Session 3 Objectives

1. Session 3 Objectives • Consider how business environments and external forces affect business strategy • Explore how industry structure and position create opportunities for competitive advantage • Analyze industries, competitors, and sustainability of different strategic options • Learn how to use strategic group mapping

2. The Strategy Design Process Strategic Analysis Strategic Choice Strategy Implementation and Evaluation Identify Sustainable Competitive Advantage Select Sustainable Competitive Advantage Create Sustainable Competitive Advantage Understand Industry Context and Competition Craft and Communicate Vision and Mission Develop Action Plans, Programs, and Processes Analyze Industry and External Environment Develop Strategic Goals and Specific Long Term Objectives Craft Changes in Structure and Processes Implement the Strategy Evaluate The Current Situation Evaluate and Select Strategy Analyze Resources and Internal Capabilities Establish the Basis for Sustainable Competitive Advantage Develop a Strategic Control System Understand and Critique Current Strategy Generate Feasible Alternative Strategies Evaluate the Strategies Results Feedback and Rethinking

3. MACROENVIRONMENT The Economy at Large Legislation and Regulation Technology Suppliers Substitutes COMPANY Rival Firms Buyers New Entrants Societal Values and Lifestyles Population Demographics  IMMEDIATE INDUSTRY AND COMPETITIVE ENVIRONMENT Environmental Analysis to Industry Analysis

4. 1. Industry’s dominant economic traits 2. Nature of competition & strength of competitive forces 3. Drivers of industry change 4. Competitive position of rivals 5. Strategic moves of rivals 6. Key success factors 7. Conclusions about industry attractiveness Assess Industry & Competitive Conditions 1. Assessment of company’s present strategy 2. Resource strengths and weaknesses, market opportunities, and external threats 3. Company’s costs compared to rivals 4. Strength of company’s competitive position 5. Strategic issues that need to be addressed Assess Company Situation Situation Analysis Identify Strategic Options for the Company Select the Best Strategy for the Company

5. Question 1: What are the Industry’s Dominant Economic Traits? • Market size andgrowth rate • Scope of competitive rivalry • Number of competitorsand their relative sizes • Prevalence of backward/forward integration • Entry/exit barriers • Nature and pace of technological change • Product and customer characteristics • Scale economies and experience curve effects • Capacity utilization and resource requirements • Industry profitability

6. Relevance of Key Economic Features Economic Feature Strategic Importance Market Size Small markets don’t tend to attract new firms; large markets attract firms looking to acquire rivals with established positions in attractive industries Market growth rate Fast growth breeds new entry; slow growth spawns increased rivalry & shake-out of weak rivals Capacity surpluses/shortages Surpluses push prices & profit margins down; shortages pull them up Industry profitability High-profit industries attract new entrants; depressed conditions lead to exit Entry/exit barriers High barriers protect positions and profits of existing firms; low barriers make existing firms vulnerable to entry Product is big-ticket item for buyers More buyers will shop for lowest price Standard products Buyers have more power because it’s easier to switch from seller to seller Rapid technological change Raises risk; investments in technology facilities/equipment may become obsolete before they wear out Capital requirements Big requirements make investment decisions critical; timing becomes important; creates a barrier to entry and exit Vertical integration Raises capital requirements; often creates competitive & cost differences among fully vs. partially vs. non-integrated firms Economies of scale Increases volume & market share needed to be cost competitive Rapid product innovation Shortens product life cycle; increases risk because of opportunities for leapfrogging

7. Question 2: What is Competition Like and How Strong Are the Competitive Forces? • Objective is to identify • Main sources of competitive forces • Strength of these forces • Key analytical tool • Five (Six) Forces Model of Competition

8. Porter’s Five Forces of Competition SUPPLIERS Bargaining power of suppliers INDUSTRY COMPETITORS Threat of substitutes Threat of new entrants POTENTIAL ENTRANTS SUBSTITUTES Rivalry among existing firms Bargaining power of buyers BUYERS

9. Rivalry Between Established Competitors The extent to which industry profitability is depressed by aggressive price competition depends upon: • Concentration (number and size distribution of firms) • Diversity of competitors (differences in goals, cost structure, etc.) • Product differentiation • Excess capacity and exit barriers • Cost conditions • Extent of scale economies • Ratio of fixed to variable costs

10. The Threat of Entry The extent to which entrants threaten industry profitability depends upon the height of barriers to entry. The principal sources of barriers to entry are: • Capital requirements • Economies of scale • Absolute cost advantage • Product differentiation • Access to channels of distribution • Legal and regulatory barriers • Retaliation

11. Threat of Substitutes Extent of competitive pressure from producers of substitutes depends upon: • Buyers’ propensity to substitute • The price-performance characteristics of substitutes. • Profitability of the substitute industry

12. Five Forces or Six? Introducing Complements The suppliers of complements create value for the industry and can exercise bargaining power SUPPLIERS Bargaining power of suppliers INDUSTRY COMPETITORS COMPLEMENTS Threat of new entrants POTENTIAL ENTRANTS Threat of substitutes SUBSTITUTES Rivalry among existing firms Bargaining power of buyers BUYERS

13. Competitive Force of Buyers Buyers are a strong competitive force when: • They are large and purchase a sizable percentage of industry’s product • They buy in large quantities • They can integrate backward • Industry’s product is standardized • Their costs in switching to substitutes or other brands are low • They can purchase from several sellers • Product purchased does not save buyer money

14. Competitive Force of Suppliers Suppliers are a strongcompetitive force when: • Item makes up large portion of product costs,is crucial to production process, and/or significantly affects product quality • It is costly for buyers to switch suppliers • They have good reputations and growing demand • They can supply a component cheaper than industry members can make it themselves • They do not have to contend with substitutes • Buying firms are not important customers

15. Dynamic Competition Porter framework assumes • industry structure drives competitive behavior • Industry structure is largely stable But---competition also changes industry structure • Schumpeterian Competition: A “perennialgale of creative destruction” where innovation overthrows established market leaders • Hypercompetition: “intense and rapid competitive moves….creating disequilibrium through continuously creating new competitive advantages and destroying, obsoleting, or neutralizing opponents’ competitive advantages

16. Question 3: What Forces Are atWork to Change Industry Conditions? • Industries change because forces are driving industry participants to alter their actions • Driving forcesare the major underlying causesof changing industry and competitive conditions • 1. Identify those forceslikely to exert greatest influence over next 1 - 3 years • Usually no more than 3 - 4 factors qualify as real drivers of change • 2. Assessimpact • What difference will the forces make - favorable? unfavorable?

17. Common Types of Driving Forces • Entry or exit of major firms • Diffusion of technical knowledge and innovations • Changes in cost and efficiency • Shift from standardized to differentiated products • Regulatory policies / government legislation • Changing societal concerns, attitudes, and lifestyles • Changes in degree of uncertainty and risk • Internet and e-commerce opportunities • Increasing globalization of industry • Changes in long-term industry growth rate • Changes in nature of product usage • Product innovation/technological change

18. Question 5: What Strategic Moves Are Rivals Likely to Make Next? • A firm’s own best strategic moves are affected by • Current strategies of competitors • Future actions of competitors • Profiling key rivals involves gathering competitive intelligence about their: • Current strategies • Most recent moves • Resource strengths and weaknesses • Announced plans

19. Competitive Scope Strategic Intent Market Share Objective Competitive Position Strategic Posture Competitive Strategy • Local • Be dominant leader • Aggressive expansion via acquisition & internal growth • Getting stronger; on the move • Mostly offensive • Striving for low-cost leadership • Regional • Overtake industry leader • Well-entrenched • Mostly defensive • Focusing on market niche • National • Be among industry leaders • Expansion via internal growth • Stuck in the middle of the pack • Combination of offensive & defensive • Pursuing differentiation based on • Quality • Service • Technology superiority • Breadth of product line • Image & reputation • More value for the money • Other attributes • Multicountry • Move into top 10 • Expansion via acquisition • Going after a different position • Aggressive risk-taker • Global • Move up a notch in rankings • Hold on to present share • Struggling; losing ground • Conservative follower • Maintain current position • Give up present share to achieve short-term profits • Retrenching to a position that can be defended • Just survive Competitor Analysis

20. Predicting Moves of Rivals Predicting rivals’ next moves involves • Analyzing their current competitive positions • Examining public pronouncements about what it will take to be successful in industry • Gathering information from grapevine or industry intelligence about current activities and potential changes • Studying past actions and leadership • Determining who has flexibility to make major strategic changes and who is locked into pursuing the same basic strategy

21. The Contributions of Game Theory to Competitive Analysis Framing strategic decisions as interactions between competitors Predicting outcomes of competitive situations involving a few players • Some key concepts: • Competition and Cooperation—Game theory can show conditions • where cooperation more advantageous than competition • Deterrence—changing the payoffs in the game in order to deter • a competitor from certain actions • Commitment—irrevocable deployments of resources that • give creditability to threats • Signaling—communication to influence a competitor's decision • Problems of game theory: • Useful in explaining past competitive behavior—weak in predicting future competitive behavior. • What’s the problem? — Multitude of models, outcomes highly sensitiveto small changes in assumptions

22. Question 6: What are the Key Factors for Competitive Success? • Competitive elements most affecting every industry member’s ability to prosper • Specific strategy elements • Product attributes • Resources • Competencies • Competitive capabilities • KSFs spell the difference between • Profit and loss • Competitive success or failure

23. Identifying Key Success Factors Prerequisites for success What do customers want? How does the firm survive competition • Analysis of competition • What drives competition? • What are the main dimensions of competition? • How intense is competition? • How can we obtain a superior competitive position? • Analysis of demand • Who are our • customers? • What do they want? KEY SUCCESS FACTORS

24. Segmentation Analysis: Principal Stages • Identify key variables and categories. • Construct a segmentation matrix • Analyze segment attractiveness • Identify KSFs in each segment • Analyze benefits of broad vs. narrow scope. Identify segmentation variables Reduce to 2 or 3 variables Identify discrete categories for each variable Potential for economies of scope across segments Similarity of KSFs Product differentiation benefits of segment focus

25. The Basis for Segmentation: Customer and Product Characteristics *Size *Technical sophistication *OEM/replacement Industrial buyers Characteristics of the Buyers *Demographics *Lifestyle *Purchase occasion Household buyers *Size *Distributor/broker *Exclusive/ nonexclusive *General/special list Distribution channel Opportunities for Differentiation Geographical location *Physical size *Price level *Product features *Technology design *Inputs used (e.g. raw materials) *Performance characteristics *Pre-sales & post-sales services Characteristics of the Product

26. Segmentation and Key Success Factors in the U.S. Bicycle Industry SEGMENT KEY SUCCESS FACTORS Low price bicycles sold primarily through department and discount stores, mainly under the retailer’s own brand (e.g. Sears’ “Free Spirit”); * Low-costs through global sourcing of components & low-wage assembly. * Supply contract with major retailer. Leading competitors: Taiwanese & Chinese assemblers, some U.S manufacturers, e.g. Murray Ohio, Huffy Medium-priced bicycles sold primarily under manufacturer’s brand name and distributed mainly through specialist bicycles stores; *Cost efficiency through large scale operation and either low wages or automated manufacturing. *Reputation for quality (durability, reliability) through effective marketing to dealers and/or consumers. * International marketing & distribution. Leading competitors: Raleigh, Giant, Peugeot, Fuji (Japan). High-priced bicycles for enthusiasts. *Quality of components and assembly, Innovation in design (e.g. minimizing weight and wind resistance). *Reputation (e.g. through success in racing, through effective brand management). *Strong dealer relations. Leading competitors: K2, Specialized, Trek Children’s bicycles (and tricycles) sold primarily through toy retailers (discount toy stores, department stores, and specialist toy stores). Similar to low-price bicycle segment.

27. Question 7: Is the IndustryAttractive or Unattractive and Why? Develop conclusions about whether the industry and competitive environment is attractive or unattractive, both near- and long-term, for earning good profits A firm uniquely well-suited in an otherwise unattractive industry can, under certain circumstances, still earn unusually good profits

28. Issues to Consider inAssessing Industry Attractiveness • Industry’s market size and growth potential • Whether competitive conditions are conducive to rising/falling industry profitability • Will competitive forces become stronger or weaker • Whether industry will be favorably or unfavorably impacted by driving forces • Potential for entry/exit of major firms • Stability/dependability of demand • Severity of problems facing industry • Degree of risk and uncertainty in industry’s future

29. Feb 1996 Nov 1984 July 2000 Feb 2004

31. Apple Computer • Historically, what were Apple’s major competitive advantages? Have they changed over time? Why? • How has the structure of the PC industry changed over the last 20 years? What new opportunities for competitive advantage have these changes created? • Evaluate Apple’s strategies since 1990. Have they developed a sustainable competitive advantage? • Has Steve Jobs finally solved Apple’s long-standing problems with the Mac business and Apple’s broader strategic position? • What should Apple do today?

32. Question 4: Which Companies are in Strongest / Weakest Positions? A strategic group is a group of firms in an industry following the same or similar strategy. • Identifying strategic groups: • Identify principal strategic variables that distinguish firms. • Position each firm in relation to these variables. • Identify clusters.

33. Steps in the construction of strategic group maps: 1. Identify two important competitive characteristics that strategically differentiate firms in an industry from one another. 2. Plot the firms on the two-variable map. 3. Draw circles around the firms that are clustered together. 4. Indicate potential movement of firms with arrows.

34. Strategic Groups in the World Automobile Industry Broad GLOBAL, BROAD-LINE PRODUCERS e.g., GM, Ford, Toyota, Nissan, Honda, VW REGIONALLY FOCUSED BROAD-LINE PRODUCERS e.g. Fiat, PSA, Renault, Rover, Chrysler GLOBAL SUPPLIERS OF NARROW MODEL RANGE e.g., Volvo, Subaru, Isuzu, Suzuki, Saab, Hyundai NATIONALLY FOCUSED, INTERMEDIATE LINE PRODUCERS e.g. Tofas, Kia, VAZ, Maruti PRODUCT RANGE LUXURY CAR MANUFACTURERS e.g., Jaguar, Rolls Royce, Daimler-Benz, BMW NATIONALLY- FOCUSED, SMALL, SPECIALIST PRODUCERS e.g., Bristol (U.K.), Classic Roadsters (U.S.), Morgan (U.K.) PERFORMANCE CAR PRODUCERS e.g., Porsche, Maserati, Lotus Narrow National GEOGRAPHICAL SCOPE Global

35. Strategic Groups Within the World Petroleum Industry Statoil INTEGRATED DOMESTIC OIL COMPANIES • PRODUCTION • COMPANIES INTEGRATED INTERNATIONAL MAJORS DIVERSIFIED MAJORS PDVSA Kuwait 0 0.5 1.0 1.5 2.0 Exxon Vertical Balance Amoco Shell BP Unocal Arco Chevron Total Indian Oil Phillips Texaco Mobil Petrobras ENI ENI Elf Elf INTERNATIONAL DOWNSTREAM OIL COMPANIES Repsol Neste Petrofina Nippon Sun 0 10 20 30 40 50 60 70 80 NATIONALLY-FOCUSED DOWNSTREAM COMPANIES Geographical Scope

36. Hamel, “Strategy as Revolution” • Strategic planning is often not strategic • Strategy making should be subversive • The bottleneck is at the top of the bottle • Revolutionaries exist in every company • Change is not the problem, engagement is • Strategy making must be democratic • Anyone can be a strategy activist • Perspective is worth 50 IQ points • Top-down and bottom up are not the only alternatives • You cannot see the end from the beginning

37. How to Start a Revolution • Re-conceive your product or service • Radically improve the value equation • Separate form and function • Achieve joy of use • Re-define the market space • Push the bounds of universality • Strive for individuality • Increase accessibility to your products • Re-draw industry boundaries • Rescale the industry • Compress the supply chain • Drive convergence between industries