1

What strategy is not (1)

� Strategic positioning is not 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?

What strategy is not (2)

� Competitive advantage

� The various activities that go into creating, producing,

selling and delivering a product or service

� Operational effectiveness

� 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

Strategic positioning

� Strategic positioning

� 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 company’s

activities

� Fit: How company’s activities interact and reinforce one another

Industry Analysis: Porter Five Forces

Threat of New

Entrants

Threat of

Substitute

Products or

Services

Bargaining Power

of Suppliers

Bargaining Power

of Buyers

Rivalry

Among

Existing

Entrants

2

Rivalry Among Existing Entrants (1)

� Refers to competition within an industry

� First need to define the industry, then analyze

factors influencing competition

The model is sensitive to defining the industry

and its boundaries

Tip: It can help find a unique and valuable position

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

� Number of firms

� Exit barriers

� Similarity in: Goals, Operations efficiency, Products

or services

Note the importance of defining industry boundaries

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.

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

3

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

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

Strategy: Big Picture Map

Environment

(Industry Analysis)

Firm

(Internal Analysis)

Core problem(s)

Recommendations

What are

the industry

issues?

Value Chain

CSDs Concentrate

ProducersRetailersBottlers Consumers

Porter Five

Forces

Buyer

4

Industry life cycle

Fragmentation Shake-out Maturity Decline

Valu

e C

reation

Time

Fragmentation

� 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

Shake-out

� A dominant model emerges for generating value on a

large scale

� The dominant model:

� 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 industry’s suppliers

Maturity

� Growth in volume slows

� Industry structure becomes remarkably stable

� Little change in the ranks of leading firms

5

Decline

� 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

Valu

e C

reation

Time

Why do successful companies fail to stay atop in the presence of disruptive technologies?

� It happens to the best

� Xerox, Seagate, Kodak

� 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

A clarification

� “Disruptive technologies“ are not necessarily entirely

new technologies

� E.g., Desktop PC to Laptop to Tablet

� Architectural changes

� Changes affecting relationships along the value chain

� Changes in technology

6

Value Creation and Value Capture

Buyer Willingness

to Pay (WTP)

Supplier Opportunity

Costs (SOC)

Firm’s

Economic Contribution

Input Price

(= Firm’s Cost)

Product Price

Consumer

Surplus

Supplier

Profits

Firm

Profits

Total value

a firm CREATES

Value a firm

CAPTURES as profits

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.

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

2. Identify the strategic significance of the disruptive technology

� Don’t ask your best customers

3. Locate a market for the disruptive technology

� If it doesn’t exist, create it by experimenting rapidly, iteratively and inexpensively

4. House the disruptive technology in an independent entity

Strategy: Big Picture Map

Environment

(Industry Analysis)

Firm

(Internal Analysis)

Core problem(s)

Recommendations

Goal: Search for sustainable competitive advantage

1. Porter Five Forces

� Value Chain

� Industry

boundaries

2. Industry life cycle

� Disruptive

technologies

1. Management

ability (to engage

with potential threats

of disruptive

technologies)

7

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

� However, profitability differences within an

industry

� Within industry variation in attractiveness

� Note: Another reason I told you to ‘play’ with industry

boundaries

Competitive advantage and sustainability

� Important subtle point:

� Competitive advantage and operational effectiveness

� Short-lived

� Competitive advantage and sustainability

� Looking for an advantage that endures over time

� The two are related

� Analyze the first and ideas for the second might

emerge

Definition: Competitive advantage

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 Creation and Value Capture

Buyer Willingness

to Pay (WTP)

Supplier Opportunity

Costs (SOC)

Firm’s

Economic Contribution

Input Price

(= Firm’s Cost)

Product Price

Consumer

Surplus

Supplier

Profits

Firm

Profits

Total value

a firm CREATES

Value a firm

CAPTURES as profits

Low-cost

strategy

Differentiation

strategy

8

Added value

� Important subtle point:

� 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)

Searching for sources of competitive advantage

� Step 1: Catalog activities

� Map what the firm does

� 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

� Durable

� Scarce

� Difficult for others to obtain

� Inimitable

� Hard to copy

� Unsubstitutable

� Difficult to replace

� Appropriable

� Resource you can tap

Searching for sources of competitive advantage

Inbound

Logistics

(e.g. Incoming

Material Storage,

Data Collection,

Service, Customer

Access)

Operations

(e.g. Assembly,

Component

Fabrication,

Branch

Operations)

Outbound

Logistics

(e.g. Order

Processing,

Warehousing,

Report

Preparation)

Marketing

& Sales

(e.g. Sales Force,

Promotion,

Advertising,

Trade Shows,

Proposal Writing)

After-Sales

Service

(e.g. Installation,

Customer

Support,

Complaint

Resolution,

Repair)

Firm Infrastructure

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

Human Resource Management(e.g. Recruiting, Training, Compensation System)

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

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

M

a

r

g

i

n

Primary Activities

Support

Activities

Value Chain

9

Sources of competitive advantage

Value Chain

FIRM

INFRASTRUCTURE

*flat org

*prime locations

HUMAN

RESOURCES

*employees: similar age as customers

*creative team

TECHNOLOGY

DEVELOPMENT

IT IT IT IT IT Support A

ctivitiesPROCUREMENT

OF INPUT

*outsourcing basic

items, in-house

fashion items

*give large run to

small workshops

*quality

*in-house dye

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)

*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

*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)

*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)

Prim

ary

Activ

ities

INBOUND

LOGISTICSOPERATIONS

OUTBOUND

LOGISTICS

MARKETING &

SALESSERVICE

Sources of competitive advantage

Value Chain

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 Ducati’s sport image in

the eyes of its core customers, the “extreme” riders

→given space and budge; independent company

HUMAN

RESOURCES

* Key selection criterion (especially at the top): share passion for Ducati

* Employees at center of advertising campaign

TECHNOLOGY

DEVELOPMENT

* R&D up 4x

Support A

ctivities

PROCUREMENT OF

INPUT

[INBOUND LOGISTICS]

* Reduced suppliers from 200 to 130.

→ increase the average quality of Ducati’s

suppliers (dropped the least efficient ones)

→ increase bargaining power vis-à-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

Games as Defined by the Rules

� 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’s Dilemma

Prisoner A

Not Confess Confess

Prisoner B

Not Confess

(6 months,

6 months)

(10 years,

Free)

Confess

(Free,

10 years)

(2 years,

2 years)

Should confess or

not?

10

What makes a Game a Prisoner’s

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)

� Sucker’s pay-off (for the player who is double-crossed)

� A game is a Prisoner’s Dilemma whenever:

T > R > P > S

e.g., Free > Six months > Two years > Ten years

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 John’s wife has triplets…

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 toadd the extra cow

11

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 Prisoner’s dilemma

In Sum: the conflict between the common interests of the group and free-riding behavior of self-interested individuals

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 opponent’s 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

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 I£0

and I£8.8mil

� revenue-marginal cost=I£166.5-I£29=I£137.5

� 64,240xI£137.5=I£8.8mil

� Retaliate: Incumbents’ annual profits drop anywhere between I£17mil and

I£34.4mil

� (I£166.5-I£98)x500,000=I£34.4mil

� New customers from price drop: (I£98-I£29)x250,000=I£17.3 and

I£34.4mil-I£17.3mil=I£17mil

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 doesn’t offer a sustainable

competitive advantage

12

Ryanair: Low Cost Airline

BA

High-end

services

No-frills

Ryanair

Early Days

BA BA

Ryanair

Today

Agenda

� Corporate strategy: competitive

advantage across multiple markets

� Adding value through

diversification (horizontal

diversification)

� Across product market

� Across geographical markets

� Adding value through vertical

integration

Corporation

Marine protein

business

Oil drilling

business

Internet portal

business

Product-market Diversification

Corporation

Canada Madagascar Singapore

Wool spinning factory

Sheep farm

Garment factory

Retail store

Vertical Integration

Multinational Operations/Geographic Diversification

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

13

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

� Relationship-specific investments

� Holdup concerns

� Double marginalization

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

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?

� Ownership test

� Does ownership of the business unit produce a greater

competitive advantage than an alternative arrangement

would produce?

Traditional Disney

� How does this affect which business Disney goes into?

TouchstoneTheme

Parks

Hotels

Film

Cruise

TV

Cable

Channel

Stores

Toys

Books

14

Traditional Disney

� What is good about having animated cartoon characters at the

center of the company?

� Asset doesn’t age or depreciate; it is very durable

� Appropriability

�Warren Buffet: “The Mouse has no agent!”

�All funds retained by Disney

� Hard to imitate

Roger Rabbit

Donald Duck

Why hard to imitate?

� E.g., Warner Bros.

Mighty Mouse

Daffy Duck

Why hard to imitate?

� Can’t substitute for Disney childhood experiences

� Lesson? Disney’s 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

15

Industry definition

� A corporate strategy approach

Classic Equipment

� Football

� Soccer Ball

� Golf clubs

� Sports bag

� Etc.

Apparel

� T-shirts

� Shorts

Technology Equipment

� Apps

� Wearables

� Training programs (e.g.,

Xbox Kinect game)

Athletic

footwear

Industry Analysis

� Industry definition: Athletic footwear

� Present time

� Value chain

� Porter Five Forces

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

� 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

16

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

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

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

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

17

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)