What strategy is not (1)

What strategy is not (2)

Competitive advantage

Strategic positioning is not operational

effectiveness

The various activities that go into creating, producing,

selling and delivering a product or service

Operational effectiveness

The key to distinguishing between the two is to
think about competitive advantage and its
sustainability (i.e. the time dimension)

What is competitive advantage? What is
operational effectiveness?

Strategic positioning

Refers to performing the above activities better than

rivals (e.g., faster, fewer inputs, etc.)

Key insight: operational effectiveness might offer

competitive advantage, but this is not sustainable

Easily emulated

Eventually competitive convergence

Industry Analysis: Porter Five Forces

Strategic positioning

Threat of New
Entrants

Attempts to achieve sustainable competitive

advantage by preserving what is distinct about a
company

Three key principles

1. Strategy is the creation of a unique and valuable
position, involving a unique set of activities
2. Strategy requires making trade-offs (what not to do)
3. Strategy involves creating fit among companys
activities

Fit: How companys activities interact and reinforce one
another

Bargaining Power
of Suppliers

Rivalry
Among
Existing
Entrants

Bargaining Power
of Buyers

Threat of
Substitute
Products or
Services

Rivalry Among Existing Entrants (1)

Refers to competition within an industry

First need to define the industry, then analyze
factors influencing competition

Rivalry Among Existing Entrants (2)

Why do we care about rivalry/competition?

Potential for industry profitability goes down as
competition goes up

How to estimate the threat of competition?

Intensity and basis of competition

The model is sensitive to defining the industry

and its boundaries

Tip: It can help find a unique and valuable position

Threat of new entrants (1)

Why do we care about potential entrants?

Entrants can affect industry profitability in a similar way
with incumbents

How to assess the risk posed by potential

entrants? Barriers to entry

Examples: patents, exclusive license agreements,
government policy, economies of scale, brand image,
access to efficient distribution channels, etc.

Number of firms

Exit barriers

Similarity in: Goals, Operations efficiency, Products
or services
Note the importance of defining industry boundaries

Threat of substitution

Substitutes refer to product or services in other
industries

Why do we care about substitutes?

Offer options to customers. Customers choices impact
industry profitability

Factors influencing the threat of substitution

Price differentials

Switching costs

Power of suppliers

Note that the focal firm plays the role of customer

Threat of entry and Threat of substitution applied to
suppliers industry

Factors influencing power of suppliers

Competition in the suppliers industry (less
competition, more power)

The number of industry customers the supplier serves
(more industry customers, more power)

Switching costs in changing suppliers (high costs,
more power)

Substitutes for suppliers (low substitution, more power)

Threat of forward integration i.e. absorb the focal firm

Strategy: Big Picture Map

Environment
(Industry Analysis)

What are
the industry
issues?

Firm
(Internal Analysis)

Power of buyers

Note that the focal firm plays the role of supplier

Power of suppliers applied to the focal firm

Factors influencing power of buyers

Number of buyers (many buyers, less power)

Switching costs of buyers to another firm in the same
industry (low costs, more power)

Purchasing power

Threat of backward integration i.e. absorb the focal
firm

Value Chain

Porter Five
Forces

CSDs Concentrate
Producers

Bottlers

Retailers

Consumers

Core problem(s)

Recommendations

Buyer

Value Creation

Industry life cycle

Fragmentation

Shake-out

Fragmentation

Maturity

Companies experiment with different approaches to a

market

Many firms offer a variety of products, and each
operates at low volumes

Companies tend to be entrepreneurial and privately
owned; focus on serving narrow geographic areas

Product lines are limited

Benchmarking is uncommon

Decline

Time

Shake-out

A dominant model emerges for generating value on a
large scale

The dominant model:

Maturity

Growth in volume slows

Industry structure becomes remarkably stable

Little change in the ranks of leading firms

More efficient than other approaches

Gains legitimacy as influential early adopters promote it
through their networks

Volumes grow quickly

Unprecedented value is generated for buyers and for
the industrys suppliers



Volumes begin to drop

Competition can take on a new intensity
Companies often search for incremental efficiencies
Leading firms may compete in wars of attrition

Industry life cycle

Value Creation

Decline

Time

Why do successful companies fail to stay atop in

the presence of disruptive technologies?

It happens to the best

Xerox, Seagate, Kodak

A clarification

Disruptive technologies are not necessarily entirely

new technologies

E.g., Desktop PC to Laptop to Tablet

Why?

Bureaucracy, arrogance, myopia, tired executive blood,
poor planning, short-term investment horizon

Bower & Christensen, Disruptive Technologies: Risk of
staying too close to the existing customers

Architectural changes

Changes affecting relationships along the value chain

Changes in technology

Value Creation and Value Capture

Value a firm
CAPTURES
as profits

Consumer
Surplus

Buyer Willingness
to Pay (WTP)

Total value
a firm
CREATES

Product Price
Firms
Economic
Contribution

Firm
Profits

Supplier
Profits

Input Price
(= Firms Cost)
Supplier Opportunity
Costs (SOC)

To prevent threat of disruptive technologies

1. Determine whether the technology has the potential

to be disruptive

Ask the technical team, not the marketing or finance

groups

Sharing Economy

Sharing Economy also referred to as:

Peer-to-peer, Mesh, Collaborative (Economy)

Sharing of excess capacity human and physical
resources

Relies on leveraging information technology to connect
excess capacity with demand

Value creation

When excess-capacity is utilized, the value of those
good increases creating economic value

Examples: eBay, Airbnb, Uber, Craigslist, etc.

Strategy: Big Picture Map

Goal: Search for sustainable competitive advantage
Environment
(Industry Analysis)

Firm
(Internal Analysis)

2. Identify the strategic significance of the disruptive

technology

Dont ask your best customers

3. Locate a market for the disruptive technology

If it doesnt exist, create it by experimenting rapidly,

iteratively and inexpensively

4. House the disruptive technology in an independent

entity

1. Porter Five Forces

Value Chain

Industry
boundaries
2. Industry life cycle

Disruptive
technologies

Core problem(s)

1. Management
ability (to engage
with potential threats
of disruptive
technologies)

Recommendations

Moving away from industry averages

So far, industry averages

Average attractiveness, one slice in time: Porter Five
Forces, Value Chain, Industry Boundaries

Average attractiveness, over time: Industry life-cycle,
disruptive technologies

Competitive advantage and sustainability

Important subtle point:

Competitive advantage and operational effectiveness

Short-lived

Competitive advantage and sustainability

However, profitability differences within an
industry

Within industry variation in attractiveness

Note: Another reason I told you to play with industry
boundaries

Looking for an advantage that endures over time

The two are related

Analyze the first and ideas for the second might
emerge

Value Creation and Value Capture

Definition: Competitive advantage

Differentiation
strategy

A firm that achieved a wider wedge between customer

willingness to pay (WTP) and supplier opportunity cost
(SOC) when compared with its rivals is said to have a
competitive advantage within its industry.

Value a firm
CAPTURES
as profits

Consumer
Surplus

Buyer Willingness
to Pay (WTP)

Total value
a firm
CREATES

Product Price
Firms
Economic
Contribution

Firm
Profits

Supplier
Profits
Low-cost
strategy

Input Price
(= Firms Cost)
Supplier Opportunity
Costs (SOC)

Added value

Important subtle point:

Searching for sources of competitive advantage

Step 1: Catalog activities

Map what the firm does

The firm can capture higher profits along the wider

wage between customer willingness to pay and
supplier opportunity costs only if the firm can not be
perfectly replaced by another

This implies the competitive advantage created can be
sustainable if the firm brings something unique (adds
value)

Step 2: Use activities to analyze costs

Look for opportunities to lower costs in a way that is not
easily imitated by competitors

Step 3: Use activities to analyze willingness to pay

Look for opportunities to raise willingness to pay in a way
that is not easily imitated by competitors

Step 4: Explore options

Take a holistic view of the firm

Features of Resources for Competitive

Advantage

Searching for sources of competitive advantage

Value Chain

Durable

Scarce

Firm Infrastructure
(e.g. Financing, Planning, Investor Relations)

Difficult for others to obtain

Inimitable

Hard to copy

Support
Activities

Human Resource Management

(e.g. Recruiting, Training, Compensation System)

Technology Development

Unsubstitutable

Difficult to replace

Appropriable

Resource you can tap

M
a
r
g
i
n

(e.g. Product Design, Testing, Process Design, Material Research, Market Research)

Procurement
(e.g. Components, Machinery, Advertising, Services)

Inbound
Logistics

Operations

Outbound
Logistics

Marketing
& Sales

(e.g. Incoming
Material Storage,
Data Collection,
Service, Customer
Access)

(e.g. Assembly,
Component
Fabrication,
Branch
Operations)

(e.g. Order
Processing,
Warehousing,
Report
Preparation)

(e.g. Sales Force,

Promotion,
Advertising,
Trade Shows,
Proposal Writing)

After-Sales
Service
(e.g. Installation,
Customer
Support,
Complaint
Resolution,
Repair)

Primary Activities

Sources of competitive advantage

Sources of competitive advantage

Value Chain
FIRM
INFRASTRUCTURE
HUMAN
RESOURCES

Value Chain

*flat org
*prime locations
*employees: similar age as customers
*creative team
IT

IT

IT

IT

Support Activities

IT

TECHNOLOGY
DEVELOPMENT

PROCUREMENT
OF INPUT

OPERATIONS

* Key selection criterion (especially at the top): share passion for Ducati
* Employees at center of advertising campaign

*Store place an
order; 2 times/week
*managerial
autonomy: order;
store layout
*no ad (reputation;
frequent shoppers;
store display; prime
locations)
*sense of scarcity
(buy fast, avoid
over ordering)

OUTBOUND
LOGISTICS

MARKETING &
SALES

*less marked down:

15-20% items in
Zara were marked
down (30%+ in
industry); price
15% down in Zara
(30% for industry)
(why: predict
fashion, small
batches, respond to
local demand, sense
of scarcity, major
outlet in Spain)

TECHNOLOGY
DEVELOPMENT

PROCUREMENT OF
INPUT

[INBOUND LOGISTICS]
* Reduced suppliers from 200 to 130.
increase the average quality of Ducatis
suppliers (dropped the least efficient ones)
increase bargaining power vis--vis major
suppliers
*Dual sourcing
increase bargaining leverage
*Short Term contracts

[OPERATIONS]
*Increase in outsourcing (up to 90%)
Emilian mechanical district, economies of scale
closer in distance: Ducati is a key part of the Emilian
district which contains 2400 medium-sized manufacturer
*Little but assembly performed in-house
*Platform approach
* Internalization of design: use internal design to substitute
for external design house it once employed
quality control; reduce time to market

Support Activities

INBOUND
LOGISTICS

HUMAN
RESOURCES

* R&D up 4x
*Frequent shipment
(e.g., 24-36 h
delivery to Europe,
24-48 h delivery to
U.S.)
* order from stores:
tailored to local
market demand
* redirect across
countries
* frequent shipping
* standardized price
tags

Primary
Activities

*quality
*in-house dye

*outsourcing basic
items, in-house
fashion items
*give large run to
small workshops
Design:
* 300,000 SKUs, as
compared with
2,000-4,000 SKUs
for the industry
* fast: sketch 9
months ahead
* 4-5 weeks to do
the design
* quick modify
*avoid fashion miss
(wait and see; two
approaches)

FIRM
INFRASTRUCTURE

* Love of change at the top

* close cross-function relations
*Separate racing division
racing division is responsible fore contribute to technology development and maintain Ducatis sport image in
the eyes of its core customers, the extreme riders
given space and budge; independent company

SERVICE

Games as Defined by the Rules

Prisoners Dilemma

 Rules determine the number of options/ alternatives

and the sequence of moves in the play of the game.
 Games can be represented in the normal form. The
payoff matrix has a structure that is a function of the
rules of the game
 Games can also be represented in the extensive
form, where payoffs are indicated at the end of the
game tree

Prisoner A
Should confess or
not?

Not Confess

Confess

Not Confess
(6 months,
6 months)

(10 years,
Free)

(Free,
10 years)

(2 years,
2 years)

Prisoner B
Confess

What makes a Game a Prisoners

Dilemma (PD)?
 We can characterize the set of choices in a PD as:
 Temptation (desire to double-cross other player)
 Reward (cooperate with other player)
 Punishment (play it safe)
 Suckers pay-off (for the player who is double-crossed)

Example:
Tragedy of the Commons
 Each cow produces 500 lbs of meat & dairy per year up
to or at carrying capacity of the pasture.
 10 families X 10 Cows X 500 lbs = 50,000 lbs of food at
carrying capacity
and then Farmer Johns wife has triplets

 A game is a Prisoners Dilemma whenever:

T>R>P>S
e.g., Free > Six months > Two years > Ten years

One more cow

So Farmer John decides he really needs one
more cow

And there is no one to tell him No! because
the commons is an unregulated public good
 Some modern commons are forests, oceans, public
roadways, air quality, etc..

Reduced Capacity
 With the overgrazing, each cow will now produce only
490 lbs of food.
 101 Cows X 490 lbs = 49,490 lbs of food at carrying
capacity
 Each family gets 4900 lbs of meat & dairy, instead of
5000
 Except Farmer John, who gets 5390 lbs
 Even with the reduced carrying capacity,
it is still to his advantage to
add the extra cow

10

Looks familiar?
Look at the situation:





N players
Individual solution is to not cooperate
Joint optimal outcome is to cooperate
This is an n-person collective Prisoners dilemma

In Sum: the conflict between the common

interests of the group and free-riding behavior
of self-interested individuals

Retaliate or Accommodate?
Quantitative reasoning

750,000 round-trip sea ferries passengers

500,000 round-trip passengers on Aer Lingus and BA

Ryanair capacity: 4x44x365=64,240 round-trip seats of capacity per year

Accommodate: Incumbents' annual profits drop anywhere between I0

and I8.8mil

revenue-marginal cost=I166.5-I29=I137.5

64,240xI137.5=I8.8mil

Retaliate: Incumbents annual profits drop anywhere between I17mil and

I34.4mil

(I166.5-I98)x500,000=I34.4mil

New customers from price drop: (I98-I29)x250,000=I17.3 and
I34.4mil-I17.3mil=I17mil

Key Takeaways

Game theory is a powerful tool for analyzing competitive moves

Logics can often be changed so a new game is played - use this
to your advantage

Never assume your opponents actions are fixed! Predict their
reaction to your actions

Complement game theory with competitor profiling to work
around the restrictive assumptions on which game theory is
built bounded rationality/behavioral theory


E.g., overconfidence, confirmation bias, escalation of commitment

Ryanair: Next

Aer Lingus and British Airways retaliated

Ryanair expend its routes drastically

1991: Real threat of bankruptcy

What happened?

Nothing unique

Grew too fast

Operational effectiveness doesnt offer a sustainable
competitive advantage

11

Ryanair: Low Cost Airline

Agenda
Product-market Diversification

High-end
services

BA

BA

Corporate strategy: competitive

advantage across multiple markets
 Adding value through
diversification (horizontal
diversification)

BA
Ryanair
Early Days

Corporation

Marine protein
business

Oil drilling
business

Internet portal
business

Multinational Operations/Geographic Diversification

 Across product market

 Across geographical markets
 Adding value through vertical
integration

Ryanair
Today

Corporation

Canada

Madagascar

Singapore

Vertical Integration
Sheep farm
Wool spinning factory

No-frills

Garment factory
Retail store

Corporate Strategy

Competition occurs at the business-unit level

Being part of a diversified company involves inevitable costs for
business units
 Often underestimated

Corporate strategy must produce a clear and offsetting gain in the
competitive advantage of business units which exceeds that available
through alternative governance structures e.g. alliances; long-term
contracts; spot markets

Achieved through horizontal diversification and/or vertical
integration
 Be aware of both costs and benefits

Costs - Examples

Coordination costs

Integration issues

Conflicts of interest
 The interest of individual divisions can be misaligned with the interest
of the entire firm (e.g., Ducati)

Negative spillover between divisions

 Some divisions constrain the development of other divisions (e.g., Ebay
and PayPal)

Incentive costs (e.g., Facebook and Instagram)

Capital misallocation
 Internal fight over resource allocation

Power game
 Division managers fight over power

12

Benefits - Examples

Economies of scope
 Synergies e.g., Facebook and Instagram
 Diseconomy of scope e.g., Bristol Farms sold by Supervalu

Cross-selling
 Complementary products e.g., Blockbuster DVD rental and food
sales; Walmart providing financial services

Ownership?

Benefits without costs?

Contracting

But contracts cannot solve all problems
 Intangible assets e.g., ideas

Contracts are as good as the ability to enforce them

Relationship-specific investments
 Holdup concerns

Double marginalization

How to evaluate?

Better-off test

Does the presence of the corporation in a given market
improve the competitive advantage of other business units
over and above what they could achieve on their own?

Traditional Disney

How does this affect which business Disney goes into?

Cruise

Ownership test

Does ownership of the business unit produce a greater
competitive advantage than an alternative arrangement
would produce?

Touchstone
Theme
Parks

Film

Hotels

TV

Cable
Channel

Toys
Stores
Books

13

Traditional Disney

Why hard to imitate?

What is good about having animated cartoon characters at the

center of the company?

Asset doesnt age or depreciate; it is very durable

Appropriability

E.g., Warner Bros.

Warren Buffet: The Mouse has no agent!

All funds retained by Disney

Hard to imitate
Mighty Mouse

Donald Duck

Daffy Duck

Roger Rabbit

Why hard to imitate?

 Cant substitute for Disney childhood experiences

Lesson? Disneys advantage could erode over time if the
company fails to capture the hearts of the next generations
 The complexity and scope of Disney is hard to imitate

Lesson? Complexity and scope need to be well managed

Corporate strategy: three dimensions
 Vertical
 Geographic
 Product (horizontal)

Disney after 1995

 What went wrong?

E.g., Importance of well managed horizontal diversification
and ABC acquisition
 End of Eisner era (2005) and beginning of Iger era (present)

Geographic
 China expansion e.g., Shanghai Disney Resort

Product
 Acquisition of Pixar, Marvel Entertainment and
Lucasfilm
 Focus on maintaining the relevance of old characters and
building new characters: Back to the initial successful business
model

14

Industry definition

Industry Analysis

A corporate strategy approach

Apparel

T-shirts

Shorts

Industry definition: Athletic footwear

Present time

Athletic
footwear

Classic Equipment

Football

Soccer Ball

Golf clubs

Sports bag

Etc.

Value chain

Porter Five Forces

Technology Equipment

Apps

Wearables

Training programs (e.g.,
Xbox Kinect game)

Threat of substitution

Substitutes refer to product or services in other
industries

Why do we care about substitutes?

Offer options to customers. Customers choices impact
industry profitability

Factors influencing the threat of substitution

Power of suppliers

Factors influencing power of suppliers

Competition in the suppliers industry (less
competition, more power)

The number of industry customers the supplier serves
(more industry customers, more power)

Switching costs in changing suppliers (high costs,
more power)

Substitutes for suppliers (low substitution, more power)

Threat of forward integration i.e. absorb the focal firm

Price differentials

Switching costs

15

Power of buyers

Factors influencing power of buyers

Number of buyers (many buyers, less power)

Switching costs of buyers to another firm in the same
industry (low costs, more power)

Purchasing power

Threat of backward integration i.e. absorb the focal
firm

Rivalry Among Existing Entrants

Why do we care about rivalry/competition?

Potential for industry profitability goes down as
competition goes up

How to estimate the threat of competition?

Intensity and basis of competition

Number of firms

Exit barriers

Similarity in: Goals, Operations efficiency, Products
or services

Threat of new entrants

Barriers to entry

Supply-side economies of scale e.g., Automotive

From fixed costs

From variable costs

Demand-side economies of scale e.g., Cell phones

Network effects

Switching costs e.g., ERP software packages

Government policy that regulates entry e.g., Liquor
retailing

Other incumbency advantages e.g., IP, access to
distribution channels

Industry Analysis
 Industry definition: Athletic footwear
 Present

Value chain

Porter Five Forces
 Highly competitive industry

Industry life-cycle
 Maturity

Within industry sources of competitive advantage?
 Differentiation strategy
 Drive a wider wage in a way that is not easily imitable
by competitors

16

Industry Analysis

What was different at the time of founding?

Industry in the fragmentation stage

Less competitive intensity
Entry easier
Importance of differentiation strategy less clear

Implications for Nike (to take into account while

continuing with internal analysis)

17