SI422 Midterm

first-mover advantages

advantages resulting from firm size: scale economies, scope economies, network effects, learning effects advantages from entry timing: preemption (channel, locataion, positioning, capacity, input), reputation effects, buyer switching costs, patents or institutional barriers

economies of scale

arise in situations in which average costs decline as current output increases ex. Intel- amortize research costs over many more units

network effects

arise when value of product or service depends on number of other people already using it ex. Verizon- most coverage, EBay- buyers make it most compelling for sellers

buyer switching costs

arises if 1st movers can lock in customers ex. Bloomberg-- money invested in on-site equipment and staff training make switching less likely

Apple horizontal diversification

better off test: costs decrease: economies of scope (parts standardization/ volume discount, spread fixed costs over more units ) WTP increase: ease of use (compatibility between products, all products use the same OS/IOS, highest customer satisfaction score compared to competitors); all products benefit from apple brand (iphone and ipad sales almost double every year after launch) ownership test: costs decrease: do not forego economies of scope in a contract (i.e. with a contract to distribute a sony mp3 player, they would not be able to spread some centralized costs like R&D over those units); avoid risk of hold up other considerations: quality (apple would never outsource an entire business unit to another party, real or perceived quality differences)

Coke Cola horizontal scope example

better off test: costs decrease: economies of scope- infrastructure already exists to support bottling, distribution, and marketing (i.e. staff but also costs of some actual ads), costs spread out over more products, ordering high volumes of similar ingredients used in Coca-Cola and Minute Maid concentrates WTP increase: promotion- coca-cola already has shelf space, will expand product line for stores using coca-cola products; brand recognition- customers are more willing to pay for products that have the coca-cola brand name; bundled sale- for bottlers? end consumers? ownership test: costs decrease: contracts- like Disney and Pixar it is very expensive and taxing to have to renegotiate a contract every couple years other considerations: variety- with more variety in their product line coca-cola will have more bargaining power when negotiating contracts, can market their brand as having more to offer than their competitors

better-off test and ownership test in context of horizontal scope

better off test: can firm achieve lower average costs or higher average prices by including multiple business units in the same firm? economies of scope: (aka synergies)- diversify if (cost of having units A and B in same firm)< (cost of unit A in firm A) + (cost of unit B in firm B) -Boost in WTP (aka cross-selling or "bundled sale")-- diversify if (WTP of activities A and B if done in same firm)> (WTP of activity A in firm A) + (WTP activity B in firm B) note: in some strategy contexts, people categorize "WTP boosting" under "economies of scope" because this benefit comes from the same drivers ownership test: -should firm own both business units (or is another arrangement more profitable?) -the prescription here cannot be characterized as easily by an algorith, but the principle remains important -note that many intangible assets satisfy this test, some do not

better-off test and ownership test in context of vertical integration

better off test: does vertical integration lead to lower average cost or higher average WTP? ownership test: is it bet to 100% own vertically integrated entity or do alternative arrangements (long-term contracts, long-term relationship, etc.) achieve same benefits at lower cost? factors that drive each: -quality and/or cost control-- relatoinship-specific investments- result of RSis that may change bargaining power with suppliers-- a.k.a hold up! -downstream free-riding: possibility that service you provide could be used by rival to lower their costs i.e. a retailer that offers much product info about the products it sells (customers may shop there, gather info, buy elsewhere); owning more of the value chain can strip away this problem! alternative: find an "alternative arrangement"

preemption

channel, location, positioing for marketing and distribution capacity, input for suppliers and manufacutring

example of relationship-specific investment: Co-Location!

coal mine: original price charged (more distant plant) was $100/ short ton (included $10 RR shipping charge) coal mine revenues: $90 electricity plant total cost of coal: $100 -but now, after the plant "co-locates" next to the ine, there is $10 of saving per short ton! good news-- this relationship passes the better off test! (cost saving working together) -who gets to keep this "created value?" "Greedy Electricy Plant owner's perspective" : "I'm the one who built my plant here.. I should keep all of the $10 savings! Also I know that the best (net) price the coal mane can charge a distant power plant customer (their 'BATNA') is $90 (that customers pays $100 total but $10 goes to shipping--- I will over to pay $91... your coal mine is still $1 ahead of best alternative, I'll keep $9 of savings "Greedy Coal Miner": "you're the one who decided to build here... I know the best cost in buying coal from a distant coal mine would be $100; I will offer you a price of $99... your power plant is still $1 ahead of best alternative, I'll keep $9 of savings -never a "right answer" as to how to split up the pie -also, after the RSI is made, each party is reliant upon the other for the foreseeable future... this dependence will never go away -after a contract between the two parties expires, there are three bad things that can happen 1. one side or the other tries to negotiate better terms (through any threatened alternative to increase bargaining leverage would be less optimal and therefore costly) 2. protracted/expensive contract renegotiations (costly) 3. failure to agree and the relationship grinds to a halt (costly) -but since either part can often escape a contract, these risks could pop up at any time, inclluding during* a contract *typically "hold-up" is thought of as #1 during a contract overall for Co-Location: -implications for writing a contract: complex/tricky contracts to write... high legal fees -implications for vertical integration: only way to make the three problems on previous slide go away is to vertically integrate implications for ownership test: when RSIs exist, we can argue it passes the ownership test... need to own to make the three problems go away

what can compelling substitutes do?

compelling substitutes have an alternative price to value ratio that cusomters find appealing -high substitute threat can drive prices down (or force costs or quality up) in an attempt to improve price to value ratio -weak substitutes allow prices to stay high (or keep costs down)

industry

define based on finding players that sell similar products with similar suppliers and buyers

potential entrants

firms existing/startup that could enter industry

rivals

firms in the same industry

things driving diversification

good reasons: efficient operations: economies of scale (benefits of size), economies of scope (synergies) market power: power over buyers, power over suppliers, reducing competition bad reasons: diversifying risk: if shareholders wanted to diversify risk, they could do it themselves managerial hubris: empire building, piling on bonuses "because the numbers work" often the numbers workout on paper, but fail in reality *good and bad in the view of firm= profits this is different from good and bad in the view of society market power motivations often lead to profit, but harm society

what is rivalry and what can rivals do?

high rivalry= competition that drives down prices or drives up costs -intense rivalry can drive prices down (or force costs or quality up) -weak rivalry allows prices to stay high (or keep costs down)

Corporate Strategy: Choosing Corporate Scope

horizontal diversification: in which business areas should we be active? vertical integration (also a business unit issue) how much of the value chain should we own? geographic scope: (also a business unit issue) in which geographic areas should we operate?

issues in corporate strategy: horizontal vs. vertical integration

horizontal integration: refers to extent to which firm is involved in multiple business areas (i.e. product/industry breadth of the firm) i.e. GE is a horizontally integrated (diversified) firm-- lightbulbs, financing, airplane engines, med tech vertical integration: describes how firm participates in various stages of the value chain note- many "vertical value chains are pictured from left to right

vertical integration

how much of the value chain should we own? vertical integration types: backward integration- occurs when a firm moves into a business that is "upstream" (i.e., closer to raw materials) i.e. if Ducati were to begin to make more supplies forward integration- occurs when firm moves into a business that is "downstream" (i.e. closer to the end consumer) i.e. Ducati entering sales

two types of stakeholder

narrow definition: a stakeholder includes those groups who are vital to the survival and success of the organization wide definition: a stakeholder includes any group or individual who can affect or is affected by the corporation *financiers= any entity or person with a financial stake in the firm (i.e. shareholder, lender, etc.)

aggregation

of firm-specific capabilities spanning functions and business units

suppliers

organizations that firms in the industry pay

buyers

organizations that pay firms in the industry

Analysis of Taxi Industry

potential entrants: high threat of entry-- anyone can drive so no skills needed, high driver turnover (no unions), oversupply (40k for 15k "capacity") industry rivalry: high extent of rivalry, floow od taxis; crowd high-potential areas, bid up prices of medallions buyers: low power of buyers; plenty of options but fares are dictated by city substitutes: low threat of subsitutes; subway; limos/livery may cherry pick more profitable fares (not "hailing" customers); bike taxis not real threat in NYC suppliers: high power of suppliers; medallions scares and valuable; leasing managers raising prices overall: below economic average profits; most important factors that affect industry profit are threat of entry, extent of rivalry, and power of suppliers

vertical scope: benefits of market transactions

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, and politics (once the two transacting entities are owned by one firm, these factors begin to matter)

sub-activities

required to accomplish the higher-level value chain step

some of Zipcar's resources passed the VRIO test

resources: car fleet, key parking spots, zipcar brand***, technology***, capabilities: customer interface, marketing

substitutes

stuff that could be an alternative to industry's products (with compelling price to value ratio)

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? i.e. is 1+1>2 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?

what is the goal of a five forces analysis

the goal of the five forces framework is to explain industry average profits and articulate the factors that affect industry-average profits

5 forces soft drink industry concetrate producers

threat of entry: none-- CP plant cost only 50-100 mil but bottlers are locked up, access to distriution is scarce, powerful brands protect incumbents extent of rivalry: low-- unit volumes eroding ffrom 2005-2009, but CPs 20 year sales growth 10% CAGR, never compete on price, C2= 74.5% in 2005 (duopoly), coke/pepsi always imitate each other, usually improving the industry power of suppliers: none-- not sugar or water (bottlers add), ingredients (coloring, flavoring) are inexpensive inputs, gross margins 78% power of buyers: none-- concentrate approaching 40% of COGS, and receive mkt $ and negotiation support from CPs, but franchise agreements favor CPs, many bottlers vs. duopoly in CP, CP threat to fwd integrate, from '88 to '09, CPs forced the bottlers to pay steadily higher prices- an increase of 3.6% CAGR, buyers did not appear to pass these thru to retail accounts- real prices down by -1.4% and no evidence of retail margin decreases threat of substitutes: low-- real threats (CPs have "call options") are bottled water (0-11% share) and sports drinks (0-2% share) overall: industry profit expected to be above economic average, all factors low strength so nothing really is an important factor affecting the industry profit

5 forces soft drink industry bottlers

threat of entry: none-- exclusive franchises in place, expensive highly automated plants, benefit from economies of scale, access to distribution is locked up extent of rivalry: low-- geographic exclusivity limits competition (why did CPs set it up this way?), some rivalry with other CP's bottlers? power of suppliers: very high-- CPs wield much power, cans/glass bottles are commodities and prices negotiated by CPs (clout), sweetener (CPs help here also) power of buyers: low-- retailers: real prices paid by consumers down -1.4% CAGR, assume bottlers costs (price paid) down by similar amount (no evidence margin down), supermarkets: pay for less per case, retail gross margin is "average" vs. other beverages at 30%, end consumer: power weakened by brand loyalty and advertising spend threat of substitutes: low-- directly face same substitute risks as CPs, for their function/services very limited substitute risk- CPs could "go direct" overall: expected industry profit below economic average, the most important factor that affects industry profit is the power of suppliers

"having your cake and eating it too"

win, win -if customers value your CSR initiatives and it boost WTP (i.e. Unilever?) -if your stakeholders value your CSR initiatives: employees, community/government (and firm benefits follow), suppliers -or CSR results in cost savings (Body Shop media attention avoided ad spending)

Rivkin analyzing customers' WTP

" a firm achieves a competitive advantage by driving a wide wedge between the WTP it generates among customers and the costs it incurs to serve those customers" -relative cost analysis addresses the cost piece -WTP addresses the other element of the wedge WTP= maximum customer would pay to get product/service -price can be set below WTP to drive market-share gains (i.e. Dell in 1990s with PCs)... i.e., price does not necessarily= WTP ways to analyze: -quantify economic value to customers-- this method is effective on big-ticket items i.e. plane with better fuel efficiency -market research (i.e., ask the customers)-- customers have difficulty answering questions about WTP (but relative importance of purchase criteria can inform this- ex. Ducati) -Market history (past price changes and effects on volume) -market experiments (i.e. price-change tests or "pilots")

non-market strategy opportunities

"classic strategic analysis emphasizes how companies can gain competitive advantage by lowering their own cost (aka costs down) or increasing customers' WTP (aka revenues up) for their own product. ... In contrast, [non-market strategy] is also concerned with rivals' cost and other companies' WTP and price" -larger incumbent firms may make some moves in order to raise costs for smaller rivals or would-be entrants (sometimes, these moves are unintuitive and may seem puzzling as on the surfact they seem to hurt the incumbents too) -incumbent firms may make moves in order to lower WTP for rivals' products i.e. social groups try to lower WTP for products of firms engaged in practices they dislike... strategists need to be on the lookout for these attacks! ex. zoning restrictions, licensing requirements, operating restrictions, minimum product standards)

how does Grant define strategy?

"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" Contemporary Strategy Analysis by Robert M. Grant *see diagram on study guide* -in Grant's view, strategy is designed to help the firm use its internal resources and characteristics to deal with its industry and competitive environment; strategy must fit with the firm and its environment!

non-market strategies, aka strategies beyond the market

"the strategist's job is to... implement strategies that allow your company to achieve and sustain superior performance. ... Strategists play against a powerful opponent- well-functioning markets. Where product markets work well, competition drives prices [downward]... rule number one in the strategist's playbook is to seek out and even create situations in which markets cannot deploy their full force" *it is possible that market failure can be a good thing!! Feliz Oberholzer-Gee Dennis Yao

firms in the drug industry are also capturing a big chunk of the value for several reasons:

*think of gang leader as "sole proprietor" of the firm -value capture= price- costs 1. pricing power due to geographic differentiation (each gang has its own turf), loyal customers with low propensity to switch 2. admittedly the "Board of Directors" captures a huge chunk of value also

ket attributes/activities of Zipcar

-"car sharing" -member-based -subscription model -wireless/internet enabled -online rental -remote access (via keycard) -dense urban environment -convenience (location, access, ease of use, gas and insurance included) -new technology platform -limited (guerilla) marketing -target customers (aka Zipsters!) -young professoinals (nights/weekends) -college educated -safe drivers -needs: convenience, environ?

should TATA motors keeps sponsoring CSR programs?

-CSR intregral to Tata's belief system -expectations towards Tata are high-- keeping CSR commitment will maintain brand value and corporate reputation, pulling support will harm both beneficiaries and Tata -it's the moral/right thing to do -CSR initiatives make Tata act as a role model and generate trusts/loyalty with employees and society -training programs provide skilled labor to Tata, too -CSR not a signficant financial burder (and even less concerning when Tata returns to profitability)

M-PESA

-Kenya's mobile banking leader background: in 2003 mobile provider Safaricom and their larger shareholder Vodafone began exploring the ideas of mobile banking -in 2007 their mobile banking platform, M-PESA, officially launched -by 2008 only 10% of Kenya's population had access to financial services -- mobile provider Safaricom thought that they could vastly improve that number using a unique mobile banking system -model for mobile banking: money transfer services: fewer than 1% of M-PESA customers ahd a balance of over $13 in the account- M-PESA was mainly used for sending and receiving money -basic business plan: M-PESA came pre-downloaded on every Safaricom SIM card; this provided easy and convenient use to their mobile customers, customer could also sign up at various locations around Kenya, M-PESA agents were located at gas stations, grocery stores, bus station kiosks, and more; by 2010 M-PESA had 17, 652 agents -M-PESA provded money transfer services; funds could be transferred between M-PESA accounts for the small fee of $0.40 USD, money did not just have to be transferred to friends and family, it could also be sued to pay for services such as taxi and bus fairs or to pay bills -M-PESA was designed to fill that 90% gap of people who did not have access to formal banking; however, it became so popular that even those with bank accounts began to use M-PESA; while it was designed for everyone, a survey of 3,000 users found that the average user was more literate, better educated, and had 65% higher expenditure than average

Prim Minister Narendra Modi made job skills a number one priority

-Modi made this a "pet project" -only 2% of workforce had former career sills training vs. 52% of US workers, 68% of UK workers, 80% of Japanese workers -if Tata Motors prioritized job skills, how could this be a "win win" -focus on rural areas or urban areas?

basic 5 forces questions

-Porter intends to use the 5 forces on the industry level (because each force acts on average across all firms in an industry) -helps us understand whether an industry's incumbents are likely to earn high/low economic rents or "profits"-- this does not necessarily mean that a new firm should enter as barriers to entry could make it very difficult

M-PESA growing and scaling the business and key challenges

-Safaricom controlled 79% of Kenya's mobile market and M-PESA was pre-installed on all Safaricom SIM cards-- this market was growing at vast rates with mobile penetration in Kenya looking to reach 101% by 2012; since M-PESA came pre-downloaded it was easy and convenient for Safaricom customers to use which helped contribute to the vast growth -regular bank transfers could take u pto 2 days in Kenya, where M-PESA transfers over a mobile network were instant, this convenience and speed attracted customers -did not just have to be for individual users; partnered with businesses around Kenya, these businesses used M-PESA to make bulk distribution payments; as of Jan. 2010, 27 companies used M-PESA for these services key challenges: -Kenya's Banking Act allows only institutions holding a valid banking license to perform banking activities; having decided not to go through the process of receiving this license, M-PESA was not allowed to perform many if the key functions of a bank, such as taking deposits and lending funds Results: -Jan 2010 there were more than 9 mil M-PESA customers -in 2009, 47% of money transfers in Kenya were mobile transfers; of that 47% M-PESA accounted for 40% -28% of MPESA transactions were to receive money -25% of transactions were to send money -cash deposits and withdrawals averaged $650 million a month -from April to Sept. of 2009, MPESA had a monthly revenue of $7 million

general types of strategies

-a firm has a competitive advantage if it achieves a higher profitability (i.e. return on assets) than the average in its industry -there are four general ways that firms can obtain competitive advantage in mature markets with capable competitors broad vs. narrow market cost leadership vs. differentiation *firms that fail to choose a particular strategy get "stuck in the middle" and underperform *premium price and cost leadership strategies are "successful" only if they generate above average profits

Ducati Strategic Activity

-activities centered around the Ducati brand (speed, Italian design) and low-cost manufacturing

reputation effects

-advantage accruing to 1st movers based on ability to achieve premium brand-name ex. FedEx and UPS brand names will make it difficult for new players to enter

patents or institutional barriers

-advantages that can arise if governing authority restricts future entry ex. pharma companies- whoever develops the drug first makes it difficult/impossible for the next firm

"Icing on the Cake"

-all superficial and no substance -public relations -pronouncements by the CEO -"greenwashing" -philanthropic activity disconnected from business operations-- NFL Breast Cancer drive? Boston area businesses donating money to Boston Children's Hospital? -not much substance (or actual "cake")-- BP's "Beyond Petroleum" Campaign before major oil spill, all perceptions on CSR and ethical indices came crashing down

economies of scope

-arise if provision of multiple different goods or services by single firm-- lower costs ex. UPS- lower cost of pickup/delivery w/ express mail due to ground business

learning effects

-arise in situations in which average costs decline as function of cumulative output ex. most manufacturing busineses

reasons for market failure: transaction costs

-arise when there are costs to making transactions i.e. if it is costly to obtain payment for goods/services (collection costs) i.e. if it is hard to reward provision of goods/services or incentives change over course of business relationship (legal/contracting costs) -firms exist in large measure to address problems of transaction costs in the market

(Lack of) market power in action

-assume that demand, marginal costs, and marginal revenue curves are drawn correctly -in perfect competition, firms must accept prices= marginal costs and produce where marginal cost curve interesects with demand Qpc= quantity produced in perfect competition -if firms raise their price, they lose all sales -thus, P=MC and profit= 0

sources of buyer power-- if buyer power high industry profits decline

-buyer concentration is high: ex. home depot (there are few home-improvement superstores, if you supply them they'll negotiate price) -customer concentration (as a % of sales): ex. Walmart (for most companies that supply Walmart, given its size Walmart is a very large percent of company sales) -product differentiation is low: ex. smuckers (if you supply them with glass jars- commodity product- they will push for lower prices) -brand identity low: ex. rental car customer (with no brand motivating purchase, buyers will focus mostly on price) -customer's costs relative to total purchases are high (as a %): ex. coach (they are very focused on the price of leather in their negotiations with these suppliers) -threat of backward integration: ex. Costco (warehouse clubs have launched a wide range of "private label" products though much of the actual manufacturing is outsourced thus comeptiting with their branded product vendors)

OITT framework

-can be used in non-market strategy thinking Opportunities: i.e. a chance for improving industry or firm profits, which could be created by market failures Interests: which organizations have similar or aligned interests Targets: ie. legislatures, agencies, courts, standards bodies, public opinion Tools: i.e. money, information provision, lawsuits, human capital, etc.

organized to capture value

-can form the basis of a sustainable competitive advantage -depends on firm's internal structure -effective organizational structure and corrdinating systems -if firm not effectively organized to exploit the competitive poteential of valuable, rare , and costly to imitate resource, the best case scenario is temporary competitive advantage

positioning preemption

-choice of best position; followers must compete directly or position differently i.e. Harley's positioning in the "Cruiser" market in the motorcycle manufacturing industry

key takeaways- horizontal scope

-coke has a diversified horizontal scope (cola, bottled water, orange juice). With separate brands, most clear benefits are derived not from increased WTP but rather from cost savings (i.e. economies of scope!) -Apple is an even more powerful example of the benefits of horizontal diversification (computers, smartphones, Ipods), fully benefiting on the cost side as well as the WTP side

pursuit of both differentiation and a low cost strategy

-could get firm stuck in the middle! -risky -in many industries, low cost and differentiation are inconsistent with one another -a firm pursuing multiple strategies risks becoming stuck in the middle -"somewhat low-priced" products with "pretty good" quality get squeezed from both directions ex. GM, Sony, Dell, Toys R Us, Hostess

as a supplier to a jacket manufacturer, are you likelier to receive more intense cost focus from your customer if you are a button supplier or a leather supplier?

-customer will focus more on cost (your price) negotiations on the leather while less focus will be placed on buttons-- the button supplier enjoys not so much "supplier power"" as it does a vacuum of buyer power (or buyer cost focus) --- leather is a much higher percentage of COGS than buttons

activities or processes

-designed to accomplish a specific task in a repeatable fashion

Coors

-doing "so-so" in the mid 1980s -against "go bif or go home" backdrop they put all of their muscle behind Coors Light -national scale backed by national ads, distribution (Silver bullet ad campaign, Unique NASCAR auto racing sponsorship) -product differentiation- not on beer itself but on perceived differentiation through innovation on packaging (R&D/product development) and also on brand

rivalry: gang wars caused tragic deaths as well as lower gang profits

-during the pre-expansion time period, the move from peace to gang war caused major declines in profitability -revenue decreases: price declines (unit prices dropped from $9.54 to $7.12 or -25%), quantity declines (volumes went from 2,019 "bags" to 1,442 or -29%) -cost increases: employee wage costs (foot soldier pay climbed from $130/p, to $220/mo., or +69%), non-recurring costs of violence climbed from $600/mo to $5200/mo in increase of 8.7x (mercenaries, funerals, weapons costs) -monthly profits available to leader: $8400 to $1000

barriers to entry-- if threat of new entrants low (barriers to entry high) industry profits rise

-economies of scale- supply side (same product): ex. semiconductor manufacturers (large players spread fixed costs over more units, resulting in lower unit cost) -economies of scope (two or more products): ex. insurance companies (by selling life, home and auto insurance, they can amortize fixed costs over more products) -demand-side benefits: ex. online auctioneers (given the huge customer base of established players, it's more compelling to list your item there vs. a site of a smaller auctioneer) -product differentiation: ex. motorcycle manufactuerers (the market has highly differentiated products) -brand: ex. branded outerwear manufacturers (powerful brands in industry make entry difficult -access to distribution is already claimed: ex. Cola (grocery store shelf space is already taken; to gain share, expensive promotional effort is necessary) -large capital requirement (for facilities or working capital): ex. bottlers (incumbents have made huge investments in highly automated lines -government policies: ex. steel mills (steel industry has benefited for years from protectionist tariffs assessed on imports) -expected retaliation: ex. operating systems (any new entrant would face a fierce fight from Microsoft)

zoning restrictions

-efforts by incumbents of particular business district to raise prices for entrants via public hearings, licensing, inspections

minimum product standards

-efforts by incumbents to build in specialized product requirements i.e. "green" efficient washing machine requirement

licensing requirements

-efforts by incumbents to require licensing for partiuclar professions i.e. real estate license, requiring law school and bar exam for lawyers

operating restricutions

-efforts by incumbents to restrict who can operate business i.e. preventing dental hygienists from cleaning teeth unless part of a dental practice

valuable

-enables firm to exploit external opportunity or offset external threat -positive effect on competitive advantage -enables firm to increase economic value creation -revenues rise if firm is about to increase perceived value of product/service

pioneering costs

-expensing incurred to 'blaze the trail' for the industry... including educating consumers, educating regulators, developing retail channels, early-stage R&D; free riders can wait and see what works and what does not ex. early MP3 players educated consumers, prepped market for Apple

how does Porter recommend that firms apply the 5 forces framework in order to increase profit?

-firms should conduct a 5 forces analysis in order to understand the factors affecting average profitability in their industry, and should draw lessons from the analysis about a. how to increase average profitability for the industry overall and b. how to take advantage of the forces in order to improve the profitability of the firm relative to its rivals in the industry

costly to imitate

-firms that do not possess the resource are unable to develop or buy the resource at a reasonable price -if it is valuable, rare, and costly to imitate it has internal strength and core competency; if competitors fail to duopolicate then the firm can achieve temporary competitive advantage

resource-based view of the firm

-focuses on firms' internal resources as determinants of competitive advantage key questions: 1. does firm possess resources or capabilities that will allow it to attain competitive advantage? 2. can the firm sustain its advantage? key assumptions: RBV views firm as a bundle of resources 1. resource heterogeneity= resources differ across firms 2. resource immobility= some resources cannot be easily traded or imitated

street drug industry

-gang leader making annual income of $140,000 in the third year; this is like a $236,000 pretax salary at a legit job -after 6 years he was promoted to BOD (much more lucrative) -seems like a GREAT industry (at least in non gang-war periods)-- for the "business owner" (i.e the leader, who is franchisee), HORRIBLE for almost all of his employees (low wages, dangerous, etc.) substitutes: other drugs, non-drug activities (recreation, etc.)

the role of government in 5 forces

-government actions and policies can affect any (or all) of the 5 forces -thus Porter suggests considering each government influence separately and under the appropriate force ex. regulatory policy may make entry more difficult or easy- the U.S. FDA places high barriers for safety and efficacy on drug companies -policy regarding unions and strikes can affect supplier poiwer -anti-trust policies (like the Sherman Act) have a substantial impact on rivalry)

what does it mean when we say that rivalry is "high"

-high rivalry means that firms in an industry compete in a way that squeezes profit margins, either by reducing average prices, increasing average costs, or both

recent development for coke in terms of corporate strategy (concept seen in ads)

-horizontally diversified (or integrated) firm selling not only cola, but minute maid, sports drinks. etc. -also you can see economies of scope-- despite having separate brands, you can see how some of Coke's advertising costs are shared and spread over more units, resulting in lower marketing costs per unit; design costs and/or R&D expenses to build the machine are being spread over more units

reasons for market failure: information imperfection (information asymmetries)

-if one party in a transaction know important info that the other party doesn't know or cannot verify cheaply i.e. when selling a used car, the owner may kknow if it is a 'lemon,' but it is hard for the potential buyer to verify; as a consequence, it may be difficult to sell i.e. people may be relectant to buy health insurance until they think they are at risk for health care costs; insurance companies cannot know and thus have to charge inefficient prices across individuals

does advertising increase rivalry (costs up) or decrease rivalry (don't compete on price)?

-in the near term, perhaps costs go up, but in the long run, industries with an advertising focus tend to have less rivalry (i.e. soft drinks) as they are trying to compete on product differentiation (thus not price)

horizontal integration

-in which business areas should be we active? *another way to think about "business area" is to think of each as a different product

Henry Mintzberg: Strategy Design vs. Strategy Emergence

-incomplete to consider strategy to be something that can simply be designed (analyzed); instead, it is important to recognize that strategy emerges and changes over time, regardless of how carefully it is planned -we do not disagree with Mintzberg- nonetheless we emphasize analysis in this course because sound analysis is a pre-requisite for successful strategy and because processes are managed by Senior Execs, whereas analysis is pervasive throughout the firm

sources of rivalry- if rivalry high profits decline

-industry growth is low: ex. investment banking in last several years (firms competing on price to try to win clients and gain market share) -demand conditions are low (overcapacity exists): ex. airlines (for years, ther have been many empty seats on airplines) -exit barriers exist: ex. shipbuilders (defense spending decreased (1960s), forcing Litton Industries to stay in declining market due to highly specialized and expensive facility) -product differentiation is low: ex. plastic bottle manufacturers (plastic bottles are a commodity product with virtually no product differentiation) -brand identities are non-factors: ex. crack cocaine dealers (street level drug users do not care about brand) -highly perishable products (or high storage costs): ex. farmers market vendors (as the day goes on, vendors will slash prices to unload their products) -fragmented market (too many players): ex. taxi drivers (in NYC there are 40,000 taxi drivers for about 15,000 driver capacity)

what types of investments must industry firms make in order to ensure that the price-value ratio of their products stays high relative to those of alternative products? are these investments sufficiently costly to drive down overall industry profits? (Drug industry)

-interfering with (or branching out into) trade of rival drugs (heroin, etc.) -probably not -overall, substitutes unlikely to squeeze profits out of this industry

Relative Cost Analysis

-it quantifies the cost per unit of a firm, relative to a rival, in a key (directly competitive) product -in Hostess vs. Little Debbie vs. Ontario/Savory helped to see: what a cost-leadership strategy looked like, what a premium price/differentiation strategy looked like, what a company stuck in the middle looked like -Flagstaff vs. Tsujimura: it was not about which type of strategy each was pursuing... they were directly competitive with no major differences in the type of strategy; rather, it allowed us to see which firm had a cost advantage if they started going "head to head" (historically they'd avoided much direct competition) -finally, it informed some decisions that Flagstaff would make about its competitive responses to Tsujimura

demand uncertainty

-level of demand and consumer value for features? aka, if you build it, will they come? ex. McDonald's able to watch the market for premium coffee unfold pre-entry

Minoli's (Ducati) Turnaround Plan Centered on both Raising WTP and reducing costs

-lower costs related to physical product without lowering WTP -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 tenter a new segment (cruisers?)

incumbent inertia

-market leaders often unable to change as market evolves ex. Kodak's inability to migrate effectively from plain film to digital photography

reasons for market failure: market power

-market power (non-competitive markets): -in economics, "market power" means the ability to raise prices without losing all customers -this is inefficient bc prices are higher (and supply lower) than would be experienced in perfect competition -might arise when oligopoly/duopoly/monopoly, weak buyer power or very differentiated products, low threat of substitutions

the following logic should guide your non-market strategy thinking

-markets fail due to: market power, public goods, externalities, info asymetry, transaction costs -when markets fail, certain types of groups tend to react: government officials, social activists -when these types of reactions occur, strategists need to recognize that both threats and opportunities emerge: "hang on" as long as possible, once change is inevitable improve incumbent firms' position

Possible Outcomes of Moving First

-might result in a competitive advantage -could also result in no advantage, and it could even result in long-term competitive disadvantage

how can we recognize monopoly?

-monopolists raise prices and 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 -concentration ratios C4, C5, C6= combined market share of top 4, 5, 6 firms -"rule of thumb" if C4, C5, or C6= 80% its an oligopoly

Ducati's "Differentiation" Strategy

-narrow scope -over 5 years (1996-2001) prices increased steadily (though admittedly relative price premium did not change) -over 5 years expanded product mix to include more low, medium, and high priced bikes, geographically grew sales in US and Asia, customer scope through growing sales to others beyond hard-core racers

how companies receive supra-normal profits

-need to keep demand high; in terms of entry keep cost below other firms -prevent entry (high entry barriers, govt. help) -keep costs low (better tech, more efficient labor force, force suppliers to take lesser profits) -keep price high (force consumers to accept high prices-- i.e. monopolist, create value or perception of value for consumers) -overall must keep price above cost so can earn profit -what is the difference across firms-- that's what differentiates strategy and economics -how different firms in same industry act-- what do they do that is the same or different?

reasons for market failure: externalities

-negative externalities: costs that individuals (or firms) can impose on others, thus distorting incentives i.e. lots of new real estate development in an exclusive neighborhood can hurt real estate value for residents; suppose that rubber tires costs $30/tire to manufacture and yields $10/tire waste, if the producer only pays the $30 production cost, they will overproduce tires and will impose the costs of pollution on others -this can lead to overproduction of unpriced negative externalities -on solution involves taxation/regualtion to help get prices right i.e. taxes on pollution; it is sometimes easy or hard to identify right tax rates, politics are often greater difficulty than economics positive externalities= benefits that individuals (or firms) get without having to pay for them i.e. residents on a street "fire proof" their homes; their neighbors benefit from this (better safety for the neighborhood) without having to pay for it -in business, this leads to underproduction of unpriced positive externalities -one solution involves subsidies/tax breaks to try to get to fair outcome i.e. R&D tax credits; intellectual property rights

do alternative products (drug industry) offer a price-value ratio that is similar to that offered by the firms in this industry?

-not for addicts -less so for local environment of gang than in other geographic regions

value creation and value capture

-note that price is different than WTP boosting (and plays no role in value creation) -price is relevant to capturing value-- price determines the split of value between supplier and buyer -price is the outcome of the negotiation (power relationship) between the buyer and supplier

suggestions to foster responsible corporate behavior

-nurture ethical behaviors among managers and employees -trim down executive compensations and rethink ownership models (i.e. family trusts, cooperative -embrace government regulation -limit corporate lobbying -civil society, including NGOs, social movements, may be more effective agents of change than governments and firms -collective effort of government, corporations, and civil society may be a promising approach in building responsible societies

capacity preemption

-occurs if 1st mover achieves sufficient production capacity; potential followers recognize that they cannot enter profitabily i.e. steel, iron, copper

location preemption

-occurs if 1st mover secures desirable locations; followers have to settle for next best i.e. restaurant at main intersection in town; airlines getting gates at airports

channel preemption

-occurs if 1st mover secures distribution channels than followers i.e. long-term contracts for retailers' shelf lspace; exclusive contracts with bottlers

input preemption

-occurs if 1st mover secures input factors under better terms than followers i.e. purchase uranium for nuclear power; special deal (either exclusive access or preferred terms- if either were possible) for vibram soles on hiking shoes

rare

-only one or a few firms posses it -if resource is common, it will result in perfect competition where no firm is about to maintain a competitive advantage -firm is on path to competitive advantage only if possesses a valuable resource that is also rare

strategy

-performing different activities from rivals or performing them in a different way -choose the right configuration of activities, incentives, systems -make the right trade-offs -strategy rests on unique activities -make sure strategy fits the environment *ulimately Porter believes that firms can achieve sustainable competitive advantage only if they have both operational effectiveness and a superior strategy

sources of first mover disadvantage

-pioneering costs -demand uncertainty -techological uncertainty -incumbent inertia

relative cost analysis comparing trader joe's to whole foods market

-pricing is based on price of a bucket-- 14 identical products -Trader Joes COGs is smaller due to high power over suppliers (80% of product mix is private brand); SGA smaller slightly because of extremely strong employee program and superior operational methods like replenishing goods, eemployee roles, employee retention, flexible individual store operations; smaller stores, alternative and cheaper marketing channels (Fearless Flyer and lack of push strategies) -COGS are broken down into 75% raw materials and 25% transportations; SGA are evenly spread across wages, general, marketing, building lease/maintenance/warehousing expenses

a "cost leadership" strategy

-produces profit margin (or attractive profits at high volumes even if unit margins are at or below industry average) above the industry average through its cost emphasis -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 quality that is acceptable to customers and often involves tradeoffs with product differentiation ex. Walmart, Southwest Airlines, Ikea, Marshalls

a "differentiation" strategy

-produces profit margin above the industry average by commanding premium prices -offer products and services that are widely acknowledged as superior in quality on at least one dimension i.e. durability, faster delivery, bundled services, greater variety, better image, easier to use, or overall higher quality-- may be multiple dimensions of superiority in an industry -selectively incur costs as necessary to create quality -invest in assets to maximize generation of value for buyers -in turn, must charge higher prices for this strategy to work -but differentiation leads to above-average profitability only if price increase (customer WTP) exceeds incremental costs incurred ex. Starbucks, Apple, Whole Foods, Rolex

the "Fundamental Fact" of strategy

-profits vary across industry and within industry -some industries have higher average profit than others -some firms have higher average profit than others -these patterns persist over time (though with caveats) -our job (as strategists) is to explain why industries and firms have hi or lo profit and help make recommendations to firms about what strategic plans may help improve their profitability

operational effectiveness

-refers to the extent to which perform similar activities better than rivals (or "at least as good") -necessary, but not sufficient for long-term competitive advantage

what is the difference between rivals and substitutes?

-rivals are direct competitors within the same industry, while substitutes refer to alternative products/firms outside the industry

sources of First mover advantage for M-PESA in Kenya

-scale economies (R&D, marketing) -network effects (everybody on it!) -preemption (channel- Safaricom) -reputation effects (most convenient) -buyer switching costs (contacts added- venmo)

technological uncertainty

-standards may be uncertain -developing product/ features; how to manufacture? -if imitation costs<< pioneering costs, leadership in an industry is bad -also followers may leapfrog leaders ex. VCRs in the 1980s- "Beta" standard lost to VHS

key concept: value creation and value capture (at industry level) (drug industry)

-street-selling drug gang is attractive "business" (at least in times of peace!!) -"firms" in the industry have created some significant value (i.e. have benefited from "value creation"= WTP- costs) due to seval positive elements: 1. WTP boosting due to highly addictive and potent product, trust in dealer is big part of value proposition 2. costs kept low due to drug dealers willing to work for very low wages due to aspirations to join

what can buyers do to industry?

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

sources of supplier power-- if supplier power high industry profits decline

-supplier concentration high: ex. Microsoft (near monopoly in operating systems drove up costs for PC makers) -high switching costs: ex. Bloomberg (financial service customers have purchased specialized equipment and invested in training -few substitute inputs: ex. Pilot's unions (airlines have no alternative; they must have well-trained pilots) -product differentiation (inputs): ex. superstar athletes (team owners must pay large salaries to star athletes to satisfy expectations -customer's cost relative to total purchases are low (as a %): ex. button manufacturer (makers of high end ski jackets are less likely to negotiate with their button supplier on price) -product is "mission critical": airbag switch maker (auto manufacturers are less likely to negotiate on price given the product's crucial role) -importance of volume to suppliers (suppliers that serve many industries will extract maximum profits from each one) -threat of forward integration (if industry makes too much money relative to suppliers, suppliers may be induced to enter)

there should be a link between the 5 forces analysis and industry profitability data

-suppose our 5 forces analysis suggested that our firm competed in a favorable industry -we would expect that data shows a positive industry influence -i.e. in which industry average profit is greater than the economy wide average profit -if analysis suggested that firm competed in unfavorable industry we would expect that data shows a negative industry influence in which industry average profit is less than economy wide average profit

the role of tech change in 5 forces

-tech change (or changes in preferences, etc.) can affect any force at any time -Porter suggests assessing the 5 forces before and after such changes in order to ascertain their impact ex. the adoption of the internet greatly increased buyer power and rivalry for travel agencies and care dealerships -the advent of airplane shipping and transport increased the power of substitutes relative to long distance trains -the success of eBay increased the threat of entry into retailing (and reduced its costs!!)

competitive positioning takeaway

-there is a link between positioning, activities, and profit -ideally, we could design strategies (tradeoffs about the configuration of activities in which we invest and which we avoid) to achieve the ideal competition position of our firm relative to its rivals -when you think about a firm's strategy, consider its competitive position and its activities and then link these to the firm's average cost and average prices -in practice, the difficult "art" of strategy comes in identifying and implementing configurations of activities that will enable the firm to either: achieve high prices with proximity in costs or achieve low costs with proximity n prices

Flagstaff's Relative Cost Analysis Key Findings

-they were roughly comparable in unit costs to Tsujimura (Flagstaff 96 cents vs. 92 cents for Tsujimura) -however, if Tsujimura were to come to the U.S. they'd have a significant edge (Flagstaff 96 cents vs. estimated 83 cents for Tsujimura) -decided not to go to Japan (would have been at cost disadvantage) -decided to achieve "OE" (i.e. improve capacity utilization and thus trim factory overhead, minimize inventory to reduce carrying costs)- could save 10 centers per unit, 96 cents down to 86 cents... over 10%) -defend their turf in the U.S.- lock up key customer accounts with long-term contracts and increased customer service attention (tough for Tsujimura's plant to get up to full capacity upon entry); fake signals about going to Jpan if forced (a bluff!)

how does a resource of capability lead to a sustained competitive advantage?

-use the VRIO framework

Disney and Pixar

-were better off working together -Disney decided they needed to own Pixar -both firms faced the same 2 decsions: 1. should we continue to maintain a long-term exclusive arrangement with the other party? 2. if so, should we execute the arrangement as a merger or via (another) long-term contract?

competitive positioning

-what explains a firm's profitability (relative to its rivals)? -what is the firm's relative position in the industry?-- what costs and prices does it achieve and what activities drive its costs and prices? -how can a firm outperform the industry average? Jan Rivkin, P. Ghemawat

impact of strategy within a difficult competitive environment

-within a particular competitive environment (or industry), strategy can affect a firm's performance relative to its rivals -an effect strategy requires tradeoffs-- such as the kinds that Freiburg made

purpose of a 5 forces analysis

1. to assess current average industry profitability of incumbent firms 2. help us understand the impact of trends and events on average industry profitability 3. to help us make recommendations to firms on how to improve a. the overall industry environment b. firm's position relative to its industry environment

brewing industry structure 1950s vs. 1980s

1950s: salient features- many small and medium sized regional brewers, local bars major outlet, mostly "popular" regular beer 1980s: salient features- small number of brewers iwth national distribution, large shift to packaged sales, proliferation of beers, incl mix shift to premium -threat of entry: decreased -supplier power: decreased -buyer power: decreased -threat of substitutes: decreased -rivalry: stayed the same

in the past, McDonalds reluctantly Reacts to Health Movement

2005: packaging with nutritional facts, avoided adding calories on menu due to perceived effect of slower customer service, fast food industry attacked by being linked to obestity 2012: calories on menu ahead of federal government, aim to display company as more than junk food market failures: negative externality (people becoming increasingly more informed about health), asymmetric info (ingredients and nutritional facts in McDonald's products)

The Experience Curve

= learning effects -for some products, the average unit cost declines as a function of the total number of units produced

substitute threat-- if threat of substitutes is high industry profits decline

A. Compelling alternative exists -compelling price to value ratio (or relative price performance): ex. video rental stores (netflix had extremely compelling value proprosition for at home viewers vs. the entrenched industry players (i.e. Blockbuster) B. the market share is up for grabs -switching costs low: ex. store based music retailers (apple made it easy and inexpensive to switch to itunes; there was nothing the retailers could do to resist the change) -buyer propensity to switch is high (no loyalty!): ex. taxi drivers (taxi customers are not particularly loyal and the subway isn't a bad alternative in NYC)

Why do firms exist?

Adam Smith -understanding corporate strategy requires thinking carefully about an odd question: why do firms exist? -if markets are so efficient in organizing transactions, why aren't all transaction handled by markets? -intuitive conclusion: firms should only exist when organizing transactions inside a single unit is more efficient than organizing them in a market -thus, firms should nly be as large as is necessary to be efficient -they should only perform those functions that they need to -corp HQ must add more value to each business activity than it adds to cost

vertical scope test: Disney Acquiring Pixar

Better off test: costs decrease: Pixar taps into Disney's economies of scope in marketing, avoid duplicative business functions (Pixar doesn't need marketing department), Pixar made films at a fraction of the cost at a faster pace, Disney's vast experience with marketing and distribution allows them to do so at a lower cost WTP increase: reduced rivalry and price competition, high historical average total box office revenue, exclusive sequel rights mean long term investments from Disney in franchise, theme parks, consumer products, etc.; gauranteed marketing and distributionmean more invested resources from Pixar toward films and sequels ensuring quality, customers are willing to pay more for products associated with Disney brand Ownership Test: costs decrease: contracts are very taxing and expensive, especially to renegotiate every couple years; increasingly complex (13 pages in 1991, 43 in 1997)-- also risk of holdup, adopting Pixar's production processes can lower unit production costs for all Disney movies, reduced corporate overhead (1 CEO, 1 CFO, etc. for 2 businesses) Other considerations: value of animated characters is complex and extends many years out, variety of distribution outlets makes it harder to predict revenue streams and each film's total box office revenue, Disney will use assets to maximize own profits/ does not need to worry about contractual relationship with Pixar, Disney keeps 100% of the profits as opposed to 60%, full control of all ancillary revenues, sequel rights, etc. of all future Diseny-Pixar films

differences between Corporate and Business unit strategy

Grant corporate: where to play? -what should the scope of the firm be (industries and markets)-- diversification, acquisitions, new business development, vertical integration (also a business unit issue), allocation of capital amongst existing businesses) -allocation of capital amongst existing businesses Business Unit: how to win? -how does the business compete? -- products, customers -how can the business achieve a sustainable competitive advantage over its industry rivals? -what activities should a firm purse?-- key "high value" activities, outsource others, vertical integration

CSR Projects for Tata Motors

Health: child malnutrition, female health, preventive health Employability: driver training, motor vehicle mechanic training, training in non-auto trades, training in agriculture trades Education: scholarships, special coaching, school infrastructure, co-curricular activities environment: student awareness, solar "study lamps" for students, tree plantation drinking water projects

CSR thinking over time

Jose Carlos Marques, Hentry Mintzberg 1. "Let them Eat Cake" 2. "Icing on the Cake" 3. "Everyone Earns a Slice of Cake" 4. "Having your Cake and Eating it Too"

Snack Cake Market

Little Debbie: low-cost strategy (note tradeoffs in activities) Savory: differentiation strategy (not unique activities) hostess: stuck in the middle! *Little Debbie has same unit profit as Savory; given lower price, higher volume likely (more profit money); note that unit margins are much higher!

a more skeptical view on CSR

Marques and Mintzberg -there's no simple recipe for responsible corporate behavior -market manipulations may be legal, and still harm society (i.e. subprime mortgage crisis) -"doing good by doing well" is an enticing proposition, but seldom attainable-- CSR is a niche strategy... i.e. very few firms can find "win win" opportunities -plus, irresponsible firms do well, too! i.e. what if much higher profits is use info asymmetry i.e. what if profits much higher if create negative externalities

"Let Them Eat Cake"

Milton Friedman questions CSR "the social responsibility of business is to increase its profits" -1976 Nobel Prize Winner in Economics -one of the most effective advocates of economic freedoms and free enterprise "there is one and only one resonsibility of business- to use its resources and engage in activities designed to increase its profits so long as it stays withing the rules of the game, which is to say, engages in open and free competition without deception or fraud."

is the competition between coke and pepsi an example of "high rivarly"?

NO -although animosity is high between the firms, the two form a happy oligopoly (along with Cadbury-Schweppes) in which neither firm competes aggressively on prices (price wars) or costs

will the 2013 Company Act promote CSR among Indian Companies?

NO: -it's just another corporate tax -philanthropy alone cannot solve systemic issues -firms will just "check the box" and do the bare minimum -if companies cannot spend in areas related to their business, the opportunity ("O" from OITT framework) is missing YES: -most firms are unlike Tata and will do nothing without a law -firms have the option to partner with NGOs or donate money to a government fund... i.e. it is made easy for them -it's really quite small... 2% of profits (i.e. will never be sizable cost bucket as % of sales) -it's a great example of collective effort of government, corporations, and civil society

"Everyone earns a slice of cake"

R. Edward Freeman "a stakeholder theory of the modern corporation" -both the stockholders and stakeholders have a right to demand certain actions from management

trader joe's focused cost leadership strategy & whole foods focused differentiation

Whole Foods: price premium strategy and narrow market -brand centered around premium products at premium price (superior in quality) customer scope: defined target market with focus on specific type of consumer- WF customer is a female, ages of 25 and 39, $1000+ in discretionary monthly income and doesn't mind spending more on organic and fair trade products geographic scope: 456 stores in the US, many concentrated in northeast and east coast overall, some also on west coast, less in the middle product scope: sell only food with no artifical flavors, colors, preservatives, sweeteners, hydrogenated fats, highfructose cornsyrup; 19% more expensive than those at "specialty" grocers trader joes: cost leader, narrow market -more efficient in terms of sales per square foot-- doubled sales per square foot achieved by whole foods, less than 15k sq ft of selling space vs 50k sq ft of normal grocery store -saving on suppliers- 80% private label items, purchase in large quantities of each SKU at low price, purchase directly from manufacturers-- cutting out midle men less fees, did not ofer a wide selction of fresh produce-- mainly frozen food -focused on everyday low pricing-- no coupons/discounts -spending less on tech and marketing: investing less in tech like self checkout, didn't spend much on marketing "marketed though Fearless Flyers", no TV ads- relied on word of mouth narrow market: customer scope- TJ's had defined narrow target market-- "is for overeducated and underpaid", health conscious, enjoy travel and liked trying new things geographic scope: 400 locations across 37 states, focused on being near learning centers and in cities, top 5 states account 60% of stores product scope: limited unique private label products, 4k SKU's per location as compared to 50k for most grocery stores and "a family couldn't do all its shopping at the store", unique products