PowerPoint Slides © Michael R. Ward, UTA 2014

Kleenex Strategy• Recall the Kleenex example from last time• What strategic decisions were being made?

• Bring out new innovations in the tissue market• Determine appropriate prices and production as competitive

entry appears• Kill off projects at the end of their product lifecycles

• What was the goal of these decisions?• Create additional value to the customer• Capture some of this value in higher price-cost margins• Sustain these margins as long as possible

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Kleenex Strategy

• This was central to a very successful advertisement campaign for many years

• Not so much any more• When to pull the plug?• Ex Director of R&D at pharmaceutical firm

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Strategy Goals• Strategy includes all opportunities to increase the size of

the profit box• Increase customer value• Lower costs• But also, sustaining your ability to set prices above costs

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Profit Dissipation• Due to falling value

• Product no longer valued by many Ex Buggy Whips

• Due to rising costs• Costs creep up, eating into margins Ex “Gingerbread”

architectural details

• Due to disappearing competitive advantage• Your ability to set prices above costs (capture value) is tied to

your competitive advantages relative to others• A new innovative product usually has huge competitive

advantage• The ability of entrants to imitate is what keeps competitive

advantage from being sustained over time• What are the sources of competitive advantage?

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Two Views• Industrial Organization (IO)

• Focus on industry, not specific firm assets• Characteristics of the particular industry determine the scope for

strategies to sustain competitive advantage• Characteristics are external to the firm and common for firms in

the industry

• Resource Based View (RBV)• Focus on firm assets as opposed to industry setting• The particular assets or resources within a firm provide scope for

differences in strategy that allow for sustainable competitive advantage

• Important that the valuable assets cannot be easily copied

• Neither is wrong; just different ways of looking at the issue

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IO View• What are the important characteristics of the industry

that affect the appropriate strategy?• Come up with 5 (or 6) main points for greater profits:

1. High barriers to entry2. Low buyer power3. Low supplier power4. Low threat from substitutes5. Low levels of rivalry between existing firms6. (Cooperation from complementary products)

• The first five are the “Five Forces” made popular by Michael Porter

• The sixth is “the force that Porter forgot”

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IO View• An industry is comprised of a group of firms producing

products that are close substitutes to each other to serve a particular market

• For a multi-product company, industry analysis may need to be done on a product-by-product basis

• To use the Five Forces model, one must consider “value capture”• Value is created in each industry and distributed across suppliers,

industry rivals, and buyers.• Firms compete to capture as much of the value created as

possible. • Michael Porter Interview

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1. Entry Barriers• Keep firms that are outside of the industry from entering

when the industry is profitable• Maintain competitive advantage• Barriers prevent, or slow, their entry• Some barriers are:

• government protection (e.g., patents or licensing requirements)• proprietary products• Strong brands / reputation• high capital requirements for entry• lower costs driven by economies of scale• Learning-by-doing, network externalities

• Strategic Implication: Develop barriers to entry if possible

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2. Buyer Power• The extent to which the customers of the product or

service can capture value• Buyer power will tend to be higher if buyers are

concentrated• Buyer power will tend to be higher if it is easy for buyers

to switch from firm to firm• More power means these buyers will find it easier to

capture value, taking it away from your firm

• Strategic Implications: Try to diversify customer base & Try to limit customers ability to switch

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3. Supplier Power• The extent to which the providers of any input to the

product or service can capture value• Their power tends to be higher when the inputs provided

are critical or highly differentiated • Concentration among suppliers gives suppliers power

since their customers will have fewer bargaining options• Even if many suppliers exist, power may still be high if

there are significant costs to switching between suppliers

• Strategic Implication: Try to limit dependence on a few suppliers as much as possible

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4. Substitutes• Other products outside of your industry that can serve the

same purpose• Ex Aluminum foil and cellophane wrap• Ex “Nice” pen and folio as graduation gifts

• Greater substitutability with another product means your demand is more elastic and price-cost margins are smaller

• Typically, these are from outside of your main set of rivals

• Strategic Implication: Often not much you can do. But this information is still relevant for the implementation of other elements of your strategy, e.g., pricing

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5. Rivalry• Refers to the form that competition takes. Is it dog-eat-

dog or is it softer?• Rivalry is likely to be quite high if there is:

• A large number of firms compete in an industry• A stable technology• A technology with high fixed costs or excess capacity• Slow or negative industry growth• Large, infrequent orders

• Rivalry higher when products are not well differentiated and buyers find it easy to switch back and forth

• Strategy Implication: Possibly try to differentiate your product more

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Pentagonal Analysis• A common tool is the so called “Pentagonal Analysis”

• Each point refers to a force and the distance gauges its importance

• Industries with similar graphs should have similar strategies

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Value Net• One limitation of the Five Forces is that it often portrays

an industry as a zero-sum game • The way you get a bigger piece of the pie is to take it from one of

the other participants in the industry

• Although this is one way to view competition, companies can also work with other industry participants to try to build a larger pie• With a larger pie, everyone’s slice grows bigger

• Some economists recommend that as a complement to a Five Forces analysis, which focuses on threats in the industry, that firms also evaluate the Value Net of the industry for cooperative opportunities

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6. Cooperation from Complements • Refers to the bundle of products produced that mutually

support each other• A product is under one company’s control whereas an

industry platform requires complementary innovations from others to be useful

• A product is proprietary while a platform is supported by a whole industry• Ex Android versus Apple IOS, CDMA standard in mobile phones,

Video game consoles and game publishers

• Strategic Implication: Your business may be better served if other firms develop compliments. If so, foster these developments

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Platform Strategy• If you decide on a platform strategy, there are two

common strategies• "Coring” - using a set of techniques to create a platform by

making a technology "core" to a particular technological system and market • Ex Google Inc. in Internet search and Qualcomm Inc. in mobile

technology.

• "Tipping” - the set of activities that helps a company "tip" a market toward its platform rather than some other potential one • Ex Linux's growth in the market for Web server operating systems

and Ebay’s dominance in online auctions

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Support for IO ViewEcon 5313

MBA Thought ExperimentEcon 5313

Apply the Five (Six) Forces to UT Arlington’s MBA programMarket Definition?1. Barriers to entry

• New For-Profit Universities? • New Non-Profit Universities?• New MBA program from existing university?

2. Buyer power• Who are buyers? Individual students? Local businesses?• Diverse groups? Switching Costs?

3. Supplier power• Who are suppliers? Faculty? Administrators? Publishers?• Are they critical or highly differentiated?

MBA Thought Experiment4. Threat from substitutes

• What are substitutes? Job experience? Certificate programs?

5. Rivalry between existing firms• Who are UT Arlington’s rivals?• UNT, UTD, TCU, SMU, UT Austin, Wharton?• How do they compete?

6. Cooperation from complementary products• Campus life? (sports, activities)• Campustown?• Network of local firm recruiters?• Network of influential alumni?

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In-class exercise• With a group of 2-4 neighbors• Choose an industry – probably one that one of you work

in – and gauge how high each of the five (six) forces are• What sort of profitability would this suggest?

• Is the prediction accurate?

• What sort of strategy would this suggest?• Is it actually being implemented?

• What changes have occurred in these forces?• What changes in strategy do they suggest?

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Resource-Based View (RBV)• Individual firms may exhibit sustained performance

advantages due to the superiority of their resources• Even when other firms in the same industry do not

• Resources are “the tangible and intangible assets firms use to conceive of and implement their strategies”

• If the IO view was the whole story, all firms in an industry would have the same level of profitability

• With the RBV view, some out perform others because they have developed better resources

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RBV Assumptions• Two primary assumptions underlie the RBV:

• resource heterogeneity (firms possess different bundles of resources)

• resource immobility (since resources can be immobile, these resource differences may persist)

• Ex Farmland is both heterogeneous and immobile• Ex Worker human capital is heterogeneous but often

mobile• Ex Raw material inputs are neither heterogeneous nor

immobile

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RBV View• If a resource is both valuable and rare, it can lead to at

least a temporary competitive advantage over rivals • A valuable resource must allow a business to conceive of

and implement strategies that improve its efficiency or effectiveness

• These resources let a firm operate at lower costs than its rivals or charge higher prices to its customers

• For a resource to be rare, it must not be broadly available to competitors

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Temporary versus Sustainable• Resources that may generate temporary competitive

advantage do not necessarily lead to a sustainable competitive advantage

• Sustainable competitive advantage requires that resources must be difficult to imitate or substitute

• Some conditions that make a resource hard to imitate are:• Resources that flow from a firm’s unique historical conditions will

be difficult for competitors to match• Resources where the link to advantage is ambiguous are more

difficult for competitors to re-create the advantage• Resource that are socially complex (e.g., organizational culture)

are difficult for rivals to duplicate

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RBV Assets• So from the resource based view perspective, resources

and capabilities that are valuable, relatively rare, and difficult to successfully imitate/substitute are at the core of sustained, excellent firm performance

• These resources and capabilities may include:• technology• physical capital• intellectual assets• human capital• financial resources• organizational form

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Frank Perdue• How did Frank Perdue create sustainable competitive

advantage in the poultry business?• Produce a chicken that tastes better, looks better, and

cooks better – increase customer value• Requires monitoring throughout the supply chain –

increases costs• Cover increased costs with price premium• How to sustain the advantage though?

• Focus on quality control• Branding

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Waffle House• How does Waffle House create sustainable competitive

advantage in the breakfast restaurant business?• Produce a low cost breakfast without amenities – increase

customer value for those who prefer value over amenities• Requires monitoring costs and prices throughout the

franchise chain• How to sustain the advantage though?

• Franchise monitoring• Branding

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Management Advice• Be wary of advice that claims to identify critical resources

or capabilities that successful companies have to develop in order to gain a competitive advantage

• Explanations such as these often mistakenly conclude a causal relationship when only a correlation exists

• Publicly available knowledge is not going to help you create a competitive advantage • Ex You read that having a CMEO (Chief Managerial Economics

Officer) in your company leads to a competitive advantage. You decide to hire a CMEO but no competitive advantage follows. What happened?

• Your competitor also heard about the CMEO "secret" and hired one too. Competitive Advantage cannot flow from something that is easily duplicated.

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From the Blog• Chapter 10• Banning ride sharing to protect taxis• Using consumer activism to erect entry barriers• Patents and Prices• Uber versus Taxis• Video Game Platforms• 59 Minute Photo• And the Band Played On

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Main Points• Strategy lies in increasing the profit box by: increasing

value, lowering costs, and/or sustaining advantage• The IO view focuses on industry structure

• The Five Forces (six) is a useful tool to analyze IO view

• The RBV view focuses on distinct assets of the firm• Sustained competitive advantage comes from superior resources

that are difficult to imitate

• Be wary of advice from consultants because this implies that the resource is easily imitable

• Strategy usually comes down to affecting: cost reduction, product differentiation and competitive intensity

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