Marketing-Industry Analysis Marketing-Industry Analysis

Ryerson University Ryerson University Email: Email: agervais@ryerson.caagervais@ryerson.ca preferred preferred

Web: Web: www.ryerson.ca/~agervaiswww.ryerson.ca/~agervais Blackboard: Blackboard: https://https://my.ryerson.ca/webapps/loginmy.ryerson.ca/webapps/login

Office: Bus 308Office: Bus 308Phone: 416-979-5000 Ext 4215Phone: 416-979-5000 Ext 4215

MKT 731 Fall 2005Instructor: Armand Gervais

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Lecture 1 AgendaLecture 1 Agenda

IntroductionsIntroductions Overview of CourseOverview of Course Project OverviewProject Overview BreakBreak Competition and Business Strategy in Historical PerspectiveCompetition and Business Strategy in Historical Perspective Porters FrameworkPorters Framework To Do’s for next weeks classTo Do’s for next weeks class Questions and AnswersQuestions and Answers Begin forming GroupsBegin forming Groups

33

IntroductionIntroduction

Armand GervaisArmand GervaisEducation: Education:

B. Comm. University of Toronto-Major EconomicsB. Comm. University of Toronto-Major Economics MBA York UniversityMBA York University

Business ExperienceBusiness Experience: : 6 years retail management. Wendy's, Major Video 6 years retail management. Wendy's, Major Video 4 years with Air Miles4 years with Air Miles

– Business/Database AnalystBusiness/Database Analyst– Project Manager Database DevelopmentProject Manager Database Development

ID-ONE Inc. Residential Interior DesignID-ONE Inc. Residential Interior Design– Partner and Operations ManagerPartner and Operations Manager

Industry Experience:Industry Experience: Retail-Confectionaries, clothing, travel, books and electronics.Retail-Confectionaries, clothing, travel, books and electronics. Hospitality- restaurants and resortsHospitality- restaurants and resorts Telecommunications Industry Telecommunications Industry Loyalty programsLoyalty programs

Teaching Experience:Teaching Experience: 3 years at Ryerson3 years at Ryerson MKT 731 (Industry Analysis), BUS 800 (Strategic Management)MKT 731 (Industry Analysis), BUS 800 (Strategic Management) CMKT 200CMKT 200

44

Class –your turnClass –your turn

Your NameYour Name School Major or specializationSchool Major or specialization Work or life experienceWork or life experience Expectations for the classExpectations for the class

– What are your objectives?What are your objectives?

– What has to happen for this to be a success for you?What has to happen for this to be a success for you?

Course OutlineCourse Outline

Project OutlineProject Outline

Competition and Business Competition and Business Strategy in Historical Strategy in Historical

PerspectivePerspectiveHarvard Business SchoolHarvard Business School

9-798-0109-798-010

Dec. 11, 1997Dec. 11, 1997

Pankaj Ghemawat & Peter Pankaj Ghemawat & Peter BotticelliBotticelli

88

Historical BackgroundHistorical Background

Article focuses on the evolution of explaining sustained differences in Article focuses on the evolution of explaining sustained differences in performance of companies.performance of companies.

First Industrial revolution mid 1700’s-mid 1800s witnessed intense First Industrial revolution mid 1700’s-mid 1800s witnessed intense competition among industrial firmscompetition among industrial firms

Individual companies did not have the potential to affect competition or Individual companies did not have the potential to affect competition or the competitive environmentthe competitive environment

Second Industrial revolution 1850+Second Industrial revolution 1850+ Development of railroads which created mass markets along with Development of railroads which created mass markets along with

improved access to capital allowed for large scale productionimproved access to capital allowed for large scale production Strategy emerged as a way to shape competitive environmentStrategy emerged as a way to shape competitive environment Adam’s Smith Invisible hand tamed by visible hand of managers Adam’s Smith Invisible hand tamed by visible hand of managers Strategy first articulated by Alfred SloanStrategy first articulated by Alfred Sloan M-form of corporation-large investments in manufacturing and marketing M-form of corporation-large investments in manufacturing and marketing

and in management to coordinate these functionsand in management to coordinate these functions General Motors 1923-46 Alfred Sloan devised strategy based on strengths General Motors 1923-46 Alfred Sloan devised strategy based on strengths

and weaknessesand weaknesses

99

Historical BackgroundHistorical Background

Challenges of WWII vital stimulus to strategic thinkingChallenges of WWII vital stimulus to strategic thinking Learning curves became increasingly important tool for planningLearning curves became increasingly important tool for planning Discovered by military aircraft industry 1920’s-1930’sDiscovered by military aircraft industry 1920’s-1930’s Direct labour costs decreased by a constant % as cumulative # of Direct labour costs decreased by a constant % as cumulative # of

aircraft produced doubled.aircraft produced doubled. Peter Drucker argued “management is not just passive,” “it Peter Drucker argued “management is not just passive,” “it

means taking action to make the desired results come to pass”means taking action to make the desired results come to pass” Insight that a company can use business strategy to exert some Insight that a company can use business strategy to exert some

positive control over market forcespositive control over market forces It was not until the 1950’s and 1960’s that many large It was not until the 1950’s and 1960’s that many large

multinational corporations had to consider global competition. multinational corporations had to consider global competition.

1010

Academic UnderpinningsAcademic Underpinnings

Wharton 1881, Harvard 1908Wharton 1881, Harvard 1908 1950’s Smith and Christensen taught students to question whether a 1950’s Smith and Christensen taught students to question whether a

firm’s strategy matched its competitive environmentfirm’s strategy matched its competitive environment How is the whole industry doing? How to compete with others? How is the whole industry doing? How to compete with others? What things does the firm have to be especially competent in order to What things does the firm have to be especially competent in order to

compete?compete? By 1960’s SWOT was used in case studiesBy 1960’s SWOT was used in case studies Although SWOT was used by many firms including Wal-Mart in the 90’s Although SWOT was used by many firms including Wal-Mart in the 90’s

it did not define firm’s distinctive competenceit did not define firm’s distinctive competence Firms aspects that were enduring & unchanging vs. responsiveFirms aspects that were enduring & unchanging vs. responsive Theodore Levitt in article “Market Myopia” was critical of firms Theodore Levitt in article “Market Myopia” was critical of firms

delivering the wrong product based on distinctive competencedelivering the wrong product based on distinctive competence He argued when companies fail it means the products offered failed to He argued when companies fail it means the products offered failed to

adapt to consumer needs. adapt to consumer needs. Music industry and it current distribution modelMusic industry and it current distribution model Fax machine and advent of emailFax machine and advent of email

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Igor AnsoffIgor Ansoff

Igor Ansoff argued that Levitt was asking companies to take unnecessary Igor Ansoff argued that Levitt was asking companies to take unnecessary risksrisks

Companies should ask if a product have a common thread with existing Companies should ask if a product have a common thread with existing productsproducts

Sony photo optics cameras video cameras digital cameras Sony photo optics cameras video cameras digital cameras Customers are sometimes identified as the common threadCustomers are sometimes identified as the common thread Issue is that customers will frequently have a range of unrelated product Issue is that customers will frequently have a range of unrelated product

missions or needs Must leverage a companies core competencies.missions or needs Must leverage a companies core competencies. McDonalds-Pizza, Wraps, salads etc. McDonalds-Pizza, Wraps, salads etc. Ansoff suggested the following categories for defining the common Ansoff suggested the following categories for defining the common

thread in its business/corporate strategy see next slidethread in its business/corporate strategy see next slide

1212

Ansoff’s Product/Mission MatrixAnsoff’s Product/Mission Matrix

Present ProductPresent Product New ProductNew Product

Market Market PenetrationPenetration

Product Product DevelopmentDevelopment

Market Market DevelopmentDevelopment

DiversificationDiversification

This is where This is where many companies many companies get into trouble!get into trouble!

Present Mission

New Mission

1313

Boston Consulting GroupBoston Consulting Group

1960’s brought diversification and technological changes increasing 1960’s brought diversification and technological changes increasing the complexity of strategic situations companies facedthe complexity of strategic situations companies faced

Henderson believed strategy should be based on logic not intuitionHenderson believed strategy should be based on logic not intuition BCG wanted to explain why one competitor outperforms another BCG wanted to explain why one competitor outperforms another

assuming comparable management skills and resources. assuming comparable management skills and resources. BCG’s claim for the experience curve was for each cumulative BCG’s claim for the experience curve was for each cumulative

doubling of experience, total costs decline by 20-30% due to doubling of experience, total costs decline by 20-30% due to economies of scale, organizational learning and technological economies of scale, organizational learning and technological innovation.innovation.

Therefore the producer producing the most, has the lowest costs and Therefore the producer producing the most, has the lowest costs and greatest profits greatest profits

By the 1970’s the experience curve led to another “powerful By the 1970’s the experience curve led to another “powerful oversimplification” the Growth Share Matrixoversimplification” the Growth Share Matrix

Using the firms experience curves areas of investment could by Using the firms experience curves areas of investment could by compared by plotting them on the gridcompared by plotting them on the grid

1414

BCG’s Growth Share MatixBCG’s Growth Share Matix

High ShareHigh Share Low ShareLow Share

““Star”Star” ““Question Mark”Question Mark”

““Cash Cow”Cash Cow” ““Dog”Dog”

High Growth

Slow Growth

1515

BCG and McKinseyBCG and McKinsey BCG’s Strategy recommendation was to maintain a balance between BCG’s Strategy recommendation was to maintain a balance between

“Cash cows” and “Stars” while allocating some resources to “Question “Cash cows” and “Stars” while allocating some resources to “Question Marks”Marks”

““Dogs” were to be sold off.Dogs” were to be sold off. Since the producer with the largest stable market share eventually has Since the producer with the largest stable market share eventually has

the lowest costs and greatest profits it is vital to dominant market sharethe lowest costs and greatest profits it is vital to dominant market share McKinsey argued that the firm should be organized on more strategic McKinsey argued that the firm should be organized on more strategic

lines with greater concern for external conditions and more future lines with greater concern for external conditions and more future oriented oriented

1971 GE asked McKinsey to examine their SBU’s1971 GE asked McKinsey to examine their SBU’s Not convinced that BCG’s Growth Matrix was sufficient McKinsey Not convinced that BCG’s Growth Matrix was sufficient McKinsey

developed: Industry Attractiveness Business Strength Matrixdeveloped: Industry Attractiveness Business Strength Matrix PIMS (Profit Impact of Market Strategies) used data from 620 SBUs from PIMS (Profit Impact of Market Strategies) used data from 620 SBUs from

57 diversified corporations.57 diversified corporations. Determined ROI by regressing historical returns on variables like market Determined ROI by regressing historical returns on variables like market

share, product quality, marketing, R&D and several othersshare, product quality, marketing, R&D and several others Regression analysis established benchmarks for potential performance Regression analysis established benchmarks for potential performance

of SBU’s with particular characteristics against actual performance of SBU’s with particular characteristics against actual performance By 1970’s virtually every consulting firm used some type of portfolio By 1970’s virtually every consulting firm used some type of portfolio

analysis to generate strategy recommendations analysis to generate strategy recommendations All these applications forced deaveraging of cost and performance numbersAll these applications forced deaveraging of cost and performance numbers

1616

Industry Attractiveness Business Strength Industry Attractiveness Business Strength MatrixMatrix

Investment Investment

and and

GrowthGrowth

Selective Selective GrowthGrowth

SelectivitySelectivity

Selective Selective GrowthGrowth

SelectivitySelectivity Harvest/DivestHarvest/Divest

SelectivitySelectivity Harvest/DivestHarvest/Divest Harvest/DivestHarvest/Divest

High

Low

Medium

LowHigh Medium

Bu

sin

ess

Str

en

gth

Industry Attractiveness

1717

Theories under attackTheories under attackExperience CurveExperience Curve High inflation and excess capacity due oil shocks of 1973 disrupted historical High inflation and excess capacity due oil shocks of 1973 disrupted historical

experience curves in many industriesexperience curves in many industries Another problem pursuing a cost curve minimization strategy was that it reduced Another problem pursuing a cost curve minimization strategy was that it reduced

the firms ability to make innovative changes or respond to changes made by the firms ability to make innovative changes or respond to changes made by competitorscompetitors

Ford’s focus on costs left him venerable to Sloan’s (GM’s) strategy of innovation.Ford’s focus on costs left him venerable to Sloan’s (GM’s) strategy of innovation. Another issue is that experience curves assume experience can be kept Another issue is that experience curves assume experience can be kept

proprietary. Managers and employees and suppliers are sharedproprietary. Managers and employees and suppliers are shared Portfolio Analysis under attackPortfolio Analysis under attack Strategic recommendations were sensitive to specific portfolio analytic Strategic recommendations were sensitive to specific portfolio analytic

techniques employed. Depending on what technique was used you got a different techniques employed. Depending on what technique was used you got a different answer!answer!

Using these techniques resulted in nothing more than fine tuning current strategyUsing these techniques resulted in nothing more than fine tuning current strategy They ignored unexpected thrust from companies not considered competitorsThey ignored unexpected thrust from companies not considered competitors Displacing technologies Airplanes vs. transoceanic linersDisplacing technologies Airplanes vs. transoceanic liners Largest criticism came from Hayes and Abernathy analysis promoted analytic Largest criticism came from Hayes and Abernathy analysis promoted analytic

detachment rather than insight and short term cost reduction rather than long term detachment rather than insight and short term cost reduction rather than long term development of technological competitiveness.development of technological competitiveness.

These and other criticisms gradually diminished the popularity of portfolio These and other criticisms gradually diminished the popularity of portfolio analysisanalysis

1818

Unbundling Industry AttractivenessUnbundling Industry Attractiveness This all led to a new focus on Industry attractiveness and competitive This all led to a new focus on Industry attractiveness and competitive

positionposition U.S. industry competitive forces increase dramatically due to import competition, U.S. industry competitive forces increase dramatically due to import competition,

antitrust actions and deregulationantitrust actions and deregulation In 1958 56% of U.S. economy subject to competition by 1980 77%In 1958 56% of U.S. economy subject to competition by 1980 77% Harvard School argued that the structure of many industries may permit incumbent Harvard School argued that the structure of many industries may permit incumbent

firms to earn positive economic profits over long periods of timefirms to earn positive economic profits over long periods of time Economists believed perfect competition that is large equally able competitors Economists believed perfect competition that is large equally able competitors

drive industry’s aggregate economic profits down to zerodrive industry’s aggregate economic profits down to zero Joe Bain of Harvard Economics uncovered relationships between structure and Joe Bain of Harvard Economics uncovered relationships between structure and

performanceperformance First study found that profitability of manufacturing industries in which the largest 8 First study found that profitability of manufacturing industries in which the largest 8

competitors accounted for more than 70% of sales was nearly twice that of competitors accounted for more than 70% of sales was nearly twice that of industries with 8 firms concentration less than 70%industries with 8 firms concentration less than 70%

Second study explained how certain industries raise prices without attracting Second study explained how certain industries raise prices without attracting competitors competitors

3 Barriers 3 Barriers 1.1. Cost advantages such as a patent PharmaceuticalsCost advantages such as a patent Pharmaceuticals2.2. Product differentiation 3MProduct differentiation 3M3.3. Economies of scale Auto production MicrochipsEconomies of scale Auto production Microchips These studies reinforced the idea that some industries are inherently much more These studies reinforced the idea that some industries are inherently much more

profitable than othersprofitable than others

1919

Differences in Profitability of Differences in Profitability of IndustriesIndustries

Pharmaceuticals

Prepackaged software

Semiconductors

Women's clothing stores

Dental equipment

Eating places

Drug stores

Petroleum / natural gas

Race track operations

Trucking except local

Engineering services

Computer system design

Cable television service

Motor vehicles

Scheduled air transport

0% 5% 10% 15% 20% 25% 30%

2020

Problems with analysisProblems with analysis

1.1. Economists focused on issues of public policy rather than Economists focused on issues of public policy rather than business policybusiness policy

2.2. Bain and his successors used a limited list of structural variables Bain and his successors used a limited list of structural variables to explain industry profitability thereby shortchanging the to explain industry profitability thereby shortchanging the richness of modern industrial competitionrichness of modern industrial competitionBoth these problems were address by Michael Porter in 1974Both these problems were address by Michael Porter in 1974

Porter prepared a note that focused on the business policy Porter prepared a note that focused on the business policy objective of profit maximization rather than the public policy of objective of profit maximization rather than the public policy of minimizing “excess profits” minimizing “excess profits” In 1980 Porter releases his landmark book ‘Competitive Strategy’In 1980 Porter releases his landmark book ‘Competitive Strategy’Porter used his “Five Forces” approach to understand the Porter used his “Five Forces” approach to understand the attractiveness of and industry environment for the “average” attractiveness of and industry environment for the “average” competitor within itcompetitor within it

2121

Porter 5 Forces FrameworkPorter 5 Forces Framework

IndustryCompetitors

Intensity ofRivalry

IndustryCompetitors

Intensity ofRivalry

BuyersBuyers

New EntrantsNew Entrants

SubstitutesSubstitutes

SuppliersSuppliers

Threat of New Entrants

Bargaining Powerof Suppliers

Threat of Substitutes

Buying Powerof Buyers

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Porter 5 Forces FrameworkPorter 5 Forces FrameworkEntry BarriersEconomies of ScaleProprietary Product DifferencesBrand IdentitySwitching CostsCapital RequirementsAccess to DistributionAbsolute Cost Advantages- Proprietary learning curve- Access to necessary inputs- Proprietary low-cost product designGovernment PolicyExpected Retaliation

Determinants of Supplier PowerDifferentiation of InputsSwitching Costs of Suppliers and Firms in the IndustryPresence of Substitute InputsSupplier ConcentrationImportance of Volume to SupplierCost Relative to Total Purchases in the IndustryImpact of Inputs on Cost or DifferentiationThreat of Forward Integration Relative to the CompetitionThreat of Backward Integration by Firms in the Industry

Rivalry DeterminantsIndustry GrowthFixed (or Storage) Costs/Value AddedIntermittent Over-CapacityProduct DifferencesBrand IdentitySwitching CostsConcentration and BalanceInformational ComplexityDiversity of CompetitorsCorporate StakesExit Barriers

Determinants of SubstitutesRelative Price Performance of SubstitutesSwitching CostsBuyer Propensity to Substitute

Bargaining LeverageBuyer Concentration vs. Firm ConcentrationBuyer VolumeBuyer Switching Costs Relative to Firm Switching CostsBuyer InformationAbility to Backward IntegrateSubstitute ProductsPull-Through

Price SensitivityPrice/Total PurchasesProduct DifferencesBrand IdentityImpact on Quality/ PerformanceBuyer ProfitsDecision Makers’ Incentives

IndustryCompetitors

Intensity ofRivalry

IndustryCompetitors

Intensity ofRivalry

BuyersBuyers

New EntrantsNew Entrants

SubstitutesSubstitutes

SuppliersSuppliers

Threat of New Entrants

Bargaining Powerof Suppliers

Threat of Substitutes

Buying Powerof Buyers

Determinants of Buyer Power

2323

Tradeoffs using Porters ModelTradeoffs using Porters Model Framework encompasses many variables and seeks to capture much of the Framework encompasses many variables and seeks to capture much of the

complexity of actual competitioncomplexity of actual competition * Porters Framework identifies relevant variables and the questions that users * Porters Framework identifies relevant variables and the questions that users

must answer in order to develop conclusions tailored to a particular industry and must answer in order to develop conclusions tailored to a particular industry and company*company*

The drawback of the framework is it often ranges beyond the empirical evidence The drawback of the framework is it often ranges beyond the empirical evidence availableavailable

Survey of empirical literature in the late 80’s revealed that only a few points were Survey of empirical literature in the late 80’s revealed that only a few points were strongly supported by empirical literature generated by the IO field. These appear strongly supported by empirical literature generated by the IO field. These appear in red on the previous slidein red on the previous slide

One of the breakthroughs built into Porter’s framework was that it emphasized One of the breakthroughs built into Porter’s framework was that it emphasized ‘extended competition’ for value rather than just competition among existing rivals ‘extended competition’ for value rather than just competition among existing rivals

The biggest conceptual advance was proposed in the mid 90’s by two strategist The biggest conceptual advance was proposed in the mid 90’s by two strategist concerned with game theoryconcerned with game theory

Brandenburger and Nalebuff argued that the process of creating value in the Brandenburger and Nalebuff argued that the process of creating value in the marketplace involved “four types of players-customers, suppliers, competitors, marketplace involved “four types of players-customers, suppliers, competitors, and complementors.”and complementors.”

Complementors are other firms from which customers buy complementary Complementors are other firms from which customers buy complementary products and services . Software or Peripherals for computersproducts and services . Software or Peripherals for computers

Or which suppliers sell complementary resourcesOr which suppliers sell complementary resources

2424

Crucial assumptions built into Crucial assumptions built into Porter’s ModelPorter’s Model

McKinsey argues that Porter framework made three critical McKinsey argues that Porter framework made three critical assumptions:assumptions:

1.1. Industry consists of unrelated buyers, sellers, substitutes and Industry consists of unrelated buyers, sellers, substitutes and competitors that interact at arm’s lengthcompetitors that interact at arm’s length

2.2. Wealth will accrue to players that are able to erect barriers against Wealth will accrue to players that are able to erect barriers against competitors and potential entrants: in other words, that the competitors and potential entrants: in other words, that the source of value is structural advantagesource of value is structural advantage

3.3. Uncertainty is sufficiently low that you can accurately predict Uncertainty is sufficiently low that you can accurately predict participants behavior and choose a strategy accordinglyparticipants behavior and choose a strategy accordingly

An example of entry barriers that no longer matter PC FinancialAn example of entry barriers that no longer matter PC Financial

In the past had to built a branch network now Amicus can provide In the past had to built a branch network now Amicus can provide the services you just create and build a brandthe services you just create and build a brand

2525

Unbundling Competitive PositionUnbundling Competitive Position Intra-industry differences in profitability may be larger than differences Intra-industry differences in profitability may be larger than differences

across industriesacross industries Industry-level effects account for 10-20% of variation of profitability while Industry-level effects account for 10-20% of variation of profitability while

stable within-industry effects account for 30-45% see next 3 slides stable within-industry effects account for 30-45% see next 3 slides Differences in profitability within industries can be even largerDifferences in profitability within industries can be even larger Toyota vs. Ford $2000 vs. $200 profit/vehicle to manufacturerToyota vs. Ford $2000 vs. $200 profit/vehicle to manufacturer One might argue that most businesses in most industry environments One might argue that most businesses in most industry environments

are better placed to try to alter their own competitive positions rather are better placed to try to alter their own competitive positions rather than the overall attractiveness of the industry in which they operate IE than the overall attractiveness of the industry in which they operate IE Southwest vs. AmericanSouthwest vs. American

For this reason competitive positioning is interesting to strategistsFor this reason competitive positioning is interesting to strategists Hunt believed that competitors within particular industries can be Hunt believed that competitors within particular industries can be

grouped by competitive strategies. grouped by competitive strategies. Appliance industry broad line vs. narrow lineAppliance industry broad line vs. narrow line

2626

Differences in Profitability of Differences in Profitability of IndustriesIndustries

Pharmaceuticals

Prepackaged software

Semiconductors

Women's clothing stores

Dental equipment

Eating places

Drug stores

Petroleum / natural gas

Race track operations

Trucking except local

Engineering services

Computer system design

Cable television service

Motor vehicles

Scheduled air transport

0% 5% 10% 15% 20% 25% 30%

2727

Differences in Profitability Within the Differences in Profitability Within the Airline IndustryAirline Industry

Southwest

American

United

Delta

US Airways

Continental

TWA

-6% -4% -2% 0% 2% 4% 6% 8% 10%

2828

Differences in Profitability Within the Differences in Profitability Within the Pharmaceutical IndustryPharmaceutical Industry

Johnson & Johnson

Scherin-Plough

American Home Prod

Smithkline Beecham

Merck

Pfizer

Boc

Carter-Wallace

Abbott

Bausch & Lomb

Scherer

Allergan

Rhone-Poulenc

Nova-Nordisk

Genentech

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

2929

Competitive Cost AnalysisCompetitive Cost Analysis Several academic views have emerged about the sources of Several academic views have emerged about the sources of

performance differences with industriesperformance differences with industries Competitive cost analysis survived the declining popularity of the Competitive cost analysis survived the declining popularity of the

experience curve in the 1970’s but was reshaped in two important ways:experience curve in the 1970’s but was reshaped in two important ways:1.1. More attention was paid to disaggregating businesses into their More attention was paid to disaggregating businesses into their

component activities or processes and how costs of activities might be component activities or processes and how costs of activities might be shared across businessesshared across businesses

2.2. Strategists greatly enriched their menu of cost drivers to include more Strategists greatly enriched their menu of cost drivers to include more than just experience than just experience

Disaggregating involved splitting costs into the cost of purchased Disaggregating involved splitting costs into the cost of purchased materials and cost added (value added-profit margins) and apply materials and cost added (value added-profit margins) and apply experience curves only to the latterexperience curves only to the latter

Next was to disaggregate a business’s entire cost structure into activities Next was to disaggregate a business’s entire cost structure into activities whose costs might be expected to behave differentlywhose costs might be expected to behave differently

Activity analysis also provided a way to assign costs in SBU’sActivity analysis also provided a way to assign costs in SBU’s Another development in competitive cost analysis was a better Another development in competitive cost analysis was a better

understanding of scale effects understanding of scale effects For example advertising costs were driven by national scale whereas For example advertising costs were driven by national scale whereas

distribution costs were driven by local or regional scaledistribution costs were driven by local or regional scale

3030

Customer AnalysisCustomer Analysis Increased sophistication in analyzing relative costs was accompanied Increased sophistication in analyzing relative costs was accompanied

by increase attention to customers in the process of analyzing by increase attention to customers in the process of analyzing competitive positioncompetitive position

This lead to the reconsideration of the idea that attaining low costs and This lead to the reconsideration of the idea that attaining low costs and offering customers low prices was always the best way to compete.offering customers low prices was always the best way to compete.

More attention came to be paid to differentiated ways of competing that More attention came to be paid to differentiated ways of competing that might let a business command a price premium by improving might let a business command a price premium by improving customers’ performance or reducing their other costscustomers’ performance or reducing their other costs

Both Hall and Porter argued that successful companies usually had to Both Hall and Porter argued that successful companies usually had to choose to compete either on the basis of low costs or by differentiating choose to compete either on the basis of low costs or by differentiating products through quality and performanceproducts through quality and performance

Porter also identified a focus option that cut across these two generic Porter also identified a focus option that cut across these two generic strategiesstrategies

Debate continued about the proposition explicitly put forth by Porter Debate continued about the proposition explicitly put forth by Porter that businesses stuck in the middle should be expected to under that businesses stuck in the middle should be expected to under perform businesses that targeted lower costs or differentiatedperform businesses that targeted lower costs or differentiated

3131

Porter’s Value ChainPorter’s Value Chain Porters Value chain resembled McKinsey’s business system Porters Value chain resembled McKinsey’s business system He focused on the links within the value chain as well as connecting the He focused on the links within the value chain as well as connecting the

value chain to the determinants of competitive position.value chain to the determinants of competitive position. Not just how you do things but what you do that determines profitabilityNot just how you do things but what you do that determines profitability Porter asserted that competitive advantage cannot be understood by Porter asserted that competitive advantage cannot be understood by

looking at a firm as a whole but It stems from the many discrete activities looking at a firm as a whole but It stems from the many discrete activities it performsit performs

Putting customer analysis and cost analysis together exposed situations Putting customer analysis and cost analysis together exposed situations in which 20% of a businesses customers accounted for more than 80% or in which 20% of a businesses customers accounted for more than 80% or even 100% of its profits even 100% of its profits The Famous 80/20 RuleThe Famous 80/20 Rule

Porters Value ChainPorters Value Chain

Firm Infrastructure

Human Resource Management

Technology Development

Procurement

Inbound

LogisticsOperations

Outbound

Logistics

Sales & Marketing

Service

3232

Dynamics of CompetitionDynamics of Competition Most ideas and tools for competitive positioning thus far were static in the sense they did Most ideas and tools for competitive positioning thus far were static in the sense they did

not explicitly address the dynamics of the competitive processnot explicitly address the dynamics of the competitive process How long can competitive advantage be sustained on the assets in place and what are the How long can competitive advantage be sustained on the assets in place and what are the

profitable reinvestment opportunities afforded by strategyprofitable reinvestment opportunities afforded by strategy In the 1980’s analysis showed that profitability and growth could not automatically be In the 1980’s analysis showed that profitability and growth could not automatically be

sustainedsustained Analysis of 700 businesses indicated that nine-tenths of the profitability differential Analysis of 700 businesses indicated that nine-tenths of the profitability differential

between the below and above average businesses vanished over a 10 year horizonbetween the below and above average businesses vanished over a 10 year horizon The The RedRed Queen effect is at work when a predator learns to run faster; its prey responds by Queen effect is at work when a predator learns to run faster; its prey responds by

acquiring better camouflage; the predator then develops a better sense of smell; the prey acquiring better camouflage; the predator then develops a better sense of smell; the prey starts to climb trees; and so on.starts to climb trees; and so on.

A study of the performance of more than 400 companies over 30 years reveals that firms A study of the performance of more than 400 companies over 30 years reveals that firms find it difficult to maintain higher performance levels than do their competitors for more find it difficult to maintain higher performance levels than do their competitors for more than about five years at a timethan about five years at a time

How can businesses create and sustain competitive advantage?How can businesses create and sustain competitive advantage? Stalk argues that leading edge of competition is the combination of fast response and Stalk argues that leading edge of competition is the combination of fast response and

increasing variety increasing variety Companies without these advantages are slipping into commodity-like competition, where Companies without these advantages are slipping into commodity-like competition, where

customers compete mainly on pricecustomers compete mainly on price Japanese and the strategic treadmill Japanese and the strategic treadmill Japanese electronics manufactures had reached a remarkable level of efficiency but they Japanese electronics manufactures had reached a remarkable level of efficiency but they

did not meet or create needs for their customersdid not meet or create needs for their customers

3333

Porter 5 Forces FrameworkPorter 5 Forces Framework

IndustryCompetitors

Intensity ofRivalry

IndustryCompetitors

Intensity ofRivalry

BuyersBuyers

New EntrantsNew Entrants

SubstitutesSubstitutes

SuppliersSuppliers

Threat of New Entrants

Bargaining Powerof Suppliers

Threat of Substitutes

Buying Powerof Buyers

3434

Porter 5 Forces FrameworkPorter 5 Forces FrameworkEntry BarriersEconomies of ScaleProprietary Product DifferencesBrand IdentitySwitching CostsCapital RequirementsAccess to DistributionAbsolute Cost Advantages- Proprietary learning curve- Access to necessary inputs- Proprietary low-cost product designGovernment PolicyExpected Retaliation

Determinants of Supplier PowerDifferentiation of InputsSwitching Costs of Suppliers and Firms in the IndustryPresence of Substitute InputsSupplier ConcentrationImportance of Volume to SupplierCost Relative to Total Purchases in the IndustryImpact of Inputs on Cost or DifferentiationThreat of Forward Integration Relative to the CompetitionThreat of Backward Integration by Firms in the Industry

Rivalry DeterminantsIndustry GrowthFixed (or Storage) Costs/Value AddedIntermittent Over-CapacityProduct DifferencesBrand IdentitySwitching CostsConcentration and BalanceInformational ComplexityDiversity of CompetitorsCorporate StakesExit Barriers

Determinants of SubstitutesRelative Price Performance of SubstitutesSwitching CostsBuyer Propensity to Substitute

Bargaining LeverageBuyer Concentration vs. Firm ConcentrationBuyer VolumeBuyer Switching Costs Relative to Firm Switching CostsBuyer InformationAbility to Backward IntegrateSubstitute ProductsPull-Through

Price SensitivityPrice/Total PurchasesProduct DifferencesBrand IdentityImpact on Quality/ PerformanceBuyer ProfitsDecision Makers’ Incentives

IndustryCompetitors

Intensity ofRivalry

IndustryCompetitors

Intensity ofRivalry

BuyersBuyers

New EntrantsNew Entrants

SubstitutesSubstitutes

SuppliersSuppliers

Threat of New Entrants

Bargaining Powerof Suppliers

Threat of Substitutes

Buying Powerof Buyers

Determinants of Buyer Power

3535

Entry BarriersEntry Barriers

Economies of ScaleEconomies of ScaleProprietary Product DifferencesProprietary Product DifferencesBrand IdentityBrand IdentitySwitching CostsSwitching CostsCapital RequirementsCapital RequirementsAccess to DistributionAccess to DistributionAbsolute Cost AdvantagesAbsolute Cost Advantages

- Proprietary learning curve- Proprietary learning curve- Access to necessary inputs- Access to necessary inputs- Proprietary low-cost product - Proprietary low-cost product

designdesignGovernment PolicyGovernment PolicyExpected RetaliationExpected Retaliation

3636

Rivalry DeterminantsRivalry Determinants

Industry GrowthIndustry Growth

Fixed (or Storage) Costs/Value AddedFixed (or Storage) Costs/Value Added

Intermittent Over-CapacityIntermittent Over-Capacity

Product DifferencesProduct Differences

Brand IdentityBrand Identity

Switching CostsSwitching Costs

Concentration and BalanceConcentration and Balance

Informational ComplexityInformational Complexity

Diversity of CompetitorsDiversity of Competitors

Corporate StakesCorporate Stakes

Exit BarriersExit Barriers

3737

Determinants of Buyer PowerDeterminants of Buyer Power

Bargaining LeverageBargaining Leverage

Buyer Concentration vs. Firm ConcentrationBuyer Concentration vs. Firm Concentration

Buyer VolumeBuyer Volume

Buyer Switching Costs Relative to Firm Switching Buyer Switching Costs Relative to Firm Switching

CostsCosts

Buyer InformationBuyer Information

Ability to Backward IntegrateAbility to Backward Integrate

Substitute ProductsSubstitute Products

Pull-ThroughPull-Through

3838

EpistasisEpistasis

This occurs when interaction between the parts builds This occurs when interaction between the parts builds to such an extent that any positive change in one to such an extent that any positive change in one part has ripple effects that cause negative change part has ripple effects that cause negative change

elsewhere. The system thus becomes more elsewhere. The system thus becomes more conservative as it grows, and finding adaptations conservative as it grows, and finding adaptations

that don’t have harmful side effects gets harder and that don’t have harmful side effects gets harder and harder.harder.

3939

Determinants of Buyer PowerDeterminants of Buyer Power

Price SensitivityPrice SensitivityPrice/Total PurchasesPrice/Total PurchasesProduct DifferencesProduct DifferencesBrand IdentityBrand IdentityImpact on Quality/PerformanceImpact on Quality/PerformanceBuyer ProfitsBuyer ProfitsDecision Makers’ IncentivesDecision Makers’ Incentives

4040

Determinants of Supplier PowerDeterminants of Supplier Power

Differentiation of InputsDifferentiation of Inputs

Switching Costs of Suppliers and Firms in the Switching Costs of Suppliers and Firms in the

IndustryIndustry

Presence of Substitute InputsPresence of Substitute Inputs

Supplier ConcentrationSupplier Concentration

Importance of Volume to SupplierImportance of Volume to Supplier

Cost Relative to Total Purchases in the IndustryCost Relative to Total Purchases in the Industry

4141

Determinants of Supplier PowerDeterminants of Supplier Power

Impact of Inputs on Cost or DifferentiationImpact of Inputs on Cost or Differentiation

Threat of Forward Integration Relative to the Threat of Forward Integration Relative to the

CompetitionCompetition

Threat of Backward Integration by Firms in the Threat of Backward Integration by Firms in the

IndustryIndustry

4242

Determinants of SubstitutesDeterminants of Substitutes

Watch Technological developments Watch Technological developments

Relative Price Performance of SubstitutesRelative Price Performance of Substitutes

Switching CostsSwitching Costs

Buyer Propensity to SubstituteBuyer Propensity to Substitute

4343

To Do’s for Next WeekTo Do’s for Next Week

– Email me your contact information please include your major, work Email me your contact information please include your major, work history and expectationshistory and expectations

– Get textbook and case packageGet textbook and case package

– Complete the assigned readingsComplete the assigned readings

– Begin to form groupsBegin to form groups

– Contemplate company/industry for ProjectContemplate company/industry for Project

*Reminder* The first half of next weeks class will be held in the *Reminder* The first half of next weeks class will be held in the Library 2Library 2ndnd Floor Floor

Research Seminar with Jane BinksmaResearch Seminar with Jane Binksma Please be promptPlease be prompt