Business 42001- Knez

Business 42001- Knez

Competitive Strategy

Lecture 1: A) Introduction to Competitive Strategy B) Industry Analysis

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Overview of Course Topics 1. Competitive Strategy Basics i. Industry Analysis ii. Strategic Positioning (Low Cost versus Differentiation Strategies) iii. Competitive Advantage and Sustainable Competitive Advantage

2. Scope of the Firm i. ii.

Horizontal Scope Vertical Scope

3. Industry Change and Strategy Development i. ii.

Disruptive Innovation Business Model Innovation

4. Entry and First-Mover Advantage 5. Standards Competition and Network Effects

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Strategy Definitions

 Business Strategy  Competitive Strategy  Strategic Management  Strategic Planning

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Business Strategy = Core Elements + Strategic Positioning Business Strategy Group of customers that have a need and willingness-to-pay for the Value Proposition

A formula for creating distinctive value in a well defined set of markets through a distinctive set of capabilities (resources and activities).

Business Strategy

Core Elements Target Customers Characteristics of the good or service that generates value at a particular price

Business Strategy

Strategic Position Value Proposition

+ Critical Capabilities

How the core elements of the business strategy are intended to create greater value than the competition through higher relative benefits (differentiation) or lower costs for a particular scope of customers.

Set of resources and activities necessary to create and deliver the value proposition to the target market.

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Scope and Market Positioning

Product Specialization  Offer a limited set of products to an array of different customer groups  Do an especially good job satisfying a subset of the needs of the customer groups being served

Product Varieties

Europe Asia U.S

Geographies

Geographic Specialization  Offer a variety of products and/or sell to a variety of customer groups within a narrow geography

Customer Groups Customer Specialization  Offer a broad set of products to a limited class of customers.  Cater to the particular need of the customer group served

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Strategic Positioning and Competitive Advantage 

Competitive Advantage: ability of a firm to outperform its industry.
The firm must create more economic value than its competitors.

• Strategic Positioning

Type of Advantage

Economic Value Created = Benefit of consumer – Cost of inputs = B - C = (B - P) + (P - C) The price P determines how much of the value created is captured by the sellers and how much is captured by the buyers.

Lower Cost

Broad

Overall Cost Leadership

Differentiation

Differentiation

Competitive Scope Narrow

Cost Based Focus

Differentiation Based Focus

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Example: GameStop - Core Elements

GameStop is the largest video game retailer in the world (over 6200 stores)

Value Proposition      

Target Market

First-to-market availability of new video games (software & hardware) Largest selection of new & used video games (include advance orders) Purchase of used games (for store credit) Distinctive in-store shopping experience Broad geographic coverage Best source of video game information

 Primary: – Hard-core game enthusiast - wants latest games/technology ASAP – Value-oriented customer - wants wide selection of value-priced used games  Secondary: casual/social gamers (Wii) whose needs concern overcoming the complexity of video game technology

Critical Capabilities  





Procurement: Leverage relationships with platform and game developers to procure large allocations of new hardware and software hitting the market. Merchandising: Have the right in-store merchandise on a store-by-store bases in context of constantly changing SKU requirements (implies a specific set of MIS and Distribution performance capabilities.) Store Operations: Generate unique gaming atmosphere that creates destination of choice for the video game enthusiast, supported by high levels of customer service provided by well-trained and motivated store personnel. Provision of latest information on video games through stores, website, and Game Informer magazine. University of Chicago/Knez

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Describing the Business Strategy  Identifying the core elements of the business strategy is the most important step in analyzing a company’s business strategy.  For our purposes, it will be sufficient to generate an abbreviated list of the 3-4 most important elements of the what, who, and how of the business strategy. Value Proposition: The list of customer benefits identified should contain those elements that are most likely to be distinctive relative to the competition for the target customer segments. Target Market: Description should clearly define the scope of the market segments served. Also, a brief description of their most important needs should be provided that provides a linkage to the described value proposition. Critical Capabilities: There are many levels of detail in describing a company’s capabilities. For the purposes of describing the core elements of the business strategy, focus on the performance requirements of the functional activities that are most important for the elements identified under the value proposition.  When we engage in a more detailed analysis of a company’s competitive advantage, we will examine the specific characteristics of the company’s activities and resources to determine how they are able to create more economic value than the competition. University of Chicago/Knez

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Example: GameStop - Strategic Position  The description of the company’s strategic position should capture (at a high level) how the company’s core strategy distinguishes it from the competition.  Traditionally, competitive strategy frames a company’s strategic position in terms of type of advantage - differentiation versus low cost, and scope - narrow versus broad. This is fine as a broad characterization, but we need to be a bit more specific. [Also, it is possible for a company to generate both lower costs and differentiation (more on this in week 2).]  GameStop Strategic Position: GameStop, as a large retailer, has a narrow-differentiation strategic position. Narrow in the sense that it is focused on the sale of video game hardware and software, and differentiated in its distinctive ability to meet the complete set of needs of multiple video game customer segments relative to the competition.

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Core Competitive Strategy Analysis Business Strategy Core Elements Target Markets

Strategic Position Value created relative to competition  Benefit Position

Value Proposition

 Cost Position

Resource/Activity Analysis  Benefit Drivers  Cost Drivers What are the specific resources/ activities that enable the firm to generate higher benefits and/or lower costs?

Critical Capabilities

+ Market/Industry Environment Industry 5-Forces Industry Factors

Economic Profitability

Competitive Advantage In what ways does the firm create higher benefits and, or lower costs? That is, what are the specific forms of the higher benefits or lower costs?

Sustainable Competitive Advantage What factors prevent the competition from duplicating or neutralizing the firm’s competitive advantage? 10

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Business 42001-Knez

Competitive Strategy

Lecture 1B: Industry Analysis Marc Knez

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Long-Term Economic Value - Strategy View

Industry Attractiveness

Competitive Position

High

Low

“+”

Growth Low

=

Cost

Long-Term Economic Value

High Low

High

Profitability

Low

High

Differentiation (Benefit)

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Attractive

A competitive advantage allows you to outperform an attractive market

0 A competitive advantage allows you to earn positive profit in an unattractive market

Unattractive

Industry Average Economic Profit

Industry Attractiveness

A Competitive Advantage Allows a Company to Rise Above its Market

Advantage 0 Company Profit - Industry Average Profit Disadvantage

Company’s Position in its Market 13 University of Chicago/Knez

Industry Analysis  From a strategic perspective, the purpose of industry analysis is to: – Understanding the factors that limit the profitability of companies in the industry. – Identify and assess alternative strategic positions – Identify changes industry conditions that will have an impact profitability and growth.

 An industry’s 5-forces determine the long-run profit potential of the industry how much of the value is retained by companies in the industry, versus:

– – – –

Bargained away by customers or suppliers Limited by substitutes Constrained by potential new entrants Competed away through high levels of rivalry

THREAT OF NEW ENTRANTS

BARGAINING POWER OF SUPPLIERS

RIVALRY AMONG COMPETITORS

BARGAINING POWER OF BUYERS

SUBSTITUTES

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Industry Value Chain and Profitability Industry Value Chain Potential Entrants

Suppliers

Supplier Power

Competition Between Incumbents (Rivalry)

Buyer Power

Intermediate Buyers

End Buyers

Substitute Products

Value Created by “Piece”Of Industry Value Chain

Substitute Value Chain

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Barriers to Entry - The Most Important Force 

The key question: To what extent does the threat or incidence of entry erode the profitability of a typical firm in the industry?



Factors that restrict entry into an industry: –

First-mover advantages • Supply-Side Economies of Sale : High Minimum Efficient Scale - MES = smallest level output such that long-run average cost are minimized • Demand-Side Economies of Scale (or network effects) • Learning curve effects • Patents and licenses • Pioneer brand advantages • Relationships with buyers and suppliers

–

Substantial exits costs - investments required for entry are industry specific

–

Expectation of aggressive response to entry 16 University of Chicago/Knez

Supplier Power and Buyer Power Supplier Power

Buyer Power 

 The key question: – To what extent do suppliers have stronger outside options than buyers, and hence, a stronger bargaining position?

The key question –

 Supplier bargaining power increases if:



To what extent do buyers have stronger outside options than buyers, and hence, a stronger bargaining position?

The power of buyers increases if:

– Input is a critical component of production

–

input is a not a critical component of production

– Supplier industry more concentrated than the industry it sells to.

–

buyers are large and few in numbers

–

input is relatively standardized lots of substitutes

–

buyers can credibly threaten to backward integrate

– Firms in the analyzed industry purchase relatively small volumes relative to other customers of the supplier. – Suppliers can credibly threaten to forward integrate.

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Substitutes  The key question: –

To what extent does competition from substitute products outside the defined boundaries of the industry erode the profitability of a typical firm in the industry?



Substitutes limit the profits of an industry by placing a ceiling on industry prices. The more attractive the price-performance tradeoff offered by substitutes, the more important the substitute product.



Identifying substitutes depends on how “finely” you draw the boundaries of the analyzed market (or market segments) – Any product/service that provides an alternative means of generating a desired outcome for the customer is a substitute. – Direct competitors are those players that provide the same primary elements of your value proposition: • Amtrak (rail) versus Airlines • Netflix versus Blockbuster (brick and mortar) • On-line media versus print media



Significant (long-term) threats to an industry are usually driven by substitute products generated through new technology/business models.

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Rivalry Among Competitors 

Two basic questions:

– How do firms compete? • price competition • product competition • technological innovations • marketing – To what extent does price competition or non-price competition (e.g., advertising) erode the profitability of a typical firm in the industry?



Intense rivalry erodes profitability by

– reducing price-cost margins (price competition) – increasing programmed costs (e.g., advertising) (non-price competition)

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Price Competition  The most significant threat to industry profitability is increased price competition  Factors which increase price competition – Decline in market demand – Large number of competitors – Large buyers who negotiate price – Poor information about competitors’ prices – Long reaction times – Lack of segmentation – Differences among competitors • Costs, market shares, brand name, quality

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How the Five Forces Affect Economic Profitability

Substitutes

Supplier Power

-

+

-

Economic Profit = (Price - Average Cost) X Sales Volume - Cost of Capital x Capital Invested

Buyer Power

-

-

+

Threat of Entry

Rivalry

-

Actual Entry

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Industry Factors Vs. Industry Forces* 

An industry’s 5-forces determine the long-run profit potential of the industry - how much of the value is retained by companies in the industry, versus:

– – – – 

Bargained away by customers or suppliers Limited by substitutes Constrained by potential new entrants Competed away through high levels of rivalry

Industry (or Environmental) Factors are external forces or industry attributes that also impact the profitability of the industry, but in ways that may be positive or negative depending on the broader industry context (most importantly, the five forces). Common industry factors include:

– – – –

Macro and Industry Growth Rate Technological change Government – Political and Regulatory conditions Importance of complementary products and services

*See – The Five Competitive Forces that Shape Strategy, by Michael Porter, HBR Jan. 2008.

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Dell Case Questions

Case Write-up Questions - Only answer the questions below if you choose to do a case write-up. Your answers should be based on the information in the case Marching Dell, not Matching Dell (B). 1.

Provide a description of the core elements of Dell’s business strategy (at the time of the case). (30%)

2.

Describe how Dell generates a competitive advantage through lower costs (at the time of the case). Note that your answer should be in terms of costs relative to their competition on important value chain activities and the cost drivers associated with these activities. Where possible, provide a back-of-the-envelop calculation of the cost advantage. Given the 600 word limit, you should identify and discuss at least three advantages that you believe are the most significant. (50%)

3.

In what ways does Dell differentiation itself from the competition (higher Benefits) (20%)



Note: The percentages indicate (roughly) the percentage of your write-up that should be devoted to each question.

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Write-Up Format  Use the cover sheet provided on the Chalk site in the Course Documents folder.  Do your best to stick to the 600 word limit. It’s okay to go over by ten or twenty words. You should only include facts from the case in your write-up that are directly relevant to your answers.  While you should avoid short bulleted answers, you should provide a clear separation between your answers to the different questions. Long paragraphs, where the critical elements of your answer are nor clearly broken out, should be avoided.  Your write-up needs to be submitted at the beginning of class. Bring an extra copy if you want to refer to it during the in-class discussion.

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Case Discussion Preparation Questions In addition to the questions above, consider the following questions in preparation for the class discussion. (Note: these are not questions for the write-up. ) 1. Conduct a quick five-forces analysis of the personal computer industry in 1998. How and why did the personal computer industry come to have such low profitability? 2. Why was Dell so successful (during the time of the case) despite the low average profitability in the PC industry? 3. Why has it been difficult for the competition to overcome Dell’s competitive advantage (through the time period covered in Matching Dell (B)? 4. For those more familiar with the PC industry, why has Dell’s performance declined since the time of the case?

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