Competition and Business Strategy in Historical Perspective - Ghemawat

1. Competition and Business Strategy in Historical Perspective - Ghemawat

2. Strategy History • Account of several eras • Invisible hand • 2nd half of 19th century  2nd half of 20th century • Based on development of new competitive models

3. Prior to 19th Century, no real opportunity or ability for single organizations to affect an industry • Legal protections were limited • Ability to generate capital for large projects was limited

4. Alfred Chandler • Visible Hand tames Invisible Hand • Development of Infrastructure  Development of Markets • Railroads • Reaction to Adam Smith theory of “invisible hand” • Both  Development of Managerial Class

5. M-form (Multidivisional form) • 2nd half of 19th century • Increasing numbers of diversified, equity-capital-financed organizations • These organizations made large investments in • Manufacturing • Marketing • Professional Mangers – to coordinate • First strategic plans from these managers • Alfred Sloan  GM over Ford • Chester Barnard  ATT

6. Effect of Second Great War • Development of Operations Research Operations Management to manage military logistics • Linear Programming + Learning Curves + Game theory • Rise of interest in formal strategic thinking • Attempts to shape the “environment” of the organization • Inter-service Competition in US Military • Development of notion of distinctive competence • After War Rapid Increase in Globalization • Need to rebuild  • Differential Advantage of US Firms due to disruption • Reduction of competitiveness so no focus on strategy

7. Learning Curve Price Drop with Increasing Volume Cost per Unit 1 Million Units 2 Million Units 4 Million Units 8 Million Units

8. Growth of Academic Influences – 1950s • Development of Business Policy  • 1. Integration of functional thinking at all levels • 2. Examination of external environment • 3. Matching of efforts 1 and 2 • Function of manager  • Continuous process of determining the nature of the enterprise and setting, revising and attempting to achieve goals

9. Growth of Academic Influences (cont.) • Organization, Subunit and Individual should have clearly defined purposes or goals defining direction and preventing drift • 1960s - SWOT (TOWS) • Popular in firms into the 1990s

10. SWOT MATRIX

11. Andrews Model

12. Growth of Academic Influences (cont.) • Willingness to risk investment leads to debate about long-range versus short-range advantages • Related to distinctive competence • Levitt – Marketing Myopia  Worry about marketing (pushing) goods based on distinctive competence and not delivering value • Ansoff – Worry about risk of action based on speculating about customer versus efficiently delivering goods and services to known demand based on competence • Ford versus GM

13. Ansoff Summary of Strategy Alternatives

14. Strategy Formula • Profitability Optimization Model (PROM) • Based on Multivariate Statistical Analysis • Explains differences in Return on Investment • Idea to generalize and quantify the strategy decision making process • Interest in Formula Dove Firms to Private Sector

15. Growth of Influence of Strategy Consultants • Move to assumption of strategic approach based on common patterns across all industries • Boston Consulting Group (BCG) • “Selling oversimplifications” • Experience Curve Model • Economies of Scale • Learning • Technological innovation • Growth Share Matrix • Portfolio Concept • Better way of allocating capital Cash Flow Matrix 1965-66

16. Basis for BCG Cash Flow Model First Mover Advantage Product Life Cycle Curve Experience Curve Sales Volume Cost per Unit Time 1 Million Units 2 Million Units 4 Million Units 8 Million Units

17. Growth of Influence of Strategy Consultants (cont.) Nine Block Matrix • McKenzie • Developed alternative version of Portfolio Analysis for GE - 1968 • Development of Strategic Business Unit (SBU) concept • Developed Alternative Matrix • Profit Impact Market Strategies (PIMS) Program (from PROM)

18. Criticisms of Consultant Theories • Experience curve • External shocks disrupted process • Need to consider/enable radical innovations • Creates competition that damages all competitors • Portfolio models • Differences in recommendation across different models • Too mechanical in allocation of resources • Vulnerability to the initiatives of outside firms • Focus on risk minimization, not innovation • Hayes and Abernathy • “Preference for analytic detachment instead of insight based on experience” • “Stress short-term cost reduction, not long-run, technological innovation”

19. Industry Attractiveness Approach • Unbundled and focused on industry attractiveness as a basis for investment choice • As an alternative to reliance on models of perfect competition • Considered inverse relation between profitability and price elasticity • Bain – Industry Structure and performance (IO) • Concentration  Profitability • Barriers to entry as a source of concentration  • Absolute cost advantage (Like a strong patent) • Economies of scale • Significant degree of product differentiation

20. Industry Attractiveness Approach • Porter Five Forces Model

21. Industry Attractiveness Approach • Brandenburger and Nalebuff model

22. Criticisms of Attractiveness Models • Coyne and Subramanyam • Assumptions behind models are not always the case • That buyers, sellers, competitiors and substitutes do not collaborate • Wealth goes to those that can create barriers – value is in structural advantage • Uncertainty is low enough to predict the behavior of others in the industry

23. Competitive Positioning Approach • Addresses profitability within an industry • Profitibility for a successful player in an unattractive industry may be better than the worst firms in an attractive industry • Important to consider competitive positions • Considered relative position of firms within industries • Competitive cost analysis • Customer analysis

24. Competitive Positioning Approach • Derived from an attempt to fix the experience curve • Disaggregated costs into specific components that added costs • Disaggegrated costs into raw materials costs and “added costs” • Sorts out scale effects from different components of costs added • Adds consideration of economies of scope

25. Cost Analysis • McKenzie model of cost drivers • Porter model

26. Value Chain Analysis • Hall – concept of differentiation • Part of changing the focus from experience • Porter elaboration of McKenzie model • More cost drivers • Attention to the concept of value • Activities can be source of cost or value competition • Optimal tradeoff between cost and value postions

27. Competitive Dynamics • Focus on time-based competition • Choices are linked across time • Focused • The length of time for competitive advantage of an investment • The availability and attractiveness of other uses of capital • Erosion of profitability through time • Stalk  Fast response + variety

28. Competitive Dynamics

29. Game Theory • Focuses on the role of commitment, or irreversibility of action • Changes what can be done by a firm • Thus changes strategic options • Assumptions of game theory are problematic • Sensitive to details • Limited number of variables • Rationality of participants

30. Resource Based View of Firm • Wernerfeldt  ownership of unique and critical resources in generating value • Role of inimitability (resistance to copying) of Advantageous Resources • Source of inimitability • Unique, historical conditions • Causal ambiguity • Social complexity

31. Core Competency • Prahalad and Hamel • Enduring inimitability based on knowledge • Knowledge creates competencies • Difficult to copy • Creates value • Applies to many end markets • Is expressed in core products

32. Dynamic Capabilities • Avoiding core rigidities • Avoiding path dependence in development of capabilities

33. Business Fads