professions §e.g., real estate license; requiring law school + bar exam for lawyers Operating restrictions §efforts to restrict who can operate business §e.g., preventing dental hygienists from cleaning teeth unless part of a dental practice

Strategy in Research & Practice

§Strategy exists as a field of research and practice: in research, the goal is to understand what are the determinants of long-term organizational performance (with the hope of informing practice) in practice, the goal is to enable organizations (typically, firms) to achieve the greatest possible organizational performance (typically, P) Practice has two major elements: ØPlanning ØExecution we focus mainly on firms, so performance = economic profits (P) we focus mainly on analysis rather than implementation we focus on strategy rather than management or tactics

Strategy = brain that coordinates all firm functions

§Strategy helps coordinate all internal firm activities by giving guidelines to each function within the firm §e.g., The answers to the questions... §Should we invest more in Marketing than rivals? §Should we invest more in R&D than rivals? §Should we invest more in Logistics than rivals? §...all depend on the firm's Strategy §if we are world's best razor blade (Gillette), then Yes to all! §if we are Wal-Mart, then Yes only to Logistics §Without overall Strategy to guide such decisions, functions (e.g,. Mktg, OM, IS, etc.) may be uncoordinated, duplicative, and work at cross purposes!

Mintzberg's 5 Ps

§Strategy is a Plan - A direction, a guide or course of action into the future (Intended) §Strategy is a Ploy - Specific maneuver intended to outwit and competitor. §Strategy is a Pattern - Consistency in behavior over time (Realized) §Strategy is a Position - Locating particular products in particular markets §(Porter - "Strategy is the creation of a unique and valuable position, involving a different set of activities.") §Strategy is a Perspective - An organizations fundamental way of doing things.

So, What Is Strategy?

§Strategy is the study of survival - how things come into existence and continue to exist. §In business, survival requires that an organization purchase inputs and transform them into outputs it can sell to others ... for a profit. §Thus, for a firm to survive, it must continuously create value and capture value. §As Porter points out, if a firm's position and activities are identical to those of its competitors, there is no reason to believe its performance will be better. §In our next two classes we will look at: §How do firms Compete? How does that affect profitability? §How can firms think about Positioning to create a Competive Advantage?

Network Effects

§arise when value of product or service depends on # of other people already using it §occurs especially in information-based products/services §e.g., Windows/Office, eBay, QWERTY keyboard

What can Substitutes do?

•close substitutes can drive prices down (or force costs or quality up) •weak substitutes allow prices to stay high

What can Buyers do to industry?

•strong buyers can force you to keep prices low (or deliver higher quality) •weak buyers can be forced to accept high prices (or low quality)

What can Suppliers do to industry?

•strong suppliers can raise industry average costs (or deliver lower quality) •weak suppliers can be forced to accept lower cost (or to deliver higher quality)

Resourced-Based View

■Resource-based view focuses on firms' internal resources as determinants of competitive advantage

What are the key questions in Firm Analysis?

■Why do some firms achieve higher profits than rivals in their industry? •why do some firms' profitability levels stay higher than rivals' profitability levels? •aka, what explains competitive advantage & sustained comp advantage? ■How can we describe firm strategies? ■What roles do the following play in strategy & competitive advantage (and sustained competitive advantage)? •competitive positions •activities (tradeoffs in choices) •costs & WTP •core competences •resources •strategic fit

Horizontal Diversification

asks, "in which industries and product segments should we be active"? describes product/industry breadth of the firm horizontally integrated (diversified) firms include GE, Mitsubishi, & BU

Strategic positioning

attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company

strategic positioning

attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company

Rivals

compete for & shape the value provided by industry firms in same industry

The three Cs of SI

competition, cooperation and collaboration

Economies of Scale

cost advantage: resulting in situations in which average costs decline as current output increases

Stakeholder Approach

firms work to meet the environmental demands of multiple stakeholders—employees, suppliers, and the community.

Suppliers

have "bargaining power" to capture more value organizations that firms in the industry PAY.

Willingness to Pay

maximum price a buyer would pay for a firm's product

Operational Effectiveness

performing the same tasks better than rivals perform them

Productivity frontier

relationship that captures the result of performing best practices at any given time; the function is concave (bulging outward) to capture the trade-off between value creation and production cost

Planned emergence

strategy process in which organizational structure and systems allow bottom-up strategic initiatives to emerge and be evaluated and coordinated by top management

Differentiated

the ability of a firm to boost the willingness to pay and command a price premium

What is strategy

the creation of a unique and valuable position, involving a different set of activities

Value created

the difference between willingness to pay and supplier cost

Competitive Convergence

the more indistinguishable companies are from one another

First step in creating a competitive advantage?

value creation